International Management Chapter 15

Production Activities involved in creating a product or service Logistics Procurement and physical transmission of material through the supply chain, from suppliers to customers 00:03 01:34 Supply Chain Management can be conducted internationally: To lower the costs of value creation and add value by better serving customer needs The strategic objectives of production and logistics are: To lower costs To increase product quality by eliminating defective products from both the supply chain and the manufacturing process Supply Chain Management 1. Production and logistics functions must be able to accommodate demands for local responsiveness 2. Production and logistics must be able to respond quickly to shifts in customer demand What firms must consider when deciding where to locate production facilities: • Country factors • Technological factors • Product factors Country Factors Firms should consider: Location economies and experience curve effects Formal and informal trade barriers Free trade agreements and regional alliances Labor market and related and supporting industries Transportation costs Incentives and subsidies Regulations affecting FDI ' Firm strategy-Core Competencies, Operations, Organizational Architecture and Global Strategy Political, economic, cultural and legal conditions Political, economic, & legal costs and risks Human Development Index Expected future movements in exchange rates CA, H-O, VPLC, NTT/STP, Porter Technological Factors Firms should consider: 1. If the level of fixed costs is very high, it makes sense for the firm to serve the world market from a single location or from very few locations 2. The larger the minimum efficient scale of a plant, the more likely centralized production makes sense 3. Flexible manufacturing technology or 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 Minimum Efficient Scale Level of output at which most scale economies are exhausted Flexible machine cells Grouping of various types of machinery help the firm to customize products to meet the demands of small customer groups in different national markets firms can act like a local firm without bearing the costs of establishing local manufacturing facilities able to serve multiple customers at same time with flexible machine cells and simultaneously produce customized versions of same product Technological Factors Concentrated production makes sense when: • Fixed costs are substantial • The minimum efficient scale (MES) of production is high • Flexible manufacturing technologies are available Technological Factors Concentrated production does not make sense when: • fixed costs are low • minimum efficient scale of production is relatively low • appropriate flexible manufacturing technologies are not available 00:03 01:34 Upgrade to remove ads Only $35.99/year Product Factors Two product factors impact location decisions: 1. The product's value-to-weight ratio 2. Whether the product serves universal needs 1. The product's value-to-weight ratio 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, produce 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 Two basic strategies for locating manufacturing facilities 1. Concentrating them in the optimal location and serving the world market from there 2. Decentralizing them in various regional or national locations that are close to major markets Strategic Roles of Foreign Factories 1. Offshore factory 2. Source factory 3. Server factory 4. Contributor factory 5. Outpost factory 6. Lead factory Offshore factory Produces goods at a lower cost than at home or in any other market Source factory Primary purpose is to drive down costs in the global supply chain Server factory Linked into global supply chain to supply specific country or regional markets Contributor factory Serves a specific nation or world region and has responsibilities for product and process engineering and development Outpost factory Can be viewed as an intelligence gathering unit Lead factory To create new processes, products, and technologies that can be used throughout the global firm in all parts of the world Hidden costs of foreign production: ØHigh employee turnover ØShoddy workmanship ØPoor product quality ØLow productivity Make-or-buy decisions To perform a value creation activity in-house or outsource it to another firm are important to a firm's strategy The Advantages of Make 1.Lowering Costs - firm is more efficient 2. Facilitating Specialized Investments - large investments in specialized assets are required 3. Protecting Proprietary Technology - to maintain control over the technology 4. Accumulating Dynamic Capabilities -skills become more valuable over time through learning 5. Improved Scheduling -planning, coordination, and scheduling of adjacent processes is easier The Advantages of Buy 1.Strategic Flexibility- outsourcing has flexibility to switch orders between suppliers as needed 2.Lower Costs 3. Offsets-help firms capture more orders from suppliers' countries Global Logistics The goal is to: ØManage global supply chain at lowest possible cost and best serve customer needs ØEstablish a competitive advantage through superior customer service ØRespond to shifts in demand Just-in-time (JIT) Inventory ØMaterials arrive at a manufacturing plant just in time to enter the production process ØMajor cost savings from reduced warehousing and inventory holding costs ØSpot defective parts, take them out of the manufacturing process, and boost product quality Electronic data interchange (EDI) ØFacilitates tracking of inputs ØFirm can optimize its production schedule ØFirm and suppliers communicate in real time ØEliminates flow of paperwork between a firm and its suppliers