1. MGMT. 416 International Business II Evrim Tören

2. Chapter 18 Global Operations and Supply Chain Management

3. Innovative supply chain management: Example of ZARA Fast-fashion involving up-to-the-minute fashion Low prices Clear market focus Zara is one of the world’s most rapidly expanding retailers, with a chain of 4,000 retail stores, located in the main cities of the world in 68 countries. Its annual sales exceed $ 4.5 billion. Its success comes from supply chain management skills. Store managers continuously inform the production units about which products are selling and which are not. It uses only four colors to reduce the dying time, keep the plants in Europe to reduce the transportation time. As a result, ZARA reduced the cycle time from initial garment design to appearance on hangers in the retail stores to 14 days (versus 3-5 months for competitors). So there is continuous supply of new merchandise; 20,000 new items every year. An effective supply chain management can lead to competitive advantage.

4. To increase competitiveness Firms search ways to reduce costs and improve the quality of their products. Improve the existing operations Open new or transfer the existing operations abroad or find alternative sources for labor, raw materials, or other inputs. Outsourcing – Hiring others to perform some of the activities and decision making in a company’s value chain, rather than having the company performing these activities.

5. Managing global supply chains It is the efforts to improve the efficiency and effectiveness of a firm’s international operations. It includes global sourcing, manufacturing systems, productivity and performance of international manufacturing operations, and issues associated with the global standardization versus localization of international operations.

6. Supply Chain Management Supply chain refers to the activities that are involved in producing a company’s products and services and how these activities are linked together. The concept of supply chain management involves the applicaitons of a total systems approach to managing the overall flow of materials, information, finances, and services within and among companies in the value chain-from raw materials and components suppliers through manufacturing facilities and warehouses and on to the ultimate customer.

7. Supply chain network: A laptop company Activity→Design→Component→Assembly→Warehousing→Marketing→Consumer sourcing & testing & distribution&sales ↑ (eg. Memory, Technical semiconductors, support disc derives) services Location→US→ S. Korea→ Taiwan → US → EU → India Taiwan Ireland US US China Singapore Canada Ireland Malaysia Singapore US Australia

8. Effective supply chain management Because inventory is carried at each stage in the supply chain, and because inventory ties up money, the goal of effective supply chain management systems is to reduce inventory, providing that the company’s products be available when needed at desired level of quality and quantity. So operations at each stage in the supply chain should be synchronized to minimize these buffer inventories.

9. Tools for effective supply chain management: New technologies, like web, internet, have enabled the availability of data on markets, suppliers, customers, employees, etc. Gathering information helped companies to deal with unplanned economic, political and social events and increased company’s ability to manage regulatory, social and environmental pressures both nationally and internationally.

10. Design of products and services There is a strong relationship between design of the product and supply chain management. According to the design, the firm will require a certain type of labor, materials, information and financing. Eg, Ford was unsuccessful selling autos designed for US and Europe in Brazil. The company developed a group of local engineers, called them “Amazon group”, to develop an auto for Latin America. The car Ecosport was designed for rugged and small roads of Latin America. The car captured 80% of the Brazilian market, and Ford increased sales in Argentina, Chile, Venezuela and Mexico.

11. Product design Two approaches: 1. Traditional “over-the-wall” approach: Designers prepare the product’s design→it is sent to manufacturing engineers. 2. Design the product with participation: Designers, engineers and customers are involved in designing. Eg, Starbucks started a MyStarbucks-Idea site. Within a week more than 100,000 votes had been casted for improvement ideas.

12. Sourcing globally Reasons for sourcing globally: ◊♦ Obtaining lower prices, ◊♦ Some products may not be available domestically, so they must be imported, ◊♦ Competitors may be using higher quality or better designed inputs, which the firm also must acquire, ◊♦ The firm may have to acquire components and machinery in foreign countries.

13. Offshoring It is relocating some or all of a business’s activities or processes to a foreign location. Companies can either set up their own facilities in foreign locations or outsource the production to other companies. Outsourcing has become an important international business activity, because this way the firms use other componies to reduce cost and capital investments, improve flexibility and speed of response, enchance quality, or provide other strategic benefits. Any part of the value chain can be outsourced, including product design, raw materials or components supply, manufacturing or assembly, logistics, distribution, markeeting, sales, service, human resources or other activities.

14. Continued..... Examples; Some nations may provide access to lower-cost or better quality minerals or other important raw materials or components compared to domestic suppliers (such as, Bauxite in Jamaica, or dynamic random-access memory chips in S. Korea) There may be abundant and inexpensive unskilled labor in some countries (to produce labor-intensive products or parts), such as athletic shoes or men2s shirts. As more of a company’s operational activities are automated, it becomes easier and more economical to outsource these activities.

15. Global sourcing arrangements Wholly owned subsidiary may be established in a country where there is low-cost labor or higher quality production. Overseas joint venture may be established with a domestic firm for similar reasons. In-bond plant contractor may be producing parts or assemblying in a foreign country. Overseas independent contractors may be producing for the home company. Independent overseas manufacturers may be selling to the main company.

16. Intrafirm trade It is the trade between a parent company and its foreign affiliates. It accounts for 30-40% of the exports and 35-45% of the imports in the US, for example. There is a strong pressure on firms to produce the products where there is competitive advantage and outsource the goods where the firm lacks competitive advantage. The market changes require quick responsiveness, so outsourcing becomes essential to follow up these changes. 50% of the goods in the market today were not in the market 5 years ago.

17. Increasing use of electronic purchasing for global sourcing Exostar.com is a global web-based business-to- business (B2B) electronic market place for the aerospace and defense industry formed by BAE Systems, the Boeing Company, Lockheed Martin Corporation, Rolls-Royce, and Raytheon creating a $80 billion trade with 37,000 suppliers to simplfy and standardize procurement processes, steamline supply chains, reduce costs, improve productivity and reach new markets. Indirect procurement includes such items as maintainance, repair, operating supplies, office equipment, and other seervices and supplies.

18. Benefits of global electronic procurement systems: Cut costs: Oracle Corp. Announced that its costs are reduced bu $2 billion. Ordering errors are also cut by 69%. Small companies overcome market enterance barriers through electronic procurement sysytems. B2B systems can create value by increasing the purchasing power of the buyers, improving process efficiency, integrating supply chains, enhancing content dissemination, and improving overall market efficiency within and across borders.

19. Problems with global sourcing Creates an opening for the competitor (eg, for Chinese companies) Exchange rate risk Security; hacking, copying, giving information about design, prices, inventory Added costs – freight, insurance and packing may add 10-12% to the quoted price. Costs of importing: ۩ International freight, insurance and packing (10-12%) ۩ Import duties (0-50%) ۩ Customhouse broker’s fees (3-5%) ۩ Transit or pipeline inventory (5-15%) ۩ Cost of L/C (1%) ۩ International travel and communication costs (2-8%) ۩ Company import specialists (5%) ۩ Reworking of products out of specification (0-15%)

20. Advanced production techniques to enhance quality and lower costs To achieve efficiency and effectiveness: Just-in-time supply chains Highly synchronized manufacturing systems Computer-integrated manufacturing (CIM) Utilizing computers and robots

21. Inventory costs are a major factor Getting rid of inventory can reduce costs by 40%. To operate without inventory; 1. Components, whether purchased from outside suppliers or made in the same plant, should be defect-free, or production line would be shut down until the inputs arrive. 2. Parts and components had to be delivered at each point in the production process at the time they are needed. Just-in- time (JIT) is a balanced system in which there is little or no delay time and idle in-process and finished goods inventory. 3. Customers want delivery when the make the purchase, so sellers must have some inventories of the finished products. Manufacturers should set up flexible production units, which necessitates rapid setup times.

22. Continued... 4. It is also necessary to reduce process time. Transport time has to be reduced, too. US and European firms group the machines by function, while Japanese group machines according to single product. Japanese achieve better results. 5. Flexible manufacturing allows product changes to be made rapidly, but each change still costs money. Therefore, the manufacturers simplified product lines and designed the products to use as many of the same parts as possible. It helps to suppliers, because they receive fewer but larger orders.

23. Continued... 6. For just-in-time to be successful, manufacturers have to have the cooperation of the suppliers. 7. To lower costs, improve quality, and lower production times, Japanese management requires that product designers, production managers, purchasing people, and marketers work as a team. 8. Getting these people together enabled suppliers to suggest using lower-cost parts, manufacturing to show when design change could simplify the production process, and marketing to contribute the customer’s viewpoint, all before the first product was produced.

24. Reducing costs Developed countries are facing increasing competitive threat from lower-cost countries like India and China. The industrial sector declined in the developed countries like Japan, US, Germany, because the manufacturing and assembling activities were relocated in countries like China, Mexico, or Eastern Europe to reduce costs.

25. Reducing costs: Improve quality Total Quality Management (TQM) – It is a system in which the entire organization is managed so that it excels on all dimensions of product and services that are important to the customer. It is invented by Bell laboratories in 1920’s. Teams are necessary for the system and one of these teams is the Quality Circly (Quality Control Circle) developed by Ishikawa. Quality circle is a small work group that meets periodically to discuss ways to improve its functional areas and the quality of the product.

26. President of Komatsu: The objective of the quality center is to take the responsibility for the quality of the product: “A small group of employees, led by a foreman who received quality control education, are divided among subdivisions.” Example: One day, telephone operators received complaints from outside callers regarding delays in answering telephones. The complaints were valid. The telephone company informed the firm that on the average telephones were answere in 3 seconds. The company telephones were answering in 7.2 seconds. So the circle discussed how to reach the 3 second standard.

27. Reducing costs: Problems with implementing the JIT system Many manufacturers in the US and other places focused only on scheduling goods inventories (little JIT), and missed the total system of covering the management of the people, materials and relations with the suppliers (big JIT). They did not understand that JIT includes TQM; continuous improvement.

28. JIT versus Taylor’s scientific management system Taylor’s scientific management system is based on scientific measurements that prescribes a division of work whereby planning is done by the managers and plan execution is left to supervisors and workers. This system contradicts with JIT and the principles of quality circles which stresses: 1. Participative decision making 2. The problem solving capabilities of workers Americans pressured for quick results and it was difficult for Americans to achieve company loyalty from the workers. Also they could not integrate the suppliers into the system.

29. Some problems with JIT JIT was a balanced system used for repetitive operations. It was less useful for job shops (firms or departments within larger firms that specialize in producing small number of custom- designed products). Because JIT is a balanced system, if one operation stops, the entire production line stops. Achieving a balanced system was difficult because production capacities differ among the various classes of machines. JIT makes no allowances for contingencies, so every piece must be defect-free. Preventive (planned) maintenance (maintenance done according to plan, not when machines break down) is crucial.

30. Example: Toyota Toyota have found out how vulnerable the JIT system is to the failure of just one supplier to deliver a part at the planned time. There was a fire in the plant of one of the suppliers. This shut down all the plants of Toyota in Japan causing it to delay production for one week. It also caused all the suppliers’ to produce Toyota parts for one week. So Toyota started to have more than one supplier for the parts of its cars.

31. Synchronous Manufacturing It is also called the theory of constraints (TOC). It is a scheduling and manufacturing control system that seeks to locate and then eliminate or minimize any constraints to greater production output, such as machines, people, tools and facilities. The system’s output is determined by and limited to the output of the slowest operation (bottleneck) that is working at the full capacity.

32. Bottleneck Bottleneck is the operation in a manufacturing system whose output sets the limit for the entire system’s output. A computer program developed by Dr. Goldtratt schedules work, taking into consideration bottleneck and nonbottleneck operations. Once a bottleneck is discovered, the operations manager can concentrate on increasing the production rate of the process. After resolving that, the manager can repeat the process on the next-slowest operation.

33. JIT versus synchronous manufacturing JIT is a balanced system. Synchrocous manufacturing aims to balance the product flow through the system, which leaves output levels of of various operations unbalanced. In synchronous manufacturing, the manager’s attention is focused on the bottleneck, rather than on other operations, because a production increase in the bottleneck means an increase in the for the entire production system. An increase in a nonbottleneck operation adds to only the machine’s idle time. A defective part or component can shut down the JIT system. Because synchronous manufacturing system has excess capacity in all operations except the bottleneck, any defective part produced befor the bottleneck can be remade, and thus the entire system is not stopped.

34. Mass customization It is the use of flexible, usually computer-aided, manufacturing systems to produce and deliver customized products and services for different customers worldwide. Toyota started using it. 1. Colloborative – company helps customers choose the required product feature 2. Adaptive – the company offers a standard product that the users can modify themselves 3. Cosmetic – only the product’s presentation is customized, such as packing or color 4. Transparent – customers are provided with individualized product or service offerings without their knowing it, such as Web site interfaces

35. Mass customization It is appropriate in situations where there is a potential for delaying the task of differentiating the product for a particular customer until the las possible point in the supply network. In this way, the company will be able to function at maximum efficiency and to rapidly respond to customers’ needs, while maintaining a minimum level of inventory.

36. Six Sigma It is a business management process for reducing defects and eliminating variation. As defects go down, so do costs and cycle time, while customer satisfaction goes up. It means 3.4 defects per million occurrences, versus two or three sigma level (more than 300,000 unsatisfactory customer complaints). In the USA, redoing is 20-40%.

37. Six sigma steps: 1. Define – who are the customers and what their complaints are 2. Measure –categorize key characteristics, verify measurement systems, collect data 3. Analyze – converge raw data into information that identifies the causes of defects or problems 4. Improve – developing solutions to the problem, implementing changes and assessing whether additional changes are required 5. Control – monitor and sustain performance over time

38. Six Sigma management The CEO is the driving force in implementing the six sigma. He is the champion in implementing, success, providing necessary resources and breaking down organizational barriers. Master black belts (MBBs) train and monitor BBs. Project leaders are called black belts (BBs), individuals with a history of achievement and experience. Project team members are called green belts (GBs).

39. Example Quality online survey found that firms increased cost savings (45% of the respondents), increased customer satisfaction (20%), reduced defects (15%), increased company growth (10%) and increased quality (5%). Motorola using six sigma since 1987, saved costs over $16 billion, reduced the cost of poor quality by 84% and increased employee productivity by 12%.