1. International Business Functions
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Chapter 15: Global Production and Supply Chain Management

2. Learning Objectives
LO 15-1 Explain why global production and supply-chain management decisions are of central importance to many global companies. LO 15-2 Explain how country differences, production technology, and production factors all affect the choice of where to locate production activities. LO 15-3 Recognize how the role of foreign subsidiaries in production can be enhanced over time as they accumulate knowledge. LO 15-4 Identify the factors that influence a firm’s decision of whether to source supplies from within the company or from foreign suppliers. LO 15-5 Understand the functions of logistics and purchasing (sourcing) within global supply chains. LO 15-6 Describe what is required to efficiently manage a global supply chain.

3. Opening Case: Amazon – A Leader in Global Supply Chain Management
Ranked number one in “Gartner Global Supply Chain Top 25”
Largest online retailer in the United States
Started in 1994 as online bookstore
In U.S., more than 130 million customers per month who rely on free, fast shipping
Amazon must leverage inventory management practices, global supply chains, and technology to be cost effective
Fulfillment centers located worldwide
So far, in addition to the United States, Amazon has retail websites for Australia, Brazil, Canada, China, France, Germany, India, Italy, Japan, Mexico, Netherlands, Spain, the United Kingdom, and Ireland. And the Amazon Prime service places great strain on Amazon’s supply chains where it is available in its worldwide locations (e.g., Canada, France, Germany, Italy, Japan, and the United Kingdom).

4. Introduction In today’s global economy, firms must decide
Where to locate productive activities
What the long-term strategic role of foreign production sites should be
Whether to own foreign production activities or outsource those activities
How to manage a globally dispersed supply chain and what the role of Internet-based information technology should be in the management of global logistics
Whether to manage global logistics or outsource

5. Strategy, Production, and Supply Chain Management 1 of 4
Production: activities involved in creating a product or service
Supply chain management: the procurement and physical transmission of material through the supply chain, from suppliers to customers
Purchasing
Logistics
LO 15-1 Explain why global production and supply chain management decisions are of central importance to many global companies.
Purchasing: worldwide buying of raw material, component parts, and products used in manufacturing the product or service.
Logistics: plans, implements, and controls the effective flows and inventory of raw material, component parts, and products used in manufacturing.

6. Strategy, Production, and Supply Chain Management 2 of 4
The strategic objectives of the production and logistics function are
To lower costs
To increase product quality by eliminating defective products from the upstream and downstream supply chain and manufacturing process
Quality refers to reliability
These two objectives are interrelated
The upstream supply chain includes all of the organizations (e.g., suppliers) and resources that are involved in the portion of the supply chain from raw materials to the production facility (this is sometimes also called the inbound supply chain). The downstream supply chain includes all of the organizations (e.g., wholesaler, retailer) that are involved in the portion of the supply chain from the production facility to the end-customer (this is also sometimes called the outbound supply chain).

7. Figure 15.1 The Relationship Between Quality and Costs
Source: David A. Gandin, “What Does Product Quality Really Mean?,” MIT Sloan Management Review, Fall 1984, pp
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8. Strategy, Production, and Supply Chain Management 3 of 4
The Six Sigma quality improvement program aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout a company
Six Sigma is a direct descendant of total quality management (TQM), which was developed by Japanese companies.
Originally, Six Sigma referred to an attempt to reduce quality defects by a factor of 6 standard deviations from the industry mean. At Motorola, where it was developed, this meant no more than 3.4 defective features per million observations. Now, Six Sigma refers to a data-driven approach to improving quality.
In addition, some countries have also promoted specific quality guidelines like the EU’s ISO 9000

9. Strategy, Production, and Supply Chain Management 4 of 4
Two other objectives are important for international companies
Production and logistics functions must be able to accommodate demands for local responsiveness
Production and supply chain management must be able to respond quickly to shifts in customer demand

10. Where to Produce 1 of 8 Country Factors Location Economies
Firms should locate manufacturing activities where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity
Location Externalities
Presence of global concentrations of activities
Formal and informal trade barriers
Transportation costs
Regulations affecting FDI
Expected future movements in exchange rates
LO 15-2 Explain how country differences, production technology, and production factors all affect the choice of where to locate production activities.
Management Focus: Philips in China
Summary
This feature describes Philips NV’s operations in China. Philips, the Dutch consumer electronics, lighting, semiconductor, and medical equipment conglomerate, has been operating factories in China since By the mid 2000s, the company had invested more than $2.5 billion in China and operated 25 factories there. Initially, Philips believed that it would sell a large portion of its output to the local Chinese market. However, the company quickly discovered that the low wages that make China such an attractive production location also meant that the market for its products was smaller than anticipated. Philips’ solution was to export most of its output to the United States and elsewhere. Discussion of the feature can revolve around the following questions:
Suggested Discussion Questions
1. What makes China such an attractive production location for Philips? Are there other locations that share the same characteristics?
Discussion Points: Several factors make China an attractive production location for Phillips. Perhaps the most important factor is the country’s cheap wages. In addition, the Chinese workforce is well educated, the economy is strong, and many of the company’s suppliers are doing business there. Most students will argue that at least at the moment, China is the only country that offers these particular qualities. While other countries like Mexico and India also have low cost workforces, they do not have the industrial base that is present in China.
2. Philips wants to eventually turn China into a global supply base from which its products will be exported around the world. Consider the advantages and disadvantages of this strategy.
Discussion Points: Students should recognize that using China as a global supply base from which to serve the world offers several advantages to Phillips. By having a single production location, the company can capitalize on costs savings that come from economies of scale as well as the low wages in China. However, if economic, political, or other types of problems arise in the country, Phillips could be in serious trouble if it has no alternate locations to fill production gaps.
Teaching Tip: Students can explore the company in more depth by going to {
Lecture Note: To extend the discussion of this feature, consider { and { .

11. Where to Produce 2 of 8 Technological Factors Fixed Costs
If they are very high, it could make sense for the firm to serve the world market from a single location or from a very few locations
Minimum efficient scale
The larger the minimum efficient scale (the level of output at which most plant-level scale economies are exhausted) of a plant, the more likely centralized production makes sense
The type of technology used in manufacturing can affect location decisions.

12. Where to Produce 3 of 8 Technological Factors continued
Flexible Manufacturing and Mass Customization
Enable firms to produce a wide variety of end products at a unit cost that traditionally would require mass production of a standardized output
Also known as lean production
Reduce set up times for complex equipment
Increase the utilization of individual machines through better scheduling
Improve quality control at all stages of the manufacturing process
Mass customization
The term mass customization has been coined to describe the ability of companies to use flexible manufacturing technology to reconcile two goals that were once thought to be incompatible: low cost and product customization.13 Flexible manufacturing technologies vary in their sophistication and complexity.
One of the most famous examples of a flexible manufacturing technology, Toyota’s production system, has been credited with making Toyota the most efficient auto company in the world. Toyota’s flexible manufacturing system was developed by one of the company’s engineers, Taiichi Ohno. After working at Toyota for five years and visiting Ford’s U.S. plants, Ohno became convinced that the mass production philosophy for making cars was flawed. He saw numerous problems with mass production.

13. Where to Produce 4 of 8 Technological Factors continued
Flexible Manufacturing and Mass Customization continued
Another common flexible manufacturing technology are the flexible machine cells: grouping of various types of machinery, a common materials handler, and a centralized cell controller
Adopting flexible manufacturing technologies can help the firm to customize products to meet the demands of small customer groups in different national markets
The settings on machines are computer controlled, which allows each cell to switch quickly between the production of different parts or products.
Thus, firms no longer need to establish manufacturing facilities in each major national market to provide products that satisfy specific consumer tastes and preferences, part of the rationale for a localization strategy .

14. Where to Produce 5 of 8 Production Factors Product features
Value-to-weight ratio
Universal needs
Locating production facilities
Centralized location
Fixed costs are substantial
The minimum efficient scale of production is high
Flexible manufacturing technologies are available
Decentralizing close to major markets
Both fixed costs and the minimum efficient scale of production are relatively low
Appropriate flexible manufacturing technologies are not available
LO 15-3 Recognize how the role of foreign subsidiaries in production can be enhanced over time as they accumulate knowledge.
If the value-to-weight ratio is high, produce the product in a single location and export it
If the value-to-weight ratio is low, manufacture the product in multiple locations across the world

15. Where to Produce 6 of 8 Production Factors continued
Strategic Roles for Production Facilities
Multinationals trying to capture gains that come with dispersed global production system
Global learning: valuable knowledge may also be found in a company’s foreign subsidiaries
Foreign factories can have one of a number of strategic roles or designations, including (1) offshore factory, (2) source factory, (3) server factory, (4) contributor factory, (5) outpost factory, and (6) lead factory.
In essence, since the early 1990s, multinationals have opted to set up production facilities outside their home country 10 times for every 1 time they have opted to create such facilities at home.

16. Where to Produce 7 of 8 Production Factors continued
Strategic Roles for Production Facilities
Offshore factory: developed and set up mainly for producing component parts or finished goods at a lower cost than producing them at home or in any other market
Source factory: primary purpose is also to drive down costs in the global supply chain
Server factory: linked into the global supply chain for a global firm to supply specific country or regional markets around the world
Contributor factory: serves a specific country or world region
Outpost factory: can be viewed as an intelligence–gathering unit
Lead factory: intended to create new processes, products, and technologies that can be used throughout the global firm in all parts of the world

17. Where to Produce 8 of 8 The Hidden Costs of Foreign Locations
High employee turnover
Shoddy workmanship
Poor product quality
Low productivity
Microsoft, for example, established a major facility in Hyderabad, India, for four very good reasons.
However, the company found that the turnover rate among its Indian employees is higher than in the United States. Demand for software programmers in India is high, and many employees are prone to switch jobs to get better pay. Although Microsoft has tried to limit turnover by offering good benefits and long-term incentive pay, such as stock grants to high performers who stay with the company, many of the Indians who were hired locally apparently place little value on long-term incentives and prefer higher current pay. High employee turnover, of course, has a negative impact on productivity. One Microsoft manager in India noted that 40 percent of his core team had left within the past 12 months, making it very difficult to stay on track with development projects.

18. Make-or-Buy Decisions
Decisions about whether to perform a certain value creation activity in-house or outsource it to another firm, are important to a firm’s manufacturing strategy
Factors in the decision
Product success
Specialized knowledge
Strategic fit
Cost and production capacity
Supplier competencies
Inventory planning
LO Identify the factors that influence a firm's decision of whether to source supplies from within the company or from foreign suppliers.
The decision of whether to buy or make a product is a much more complex and research-intensive process than the typical global firm may expect

19. Global Supply Chain Functions 1 of 5
Global Logistics
Core Activities
Global distribution center management
Inventory management
Packaging and materials handling
Transportation
Reverse logistics
LO 15-5 Understand the functions of logistics and purchasing (sourcing) within global supply chains.

20. Global Supply Chain Functions 2 of 5
Global Logistics continued
Global distribution center
A facility that positions and allows customization of products for delivery to worldwide wholesalers or retailers or directly to consumers anywhere in the world
The foundation of a global supply network
Global inventory management
The decision-making process regarding the raw materials, work-in-process, and finished goods inventory for an MNC
Walmart:
Amazon:

21. Global Supply Chain Functions 3 of 5
Global Logistics continued
Packaging: three different categories
Primary packaging holds the product itself
Secondary packaging is designed to contain several primary packages
Transit packaging is used when primary and secondary packages are assembled for transportation
Packaging is intended to perform, protect, and inform

22. Global Supply Chain Functions 4 of 5
Global Logistics continued
Transportation
The movement of raw material, component parts, and finished goods throughout the global supply chain
Largest percentage of any logistics budget
Ocean is the least expensive and air is the most expensive
Transport of containerized cargo:
Reverse logistics
The process of moving inventory from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal
The ultimate goal is to optimize the after-market activity or make it more efficient

23. Global Supply Chain Functions 4 of 5

24. Global Supply Chain Functions 5 of 5
Global Purchasing
Five strategic levels
Level I: domestic purchasing activities only
Level II: international purchasing only as needed
Level III: international purchasing as part of firm’s overall supply chain management strategy
Level IV: global purchasing activities that are integrated across the firm’s locations worldwide
Level V: global purchasing activities that are integrated across worldwide locations and functional groups
Beyond the domestic, international, and global purchasing strategies in levels I through V, purchasing includes a number of basic choices that companies make in deciding how to engage with markets.27 The starting point is a choice of internal purchasing versus external purchasing—in other words, “how to purchase.” The next decision, in both internal and external purchasing, is to figure out “where to purchase” (domestically or globally). This takes us ultimately to the “types of purchasing” (where and how) and the four choices for purchasing strategy: domestic internal purchasing, global internal purchasing, domestic external purchasing, and global external purchasing.

25. Managing a Global Supply Chain 1 of 5
Efficient supply chain management can have a substantial impact on a firm’s profitability
Four important areas
The role of just-in-time inventory
The role of information technology
Coordination
Interorganizational relationships
LO Describe what is required to efficiently manage a global supply chain.

26. Managing a Global Supply Chain 2 of 5
Role of Just-in-Time Inventory
Economizes on inventory holding costs by having materials arrive at a manufacturing plant just in time to enter the production process, and not before
Can result in major cost savings from reduced warehousing and inventory holding costs
Can help firms spot defective parts, take them out of the manufacturing process, and boost product quality
Leaves firms without a buffer stock of inventory which can help company respond quickly
To reduce the risks associated with depending on one supplier for an important input, some firms source these inputs from several suppliers located in different countries. Strategically, all global companies need to build in some degree of redundancy in supply chains by having multiple options for suppliers.

27. Managing a Global Supply Chain 3 of 5
Role of Information Technology
Electronic data interchange (EDI)
Facilitates the tracking of inputs
Allows the firm to optimize its production schedule
Allows the firm and its suppliers to communicate in real time
Eliminates the flow of paperwork between a firm and its suppliers

28. Managing a Global Supply Chain 4 of 5
Coordination in Global Supply Chains
Global supply chain coordination
Shared decision-making opportunities and operational collaboration of key global supply chain activities
Helps to create a more integrated, coherent, efficient, and effective global supply chain
Operational objectives
Responsiveness
Variance reduction
Inventory reduction
Shipment consolidation
Quality
Life-cycle support

29. Managing a Global Supply Chain 5 of 5
Interorganizational Relationships
Trust and commitment between interacting organizations are important to an efficient and effective global supply chain

30. Figure 15.5 Upstream/Inbound Relationships
Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017).
A global company should allocate 20 percent of its efforts to the vendor category, 30 percent to the supplier category, and 50 percent to the partner category in the upstream/inbound portion of the global supply chain. Likewise, a global company should allocate 20 percent of its efforts to the buyer category, 30 percent to the customer category, and 50 percent to the client category in the downstream/outbound portion of the chain.
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31. Figure 15.6 Downstream/Outbound Relationships
Source: C. W. L. Hill and G. T. M. Hult, International Business: Competing in the Global Marketplace (New York: McGraw-Hill Education, 2017).
A global company should allocate 20 percent of its efforts to the vendor category, 30 percent to the supplier category, and 50 percent to the partner category in the upstream/inbound portion of the global supply chain. Likewise, a global company should allocate 20 percent of its efforts to the buyer category, 30 percent to the customer category, and 50 percent to the client category in the downstream/outbound portion of the chain.
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32. Summary In this chapter we have
Explained why global production and supply-chain management decisions are of central importance to many global companies.
Explained how country differences, production technology, and production factors all affect the choice of where to locate production activities.
Recognized how the role of foreign subsidiaries in production can be enhanced over time as they accumulate knowledge.
Identified the factors that influence a firm’s decision of whether to source supplies from within the company or from foreign suppliers.
Understood the functions of logistics and purchasing (sourcing) within global supply chains.
Described what is required to efficiently manage a global supply chain.