INTERNATIONAL OPERATIONS MANAGEMENT
ARIZONA STATE UNIVERSITY
OMT 440 - INTERNATIONAL BUSINESS
WEEK 5
CHAPTER OBJECTIVES:
After studying this chapter, you are expected to be able to :
a)
Outline supply chain management and vertical integration.
b)
Managing productivity and international business.
c)
Managing quality in international business.
d)
Managing information in international business.
Export companies, multinational companies and global companies do business in
international markets. Tips and strategies become very important given the complexity of
international business issues in the era of hypercompetition that is currently ongoing. An
understanding of International Operations such as outsourcing, international infrastructure,
global quality management and others, is increasingly necessary.
DEFINITION OF INTERNATIONAL OPERATIONS MANAGEMENT:
Operations management is the set of activities an organization uses to transform types
of inputs into final goods and services. International operations management performs
transformations related to the activities of international companies. Complexities in
international operations management include: resources, location, and logistics.
Supply chain management is the activity of organizing the processes and steps by
which a company acquires the various resources needed to make its products. Vertical
integration is the extent to which a firm provides its own resources or obtains them from
other sources.
The factors that influence the decision to make or buy are:
a)
Size.
b)
Scope of operations
c)
Technological expertise
d)
Product environment (nature of product)
e)
Cost.
f)
Control
g)
Risk.
h)
Investment
i)
Flexibility
Factors that influence site selection are:
a)
Country-related issues include resource availability, cost, infrastructure, and home
country influence.
b)
Product-related issues include the weight-to-value ratio, technology, the importance
of customer feedback, etc.
c)
Government policies include the stability of the political process, national trade
policy, economic development incentives, the existence of foreign trade zones.
d)
Organizational issues include business strategy, organizational structure, inventory
management policies.
Productivity is a measure of economic efficiency that summarizes the value of output
relative to the value of the inputs used to create the output. The function of productivity is to
help determine the overall success of the company, contribute to long-term survival, and
contribute to the overall standard of living. Strategies to improve productivity include
spending more on research and development, improving operations, and increasing employee
participation.
Total quality management (TQM) is an integrated effort to systematically and
continuously improve the quality of a company's products and/or services. Statistical process
control is a family of mathematically based tools for quality monitoring and control.
Benchmarking is the legal and ethical process of studying how other companies do things in a
high-quality way and then replicating or improving on the methods used.
SUPPLY CHAIN MANAGEMENT AND VERTICAL INTEGRATION:
Supply chain management originated from military logistics, and was instrumental in
determining war victories, especially in the Second World War. When the war was over, this
logistics technique was used in the shipping business. Here there was cooperation between
the shipping company and the warehouse, and the arrangement began to be carried out by a
third party. Later, in the era of globalization, many companies began to look for ways to
reduce production costs. Many multinational companies moved factories to countries with
cheap labor. Indonesia and some parts of Asia are examples of this. Here we see that logistics
plays an even more important role.
The development of logistics became even greater with the advent of information
technology in the 1980s. Many factors such as cheaper computers, faster computers, wider
adoption of the internet, cheaper bandwidth, made it easier for people to communicate and
collaborate in an increasingly efficient way. This widespread application of information
technology reduces human error, reduces production costs, and improves quality to an
extraordinary degree. The science of logistics has finally evolved into a supply chain, with an
integral systems approach, which includes Warehouse Storage, Transportation, Inventory,
Ordering, and Quantity. These five components must be optimized as a whole. Individual
optimization is not recommended because it can make the overall system suboptimal (or
expensive). For example, to reduce production costs, we try to move the storage warehouse to
another place that is cheaper. But maybe this will result in more expensive transportation
costs, and so on.
Supply-chain management is the integration of the activities of procuring materials
and services, converting them into intermediate and final products, and delivering them to
customers. The goal is to build a supply chain that focuses on maximizing value for the
customer. The key to effective supply chain management is to make suppliers "partners" in
the company's strategy to meet the ever-changing market (Heizer and Render, 2005: 4).
Indrajit and Djokopranoto in Qolbi Isnanto (2009: 3) reveal that supply chain management
(SCM) is a system where organizations distribute their production goods and services to their
customers. This chain is also a network of various organizations that are interconnected and
have the same goal, namely the best possible procurement or goods, the term supply chain
also includes the process of changing these goods, for example from raw goods to finished
goods. Supply chain management is the integration of activities that begin with the
procurement of goods and services, transforming raw materials into goods in process and
finished goods, and delivering these goods to their customers in an efficient manner. In this
definition, in general, the understanding of the supply chain will mean the flow of materials
from the beginning to the consumer with attention to the factors of timeliness, cost, and the
number of products.
In the operational definition of the notion of supply chain, there are three aspects that need to
be considered, namely the following.
a)
Supply Chain Management is an approach used to achieve efficient integration of
suppliers, manufacturers, distributors, retailers, and customers.
b)
Supply Chain Management has an impact on cost control.
c)
Supply Chain Management has an important role in improving the quality of the
company's services to customers.
To manage the flow of goods and services in a supply chain, it is first necessary to
have a true and complete picture of the entire chain, from the first to the last link. For
example, the supply chain of a paper mill starts with the timber forests that produce the raw
materials, the auxiliary materials, equipment and other suppliers involved. In addition, it is
also necessary to know the nature of supply chain movements for various inventories. The
purpose of inventory is several types of goods stored in warehouses that have slightly
different movement properties from one another so that the length of the supply chain is also
different depending on the raw material fulfillment method and inventory method chosen by
the business actor. There are several types of inventory, which are as follows.
a)
Raw materials.
b)
Work in process product.
c)
Commodity goods.
d)
Project items.
Successful supply chain management requires:
a)
human resource support, leadership and commitment to change;
b)
understand the extent of the changes required;
c)
agree on the vision and core processes of supply chain management;
d)
commitment to the need for resources and power or authority to achieve set goals.
The core business processes of supply chain management include the following.
a)
Customer Relationship Management (CRM).
b)
Customer Service Management (CSM).
c)
Demand Management.
d)
Customer Demand Fulfillment.
e)
Manufacturing Flow Management.
f)
Procurement.
g)
Product Development and Commercialization.
h)
Returns.
When managing the flow of goods and services in a supply chain, the first thing to know is
the true and complete picture of the entire chain. Some of the things that are taken into
consideration in supply chain management are as follows.
a)
Market Coverage Objectives.
b)
Customer Buying Behavior.
c)
Distribution types are: intensive distribution, selective distribution, and exclusive
distribution.
The design of the supply chain flow will be more complex when the actors of each
stage of the supply chain have additional actors, for example, distributors have sub-
distributors for certain regions. Thus, the supply chain flow design mindset must also
consider its complexity, especially in carrying out effective control so that a product flow that
can be properly monitored from the procurement of raw materials to the delivery of products
to customers will be obtained. For this reason, related to product characteristics, there are
nine product characteristics that should be analyzed by the designer:
a)
The Product's Value.
b)
The Techicality of the product.
c)
The Degree of Market Acceptance.
d)
The Degree of Substitutability.
e)
The Product's Bulk.
f)
The product's perishability.
g)
The Degree of Market Concentration.
h)
Seasonality.
i)
The Width and Depth of the Product Line.
Supply chain management performance is all customer demand fulfillment activities
expressed quantitatively. The end result is a number or percentage of the company's customer
demand fulfillment activities. The objectives of performance measurement are:
a)
To create a physical delivery process (goods flow smoothly and inventory is not too
high).
b)
Stream lining information flow (information flow between each channel).
c)
Good cash flow for each channel in the supply chain.
Material flow in the supply chain is also often associated with various kinds of corporate
financial measurements. However, inventory measurement can be divided into three basic
forms, namely the average aggregate value of inventory, supply weeks, and inventory turns.
The average aggregate value of inventory is the total value of all items stored in inventory.
Supply week is an inventory valuation obtained by dividing the average aggregate value of
inventory by sales per week on an at-cost basis. Inventory turnover is an inventory
calculation obtained by dividing annual sales (at cost) by the average aggregate value of
inventory for one year.
According to Heizer and Render (2005:9-13) companies must decide on a supply
chain strategy in obtaining goods and services from outside. Some of these strategies include:
a)
Multiple Suppliers. With a multiple supplier strategy, suppliers respond to bid requests
and specifications, with orders generally going to the low bidder.
b)
Few Suppliers. A strategy of having few suppliers implies that rather than looking for
short-term attributes, such as low cost, buyers want to establish long-term relationships
with loyal suppliers. Using only a few suppliers can create value by allowing suppliers to
have economies of scale and learning curves that result in lower transaction costs and
production costs.
c)
Vertical Integration. Vertical integration develops the ability to produce goods or
services that were previously purchased or bought by supplier or distributor companies.
Vertical integration can take the form of forward or backward integration. Backward
integration suggests a company to buy out its suppliers. Forward integration suggests a
component manufacturer to make the finished product.
d)
Keiretsu Network. Keiretsu is a Japanese term to describe the warfare of being part of a
company. Keiratsu members are ensured long-term relationships and are therefore
expected to act as partners that provide technical expertise and production quality
stability.
e)
Virtual Company. A company that relies on various supplier relationships to provide
services on demand. Also known as a hollow corporation or network company.
MANAGING PRODUCTIVITY AND QUALITY IN INTERNATIONAL BUSINESS:
According to the National Productivity Council (in Husein, 2002:9), productivity
means a comparison between the results achieved (output) and the overall resources used
(input). In other words, productivity has two dimensions. The first dimension is effectiveness
which leads to the achievement of targets related to quality, quantity and time. The second is
efficiency which relates to efforts to compare inputs with the realization of their use or how
the work is carried out. Such an opinion shows that productivity includes a number of issues
related to management and technical operational activities.
Productivity is a measure of economic performance: the ratio between the amount of
output produced and the amount of resources used for that production. The fewer resources
required in production, the higher the productivity and everyone benefits. Productivity also
refers to the quantity and quality of output. More efficient use of resources will result in a
greater quantity of products. However, without satisfactory quality, the products will be
rejected by consumers. Producing quality means producing a usability match (providing the
features desired by consumers).
Increased productivity is the dream of every company, productivity contains
understanding with respect to economic, philosophical concepts. productivity with respect to
human efforts or activities to produce goods or services that are useful for meeting the needs
of human life and society in general. As a philosophical concept, productivity contains a view
of life and a mental attitude that always strives to improve the quality of life where today's
situation must be better than yesterday, and the quality of life tomorrow must be better than
today. This is what gives impetus to strive and develop themselves. While the concept of the
system, provides guidelines for thinking that the achievement of a goal there must be
cooperation or integration of the relevant elements as a system.
Total quality management (TQM) covers all activities that provide quality products to
the market. TQM considers all parts of the business (customers, suppliers, and employees).
The strategic approach of TQM starts with a customer focus, involving methods of
determining what customers want and then directing all company resources to fulfill those
wants. TQM includes four basic managerial activities:
a)
Planning for quality
b)
Organizing quality
c)
Directing quality
d)
Controlling quality
TQM tools include:
a)
Value-added analysis evaluates all work activities, material flows, and paperwork in
order to assess the utility received by consumers
b)
Statistical process control (SPC) is a method in which data is collected and variations in
production activities are analyzed in order to determine the need for rule improvements,
examples of which are process variation studies and control charts.
c)
Quality/cost studies identify a company's current costs and uncover areas where
improvements can yield the greatest potential cost savings, related to finding, correcting,
or preventing defective goods and services (which can arise from internal failures that
occur during production and onboarding of goods and external failures that occur once
goods are out in the market).
d)
A quality improvement (QI) team is a cooperative group of workers from different work
areas who meet regularly in order to define, analyze, and solve common production
problems, with the goal of improving their own work methods and the products they
produce.
e)
Benchmarking improves a company's production results or business procedures by
comparing them against its past performance or the best practices of other companies.
f)
Getting closer to consumers is the process of maintaining close contact with consumers
and finding ways to ensure that the company provides the desired value and quality in
the products used by consumers.
MANAGING INFORMATION IN INTERNATIONAL BUSINESS:
The era of globalization is an era when information exchange becomes very easy and
fast. Supported by the development of increasingly sophisticated technology, cross-country
communication has become a common thing. International cooperation is increasingly easy to
do. Global information technology is an important component in the successful running of an
organizational field. Global information technology is the utilization of various forms of IT to
support the operations and management of global businesses. Examples of Global Businesses
are IBM, Microsoft, etc.
Strategies for managing international information systems: selecting the best
application from all subsidiaries to be used as the global application, establishing a
multinational development team representing the various subsidiaries, parallel development,
where each subsidiary works on its own part of the interface, and appointing a center of
excellence, where a specific, more experienced subsidiary is appointed to develop the system.
Operations management is the set of activities an organization uses to transform types
of inputs into final goods and services. International operations management performs
transformations related to the activities of international companies. Complexities in
international operations management include: resources, location, and logistics.
Supply-chain management is the integration of the activities of procuring materials
and services, converting them into intermediate and final products, and delivering them to
customers. The goal is to build a supply chain that focuses on maximizing value for the
customer.
Productivity is a measure of economic performance: the ratio between the amount of
output produced and the amount of resources used for that production.
Total quality management (TQM) covers all activities that provide quality products to
the market. TQM considers all parts of the business (customers, suppliers, and employees).
TQM tools include: value-added analysis, statistical process control, quality/cost
studies, quality improvement teams, benchmarking, and getting closer to the customer.
Strategies for managing international information systems: selecting the best
application from all subsidiaries to be used as the global application, establishing a
multinational development team representing the various subsidiaries, parallel development,
where each subsidiary works on its own part of the interface, and appointing a center of
excellence, where a specific, more experienced subsidiary is appointed to develop the system.
PRACTICE QUESTIONS:
1. What is international operations management?
2. What is supply chain management and vertical integration?
3. Explain what is meant by productivity?
4. Explain what is meant by integrated quality management?
GROUP DISCUSSION
The Operation Strategy of Starbucks
Operations management is defined as the systematic design, direction, and control of
processes that transform inputs into services and products for internal, as well as external,
customers. Moreover, Starbucks uses the bean stock to improve their operations through
many decades. In the year 1991, Starbucks was the first U.S. privately owned coffee company
in the history to offer stock options called "bean stock". The current CEO of Starbucks is
Howard Schultz, he replaced Jim Donald to turn Starbucks around from struggling in the
coffee world and he is now currently focusing on the Internet projects for the company, also
managing Starbucks with the stock-option called bean stock. This idea is mainly given to
managers, baristas and employees inside the manufactures. Bradley Honeycutt, a woman in
Starbuck's human resources department, came up with the name "Bean Stock" and stated that
"it's not only a playful reference to the coffee beans we sell but also evokes Jack's beanstalk,
which grew to the sky." This is why bean stock has its own uniqueness and no other company
has a stock-option plan that is as widely used as bean stock. Bean stock is the main difference
between the operations in Starbucks and other manufactures in the same industry, because
Starbuck's operation focuses on turning every employee into a partner, in other words, bean
stock forms a big family within Starbucks Company. This bean stock option is the core
process of Starbucks which can be defined as a chain of activities that delivers value to
external customers. The board of directors and CEO believe that the bean stock started to
affect the attitudes and performance of employees quickly after they started this new stock
option of bean stock. Moreover, with this bean stock idea, employees' relationships are a lot
closer than any other companies that have to deal with customer relations and are known as
customer relationship process.
INTERNATIONAL FINANCIAL MANAGEMENT:
CHAPTER OBJECTIVES:
After studying this chapter, you are expected to be able to :
a)
Explain financial issues in international trade
b)
Identify and manage exchange rate risk.
c)
Elaborate on working capital management
d)
Identify sources of international investment.
International financial management is the financial planning, organization, and control of
multinational corporations (MNCs). Multinational corporations are companies that operate
all over the world. They are large companies owned by global capitalists with centers in
Canada, the United States, Japan, Germany, Italy, France, and the United Kingdom. These
companies are commonly called global conglomerates or global capitalists. They do not
recognize countries, nations, homelands, in developing their capital. Today these companies
dominate the world economy, and control the economies of developing countries in Africa,
Asia and Latin America. Their main goal is profit.
International finance is important for:
a)
expansion of multinational corporations (MNCs) into developing countries (NSBs),
b)
ideological expansion of globalization, and
c)
international trade (export-import).
Liberal economic thinkers claim that the expansion of MNCs into developing countries is the
locomotive of development in NSBs, hence their presence is desirable. To convince people in
developing countries that MNCs are important, the ideology of globalism is promoted,
without MNCs there would be no development in developing countries as they lack capital,
knowledge, technology and expertise.
Rationally, the expansion of MNCs into NSBs is due to:
a)
saturated investment in MNC countries,
b)
in NSB natural resources are abundant,
c)
in NSB cheap labor,
d)
in NSB capitalist-bureaucrats thrive,
e)
in NSB comprador capitalists are very loyal to MNCs,
f)
in the NSB a potential market for global capitalists,
g)
in NSBs the tax system is flexible,
h)
in NSBs the (port) customs policy is flexible,
i)
in the NSB Labor Laws favor capitalists,
j)
in NSBs the government provides investment security,
k)
in NSBs gives global capitalists the freedom to transfer capital and profits,
l)
in NSBs the banking system is flexible.
International financial management includes the activities of: (1) financial flows, i.e. inflows
of capital and loans, (2) real flows, i.e. inflows of merchandise (raw materials, semi-finished
goods, and finished goods, (3) cultural flows, i.e. inflows of science, technology, and
mindsets and behaviors. The essence of international financial management is the export of
capital, culture, and merchandise from developed capitalist countries to developing countries.
For developing countries (NSBs), the presence of MNCs is a form of "modern colonization"
brought about by the process of globalization.
Many scholars have taken the initiative to fight it. They say that globalization is a human
engineering of MNCs to control the economic, social, political, and cultural (education) of
developing countries. However, behind it all there is a speck of profit, namely:
a)
can capitalize on comparative advantages,
b)
transfer of science and technology.
The risks that NSBs face are:
a)
uncertainty of foreign exchange rates, as currency values can be gamed by global capitalists,
b)
high country risk, MNCs can control the politics of NSBs because their economies have been
hegemonized and dominated.
After all, international financial management is important to learn because it can:
a)
assists financial managers in predicting international events and the impact of
international events on corporate financial decisions,
b)
know the world economic cycle (growth, crisis, recovery),
c)
knowing the MNC's strengths in empowering NSBs so that NSBs are dependent on them,
d)
know the morals of the nation (patriot, bureaucrat capitalist, comprador capitalist),
e)
understand the character of MNCs that are only profit-oriented without caring about the
fate of the many people they control,
f)
know the flow of funds from developed countries to NSBs and from NSBs to developed
countries.
FINANCIAL ISSUES IN INTERNATIONAL TRADE
Financial issues in international trade include the currency used for transactions, when
and how to check credit, the forms of payment used, and how to arrange international
financing. The various payment methods used in international transactions include payment
in advance, open account, documentary collection, letters of credit, credit cards, and
countertrade. Cash in advance provides protection to exporters against the possibility of
importers delaying payment, this may be due to the country where the importer is located in a
non-conducive state or due to the characteristics of the importer himself who is often
negligent in making payments. Letter of credit (L/C) is a letter signed by a bank on behalf of
the buyer and addressed to the seller.
IDENTIFY AND MANAGE EXCHANGE RATE RISK
The international monetary system is the structure, instruments, institutions, and agreements
that determine the exchange rates or values of various currencies in the world, including the
adjustment of capital flows and international trade, and the balance of payments. The system
is designed by global capitalists to facilitate the development of their capital through the
international monetary fund or IMF and the World Bank.
The various international monetary systems that are commonly used include:
a)
fixed exchange rate. The government keeps the value of the currency at a set level
buying or selling foreign exchange. Government policy of devaluation or revaluation.
b)
floating exchange rate, or free float rate. The supply and demand of the forex market
is influenced by price levels, interest rates, and economic growth.
c)
managed float, or controlled float. The currency exchange rate is set by the
government, but is floated usually downgraded based on the government's decision.
d)
Target zone arrangement, or target zone arrangement. A combined currency system
to deal with exchange rate changes.
e)
pegged, or tethered exchange rate. A country sets the value of its currency based on
the value of the currency of one or a group of countries.
f)
crawling peg, or crawling tether. A country sets the value of its currency in relation to
the value of other countries' currencies, but changes it step by step.
g)
pegged to a basket of currencies. About 34 countries tether their currencies to a basket
of currencies of their trading partner countries
The equilibrium of currency exchange rates is determined by the interaction of various
factors that affect the demand and supply of currencies, including:
a)
Inflation rate
b)
Income level
c)
Interest rate
d)
Government control
e)
Market expectations
Exchange rate formation mechanism. Global businesses must understand the changes
and formation of exchange rates. The purpose is to know whether the currency is appreciating
or depreciating, and to forecast changes in exchange rates.
International payment flows that affect the supply and demand for money are:
a)
international trade, and
b)
financial flows, namely the investments of the global capitalists.
The factors that affect international payments are:
a)
differences in inflation rates,
b)
income differences,
c)
restrictions on trade transactions,
d)
interest rate differentials, and
e)
restrictions on global capitalist capital flows.
The foreign exchange market is the buying and selling of foreign exchange that is generally
conducted through electronic computer information, available in all countries, fluctuating
every hour on every working day. The market is generally used for capitalist speculation. The
functions of the forex market are:
a)
transfer of purchasing power,
b)
credit provision: L/C and banker's acceptance,
c)
risk minimization: hedging, forwards.
The participants in the forex market are:
a)
banks and non-banks that act as dealers,
b)
individuals and companies conducting trade and investment transactions,
c)
speculators and arbitrators,
d)
central bank,
e)
forex brokers.
The types of transactions conducted in the forex market are:
a)
spot transaction: the exchange rate at the time of the transaction,
b)
forward transactions: forex delivered during y.a.d.
c)
swap transaction: occurs in the interbank market, namely the purchase and sale of foreign
exchange simultaneously, buying and selling on different dates, so it is called spot against
forward type.
In the forex market, we must distinguish between exchange rates, quotes, sports markets,
forward markets, futures markets, and options markets. Exchange rate is the foreign
exchange rate, the price of a currency expressed in another currency. Quotation is the
willingness to buy or sell forex at the prevailing price level. Types of quotes are:
a)
Direct and indirect quotations.
b)
The European and American way
c)
Bid and offer quotations
d)
Expresses forward quotes on a point basis
e)
Forward quotes in percentage
f)
Cross rate
Exchange Rate Risk is the risk associated with how much the base cash flows of the
parent company's home currency are worth. When an international company conducts
business in a foreign country its financial manager must consider fluctuating exchange rates,
and these fluctuations pose risks, namely:
a)
Transaction risks involving payables and receivables are valued in foreign currencies.
The buyer or borrower can accelerate or delay or even change the terms of payment in
order to overcome this risk. One type of hedging that can be done is forward hedge
which is done in the foreign exchange market and involves a contract.
b)
Translation risk concerns losses or gains arising from the restatement (conversion) of the
values of assets and liabilities/receivables and payables arising from overseas
investments from one currency to another (Ball and McCulloch, 2007).
WORKING CAPITAL MANAGEMENT:
The working capital management of multinational companies is in principle no
different from the working capital of domestic companies, where the purpose of working
capital management:
a)
Accelerate the collection of receivables and slow down short-term payments.
b)
Allocate funds optimally.
c)
Achieve maximum profit for short-term investment of surplus funds.
In terms of raising capital, the things that must be considered to make a decision (McCulloh,
2001) are:
a)
What currency the capital will be raised in.
b)
Long-term forecasts of the currency's strength and weakness
c)
How much money will be in the form of equity capital in the form of shares, and in the
form of credit capital by selling bonds.
d)
If the decision is to use one of the world's capital markets, the market that can be reached
at the lowest cost should be sought.
e)
How much money the company needs, and for how long Are other sources of money
available
SOURCES OF INTERNATIONAL INVESTMENT:
The sources of international investment can be:
a)
Portfolio investment. This portfolio investment is made through the capital market with
securities instruments such as stocks and bonds.
b)
Foreign direct investment (FDI). Direct investment, known as Foreign Direct
Investment (FDI), is a form of investment by building, totally buying or acquiring a
company. Investment in Indonesia is regulated by Law Number 25 of 2007 concerning
Investment. In this Law, what is meant by Foreign Investment is an investment activity
to conduct business in the territory of the Republic of Indonesia carried out by foreign
investors, either using fully foreign capital or in partnership.
International financial management is the financial planning, organization, and
control of multinational corporations (MNCs). Multinational corporations are companies that
operate worldwide. International financial management includes activities: (1) financial flow,
which is the inflow of capital and loans, (2) real flow, which is the inflow of merchandise
(raw materials, semi-finished goods, and finished goods, (3) cultural flow, which is the
inflow of science, technology, and mindset and behavior. The essence of international
financial management is the export of capital, culture, and merchandise from developed
capitalist countries to developing countries.
Financial issues in international trade include the currency used for transactions, when
and how to check credit, the forms of payment used, and how to arrange international
financing.
The various payment methods used in international transactions include: payment in
advance, open account, documentary collection, letters of credit, credit cards, and
countertrade.
The various international monetary systems that are commonly used include: fixed
exchange rate, floating exchange rate (free float), managed float, target zone arrangement,
pegged, crawling peg, pegged to a basket.
Exchange rate risk is the risk associated with how much the parent company's home
currency cash flows are worth. When an international company conducts business in a
foreign country its financial manager must consider fluctuating exchange rates, and these
fluctuations give rise to risks, viz: transaction risk, which concerns payables and receivables
valued in foreign currencies, and translation risk, which concerns losses or gains resulting
from the restatement (conversion) of the values of assets and liabilities.
The working capital management of multinational companies is in principle no
different from the working capital of domestic companies.
The sources of international investment can be portfolio investment and foreign direct
investment (FDI), known as Foreign Direct Investment (PMA).
PRACTICE QUESTIONS:
1. What is international financial management?
2. Describe the issues of international finance?
3. Describe the methods of international payments?
4. Explain exchange rate risk?
5. Describe the sources of international investment?
GROUP DISCUSSION:
International Financial Reporting Standards
(IFRS: International Financial Reporting Standards)
IFRS (International Financial Reporting Standards) is an international financial
reporting standard adapted by the International Accounting Standards Board (IASB). The
implementation of IFRS is mandatory for companies going public in Indonesia and took
effect on January 01, 2012. IFRS is a new international financial reporting standard
developed from the previous international financial reporting standard, International
Accounting Standards (IAS). IAS were issued between 1973 - 2001 by the International
Accounting Standards Committee (IASC)). On April 1, 2001, the new IASB took over the
responsibility of preparing International Accounting Standards from the IASC. During its
first meeting, the new Board adapted existing IASs and SICs. The IASB continued to develop
standards and named its new standards IFRS.
IFRS is considered to be a collection of "basic principles" standards which then establishes
body rules as well as dictates certain applications. International Financial Reporting
Standards include:
-International Financial Reporting Standards (IFRS)) published after 2001.
-International Accounting Standards (IAS)) issued before 2001
-International Financial Reporting Interpretations Committee (IFRIC)) issued after 2001
-Standing Interpretations Committee (SIC) issued before 2001
-Framework for the Preparation and Presentation of Financial Statements (1989))
Chairman of the IFRS Implementation Team - Indonesian Accountants Association (IAI)
said, by adopting IFRS, Indonesia will get seven benefits at once.
1. improving the quality of financial accounting standards (FAS) and reducing FAS costs
2. increase the credibility and usefulness of financial statements.
3. improve the comparability of financial reporting.
4. increase financial transparency and improve the efficiency of preparing financial
statements.
5. lowering the cost of capital by opening up opportunities to raise funds through the capital
market.
INDUSTRIAL RELATIONS
AND INTERNATIONAL HUMAN RESOURCE MANAGEMENT
(International Human Resource & Industrial Relations)
CHAPTER OBJECTIVES:
After studying this chapter, you are expected to be able to :
a)
Outline international managerial labor needs
b)
Elaborate on recruitment & selection and training & development systems
c)
Elaborate on performance appraisal & compensation
d)
Elaborate on labor relations.
HR management includes the activities of recruiting and selecting non-managers and
managers, providing training and development, assessing performance, and providing
compensation and benefits. International HR managers must deal with differences in culture,
levels of economic development, and legal systems between the countries in which a
company operates. These differences may force to adjust hiring, firing, training and
compensation programs in countries on a basic basis.
UNDERSTANDING INTERNATIONAL MANAGERIAL LABOR NEEDS
The staffing issues facing international HR managers can be divided into two broad
categories. One of these categories is recruiting, training and retaining managerial and
executive employees. The other category is recruiting, training and retaining non-managerial
employees, such as production blue-collar workers and white-collar office staff. For
managerial employees, strategic and development issues are of basic importance. For non-
managerial workers, the differences in cultural, political, and legal conditions between
countries may be more important.
The size of the task of recruiting, training, and retaining managers depends on the
involvement of international firms. Clearly, the needs of firms in the early stages of
internationalization, such as direct exporters, are much more complex and comprehensive
than those facing MNCs with extensive investments in many countries.
To operate successfully, a global company needs a team of managers who collectively
possess the following skills and knowledge:
a)
The company's product line: product managers should be aware of factors such as
latest manufacturing techniques, research and development opportunities, and competitor
strategies.
b)
Functional skills (accounting, logistics, marketing, manufacturing management, and so
on) are necessary to ensure global competitiveness: functional specialists seek to capture
global economies of scale and synergies in finance, marketing, and production activities.
c)
The market of each country in which the company does business: managers in the
country must understand factors such as local laws, culture, competitors, distribution
systems, and advertising media. These managers play a key role in meeting local
customer needs, ensuring compliance with host country regulations, and expanding the
company's stock market and profitability in the host country.
d)
Corporate global strategy: high-level executives at corporate headquarters must
formulate a global strategy for the company and then control and coordinate the
company's activities over product, functional, and country managers to ensure the
strategy is successfully implemented.
RECRUITMENT, SELECTION, TRAINING AND DEVELOPMENT SYSTEM:
The extent to which firms internationalize and the degree of centralization or
decentralization affect (and are affected by) the citizenship philosophy for international
managers. Parent country nationals (PCNs) are residents of the home country in international
business. The use of PCNs, a foreign MNC in operation provides many advantages to the
company. Since PCNs usually share a common culture and educational background with
corporate headquarters staff, they facilitate communication and coordination with corporate
headquarters. Host country nationals (HCNs) are residents of the host country. HCNs are
typically used by international businesses to fill mid-level and low-level jobs, but they also
frequently appear in managerial and professional positions. An international company may
hire third-country nationals (TCNs), who are not citizens of the country or the host country.
Like PCNs, TCNs are most likely to be used in high-level and/or technical positions. TCNs
and PCNs are collectively known as expatriates, or people who work and live in countries
other than their home country.
International companies develop systematic strategies to select between HCNs, PCNs
and TCNs for various positions. Some companies rely on an ethnocentric staffing model,
where they primarily use PCNs for higher-level staff foreign positions. This approach is
based on the assumption that the office perspective should take precedence over local and
foreign perspectives and that PCNs will be most effective in representing the views of the
office in foreign operations. Other international companies follow a polycentric staffing
model i.e. they emphasize the use of HCNs in the belief HCNs know the local market best.
Finally, the geocentric staffing model places PCNs, HCNs and TCNs on equal footing.
Companies that adopt this approach want to hire the best person available, regardless
of where the individual comes from International businesses recruit experienced managers
through various channels. Common sources of recruitment are within the company itself
among employees already working for the company in the host country or those who,
although currently working domestically, may be prepared for international assignments in
the host country. The second group may include managers who have never held an
international assignment and managers who have completed previous international
assignments. International businesses may also seek to identify prospective managers who
work for other companies. These may be home country managers who are considered
qualified for international assignments or managers who are already working on international
assignments for other companies. For higher-level positions, companies often rely on so-
called headhunters to help them find prospective candidates.
Headhunters recruit companies that actively seek qualified managers and other
professionals for possible placement in other organizations. A company may sometimes find
it useful to relocate its facilities to be closer to a pool of qualified employees. It is common
for large multinational companies to hire recent college graduates for immediate foreign
assignments. Some companies, however, will hire new graduates whom they eventually
intend to send overseas and, in the short term, give the graduates domestic assignments.
Especially attractive are graduates with foreign language skills, international travel
experience and majors in International Business or related fields.
Once the pool of potential managers has been identified, the HR manager must decide
which people from the pool are the best qualified for the task. The most promising candidates
share the following characteristics: managerial competence (technical and leadership skills,
knowledge of culture) appropriate training (formal education, knowledge of the host market
and culture and language), and adapting to new situations (ability to deal simultaneously with
adjusting to a new job and work environment, adjusting to working with HCNs, and adjusting
to a new national culture).
Training is instruction aimed at improving specific job-related skills and abilities.
Development is general education related to preparing managers for new tasks and/or higher-
level positions.
Before a company can undertake a meaningful training or development program, it
must assess its exact training and development needs. This assessment (training assessment)
involves determining the difference between what managers and employees can do and what
the company feels they should be able to do. The first issue international businesses should
consider when planning their training and development efforts is whether to rely on standard
programs or develop their own customized programs.
PERFORMANCE APPRAISAL AND COMPENSATION:
Performance appraisals of managers in international business enterprises should be
based on a clear understanding of the objectives for foreign operations. A successful
subsidiary in a mature and stable foreign market will have different objectives than a start-up
operation in a growing but unstable market. Actually in assessing a manager's performance,
the company may consider sales, profit margins, market share growth, or other measures or
indicators deemed important. If the subsidiary has been experiencing problems, performance
may be more appropriately gauged by how well the manager has helped to resolve those
problems.
International businesses find it necessary to provide these managers with
compensation differentials to make up for the dramatic differences in monetary valuations,
living standards, lifestyle norms, and so on. When managers are on short-term assignments
abroad, their home country salaries usually remain unchanged. If foreign assignments are
limited or long-term, compensation is routinely adjusted to allow managers to maintain their
home country standard of living. This adjustment is especially important if a manager is
transferred from a low to a high-cost location or from a country with a high standard of living
to one with a lower standard of living. The starting point in compensation differentials is the
cost-of-living allowance, which is intended to offset differences in the cost of living in the
home and host countries.
LABOR RELATIONS:
More than half of the world's labor force outside the United States belongs to workers.
In Europe, labor is much more important than in the United States. Labor in many European
countries is aligned with political parties, and its fate ebbs and flows as a function of their
party's current control of government. In most of Europe, temporary work stoppages are often
used by labor unions in an attempt to gain support for their demands. Collective bargaining is
the process used to make agreements between management and labor unions. As already
mentioned, collective bargaining in the United States is highly regulated.
Other than through laws that regulate the process, however, the government plays a
relatively passive role in developing labor agreements. Union representatives and
management meet and negotiate contracts. The contract governs their collective labor
relationship until the contract expires, when a new one is negotiated.
PRACTICE QUESTIONS
1. Explain the importance of knowing labor needs in international business.
2. Explain the importance of training and development needs assessment for international
workers?
3. Explain what is meant by training and development?
4. Explain what is meant by performance appraisal?
5. Explain what is meant by labor relations?
GROUP DISCUSSION
Case 1:
Robert Half International (RHI), a professional consulting firm, has staffing operations in
more than 400 locations worldwide. During the recession of 2009, RHI began hiring older,
more experienced workers to add to its roster of temporary workers.
Typically, temporary workers are low-level employees, but during the recession,
many workers with fifteen or twenty years of experience lost their jobs or retired from full-
time jobs. RHI hired older highly skilled workers, such as accounting and finance experts, to
work on temporary projects-helping a company restructure or emerge from bankruptcy, for
example. The situation is a win-win: Companies get access to experts they may not otherwise
be able to afford, while retired workers earn extra money or income after a layoff. Zurich-
based Adecco, a competitor to RHI, likewise hires older workers. "More companies are
looking for flexible, highly skilled temporary employees because it's much easier to end an
assignment than terminate employment," said Doug Arms, chief talent officer at Ajilon
Professional Staffing, a unit of Adecco.
Case 2:
CASE OF HUMAN RESOURCE UTILIZATION, JOB TRANSFER IN PT. CALTEX
PACIFIC INDONESIA
PT Caltex Pacific Indonesia (PT CPI) is a foreign capital company (PMA) that
contracts with the Government of Indonesia in the field of petroleum exploration and
production in Indonesia. Although the company provides salaries, benefits and various
facilities to employees which by the size of some other companies are considered quite
special, the company faces problems in human resource development.
PT CPI faces problems in the preparation of experts. It seems that PT CPI is only used
as a stepping stone to find work elsewhere. During this period, around 51.42% of employees
with undergraduate backgrounds quit their jobs and moved to other companies. In general,
employees who quit their jobs came from Java. This labor turnover greatly affects the
company's operations. High labor turnover is considered strange by the company, because
the company has provided good salaries, benefits and facilities.
However, in the eyes of employees, what the company provides to employees is not
satisfactory. For example, there are employees who demand that the salaries of employees
who work directly in the field of exploration and production be given in the same proportion
is greater than that of administrative employees. In addition, there are various other
complaints. For example, salaries, allowances and facilities for employees are far above what
domestic employees get, despite the fact that work abilities and achievements are not so
different. Another complaint is the different treatment of employees from the Pertamina
consortium working at PT CPI. They get better opportunities to participate in training for
career advancement compared to employees who are not from the Pertamina consortium. In
addition, some employees feel that old-age benefits are relatively low.
Employees feel that what they receive is not in accordance with their sacrifices that
have to work in a work environment far from big cities. To overcome the above problems, the
company must take various corrective actions so that employees can stay in the company for
a relatively long time. At a time when Indonesia's economic growth is quite rapid, many new
industries have emerged, tightening competition for high-quality labor.
