Chapter 16

Global Production,
Outsourcing, and
Logistics
McGraw-Hill/Irwin
 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?
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 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
 Questions: How can production and logistics
1. 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
2. Add value by better serving customer needs?
 eliminate defective products from the supply chain and the
manufacturing process
3. Can help meet demands for local responsiveness
4. Be able to respond quickly to shifts in customer demand 16-3
 How Can Cost Be Reduced and
Quality Be Improved?
 Reducing cost and improving quality are not
independent of each other.

 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

Improved quality reduces costs

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The Relationship Between
Quality and Costs

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How Production Be Organized?
 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
1. Country factors
2. Technological factors
3. Product factors
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 Why Are
Country Factors Important?
 Manufacturing should be located where economic,
political, and cultural conditions are most
conducive to the performance of that activity
 Firms should consider
 the availability of skilled labor and supporting
industries
 formal and informal trade barriers
 expectations about future exchange rate changes
 transportation costs
 regulations affecting FDI

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 Why Are Technological
Factors Important?
 Firms should consider
1. The level of fixed costs
 if fixed costs are high, produce in a single location or a few
locations
 when fixed costs are low, multiple production plants may be
possible – allows firms to respond to local demands
2. 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
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 Why Are Technological
Factors Important?
3. The flexibility of the technology
 flexible manufacturing technology or lean
production
 reduces set up times for complex equipment
 increases the utilization of individual machines
 improves quality control
 Flexible manufacturing allows firms to
produce a wide variety of end products at a
relatively low unit cost
 Mass customization
 Flexible machine cells

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 What Should a Firm Do?
 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

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 Why Are Product Factors
Important To Location Decisions?
 Two product factors impact location decisions
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 to other parts of
the world
 If the value-to-weight ratio is low, there is greater
pressure to manufacture the product in multiple
locations across the world
2. 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

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How Are Location, Strategy,
And Production Related?
Location, Strategy, and Production

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 What Is The 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
 Improvement in a facility comes from
1. Pressure to lower costs or respond to local markets
2. An increase in the availability of advanced factors of
production

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 What Is The Strategic Role Of
Foreign Factories?
Many companies now see foreign factories
as globally dispersed centers of excellence
supports the development of a transnational
strategy
global learning - valuable knowledge 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

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 Should A Firm
Outsource Production?
Should a firm make or buy the component
parts to go into its final product?
Make-or-buy decisions are important to
firms' manufacturing strategies
service firms also face make-or-buy decisions
decisions involving international markets are
more complex than those involving domestic
markets

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 Why Make?
 Vertical integration - making component parts in-house
1. Lowers costs - if a firm is more efficient at that
production activity than any other enterprise,
manufacturing in-house makes sense
2. Facilitates investments in highly specialized assets -
internal production makes sense when substantial
investments in specialized assets are required
3. Protects proprietary technology – in-house production
makes sense when component parts contain proprietary
technology
4. Accumulating Dynamic Capabilities
5. Facilitates the scheduling of adjacent processes -
planning, coordination, and scheduling of adjacent
processes can be easier with in-house production
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 Why Buy?
 Buying component parts from independent suppliers
1. Gives the firm greater flexibility
 important when changes in exchange rates and trade
barriers alter the attractiveness of various supply sources
over time
2. Helps drive down the firm's cost structure
 avoids challenges of coordination and control of additional
subunits
 avoids the lack of incentive associated with internal
suppliers
 avoids the difficulties with setting appropriate transfer
prices
3. Helps the firm capture orders from international customers
 can help firms gain orders from suppliers’ countries
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 Do Strategic Alliances With
Suppliers Make Sense?
Sometimes, firms can capture the benefits
of vertical integration without the
associated organizational problems by
forming long-term strategic alliances with
key suppliers
However, these commitments may actually
limit strategic flexibility

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 How Do Firms Manage
The 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

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 What Is The Role Of
Just-In-Time Inventory?
 Just-in-time (JIT) systems economize on
inventory holding costs by having materials arrive
at a manufacturing plant just in time to enter the
production process
 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
 But, a JIT system leaves the firm with no buffer
stock of inventory to meet unexpected demand or
supply changes

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 What Is 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

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