wk 6 quiz chapter 16 -17
International Business
10e
By Charles W.L. Hill
Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.
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Chapter 17
Global Production, Outsourcing, and Logistics
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What Are the Main
Production Issues for Firms?
- International firms must answer five interrelated questions
Where 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 outsource those activities to independent vendors?
How should a globally dispersed supply chain be managed, and what is the role of Internet-based information technology in the management of global logistics?
Should the firm manage global logistics itself, or should it outsource the management to enterprises that specialize in this activity?
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The Opening Case: Did Boeing Outsource Too Much Work on the 787? describes some of the challenges Boeing faced in building the energy-efficient 787. More than 70% of the component parts for the new plane were outsourced to suppliers in many countries, as well as some of the design engineering, which contributed to over a billion dollars in cost overruns and serious delays in production.
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How Are Strategy, Production, and Logistics Related?
- Production - activities involved in creating a product
- Logistics - procurement and physical transmission of material through the supply chain, from suppliers to customers
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LO 1: Explain why production and logistics decisions are of central importance to many multinational businesses.
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How Are Strategy, Production, and Logistics Related?
- Questions: How can production and logistics
Lower the costs of value creation?
- disperse production to the most efficient locations
- manage the global supply chain efficiently to better match supply and demand
Add value by better serving customer needs?
- eliminate defective products from the supply chain and the manufacturing process
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Production and logistics are closely linked since a firm’s ability to perform its production activities efficiently depends on a timely supply of high quality material inputs.
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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How Can Quality Be Improved?
- Most firms use the Six Sigma program - a direct descendant of total quality management (TQM)
- aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout the company
- in the EU, firms must meet ISO 9000 standards before gaining access to the EU marketplace
- Improved quality reduces costs
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The total quality management (TQM) philosophy was developed by a number of American consultants such as W. Edwards Deming, Joseph 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
Production process operating at Six Sigma are 99.99966 percent accurate.
- Only 3.4 defects per million units
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How Can Quality Be Improved?
The Relationship Between Quality and Costs
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Where Should
Production Be Located?
- Firms should locate production so that
- production and logistics can be locally responsive
- production and logistics can respond quickly to shifts in customer demand
- Firms should consider
Country factors
Technological factors
Product factors
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LO 2: Explain how country differences, production technology, and product features all affect the choice of where to locate production facilities.
Demands for local responsiveness arise from national differences in consumer tastes and preferences, infrastructure, distribution channels, and host-government demands.
Demands for local responsiveness create pressures to decentralize production activities to the major national or regional markets in which the firm does business or to implement flexible manufacturing processes that enable the firm to customize the product coming out of a factory according to the market in which it is to be sold.
In recent years, time-based competition has grown more important. When consumer demand is prone to large and unpredictable shifts, the firm that can adapt most quickly to these shifts will gain an advantage.
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Why Are
Country Factors Important?
- Manufacturing should be located where economic, political, and cultural conditions are most conducive to the performance of that activity
- create a global web of activities
- global concentrations of activities at certain locations
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LO 2: Explain how country differences, production technology, and product features all affect the choice of where to locate production facilities.
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Why Are
Country Factors Important?
- Firms should consider
- the availability of skilled labor and supporting industries
- formal and informal trade barriers
- expectations about future exchange rate changes
- transportation costs
- regulations affecting FDI
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LO 2: Explain how country differences, production technology, and product features all affect the choice of where to locate production facilities.
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Why Are Technological
Factors Important?
- Firms should consider
The level of fixed costs
- if fixed costs are high, produce in a single location or a few locations
- when fixed costs are low, multiple production plants may be possible
- allows firms to respond to local demands
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LO 2: Explain how country differences, production technology, and product features all affect the choice of where to locate production facilities.
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Why Are Technological
Factors Important?
The minimum efficient scale
- the level of output at which most plant-level scale economies are exhausted
- when minimum efficient scale is high, choose centralized production in a single location or a limited number of locations
- when minimum efficient scale is low, respond to local market demands and hedge against currency risk by operating in multiple locations
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Why Are Technological
Factors Important?
The flexibility of the technology
- flexible manufacturing technology or lean production
- reduces set up times for complex equipment
- increases the utilization of individual machines
- improves quality control
- allows firms to produce a wide variety of end products at a relatively low unit cost
mass customization
flexible machine cells
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What Should a Firm Do?
- Production should be concentrated in a few locations when
- fixed costs are substantial
- the minimum efficient scale of production is high
- flexible manufacturing technologies are available
- Production in multiple locations makes sense when
- both fixed costs and the minimum efficient scale of production are relatively low
- appropriate flexible manufacturing technologies are not available
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Why Are Product Factors Important to Location Decisions?
- Two product factors impact location decisions
The product's value-to-weight ratio
- if the value-to-weight ratio is high, produce the product in a single location and export to other parts of the world
- if the value-to-weight ratio is low, there is greater pressure to manufacture the product in multiple locations across the world
Whether the product serves universal needs
- when products serve universal needs, the need for local responsiveness falls, and concentrating manufacturing in a central location makes sense
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How Are Location, Strategy,
and Production Related?
Location, Strategy, and Production
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What Are the Hidden Costs of Foreign Production Locations?
- There may be hidden costs associated with foreign production
- Before making the decision to locate production in a foreign location firms must consider the potential for
- high employee turnover
- poor workmanship
- poor product quality
- low productivity
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What Is the Strategic Role
of Foreign Factories?
- The strategic role of foreign factories and the strategic advantage of a particular location can change over time
- factories established to take advantage of low cost labor can evolve into facilities with advanced design capabilities
- Improvement in a facility comes from
Pressure to lower costs or respond to local markets
An increase in the availability of advanced factors of production
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LO 3: Recognize how the role of foreign subsidiaries in production can be enhanced over time as they accumulate knowledge.
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What Is the Strategic Role
of Foreign Factories?
- Many companies now see foreign factories as globally dispersed centers of excellence
- supports the development of a transnational strategy
- global learning - valuable knowledge can be found in foreign subsidiaries
- implies that firms are less likely to switch production to new locations simply because some underlying variable like wage rates has changed
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Should a Firm
Outsource Production?
- Question: Should a firm make or buy the component parts to go into its final product?
- Make-or-buy decisions are important to firms' manufacturing strategies
- service firms also face make-or-buy decisions
- decisions involving international markets are more complex than those involving domestic markets
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LO 4: Identify the factors that influence a firm’s decision of whether to source supplies from within the company, or from foreign suppliers.
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Why Make?
- Vertical integration - making component parts in-house
Lowers costs
- if a firm is more efficient at that production activity than any other enterprise, manufacturing in-house makes sense
Facilitates investments in highly specialized assets
- internal production makes sense when substantial investments in specialized assets are required
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Management Focus: Hewlett Packard in Singapore explores the strategic decision making involved in establishing Hewlett Packard’s Singapore plant. The company initially used the plant as a low cost location to manufacture electronic components. Later, entire products were produced in Singapore, Later still, the Singapore plant was involved not only in production but also product design. Today, the plant is an important part of Hewlett Packard’s global network responsible for manufacturing, product development and design, and research.
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Why Make?
Protects proprietary technology
- in-house production makes sense when component parts contain proprietary technology
Facilitates the scheduling of adjacent processes
- planning, coordination, and scheduling of adjacent processes can be easier with in-house production
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Why Buy?
- Buying component parts from independent suppliers
Gives the firm greater flexibility
- important when changes in exchange rates and trade barriers alter the attractiveness of various supply sources over time
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Why Buy?
Helps drive down the firm's cost structure
- avoids challenges of coordination and control of additional subunits
- avoids the lack of incentive associated with internal suppliers
- avoids the difficulties with setting appropriate transfer prices
Helps the firm capture orders from international customers
- can help firms gain orders from suppliers’ countries
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Do Strategic Alliances with Suppliers Make Sense?
- Firms can capture the benefits of vertical integration without the associated organizational problems by forming long-term strategic alliances with key suppliers
- however, these commitments may actually limit strategic flexibility
- risk giving away key technological know-how to a supplier
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How Do Firms Manage
the Global Supply Chain?
- Logistics encompasses the activities necessary to get materials to a manufacturing facility, through the manufacturing process, and out through a distribution system to the end user
- The goal is to
- manage a global supply chain at the lowest possible cost and in a way that best serves customer needs
- establish a competitive advantage through superior customer service
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What Is the Role of
Just-In-Time Inventory?
- Just-in-time (JIT) systems economize on inventory holding costs by having materials arrive at a manufacturing plant just in time to enter the production process
- JIT systems
- generate major cost savings from reduced warehousing and inventory holding costs
- can help the firm spot defective parts and take them out of the manufacturing process
- But, a JIT system leaves the firm with no buffer stock of inventory to meet unexpected demand or supply changes
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What Is the Role of Information Technology and the Internet?
- Web-based information systems play a crucial role in materials management
- allow firms to optimize production scheduling according to when components are expected to arrive
- Electronic Data Interchange (EDI)
- facilitates the tracking of inputs
- allows the firm to optimize its production schedule
- lets the firm and its suppliers communicate in real time
- eliminates the flow of paperwork between the firm and its suppliers
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LO 5: Describe what is required to efficiently coordinate a globally dispersed production system.