1. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 section four chapter nineteen Global Operations Management Concept Preview After reading this chapter, you should be able to: 1. describe the five global sourcing arrangements 2. appreciate the importance of the added costs of global sourcing 3. understand the Japanese efforts to improve quality and lower costs 4. know the just-in-time production system 5. comprehend the problems with JIT

2. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 section four chapter nineteen Global Operations Management Concept Preview continued After reading this chapter, you should be able to: 6. understand synchronous manufacturing. 7. identify impediments to global standardization or production processes and procedures. 8. understand the importance of intermediate and appropriate technology. 9. know the two general classes of activities—productive and supportive —that must be performed in all manufacturing systems.

3. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 section four 19-3 Five Most Important Reasons for Sourcing Globally Reason Percentage of Respondents 1. Lower price available from foreign sources74% 2. Foreign products not available locally49 3. Firm’s worldwide operation and attitude28 4. Advanced technology available from foreign sources28 5. Higher-quality products available from foreign sources25 Table 19.1 Source: Laura M. Birou and Stanley E. Fawcett, “International Purchasing Benefits, Requirements, and Challenges,” Internatinal Journal of Purchasing and Materials Management, Spring 1993, p. 34.

4. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 section four Global Sourcing Arrangements  Wholly owned subsidiary –establish in a country with low-cost labor –supply components to the home country plant –or subsidiary may produce a product not made in home country  Overseas joint venture –establish where labor costs are lower than home country to supply components to the home country 19-4

5. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 section four Global Sourcing Arrangements  In-bond plant contractor –home country plant sends components –can be machined and assembled or only assembled by an independent contractor in an in-bond plant  Overseas independent contractor –common in clothing industry –contract with foreign manufacturer to make clothing to specification with their labels  Independent overseas manufacturer 19-5

6. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 section four Problems with Global Sourcing Added CostsPercentage International freight, insurance, and packing10-12% Import duties0-50% Customhouse broker’s fees3-5% Inventory in the pipeline5-15% Cost of the Letter of credit (LOC)1% International travel and communications2-8% Company import specialists5% Reworking of products out of specifications0-15% 19-6

7. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 section four Global Production Systems Advanced Production Technology-Japan  Export economy for growth  American experts  Quality vs. quantity  Statistical control of quality  High quality products at low prices  Lower costs and improve quality –components had to be defect free regardless of source –JIT—fewer but cooperative vendors –eliminate inventories --flexible manufacturing –reduce process time –flexible manufacturing –team work among product design, production, purchasing and marketing –cooperation and communication all before the first product was produced –top management to workers committed to quality –total quality management –team work and quality circles –theory of constraints –soft manufacturing –European production technology 19-7

8. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 section four Comparisons of Productivity and Competitiveness  Governments need to make structural changes –deregulation –lower taxes –looser work laws  Europe has fallen farther behind –failure to restructure economies –increasing global competition 19-8

9. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 section four International Effort to Improve Quality and Lower Costs  JIT  Synchronous production systems  Computer integrated manufacturing (CIM)  Re-engineering  Down-sizing  Team problem-solving  Malcolm Baldridge National Quality Award –encourages American firms to improve quality –while decreasing costs 19-9

10. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 section four Baldridge Award Winners YearManufacturingServiceSmall Business 1988Motorola—Globe Metallurgical Westinghouse Commercial Nuclear Fuel Division 1989Millikin & Co.—— Xerox Business Products 1990CadillacFederal ExpressWallace Co. IBM Rochester 1991Solectron—Marlow Industries Zytec Corp. 1992AT&T Network Systems AT&T UniversalGranite Rock Co. Group Card Services Transmissions Systems Business Unit Texas Instruments DefenseRitz-Carlton Systems and Electronics Hotel Co. Group 1993Eastmen Chemical Co.—Ames Rubber Co. 19-10

11. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 section four Baldridge Award Winners YearManufacturingServiceSmall Business 1994AT&T ConsumerGTE DirectoriesWainwright Industries Communications Services Corporation 1995Armstrong World Industries—— Building Products Operations Corning Inc. 1996ADAC LaboratoriesDana CommercialCustomer Research Credit CorporationTrident Precision Manufacturing, Inc. 19973M Dental Products DivisionMerrill Lynch Credit— Selectron Corporation Corporation Xerox Business Services 19-11

12. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 section four Reasons for Global Standardization of Production Systems  Simpler and less costly when standardized  Logistics of supply  Rationalization  Purchasing  Quality control  Production and maintenance control 19-12

13. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 section four Impediments to Globalization of Production Facilities  Economic forces –capital-intensive process –labor-intensive process –computer integrated manufacturing –cost of production  Cultural forces –availability of skilled workers –attending, maintaining & setup of machinery –low prestige of technical training –absenteeism  Political forces –labor-intensive vs. modern equipment –laws prohibit importation of used machinery  Hybrid design  Intermediate technology 19-13

14. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 section four Comparison of Appropriate Technology (AT) and Capital-intensive Technology (CIT) Ratios AnnualCost,ATNo. WorkersCost per job OutputPlant/CostPlant/No. WorkersAT/Plant Cost Industryof PlantCIT PlantCIT Plantper Job, CIT Brick making16 million bricks0.23.20.1 Cotton Spinning2,000 tons0.32.50.1 Sugar Processing50,000 tons0.64.80.1 Cotton Weaving40 mil square yards0.52.10.2 Corn Milling36,000 tons0.41.50.3 Shoes300,000 pairs0.51.40.4 Leather Processing600,000 hides0.71.70.6 Beer Brewing200,000 hectoliters0.60.90.7 Fertilizer528,000 tons of urea0.91.00.9 19-14 Table 19.2 Source: Calculated from Tables 2 and 3, Howard Pack, Macroeconomic Implications of Factor Substitution in Industrial Processes, World Bank Staff Working Paper No. 377 (March 1980).

15. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 section four Impediments to Globalization of Production Facilities  Local production system –basis for organization –horizontal and vertical integration –design of the production system  plant location  plant layout  materials handling  human element  manufacturing activities  Obstacles to meeting manufacturing standards –low output –delivery of raw materials –poor coordination of production scheduling –absenteeism 19-15

16. Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 1999 section four Impediments to Globalization of Production Facilities  Inferior product quality  Excessive manufacturing costs  Supportive activities –purchasing –maintenance –technical function 19-16