Global Production, Outsourcing, and Logistics Discussion Section April 6, 2007 Brian Chen

Agenda  Review Chapter 15 (Export/Import)  Review Chapter 16 (Global Production)  Briefly Discuss Dell Case  Global Production Group Discussion

Chapter 15: Export/Import/Countertrade  Outline some of the tremendous advantages and common pitfalls of exporting  Identify the primary sources of information available to firms interested in exporting  Describe the "nuts and bolts" of exporting L/C, Draft (Bill of Exchange), Bill of Lading What do these documents serve to do?  To transfer the risk of nonperformance to a third party specializing in taking such risks  Suggest how firms can use the EXIM bank and insurance to facilitate exports

Chapter 16: Global Production, Outsourcing, and Logistics  Where should production be located and should they be concentrated or dispersed?  What should be the long-term strategic role of foreign production sites? Should the firm abandon a foreign site if factor costs change, or is there value to maintaining an operation at a given location even if economic conditions change?  Should the firm own foreign production or should production be outsourced?  How should a globally-dispersed supply chain be managed?  Should the firm manage the logistics or outsource their management?

Dell Case: Question 1  What are the advantages to Dell of having manufacturing sites located where they are? What are the potential disadvantages?

Answer  Dell’s manufacturing sites are in Brazil, China, Malaysia, Ireland, and the U.S. Advantages of these locations are that some of them are low cost (Brazil, China, Malaysia and, relatively, Ireland), they have educated work forces that are highly productive, and they are near large regional markets.

Dell Case: Question 2  Why does Dell purchase most of the components that go into its PC from independent suppliers, as opposed to making more itself? (Does does little more than final assembly of components into PC)

Answer  Dell outsources because it enables Dell’s business model to be successful. Dell’s comparative advantage is in pricing, customization and rapid order fulfillment, all advantages gained through supply chain management and logistics. By outsourcing, Dell does not carry risks connected to inventory such as obsolescence, Dell can maintain flexibility in its manufacturing, and Dell has lower coordination costs than if it were vertically integrated, producing its own parts. Outsourcing allows Dell to focus on what it does best.

Dell Case: Question 3  What are the consequences for Dell’s cost structure and profitability of replacing inventories with information?

Answer  Dell has been able to achieve the lowest inventory levels in the industry. In 2004, that was only three days of inventory on hand, compared to 30, 45, or even 90 days’ worth at competitors. This is a critical advantage in the computer inventory, where component costs account for 75 percent of revenues and typically fall by 1 percent per week due to rapid obsolescence. Replacing inventory with information has contributed greatly to Dell’s business model; it is the cornerstone of their cost structure. Reducing inventory also reduces the need for working capital. In sum, replacing inventory with information boosts profitability.

Dell Case: Question 4  Do you think that Dell’s model can be imitated by other PC manufacturers and manufacturers in other industries?

Answer  Yes, Dell’s model can be imitated, but the managerial skills are difficult to build. Other companies who are trying to replace inventories with information include Wal-Mart, Target, Best Buy, and Circuit City. Auto manufacturers also have been making strides in this direction.

Dell Case: Question 5  What factors might make it difficult for other PC companies to adopt Dell’s model?

Answer  The chief factor that makes it difficult for other PC firms to adopt Dell’s model has to do with managerial know-how. Knowing what to do is simple. Knowing how to do it is immensely complicated.

Dell Case: Question 6  What is the source of Dell’s competitive advantage? How secure is this advantage?

Answer  Low cost is the source of Dell’s competitive advantage. Dell seems to be able to counter competitive challenges, which evidences management capability. This indicates a relatively secure advantage, but because it is imitable, it is not tremendously secure.

Dell Case: Question 7  What are the potential risks associated with Dell’s global supply chain strategy? How can these risks be mitigated?

Answer  There are many risks associated with Dell’s supply chain management. If the transportation links are disrupted (work stoppages, terrorism), Dell’s approach will be affected. Also, they are vulnerable to problems their suppliers have. Dell is also vulnerable to IT issues: hacking, system failures. Their competitors would be facing the same issues, though. The risks that need most to be mitigated are the supplier ones because they would not be shared by competitors. These can be mitigated by integration with the supplier, and Dell has integrated with the supplier’s supplier as well.

Global Production: Group Discussion  You are Apple, Maytag, Toyota, and Sony. How will you coordinate your production activities for the iPhone, the Maytag Neptune Washer, the Prius, and the Sony Playstation Portable? Where should production be located and should they be concentrated or dispersed? What should be the long-term strategic role of foreign production sites? Should the firm abandon a foreign site if factor costs change, or is there value to maintaining an operation at a given location even if economic conditions change? Should the firm own foreign production or should production be outsourced? How should a globally-dispersed supply chain be managed? Should the firm manage the logistics or outsource their management?