Chapter Sixteen Global Production, Outsourcing, and Logistics 16 - Opening Case • When introducing the X-Box gaming console, Microsoft had to decide if it should manufacture the console or outsource manufacturing to a 3rd party - Microsoft primarily creates software and lacked the manufacturing capabilities to make the XBox • Microsoft decided to outsource production to Flextronics for four reasons - Flextronics had been pursuing an industrial park strategy so that it could control its supply chain - Flextronics had a global presence - Flextronics could use Web-based information systems to share information with Microsoft - Microsoft trusted Flextronics McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 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? McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 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 McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 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 poorquality 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 McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - Relationship Between Quality and Costs McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 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 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 McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 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 McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 10 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 McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 12 Country Factors • Optimum economic, political, and cultural conditions • Externalities - Skilled labor pools - Supporting industries • Formal and informal trade barriers • Exchange rate McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 13 Technological Factors • Fixed costs • Minimum efficient scale • Flexible manufacturing - Reduce setup times for complex equipment - Increase machine utilization - Improve quality control Mass customization Low cost • Flexible machine cells to perform a variety of operations McGraw-Hill/Irwin International Business, 6/e Product customization © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 14 Typical Unit Cost Curve McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 15 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 McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 16 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 McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 17 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 McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 18 Decentralized Location • Factor costs 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 McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 19 Location Strategy and Production McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 20 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 McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 21 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 McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 22 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 McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 23 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 McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 24 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 McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 25 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 McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved 16 - 26 Looking Ahead to Chapter 17 • Global Marketing and R & D - The Globalization of Markets and Brands Market Segmentation Product Attributes Distribution Strategy Communication Strategy Pricing Strategy Configuring the Marketing Mix New-Product Development McGraw-Hill/Irwin International Business, 6/e © 2007 The McGraw-Hill Companies, Inc., All Rights Reserved ... McGraw -Hill/ Irwin International Business, 6/e © 2007 The McGraw -Hill Companies, Inc., All Rights Reserved 16 - Relationship Between Quality and Costs McGraw -Hill/ Irwin International Business, ... McGraw -Hill/ Irwin International Business, 6/e Product customization © 2007 The McGraw -Hill Companies, Inc., All Rights Reserved 16 - 14 Typical Unit Cost Curve McGraw -Hill/ Irwin International Business, ... nations McGraw -Hill/ Irwin International Business, 6/e © 2007 The McGraw -Hill Companies, Inc., All Rights Reserved 16 - 19 Location Strategy and Production McGraw -Hill/ Irwin International Business,