Textbook Behavior in Organizations, 8ed A' B' Shani

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ISG BBA PROGRAM Spring semester
BUS 470 International Business
Lecture 8 Global Production, Outsourcing and
Logistics
Location strategy, Make or buy decisions
Chapter 11
Tuesday, March 20th 2007
Guillaume Sarrat de Tramezaigues
www.gstblog.com
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Opening Case

• When introducing the X-Box gaming console,
  Microsoft had to decide if it should manufacture
  the console or outsource manufacturing to a 3rd
  party
• Microsoft primarily creates software and lacked
  the manufacturing capabilities to make the X-Box
• Microsoft decided to outsource production to
  Flextronics for four reasons
• Flextronics had been pursuing an industrial park
  strategy so that it could control its supply
  chain
• Flextronics had a global presence
• Flextronics could use Web-based information
  systems to share information with Microsoft
• Microsoft trusted Flextronics

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Introduction

• As trade barriers fall and global markets
  develop, firms must confront a set of
  interrelated issues
• Where in the world should production activities
  be located
• What should be the long-term strategic role of
  foreign production sites?
• Should the firm own foreign production activities
  or is it better to outsource to vendors?
• How should a globally dispersed supply chain be
  managed?
• Should the firm manage global logistics itself,
  or should it outsource the management to
  enterprises that specialize in this activity?

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Strategy, Production, and Logistics

• Production is the activities involved in creating
  a product
• Can be both service and manufacturing activities
• Logistics is the activity that controls the
  transmission of physical materials through the
  value chain
• Production and logistics are closely linked since
  a firms ability to perform its production
  activities efficiently depends on a timely supply
  of high quality material inputs

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Strategy, Production, and Logistics

• Production and logistics functions have a number
  of important strategic objectives
• Lower costs
• Increase product quality by eliminating defective
  products from both the supply chain and the
  manufacturing process
• These objectives are interrelated
• Increasing productivity because time is not
  wasted producing poor-quality products that
  cannot be sold, leading to a direct reduction in
  unit costs
• Lowering rework and scrap costs associated with
  defective products
• Reducing the warranty costs and time associated
  with fixing defective products

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Total Quality Management

• The total quality management (TQM) philosophy was
  developed by a number of American consultants
  such as W. Edwards Deming, Josephy Juran, and A.
  V. Feigenbaum
• Deming identified a number of steps that should
  be included in any TQM program
• Management should embrace the philosophy that
  mistakes, defects, and poor quality materials are
  not acceptable
• Supervisors should work more with employees and
  provide them with the tools they need to do the
  job
• Management should create an environment in which
  employees will not fear reporting problems
• Work standards should not only be defined as
  numbers or quotas, but should include some notion
  of quality

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Six Sigma

• Six Sigma is the modern successor to TQM
• It is a statistically based philosophy that aims
  to reduce defects, boost productivity, eliminate
  waste, and cut costs throughout a company
• Production process operating at Six Sigma are
  99.99966 percent accurate
• Only 3.4 defects per million units

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Strategy, Production, and Logistics

• In addition to lowering costs and improving
  quality, two other objectives have particular
  importance
• Production and logistic functions must be able to
  accommodate demands for local responsiveness
• Production and logistics must be able to respond
  quickly to shifts in customer demand

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Where to Produce

• For the firm contemplating international
  production a number of factors must be considered
• Country factors
• Technological factors
• Product factors

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Country Factors

• Optimum economic, political, and cultural
  conditions
• Externalities
• Skilled labor pools
• Supporting industries
• Formal and informal trade barriers
• Exchange rate

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Technological Factors

• Fixed costs
• Minimum efficient scale
• Flexible manufacturing
• Reduce setup times for complex equipment
• Increase machine utilization
• Improve quality control
• Flexible machine cells to perform a variety of
  operations

Mass customization
Low cost
Product customization
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Typical Unit Cost Curve
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Manufacturing Location

• Arguments for concentrating production to a few
  locations include
• Fixed costs are substantial
• Minimum efficient scale is high
• Flexible manufacturing technologies available
• Arguments to manufacture in all major markets the
  firm operates in include
• Fixed costs are low
• Minimum efficient scale is low
• Flexible manufacturing technologies unavailable
• Trade barriers and transportation costs remain
  major impediments

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Product Factors and Location Strategies

• Two product features affect location decisions
• Value to weight ratio
• Product serves universal needs
• Two basic strategies
• Concentrating in a centralized location and
  serving the world market
• Decentralizing them in various regional or
  national locations close to major markets when
  opposite conditions exist

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Centralized Location

• Factor costs have substantial impact
• Low trade barriers
• Externalities favor certain location
• Stable exchange rates
• High fixed costs, high minimum efficient scale
  relative to global demand or flexible
  manufacturing technology
• Products value-to-weight ratio is high
• Product serves universal needs

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Decentralized Location

• Factor costs do not have substantial impact
• High trade barriers
• Location externalities not important
• Exchange rates volatile
• Low fixed costs, low minimum efficient scale
• Flexible manufacturing technology unavailable
• Products value-to-weight ratio is low
• Significant differences in consumer tastes and
  preferences exist between nations

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Location Strategy and Production
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Strategic Role of Foreign Factories

• Initially, established where labor costs low
• Later, important centers for design and final
  assembly
• Upward migration caused by pressures to
• Improve cost structure
• Customize product to meet customer demand
• An increasing abundance of advanced factors of
  production

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Make or Buy Decisions

• Should a firm make or buy the component parts
  that go into their final product?
• Advantages of making own components
• Lower costs if most efficient producer
• Facilitating specialized investments
• Proprietary product technology protection
• Improved scheduling

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Advantages of Buy Versus Make

• Strategic flexibility in sourcing components
• Lower firms cost structure
• Offsets
• Strategic alliances with suppliers give benefits
  of vertical integration without the associated
  organizational problems

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Managing a Global Supply Chain

• Objective of materials management in managing a
  firms global supply chain
• Maintain lowest possible cost
• In a way that best serves the customers needs
• Role of just-in time inventory
• Economize on inventory holding costs
• Speeds inventory turnover
• Drawback no buffer stock

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Role of Information Technology and the Internet

• Firms increasingly use electronic data
  interchange (EDI) to coordinate the flow of
  materials into manufacturing, through
  manufacturing, and out to customers
• EDI systems require computer links between a
  firm, its suppliers, and its shippers these
  electronic links are then used
• To place orders with suppliers
• To register parts leaving a supplier
• To track them as they travel toward a
  manufacturing plant
• To register their arrival

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Role of Information Technology and the Internet

• EDI systems have resulted in
• Suppliers, shippers, and the purchasing firm
  communicate with each other with no time delay
• Increased flexibility and responsiveness of the
  whole global supply system
• Paperwork between suppliers, shippers, and the
  purchasing firm is eliminated
• Web-based systems are rapidly transforming the
  management of globally dispersed supply chains,
  allowing even small firms to achieve a much
  better balance between supply and demand
• Because the number of firms adopting these
  systems has increased, those that dont may find
  themselves at a significant competitive
  disadvantage