Case Studies 1

SUPPLY CHAIN MANAGEMENT WEEK 3-LECTURE 1

CHAPTER 5

DR. ISMAIL CIVELEK

LOCATING GLOBAL ACTIVITIES

Apple

• CA vs China

Toyota

• Japan vs KY

Honda

• Japan vs OH

P&G

GAP

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LOCATING GLOBAL ACTIVITIES

An export-based strategy means that the firm has chosen to locate as much of the value chain as possible back home, while locating downstream activities close to the customer.

• Not much coordination is required here as there are few assets overseas and little international variation in product offerings.

In a multilocal strategy activities are geographically dispersed and only loosely coordinated.

• When coordination is high, the firm is using controlled foreign direct investment. This is a form of global strategy and is often a transition phase from multilocal strategy.

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LOCATING GLOBAL ACTIVITIES

Denso: Japanese AC producer

• Thermal, electrics systems  Thailand • Components, spark plugs, delays  Malaysia • Refrigeration units for automobiles  Philippines • Specialty industrial products  Australia

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ROLE OF NATIONAL FACTORS

• Multinational companies should locate activities in countries where the costs of raw materials, labor, and other factor costs are lowest for a given level of productivity.

• Factors such as tax benefits and other forms of governmental aid are relevant considerations.

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ROLE OF NATIONAL FACTORS • Toyota -> KY (then IN)

• Honda -> OH (then IN & AL)

• Nissan -> TN (then MS)

• Volkswagen -> TN

• Kia -> GA

• Hyundai -> AL

• BMW -> SC

• Mercedes -> AL

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GLOBALLY STRATEGIC COUNTRIES FOR ACTIVITY LOCATION

R&D

• Major source of industry innovation • Presence of highly skilled and/or low-cost R&D workers • Highly demanding customers • China vs India

Manufacturing

• Favorable factor conditions • Close location to major markets • Favorable country-of-origin effect • Manufacturing presence of global competitors • Role of Transportation Costs (Mexico vs China)

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ROLE OF EXCHANGE RATES

• Currency exchange rates have a direct effect on relative country costs and, therefore, on the competitive positions of companies.

• Companies need to recognize the strategic as well as financial risk posed by currency changes.

• Given the difficulty of forecasting exchange rates, global managers can choose among speculation, hedging, or being flexible with respect to shifting production with exchange rate shifts.

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BENEFITS OF GLOBAL LOCATION OF ACTIVITIES

A global strategy for activity location can achieve the benefits of:

• Cost reduction • Improved quality • Enhanced customer preference • Increased competitive leverage

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BENEFITS OF GLOBAL LOCATION OF ACTIVITIES

• A global approach to activity location can reduce costs in several ways.

• Exploit economies of scale by pooling production or other value-adding activities.

• Exploit economies of scope – the gains from spreading activities across multiple product lines or businesses.

• Exploiting flexibility. This comes from the capability to switch activities between locations.

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DRAWBACKS OF GLOBAL LOCATION OF ACTIVITIES

The drawbacks of a global strategy for activity location include:

• Lessened responsiveness to customers • Increased currency risk • Increased risk of creating competitors • Difficulties in managing the value-added chain

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