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

2. 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?

3. 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

4. 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

5. Relationship Between Quality and Costs
Figure 16.1, p. 557

6. 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

7. 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 percent accurate
Only 3.4 defects per million units

8. 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.

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

10. Country Factors Optimum economic, political, and cultural conditions
Externalities
Skilled labor pools
Supporting industries
Formal and informal trade barriers
Exchange rate

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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