International Business Fourth Edition

Global Manufacturing and Materials Management CHAPTER 16 Global Manufacturing and Materials Management

Chapter Focus Examine: Where in the world should productive activities be located? What should be the long term strategic role of foreign production sites? Should the firm own foreign production sites or outsource those activities to independent vendors? How should a globally diverse supply chain be managed and what is the role of the Internet in managing global logistics? Should the firm manage global logistics itself or outsource the management to enterprises that specialize in this activity?

Strategy, Manufacturing, and Logistics Focus Production Logistics Performed internationally To lower costs of value creation Add value by better serving customer needs

Materials Management Materials Management: the activity that controls the transmission of physical materials through the value chain, from procurement through production and into distribution. Logistics: the procurement and and physical transmission of material through the supply chain, from suppliers to customers.

Manufacturing and Materials Management - Strategic Objectives - Lower costs. Increase product quality. Total Quality Management. Increases productivity. Lowers rework and scrap costs. Lowers warranty costs. Accommodate demands for local responsiveness. Respond quickly to shifts in customer demand.

Total Quality Management (TQM) The leaders: W. Edwards Deming, Joseph Juran, and A.V. Feigenbaum “We have learned to live in a world of mistakes and defective products as if they were necessary to life. It is time to adopt a new philosophy in America.” W. Edwards Deming

The Relationship Between Quality and Costs Lowers Rework and Scrap Costs Increases Productivity Warranty and Rework Costs Improves Performance Reliability Service Costs Manufacturing Costs Profits Figure 16.1

Where to Manufacture Country Factors Technological Product Locating Manufacturing Facilities

Country Factors Political economy. Culture. Relative factor costs. Global concentrations of activity. Skilled labor pools. Supporting industries. Formal and informal trade barriers. Transportation costs. Rules regarding FDI. Exchange rate movements.

Technological Factors Fixed costs. Minimum efficient scale. Flexible manufacturing (Lean Production). Reduce setup times. Increase machine utilization. Improve quality control. Flexible machine cells. Product customization Mass Customization Low cost

A Typical Unit Cost Curve Unit Costs Volume Minimum Efficient Scale Figure 16.2

Product Factors and Location Strategies Two product features affect location decisions: Value to weight ratio. Product serves universal needs. Two strategies for locating manufacturing facilities: Concentration. Decentralization.

Product Factors Value-to-weight ration. Influences transportation costs. High value-to-weight. Electronic components. Low value-to-weight. Bulk chemicals. Does the product serve universal needs? Industrial products. Modern consumer products. Handheld calculators. Personal computers.

Manufacturing Location Factor costs have substantial impact. Low trade barriers. Externalities favor certain locations. Stable exchange rates. Minimum efficient scale is high and flexible manufacturing technologies available. Product’s value-to-weight ration is high. Product serves universal needs. Concentration.

Manufacturing Location Factor costs do not have substantial impact. High trade barriers. Location externalities unimportant. Exchange rate volatility. Production technology has low fixed costs, low minimum efficient scale, flexible manufacturing technology unavailable. Product has low value-to-weight ratio. Product does not serve universal needs. Decentralization

Location Strategy and Manufacturing Technological Factors Flexible manufacturing technology Available Not Available Minimum efficient scale High Low Fixed costs High Low Product Factors Serves universal needs Yes No Value-to-weight ration High Low Country Factors Differences in factor costs Substantial Few Substantial Few Trade barriers Few Many Differences in political economy Differences in culture Substantial Few Concentrated Decentralized Favored Manufactured Strategy Table 16.1

Strategic Role of Foreign Factories Initially, established where labor costs low. Later, important centers for design and final assembly. Upward migration caused by: Pressure to improve cost structure. Pressure to customize product to meet customer demand. Increasing abundance of advanced factors of production. Dispersed Centers of Excellence are consistent with a Transnational Strategy

Make or Buy Make Buy Proprietary Product Technology Protection Lower costs Proprietary Product Technology Protection Facilitating specialized investments Improved scheduling Buy Strategic flexibility Lower costs Offsets Trade-offs

Strategic Alliances with Suppliers Attempting to reap benefits of vertical integration Building long-term relationships Mutually beneficial Pressure from JIT CAD CAM Trust May limit strategic flexibility Risks giving away key technology know-how

Coordinating a Global Manufacturing System Materials management (includes logistics): Activities necessary to get materials from suppliers to manufacturer, to distribution system, to end user. Achieve lowest possible cost that meets customer’s needs. Power of ‘Just-in-Time’: Economize on inventory holding costs. Drawback: no buffer inventory.

The Role of the Organization Organizational linkages are more numerous and complex. More difficult to control costs. Functionally separate materials management: Equal weight with other departments. Purchasing, production and distribution are one basic task: controlling material flow from purchase to customer.

Potential Materials Management Linkages Plant 1 Market A Source A Source B Plant 2 Market B Source C Plant 3 Market C Markets Manufacturing Locations Source Locations Far East Europe North America Figure 16.3

Traditional Organizational Structure CEO Distribution Production Planning and Control Purchasing Manufacturing Marketing Finance Figure 16.4A

Organization Structure with Materials Management as Separate Function Strategic manager/CEO Production planning and control Purchasing Materials management Manufacturing Marketing Finance Distribution Figure 16.4B

Role of Information Technology and the Internet Track component parts to assembly plant. Optimize production scheduling. Ability to accelerate (or slow) production. Electronic data interchange coordinates flow through into/through manufacturing to customers. Suppliers, shippers, and purchasing firms can communicate with each other without delay. Flexibility and responsiveness. Paperwork is decreased.