© Ram Mudambi, Temple University, Lecture 08 Global Manufacturing and Logistics

© Ram Mudambi, Temple University, Outline  Distance still matters  Location issues in global manufacturing  Vertical vs. horizontal FDI  Global materials management  Value chain innovation  Make or buy?  Outsourcing logistics

© Ram Mudambi, Temple University, Cf: Ghemawat

© Ram Mudambi, Temple University, Location Strategy and Manufacturing Serves universal needs Yes No Flexible manufacturing technology Available Not Available Minimum efficient scale High Low Differences in factor costs Substantial Few Technological Factors Product Factors Fixed costs High Low Concentrated Decentralized Trade barriers Few Many Value-to-weight ratio High Low Country Factors Differences in political economy Substantial Few Favored Manufacturing Strategy Differences in culture Substantial Few

© Ram Mudambi, Temple University, Two Forms of FDI Value chain Location 1 Stage 1 Location 2 Stage 1 Horizontal FDI Location 2 Stage 0 Backward Vertical FDI Location 2 Stage 2 Forward Vertical FDI HOME HOST Vertical FDI

© Ram Mudambi, Temple University, Dispersed FDI Value chain Location 1 Stage 1 Location 2 Stage 1 Horizontal FDI Location 2 Stage 0 Backward Vertical FDI Location 2 Stage 2 Forward Vertical FDI HOST 2 Vertical FDI HOST 1 HOME

© Ram Mudambi, Temple University, Belfast Carburetors and distributors Treforest Spark plug insulators Leamington Foundry production of engine components Dagenham Final assembly Bordeaux Transmissions Enfield Instruments, fuel and water gauges, plugs Basildon Radiators, water pump assembly, engine components Genk Body panels, road wheels Wülfrath Transmission parts, engine components Saarlouis Final assembly Cologne Die-cast transaxle casings, gear and engine components Valencia Final assembly

© Ram Mudambi, Temple University, Coordinating a Global Manufacturing System  Materials management and logistics:  Global sourcing Achieve lowest possible cost that meets customer’s needs.  Power of ‘Just-in-Time’:  Economize on inventory holding costs.  Drawback: no buffer inventory.

© Ram Mudambi, Temple University, Global sourcing  The process of identifying, evaluating, negotiating and configuring supply across multiple locations to reduce costs, maximize performance and mitigate risks.

© Ram Mudambi, Temple University,  Material costs -- price, setup, tooling, transaction and other costs related to the actual product or service  Transportation costs -- transportation, fuel surcharges and other fees included in a freight rate  Inventory carrying costs -- warehousing, handling, taxes, insurance, depreciation, shrinkage, obsolescence, and other costs associated with maintaining inventories, including the cost of money or opportunity costs  Cross-border taxes and tariffs -- often referred to as landed costs, i.e., the sum of duties, insurance and other fees for door-to-door delivery  Supply and operational performance -- the cost of noncompliance or underperformance; can offset any price gains attained by shifting to an offshore source  Supply and operational risks -- including geopolitical factors or natural disasters and disease; tariff and policy changes; and instability caused by war and/or terrorism, all of which may disrupt supply lines

© Ram Mudambi, Temple University, Dell Business Strategy BUSINESS MODEL: Traditional PC industry Assembly of PCs by PC Makers (to fill Orders from Suppliers and Keep Distribution Channel stocked Assembly of PCs by PC Makers (to fill Orders from Suppliers and Keep Distribution Channel stocked Service and Support activities provided to PC Maker (via telephone, fax, Or ) or by Independent Service providers Service and Support activities provided to PC Maker (via telephone, fax, Or ) or by Independent Service providers Manufacture of PC components by suppliers Manufacture of PC components by suppliers Purchases by PC users Purchases by PC users Sales and Marketing Activities of Resellers to Sell inventories Of PCs on hand Sales and Marketing Activities of Resellers to Sell inventories Of PCs on hand Customized assembly of PCs by PC Makers as orders from PC buyers come in Customized assembly of PCs by PC Makers as orders from PC buyers come in BUSINESS MODEL: Built-to-order/direct sales VALUE CHAIN INNOVATIONS Global sourcing Regional assembly

© Ram Mudambi, Temple University, Dell Business Strategy Dell believes that the direct model provides it with several distinct competitive advantages. Eliminates wholesale/retail channel. Avoids the higher inventory costs. Reduces high risk of outdated technology. Maintenance and monitoring of customer database, helping to shape future product offerings.

© Ram Mudambi, Temple University, Make or Buy  Advantages of Make:  Lower costs.  Facilitating specialized investments.  Proprietary product production technology protection.  Improved scheduling.  Advantages of Buy:  Strategic flexibility.  Lower costs.  Offsets.

© Ram Mudambi, Temple University, 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.

© Ram Mudambi, Temple University, Global organizational linkages Global Procurement Division Parts Supplier Contract Manufacturer Negotiations and payment Product supply Oversight(EDI) OEM Sub-assembly or Branded product MNC

© Ram Mudambi, Temple University, Local market servicing Need for a local partner R&D knowledge Foreign partner – Technology (R&D knowledge) Marketing knowledge Domestic partner – Distribution channels (Marketing knowledge ) FINAL MARKET

© Ram Mudambi, Temple University, Using 3PL’s Upstream Client Firm 3PL Downstream Buyer Upstream systems integration Downstream systems integration Oversight Technology People Channel density Channel diversity

© Ram Mudambi, Temple University, Using 4PL’s Upstream client unit 4PL External buyer Downstream client unit Outsourcing the internal and external logistics function

© Ram Mudambi, Temple University, Takeaways  Manufacturing and logistics decisions are intimately intertwined with all aspects of the FDI decision  Regional strategy will often be a crucial factor  Superior manufacturing and logistics can support value chain innovation  The make or buy decision encompasses both manufacturing and logistics