1. Global Business Today 6e
by Charles W.L. Hill
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Global Production, Outsourcing, and Logistics
Chapter 14
Global Production, Outsourcing, and Logistics

3. 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

4. Strategy, Production, and Logistics
Question: How can production and logistics be conducted internationally to
lower the costs of value creation
add value by better serving customer needs?
Production refers to activities involved in creating a product
Logistics refers to the procurement and physical transmission of material through the supply chain, from suppliers to customers

5. Strategy, Production, and Logistics
The strategic objectives of the production and logistics function are
to lower costs
to increase product quality by eliminating defective products from both the supply chain and the manufacturing process
These two objectives are interrelated

6. Strategy, Production, and Logistics
Better quality control helps firms reduce costs because
time is not wasted manufacturing poor quality products that cannot be sold
re-work and scrap costs are lower
warranty costs and the time used too fix defective products are lower

7. Strategy, Production, and Logistics
Question: What management tool is used to increase the reliability of product offerings?
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)
In addition, some countries have also promoted specific quality guidelines like the European Union’s ISO 9000 standards

8. Strategy, Production, and Logistics
Two other objectives are important for international companies
production and logistics functions must be able to accommodate demands for local responsiveness
production and logistics must be able to respond quickly to shifts in customer demand

9. Where to Produce
Question: Where should production activities be located?
When deciding where to locate production facilities, firms must consider
country factors
technological factors
product factors
Internet Extra: The World Factbook offers very detailed guides on countries and is a great starting place to explore the relative merits of different countries as investment destinations. Create a fictitious product and market. Then go to the site {
Click on the countries you are interested in exploring. Then identify various relevant factors such as government or transportation. Develop a ranking system to help you identify the best location to produce your product.

10. Country Factors
Firms should locate manufacturing activities where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity
Regulations affecting FDI and trade can significantly affect the appropriateness of specific countries, as can expectations about future exchange rate changes
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 {
Video Note: In recent years, many companies have turned to China as a location for low cost production. However, in the light news of various tainted products produced being in China, some managers are questioning that strategy. The iGlobe Probe Sheds Light on Working Conditions in China explores working conditions in China and the potential for production problems.

11. Technological Factors
The type of technology a firm uses in its manufacturing can affect location decisions
Firms should consider
1. The level of fixed costs involved
If the fixed costs of setting up a manufacturing plant 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
2. The minimum efficient scale of the technology
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

12. Technological Factors
3. The flexibility of the technology
The term flexible manufacturing technology or lean production covers a range of manufacturing technologies that are designed to:
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

13. Technological Factors
So, flexible manufacturing technologies enable firms to produce a wide variety of end products at a unit cost that traditionally would require mass production of a standardized output
Mass customization implies that a firm may be able to customize its product range to suit the needs of different customer groups without bearing a cost penalty

14. Technological Factors
Flexible machine cells (grouping of various types of machinery, a common materials handler, and a centralized cell controller) are another common flexible manufacturing technology
Adopting flexible manufacturing technologies can help improve the competitive position of firms by allowing the firm to customize products to meet the demands of small customer groups in different national markets
So, firms can act like a local firm without bearing the costs of establishing local manufacturing facilities

15. Technological Factors
Question: When does it make sense to concentrate production at a few choice locations?
Concentrated production makes sense when
fixed costs are substantial
the minimum efficient scale of production is high
flexible manufacturing technologies are available
Concentrated production does not make sense when
both fixed costs and the minimum efficient scale of production are relatively low
appropriate flexible manufacturing technologies are not available

16. Product Factors Two product factors impact location decisions
1. The product's value-to-weight ratio
If the value-to-weight ratio is high, it is practical to produce the product in a single location and export it
If the value-to-weight ratio is low, there is greater pressure to manufacture the product in multiple locations across the world
2. Whether the product serves universal needs
The need for local responsiveness is reduced for products that do, which increases the attractiveness of concentrated manufacturing

17. Locating Production Facilities
There are two basic strategies for locating manufacturing facilities
Concentrating them in the optimal location and serving the world market from there
Decentralizing them in various regional or national locations that are close to major markets

18. Locating Production Facilities

19. Classroom Performance System
Decentralized production will be favored when
There are substantial differences in political economy
Fixed costs are high
The product’s value-to-weight ratio is high
Exchange rates are volatile
Classroom Performance System Answer: d

20. Classroom Performance System
Firms will prefer concentrated production when
Minimum efficient scale is high
Location externalities are not important
The product does not serve universal needs
There are few trade barriers
Classroom Performance System Answer: a

21. The Strategic Role of Foreign Factories
Question: Does the rationale for establishing a foreign production facility change?
The strategic role of foreign factories and the strategic advantage of a particular location can change over time
A factory initially established to make a standard product to serve a local market, or to take advantage of low cost inputs, can evolve into a facility with advanced design capabilities
As governmental regulations change and/or countries upgrade their factors of production the strategic advantage of a particular location can change

22. The Strategic Role of Foreign Factories
As the strategic role of a factory is upgraded and a firm develops centers of excellence in different locations worldwide, it supports the development of a transnational strategy
A focus of a transnational strategy is global learning (the idea that valuable knowledge does not reside just in a firm’s domestic operations, it may also be found in its foreign subsidiaries)
So, managers should promote the idea that factories are potential centers of excellence with strategic importance to the firm

23. Outsourcing Production: Make-or-Buy Decisions
Question: Should an international business make the component parts to go into their final product or outsource them?
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
Management Focus: Hewlett Packard in Singapore
Summary
This feature explores the strategic decision making involved in establishing Hewlett Packard’s Singapore plant. The company initially used the plant as a low cost location to manufacture electronic components. Later, entire products were produced in Singapore. Still later, the Singapore plant was involved not only in production but also product design. Today, the plant is an important part of Hewlett Packard’s global network and is responsible for manufacturing and also product development and design. The following questions can provide the basis for the discussion of this feature:
Suggested Discussion Questions
1) What factors were important in Hewlett Packard’s initial decision to open a plant in Singapore? How did these factors contribute to the decision to increase responsibilities at the Singapore plant?
Discussion Points: Hewlett-Packard initially selected Singapore as a production location because the country offered a lower cost, well-educated workforce that spoke English. In addition, the country was economically stable, and had a good infrastructure. The lower cost, well-educated workforce enabled Hewlett-Packard to reduce its manufacturing and product development costs when the company decided to assign the responsibility for redesigning its handheld calculator to its Singapore facility. The success of this assignment was such that the company has continued to ask the facility to redesign other products.
2) Today, the Singapore plant is considered to be a “lead plant” for Hewlett Packard. How can the company help the plant continue to be a key component in Hewlett Packard’s global network?
Discussion Points: Many students will suggest that communication will be central to ensuring that the Singapore facility remains a lead plant for Hewlett-Packard. Already, the company has made the commitment to ensuring the Singapore facility is on the same page as the headquarters location by transferring engineers from Singapore to the United States, and back. Students will probably suggest that continuing to establish cross-border relationships and teams will be important as the company goes forward.
Teaching Tip: To further explore Hewlett-Packard’s international operations, go to {
Lecture Note: To extend the discussion of this feature, consider { }.

24. The Advantages of Make
Making component parts in-house (vertical integration) is attractive because it
is associated with lower costs
facilitates investments in highly specialized assets
protects proprietary technology
facilitates the scheduling of adjacent processes

25. The Advantages of Make 1. Lowering Costs
A firm should consider manufacturing a part in-house if the firm is more efficient at that a production activity than any other enterprise
2. Facilitating Specialized Investments
In-house production makes sense when substantial investments in specialized assets (assets whose value is contingent upon a particular relationship persisting) are required to manufacture a component

26. The Advantages of Make 3. Protecting Proprietary Technology
When proprietary technology is involved, in-house production can make sense to maintain control over the technology
4. Improving Scheduling
In some cases, in-house production can make planning, coordination, and scheduling of adjacent processes easier

27. Classroom Performance System
Which of the following is not one of the key factors that influence the decision of where to produce?
Country factors
Competitors factors
Technological factors
Product factors
Classroom Performance System Answer: b

28. The Advantages of Buy
Buying component parts from independent suppliers (outsourcing) is attractive because it
gives the firm greater flexibility
helps drive down the firm's cost structure
helps the firm to capture orders from international customers

29. The Advantages of Buy 1. Strategic Flexibility
Outsourcing provides the firm with the flexibility to switching orders between suppliers as circumstances dictate
This ability is particularly important when changes in exchange rates and trade barriers the attractiveness of supply sources

30. The Advantages of Buy 2. Lower Costs Firms that outsource can avoid
the challenges involved with coordinating and controlling additional subunits
the lack of incentive associated with internal suppliers
the difficulties with setting appropriate transfer prices
3. Offsets
Outsourcing can help firms capture more orders from suppliers’ countries

31. Trade-Offs
The benefits of manufacturing components in-house are greatest when
highly specialized assets are involved
when vertical integration is necessary for protecting proprietary technology
when the firm is more efficient than external suppliers at performing a particular activity

32. Strategic Alliances with Suppliers
Question: Can strategic alliances with suppliers give firms the benefits of vertical integration?
Some firms have tried to use strategic alliances to capture some of the benefits of vertical integration, without having the associated organizational problems
However, in some cases, this backfires as firms find their strategic flexibility limited by commitments to alliance partners

33. Classroom Performance System
Buying from independent suppliers offers all of the following advantages except
It gives the firm greater flexibility
It helps drive down the firm's cost structure
It protects proprietary property
It helps the firm to capture orders from international customers
Classroom Performance System Answer: c

34. Managing a Global Supply Chain
Question: Why is logistics important to the international firm?
Logistics encompasses the activities necessary to get materials to a manufacturing facility, through the manufacturing process, and out through a distribution system to the end user
In international business, this is complicated by distance, time, exchange rates, and customs barriers, etc.
Efficient logistics can have a major impact upon a firm's bottom line

35. The Role of Just-in-Time Inventory
Question: How can a just-in-time inventory process help a firm?
A just-in-time (JIT) economizes on inventory holding costs by having materials arrive at a manufacturing plant just in time to enter the production process, and not before
It can result in major cost savings from reduced warehousing and inventory holding costs
It can help firms spot defective parts, take them out of the manufacturing process, and boost product quality

36. The Role of Information Technology and the Internet
Question: What is the role of information technology in materials management?
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

37. Critical Discussion Question
1. An electronics firm is considering how best to supply the world market for microprocessors used in consumer and industrial electronic products. A manufacturing plant costs approximately $500 million to construct and requires a highly skilled work force. The total value of the world market for this product over the next 10 years is estimated to be between $10 and $15 billion. The tariffs prevailing in this industry are currently low. Should the firm adopt a concentrated or decentralized manufacturing strategy? What kind of location(s) should the firm favor for its plant(s)?
Answer: The firm should pursue a concentrated manufacturing because (1) the tariffs prevailing in the industry are low, (2) the cost of building a plant to produce the microprocessors is high, and (3) the product's value-to-weight ratio is high. All of these factors favor a concentrated versus a decentralized manufacturing strategy. In terms of location, the company should consider three factors: country factors, technology factors, and product factors. First, in terms of country factors, the firm should locate its plant in a country that has a highly skilled pool of workers available. That criterion could limit the firm to developed nations. Second, in terms of technology factors, the firm is compelled to limit the number of its manufacturing facilities because of the high cost of constructing a plant. Third, in terms of product factors, the firm can manufacturer its product in a central location due to the relatively high value-weight ratio and the universal appeal of the product.

38. Critical Discussion Question
2. A chemical firm is considering how best to supply the world market for sulfuric acid. A manufacturing plant costs approximately $20 million to construct and requires a moderately skilled work force. The total value of the world market for this product over the new 10 years is estimated to be between $20 and $30 billion. The tariffs prevailing in this industry are moderate. Should the firm favor concentrated manufacturing or decentralized manufacturing? What kind of location(s) should the firm seek for its plant(s)?
Answer: This question is a tougher call than the scenario depicted in Question #1. The firm should probably pursue a limited decentralized manufacturing strategy (meaning that the firm should not set up a plant in every country that it sells to, but should set up plants in several "regions" of the world). This strategy makes sense because (1) The tariffs prevailing in the industry are moderate (rather than low), (2) the cost of constructing a facility is relatively modest ($20 million), and (3) only a moderately skilled work force is needed (which is probably available in many low-cost regions of the world). The firm should select its location based on country factors, technology factors and product factors. In terms of country factors, the firm should find locations where semi-skilled labor is inexpensive. In terms of technology factors, the firm is not constrained by a high fixed costs associated with its product, so technology is not a pervasive issue. Finally, product factors favor the firm locating in several locations throughout the world. The company's product has a low value-weight ratio, making it unattractive to produce the product in a central location and export it across the world.

39. Critical Discussion Question
3. A firm must decide whether to make a component part in-house or to contract it out to an independent supplier. Manufacturing the part requires a non-recoverable investment in specialized assets. The most efficient suppliers are located in countries with currencies that many foreign exchange analysts expect to appreciate substantially over the next decade. What are the pros and cons of (a) manufacturing the component in-house and (b) outsourcing manufacture to an independent supplier? Which option would you recommend? Why?
Answer: Manufacturing in-house would reduce the risk of currency appreciation and rising costs from independent suppliers. Specialized asset investment would make firm dependent on specific suppliers, however, technological know-how would be protected, and improved scheduling would be available. Outsourcing would be beneficial if the product using the component fails in the market because the supplier will bear the cost of the non-recoverable investment, and flexibility in case a better component can be designed or bought would be preserved. Outsourcing would also lower organizational and coordination costs. Based on what we know, manufacturing in-house may be slightly preferred, but other information could tip the decision the other way.

40. Critical Discussion Question
4. Reread the Management Focus on Philips in China then answer the following questions:
a) What are the benefits to Philips of shifting so much of its global production to China?
b) What are the risks associated with a heavy concentration of manufacturing assets in China?
c) What strategies might Philips adopt to maximize the benefits and mitigate the risks associated with moving so much product?
Answer:
a) China is an attractive production location for Philips for several reasons. The country has low wage rates, an educated workforce, a strong economy, is a member of the World Trade Organization, and has a stable exchange rate that is pegged to the U.S. dollar. In addition, China’s rapidly expanding industrial base is home to many companies that Philips uses as suppliers.
b) Philips reliance on China as a major location for production could be risky if political, economic, or other problems disrupt production and therefore, the company’s ability to supply global markets.
c) Some students may suggest that Philips by locating so much production in China has essentially put all of its eggs in one basket and that a strategy that disperses some production to other locations might be better. By hedging its risk, the company could avoid potential disruptions in its supply chain.

41. Critical Discussion Question
5. Explain how an efficient materials management function can help an international business compete more effectively in the global marketplace.
Answer: Given the complexity involved in coordination of material and product flows in a multinational enterprise (purchases, currency exchange, inbound and outbound transportation, production, inventory, communication, expediting, tariffs and duties), a materials management function can help to assure that these flows take place in the most efficient manner possible. A related advantage is that by having a materials management function, a firm may obtain improved information about the costs of different transport alternatives, and choose to reconfigure some of its flows to better take advantage of these costs. By being better able to utilize just in time techniques, the cost of production can be lowered while the quality is increased. The materials management function can also help an international business to develop information technology systems that allow it to better track the flow of goods throughout the firm.