Chapter 14 Global Production

McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Strategy, Production, Logistics Value chain activities -Production, marketing, logistics, R&D, HR, IS Production: -physical goods, as well as services Logistics: -controls physical transmission of materials through the value chain Production and logistics decisions -Lower costs of value creation -Add value through better attention to customer needs

McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Production and Materials Management / Logistics Production activities -Service and manufacturing -Conversion of inputs to a product Materials management activities -Physical transmission of materials through value chain: procurement –> production –> distribution Logistics activities encompass -Procurement and physical transmission of material through the supply chain suppliers –> customers

McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Relationship Between Quality and Costs Improves Performance Reliability Increases Productivity Lowers Rework and Scrap Costs Lowers Warranty Costs Lowers Manufacturing Costs Increases Profits Lowers Service Costs Quality …

McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Quality and Cost Management TQM: technique to improve products and services quality Six Sigma: Statistically based cost cutting system -Reduces defects, boosts productivity, eliminates waste ISO European Unions standards for quality -Set by code -Firm must be certified “ISO 9000” before it may access the EU marketplace

McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Which Manufacturing Location? Country Factors -Favorable economic, political, cultural conditions Technological Factors -Fixed costs relatively low -Minimum efficient scale Magnitude of plant output to realize scale-economies Market demand level adequacy -Flexible manufacturing; lean production -Mass customization -Flexible machine cells Product features: value-to-weight ratio, universal needs

McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Where to Locate? Concentrate Manufacturing if: Costs of manufacturing are responsive to country environment (one location best) Trade barriers are low Product serves universal needs -Minor difference in customer needs -Minimal consumer preferences

McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved.

McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Where to Locate? Concentrate Manufacturing if: Trade barriers are low Exchange rates among currencies with impact on your business are stable Production technology -Has high fixed costs -Has high minimum efficient scale -Exists in flexible manufacturing format

McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Country environment does not affect costs Trade barriers are high Production technology -Has low fixed costs -Has low minimum efficient scale -Does not exists in flexible manufacturing format Product value-to-weight ratio is low Product does not serve universal needs -Customer needs different -Consumer preferences different When to Decentralize Manufacturing?

McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Make-or-Buy? “Make” advantage -Lower costs in-house? -Are specialized assets needed? -Is proprietary technology needed? Know-how protection issue (Dunning) “Buy” advantage -Strategic flexibility needed? -Lower costs by buying? In either case “improved scheduling” is important

McGraw-Hill/Irwin Global Business Today, 4/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Other Issues Strategic alliances with suppliers Just-in-time inventory system management The role of information technology The role of the internet