Global Production, Outsourcing, and Logistics Chapter Sixteen Global Production, Outsourcing, and Logistics

Introduction As trade barriers fall and global markets develop, firms must confront a set of interrelated issues Where in the world should production activities be located What should be the long-term strategic role of foreign production sites? Should the firm own foreign production activities or is it better to outsource to vendors? How should a globally dispersed supply chain be managed? Should the firm manage global logistics itself, or should it outsource the management to enterprises that specialize in this activity?

Strategy, Production, and Logistics Production is the activities involved in creating a product Can be both service and manufacturing activities Logistics is the activity that controls the transmission of physical materials through the value chain Production and logistics are closely linked since a firm’s ability to perform its production activities efficiently depends on a timely supply of high quality material inputs

Strategy, Production, and Logistics Production and logistics functions have a number of important strategic objectives Lower costs Increase product quality by eliminating defective products from both the supply chain and the manufacturing process These objectives are interrelated Increasing productivity because time is not wasted producing poor-quality products that cannot be sold, leading to a direct reduction in unit costs Lowering rework and scrap costs associated with defective products Reducing the warranty costs and time associated with fixing defective products

Relationship Between Quality and Costs Figure 16.1, p. 557

Total Quality Management The total quality management (TQM) philosophy was developed by a number of American consultants such as W. Edwards Deming, Josephy Juran, and A. V. Feigenbaum Deming identified a number of steps that should be included in any TQM program Management should embrace the philosophy that mistakes, defects, and poor quality materials are not acceptable Supervisors should work more with employees and provide them with the tools they need to do the job Management should create an environment in which employees will not fear reporting problems Work standards should not only be defined as numbers or quotas, but should include some notion of quality

Six Sigma Six Sigma is the modern successor to TQM It is a statistically based philosophy that aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout a company Production process operating at Six Sigma are 99.99966 percent accurate Only 3.4 defects per million units

Strategy, Production, and Logistics In addition to lowering costs and improving quality, two other objectives have particular importance Production and logistic functions must be able to accommodate demands for local responsiveness Production and logistics must be able to respond quickly to shifts in customer demand Demands for local responsiveness arise from national differences in consumer tastes and preferences, infrastructure, distribution channels, and host-government demands. Demands for local responsiveness create pressures to decentralize production activities to the major national or regional markets in which the firm does business or to implement flexible manufacturing processes that enable the firm to customize the product coming out of a factory according to the market in which it is to be sold. In recent years, time-based competition has grown more important. When consumer demand is prone to large and unpredictable shifts, the firm that can adapt most quickly to these shifts will gain an advantage.

Where to Produce For the firm contemplating international production a number of factors must be considered Country factors Technological factors Product factors

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

Typical Unit Cost Curve The level of output at which most plant-level scale economies are exhausted is referred to as the minimum efficient scale of output. This is the scale of output a plant must operate to realize all major plant-level scale economies (see Figure 16.2). The implications of this concept are as follows: The larger the minimum efficient scale of a plant relative to total global demand, the greater the argument for centralizing production in a single location or a limited number of locations. Alternatively, when the minimum efficient scale of production is low relative to global demand, it may be economical to manufacture a product at several locations. Figure 16.2, p. 562

Manufacturing Location Arguments for concentrating production to a few locations include Fixed costs are substantial Minimum efficient scale is high Flexible manufacturing technologies available Arguments to manufacture in all major markets the firm operates in include Fixed costs are low Minimum efficient scale is low Flexible manufacturing technologies unavailable Trade barriers and transportation costs remain major impediments

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

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 An increasing abundance of advanced factors of production

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 Information Technology and the Internet Firms increasingly use electronic data interchange (EDI) to coordinate the flow of materials into manufacturing, through manufacturing, and out to customers EDI systems require computer links between a firm, its suppliers, and its shippers; these electronic links are then used To place orders with suppliers To register parts leaving a supplier To track them as they travel toward a manufacturing plant To register their arrival

Role of Information Technology and the Internet EDI systems have resulted in Suppliers, shippers, and the purchasing firm communicate with each other with no time delay Increased flexibility and responsiveness of the whole global supply system Paperwork between suppliers, shippers, and the purchasing firm is eliminated Web-based systems are rapidly transforming the management of globally dispersed supply chains, allowing even small firms to achieve a much better balance between supply and demand Because the number of firms adopting these systems has increased, those that don’t may find themselves at a significant competitive disadvantage