International Business- Global production slides
- 2. 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 X- Box • 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
- 3. 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?
- 4. 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
- 5. 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 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
- 6. Relationship Between Quality and Costs
- 7. 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 do 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
- 8. 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
- 9. 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
- 10. Where to Produce • For the firm contemplating international production a number of factors must be considered – Country factors – Technological factors – Product factors
- 11. Country Factors • Optimum economic, political, and cultural conditions • Externalities – Skilled labor pools – Supporting industries • Formal and informal trade barriers • Exchange rate
- 12. Technological Factors • Fixed costs • Minimum efficient scale • Flexible manufacturing – Reduce setup times for complex equipment – Increase machine utilization – Improve quality control • Flexible machine cells to perform a variety of operations Mass customization Low cost Product customization
- 13. Typical Unit Cost Curve
- 14. 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
- 15. 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
- 16. 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
- 17. Decentralized Location • Factor costs do 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
- 19. 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
- 20. 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
- 21. 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
- 22. 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
- 23. 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
- 24. 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