• Global Production and Supply Chain Management

Index

 Learning Objectives

 Introduction

 Strategy, Production, and Supply Chain Management function Objectives

 Where to Produce?? country , technological and production factors

 Locating and Strategic Roles for Production Facilities

 Make-or-Buy Decisions

 Global Supply Chain Functions

 Managing a Global Supply Chain

LEARNING OBJECTIVES

 global production and supply chain management decisions are of central importance to many global companies.

 how country differences, production technology, and production factors all affect the choice of where to locate production

activities.

 the role of foreign subsidiaries in production can be enhanced over time as they accumulate knowledge.

 Identify the factors that influence a firm’s decision of whether to source supplies from within the company or from

 foreign supplier

 Understand the functions of logistics and purchasing (sourcing) within global supply chains.
Introduction
As trade barriers fall and global markets develop, many firms increasingly confront a set of
interrelated issues.
1- where in the world should production activities be located? Should they be concentrated
in a single country, or should they be dispersed around the globe, matching the type of
activity with country differences in factor costs, tariff barriers, political risks, and the like to
minimize costs and maximize value added?
2- what should be the long-term strategic role of foreign production sites, Value can come
from cost inefficiencies.
3- should the firm own foreign production activities, or is it better to outsource those
activities to independent vendors? Outsourcing means less control, but it can be cost-
efficient
4- how should a globally dispersed supply chain be managed, and what is the role of
information technology in the management of global logistics, purchasing (sourcing), and
operations?
5- similar to issues of production, should the company manage global supply chains itself?
 “production” of certain service activities to developing nations where labor costs are lower
e.g., the trend among many U.S. companies to outsource customer care services to places
such as India, where English is widely spoken and labor costs are much lower).
 Supply chain management is the integration and coordination of logistics, purchasing,
operations, and market channel activities from raw material to the end-customer. Production
and supply chain management are closely linked because a firm’s ability to perform its
production activities efficiently depends on a timely supply of high-quality material and
information inputs, for which purchasing and logistics are critical functions.
 For make-or-buy decisions ( sourcing, and logistics) is one of the most commonly discussed
topics in news media and on the internet related to production and supply chains.
 the word outsourcing sometimes even creates an “us against them” mentality (i.e., should the
company outsource production or other activities to entities outside its country borders, or
should it use only domestic operations? .
 strategic objectives for an international The production and supply chain
management functions

 ensure that the total cost of moving from raw materials to finished goods is as low as possible for the value

provided to the end-customer.

 increase product (or service) quality by establishing process-based quality standards and eliminating defective

raw material

 the objectives of reducing costs and increasing quality are not independent of each other. As illustrated in Figure

 Ability to accommodate demands for local responsiveness.

 production and supply chain management must be able to respond quickly to shifts in customer demand
the firm that improves its quality control will also reduce its costs of value creation.

 Improved quality control reduces costs by 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.
Where to Produce??
COUNTRY FACTORS

economic, political, and cultural conditions—including relative factor costs

expected future movements in its exchange rate

TECHNOLOGICAL FACTORS
Fixed Costs
Minimum Efficient Scale

PRODUCTION FACTORS

product features,
locating production facilities
strategic roles for production facilities. • Flexible Manufacturing and Mass Customization
• Producing greater product variety from a factory
implies shorter production runs, which in turn implies
an inability to realize economies of scale
Locating Production Facilities
the role of foreign subsidiaries in production can be enhanced over time as they accumulate knowledge.
There are two basic strategies for locating production facilities:
(1) concentrating them in a centralized location and serving the world market from there or
(2) decentralizing them in various regional or national locations that are close to major markets.
Strategic Roles for Production Facilities

 The growth of global production among multinational companies has been tremendous
over the past two decades, outdoing the growth of home country production by more
than 10-fold

 When making these decisions, managers need to think about the strategic role assigned
to a foreign factory and major consideration here is the importance of global learning
Foreign factories can have one of a number of strategic roles or
designations, including
1. offshore factory
2. source factory
3. server factory
4. contributor factory
5. outpost factory
6. lead factory
THE HIDDEN COSTS OF FOREIGN LOCATIONS

here may be some “hidden costs” to basing production in a foreign location. Numerous anecdotes suggest that

 high employee turnover

 shoddy workmanship

 poor product quality

 low productivity are significant issues in some outsourcing locations

 Microsoft, for example, established a major facility in Hyderabad, India, for four very good reasons:
(1) The wage rate of software programmers in India is one-third of that in the United States;
(2) India has an excellent higher education system that graduates many computer science majors every year;
(3) there was already a high concentration of information technology companies and workers in Hyderabad;
and
(4) many of Microsoft’s highly skilled Indian employees, after spending years in the United States, wanted to
return home, and Microsoft saw the Hyderabad facility

as a way of holding on to this valuable human capital. However, the company found that the turnover rate among
its Indian employees is higher than in the United States
 Make-or-Buy Decisions

for a global firm is the strategic decision concerning whether to produce an item in-house (“make”) or purchase it
from an outside supplier (“buy”).
Make-or-buy decisions are made at both the strategic and operational levels

with the strategic level being focused on the long term

the operational level being more focused on the short term.

the make-or-buy decision is also the starting point for operations’ influence on global supply chains.
To facilitate g of the make-or-buy decision, we have captured the dynamics of this choice in two graphics that illustrate either
operationally favoring a make decision or operationally favoring a buy decision
Global Supply Chain Functions

 purchasing represents the part of the supply chain that involves worldwide buying of raw material,

component parts, and products used in the manufacturing of the company’s products and services.

 The core activities performed in purchasing include the development of an appropriate strategy for

global
purchasing and selecting the type of purchasing strategy best suited for the company.

strategic levels—from domestic to international to global

 Level I is simply companies engaging in domestic purchasing activities only.

 Levels II and III are both considered “international purchasing,” but of various degrees and forms

 Levels IV and V both involve “global purchasing” to various degrees.

The types of purchasing activities and strategies just discussed come with a set of generic options for the
“international arena.” But we all know that outsourcing and offshoring, along with many by-products and other
similar yet quite different options, exist in the purchasing world today
 Managing a Global Supply Chain

The potential for reducing costs through more efficient supply chain management is
enormous.
For the typical manufacturing enterprise, material costs account for between 50 and 70
percent of revenues, depending on the industry.
Even a small reduction in these costs can have a substantial impact on profitability.
There is Four main areas are of concern in managing a global supply chain
1. ROLE OF JUST-IN-TIME INVENTORY

• just-in-time inventory systems now play a major role in most manufacturing firms.

• The basic philosophy behind just-intime (JIT)inventory systems is to economize on inventory holding
costs by having materials arrive at a manufacturing plant just in time to enter the production process
and not before.

• The major cost savings comes from speeding up inventory turnover. This reduces inventory holding
costs, such as warehousing and storage costs.

2- ROLE OF INFORMATION TECHNOLOGY

Web and cloud-based information systems play a crucial role in modern global supply chains.

• By tracking component parts through ERP Systems

• And coordinate the flow of materials into manufacturing

3- COORDINATION IN GLOBAL SUPPLY CHAINS

• Consider how to turn an aircraft

• think in terms of coordination and leverage points

• Shared decision making—such as joint consideration of replenishment, inventory holding costs, collaborative

planning, costs of different processes

4- INTERORGANIZATIONAL RELATIONSHIPS
Interorganizational relationships have been studied and talked about in various contexts for decades. The two keys
are trust and commitment.