Global Production, Outsourcing, and Logistics PDF

T11 - GLOBAL PRODUCTION, OUTSOURCING, AND LOGISTICS What Are The Main Production Issues For Firms? International firms must answer five interrelated questions 1. Where should production activities be located? 2. What should be the long-term strategic role of foreign production sites? 3. S...

T11 - GLOBAL PRODUCTION, OUTSOURCING, AND LOGISTICS What Are The Main Production Issues For Firms? International firms must answer five interrelated questions 1. Where should production activities be located? 2. What should be the long-term strategic role of foreign production sites? 3. Should the firm own foreign production activities or outsource those activities to independent vendors? 4. How should a globally dispersed supply chain be managed, and what is the role of Internet- based information technology in the management of global logistics? 5. Should the firm manage global logistics itself, or should it outsource the management to enterprises that specialize in this activity? How Are Strategy, Production, And Logistics Related? Production - activities involved in creating a product Logistics - procurement and physical transmission of material through the supply chain, from suppliers to customers @ product management - Information and capital flow from origin point to consumption point Questions: How can production and logistics a) Lower the costs of value creation? ✓ disperse production to the most efficient locations ✓ manage the global supply chain efficiently to better match supply and demand b) Add value by better serving customer needs? ✓ eliminate defective products from the supply chain and the manufacturing process How Can Quality Be Improved? Most firms use the Six Sigma program - a direct descendant of total quality management (TQM) aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout the company. Ex: Companies like Motorola and General Electric use this program. In the European Union, firms must meet ISO 9000 standards before gaining access to the European marketplace Improved quality reduces costs Where Should Production Be Located? Firms should locate production so that production and logistics can be locally responsive production and logistics can respond quickly to shifts in customer demand Firms should consider a) Country factors b) Technological factors c) Product factors  a) Country Factors Manufacturing should be located where economic, political, and cultural conditions are most conducive to the performance of that activity. In other words, a firm should produce its product where ever it makes the most sense. Factors :- ✓ the availability of skilled labor and supporting industries ✓ formal and informal trade barriers ✓ expectations about future exchange rate changes ✓ transportation costs ✓ regulations affecting FDI Regulations on FDI and trade can significantly affect the attractiveness of a country as a production location. In addition, expectations about the future value of a currency can also influence the decision of where to produce. - Alter a country’s effectiveness as a manufacturing base. - Currency appreciation can transform a high location to low cost location. b) Technological Factors Factors:- i) The level of fixed costs if fixed costs are high, produce in a single location or a few locations - Ex: It costs more than a billion dollars to set up a semi-conductor plant for example, so a semi-conductor producer is unlikely to establish multiple plants. when fixed costs are low, multiple production plants may be possible – allows firms to respond to local demands ii) The minimum efficient scale when minimum efficient scale (the level of output at which most plant-level scale economies are exhausted) is high, choose centralized production in a single location or a limited number of locations when minimum efficient scale is low, respond to local market demands and hedge against currency risk by operating in multiple locations iii) The flexibility of the technology flexible manufacturing technology or lean production - is changing the way companies produce, allowing them to challenge the traditional rules of production. ✓ reduces set up times for complex equipment ✓ increases the utilization of individual machines through better scheduling ✓ improves quality control at all stages of the manufacturing process Flexible manufacturing allows firms to produce a wide variety of end products at a relatively low unit cost Mass customization - implies that a firm can customize its product line to meet the needs of different customers without additional costs.  Flexible machine cells - This type of technology groups various types of machinery, a common materials handler, and a centralized cell controller. Firms that use flexible manufacturing technologies have a competitive advantage over those that don’t because they can customize their products to meet the needs of different national markets. Why is flexible manufacturing so important? - Flexible manufacturing allows companies to produce a wide variety of products at a unit cost that would normally be associated with mass production of a standardized product Production should be concentrated in a few locations when fixed costs are substantial the minimum efficient scale of production is high flexible manufacturing technologies are available Production in multiple locations makes sense when ✓ both fixed costs and the minimum efficient scale of production are relatively low ✓ appropriate flexible manufacturing technologies are not available c) Product Factors Two product factors impact location decisions:- i) The product's value-to-weight ratio If the value-to-weight ratio is high, produce the product in a single location and export to other parts of the world. - Ex: pharmaceutical products. It doesn’t cost as much to ship prescription pain killers as it costs to ship a car, so centralized production makes sense. If the value-to-weight ratio is low, there is greater pressure to manufacture the product in multiple locations across the world ii) Whether the product serves universal needs When products serve universal needs, the need for local responsiveness falls, and concentrating manufacturing in a central location makes sense. - When there are few differences in consumer tastes and preferences, the need to be locally responsive is reduced, and centralized manufacturing makes sense. - For example, a firm might produce calculators or video game consoles at a single location because they can be produced in bulk. Locating Production Facilities There are two basic strategies for locating manufacturing facilities a) Concentrating them in the optimal location and serving the world market from there - In pursuit of low cost strategies n to take advantage of economies of scale. - Make sense when differences between political economy, culture and factor costs hv substantial impact. - Trade barriers r low, location externalities r important in industry and exchange rates r stable.  b) Decentralizing them in various regional or national locations that are close to major markets. - Common policy for multinational strategy. - Make sense when differences in political economy, culture and factor costs r few substantial impact. - The production technology has low fixed cost, low minimum efficient scale and flexible manufacturing technology is not available. How Are Location, Strategy, And Production Related? Location, Strategy, and Production Strategic Role Of Foreign Factories The strategic role of foreign factories and the strategic advantage of a particular location can change over time factories established to take advantage of low cost labor can evolve into facilities with advanced design capabilities - Ex: Hewlett Packard initially located it production in Singapore to take advantage of low costs there, but today, the facility is an important center for designing and assembling portable ink jet printers. as governmental regulations change and/or countries upgrade their factors of production the strategic advantage of a particular location can change Improvement in a facility comes from Pressure to lower costs or respond to local markets An increase in the availability of advanced factors of production Many companies now see foreign factories as globally dispersed centers of excellence excellence in different locations worldwide, 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 can be found in foreign subsidiaries  ▪ implies that firms are less likely to switch production to new locations simply because some underlying variable like wage rates has changed Should A Firm Outsource Production? Should a firm make or buy the component parts to go into its final product? - 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 service firms also face make-or-buy decisions decisions involving international markets are more complex than those involving domestic markets Toyota for example, actually produces less than 30 percent of the value of its cars. The rest is outsourced to other companies. i. The Advantages of Make :- ▪ Vertical integration : process by which a company extends it’s control over additional stages of production either inputs/outputs - making component parts in-house is attractive because a) Lowers costs - manufacturing in-house makes sense if a firm is more efficient at that production activity than any other enterprise. - Boeing for example, keeps large systems integration activities in-house because it’s more efficient at this activity than any other firm. b) Facilitates investments in highly specialized assets - - 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 - Ex: So, if Nissan develops a new fuel injection system that it believes will be an important competitive advantage, but that requires specialized assets, Nissan will probably choose to produce the system in-house. Because the system is unique to Nissan vehicles, it’s not worth it for an outside supplier to make the investments that would be needed. c) Protects proprietary technology – in-house production makes sense when component parts contain proprietary technology (to maintain control over the technology) - Boeing for example, manufactures its own cockpits so that it doesn’t give away proprietary information to competitors. d) Improving Scheduling in-house production can make planning, coordination, and scheduling of adjacent processes easier. - For firms with just-in time inventory systems, this can be a real advantage. ii. The Advantages of Buy ▪ Popular in business of company manufacturing ▪ Buying component parts from independent suppliers (outsourcing) is attractive because a) Gives the firm greater flexibility Outsourcing provides flexibility to switch orders between suppliers as circumstances dictate  important when changes in exchange rates and trade barriers alter the attractiveness of various supply sources over time b) Helps drive down the firm's cost structure Firms that outsource can:- ✓ avoids challenges of coordination and control of additional subunits ✓ avoids the lack of incentive associated with internal supplier - Because internal suppliers have a captive customer, they often don’t share the same drive to improve quality and lower prices that independent suppliers have. ✓ avoids the difficulties with setting appropriate transfer prices - A number of factors like exchange rates changes, and the ignorance of headquarters about local conditions, affect how prices should be set. c) Helps the firm capture orders from international customers can help firms gain orders from suppliers’ countries Ex: Boeing was able to get a large order from Air India for example, but agreed to shift some subcontracting work to Indian suppliers. Managing a Global Supply Chain 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 The goal is to ✓ manage a global supply chain at the lowest possible cost and in a way that best serves customer needs ✓ establish a competitive advantage through superior customer service Efficient logistics can have a major impact upon a firm's bottom line When it comes to international logistics, firms have to deal with complications like distance, time, exchange rates, and customs barriers. The Role Of Just-In-Time Inventory - reduce inventory costs economize on inventory holding costs by having materials arrive at a manufacturing plant just in time to enter the production process system was pioneered in Japan during the 1950s and 1960s. JIT systems generate major cost savings from reduced warehousing and inventory holding costs can help the firm spot defective parts and take them out of the manufacturing process to boost product quality Because inventory turnover is speeded up, firms can reduce warehouse and inventory holding costs. But, a JIT system leaves the firm with no buffer stock of inventory to meet unexpected demand or supply changes Benefits:- i) Reduce inventory waste - Unavailable products increase waste consumer inventory space. - JIT eliminates overproduction when supply of the item exceed demand. ii) Reduce warehouse holding cost - R kept to a minimum cause u order only when ur customer place an order.  iii) Give the manufacturer more control - Can quickly respond to customers’ needs - Make the JIT model flexible and able to cater to ever changing market needs. iv) Local sourcing - Need to source ur raw materials locally - Reduce transportation time and cost Drawbacks:- i) Unreliable suppliers - Relies heavily on strong relationships n precise forecasting with key suppliers - Suppliers that does not supplies materials to firm exactly on time and the correct amount could impact the production process. ii) Costly technology - Could be expensive and difficult to implement iii) Natural disasters - Interfere with flow of goods to the company from suppliers iv) Unexpected demand surge - A company may not able to immediately meet their requirements of massive and unexpected order since it has few/no stock of finished goods. Real example:- i) Apparel industry (Nike) - To improve their disconnect production facilities across Southeast Asia ii) Retail industry (Zara) - To keep sales and production aligned geographically. iii) Technology industry - Reduced their costs and cut lead time iv) Fast food industry (Burger king) - Applied to food ordering where food is kept fresh and waste is reduced. The Role Of Information Technology And The Internet Web-based information systems play a crucial role in materials management allow firms to optimize production scheduling according to when components are expected to arrive Electronic Data Interchange (EDI) facilitates the tracking of inputs allows the firm to optimize its production schedule lets the firm and its suppliers communicate in real time eliminates the flow of paperwork between the firm and its suppliers