Global Manufacturing and Materials Management 16 Chapter Global Manufacturing and Materials Management

Case: Competitive advantage at Dell Dells business model based on direct selling of customized product at low prices Location advantages (Brazil, Ireland, Malaysia, China & US) Close to markets Low shipping costs Speed of delivery Supply base global Dell manages global supply chain to minimize inventory and customize PCs in three days

Materials management Activity that controls the transmission of physical materials through the value chain Includes procurement, production and into distribution Logistics : Procurement and physical transmission of materials through the supply chain, from suppliers to customers

Manufacturing and materials management Strategic objectives Lower costs Disperse manufacturing activities to efficient global locations Increase productivity Using Total Quality Management (W. Edward Demming)

Manufacturing and materials management Strategic objectives Accommodate demands for local responsiveness decentralize production Respond quickly to shifts on customer demand time-based competition extremely important

The relationship between quality and cost Fig 16.1

Where to manufacture? Country Factors Technological Product Locating Manufacturing Facilities

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

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

Manufacturing location Fixed costs are substantial Minimum efficient scale is high Flexible manufacturing technologies available Fixed costs are low Minimum efficient scale is low Flexible manufacturing technologies unavailable Trade barriers and transportation costs remain major impediments Single or few locations. Major market locations if it better meets local demands.

A typical unit cost curve Fig 16.2

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

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 Product’s value-to-weight ratio is high Product serves universal needs

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 Product’s value-to-weight ratio is low Significant differences in consumer tastes and preferences exist between nations.

Location strategy and manufacturing

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. and An increasing abundance of advanced factors of production Dispersed centers of excellence are consistent with a Transnational Strategy

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

Advantages of buy versus make Strategic flexibility in sourcing components Lower firm’s cost structure Offsets Strategic alliances with suppliers give benefits of vertical integration without the associated organizational problems

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

Role of organization Organizational linkages more numerous and complex More difficult to control costs Require separate materials management as a function Equal weight with other departments Decide between centralized and decentralized organizational structure

Potential materials management linkages Fig 16.3

Traditional organizational structure

Organization structure with materials management as separate function Fig 16.4B Strategic manager/CEO Production planning and control Purchasing Manufacturing Marketing Finance Distribution Materials management

Role of information technology and the internet Track component parts across the globe to an assembly plant Optimize and adjust production scheduling Electronic data interchange (EDI) Used to coordinate flow of materials between suppliers ,firm, shippers and customers Communicate without time delay Increases flexibility and responsiveness of the whole global system Paperwork decreased Significant competitive advantage