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International Business Huang Huiping

Chapter 9 Global Production, Outsourcing

and Logistics

Learning Objectives: (课堂教学目标)


 Explain why production and logistics decisions are of central importance to
many multinational businesses.
 Explain how countries differences, production technology, and product
features all affect the choice of where to locate production activities.
 Discuss 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
suppliers from within the company or from foreign suppliers.
 Articulate what is required to efficiently coordinate a globally dispersed
production system.

Content and Schedule : (本章主要内容与学时计划)


 Opening case 15’
 Strategic ,Manufacturing and Logistic 20’
 Where to manufacture 45’
 The strategic role of foreign subsidiaries in production 10’
 Make or buy decision 45’
 Manage a global supply chain 20’
 Summary and Critical Questions Discussion 25’

Special Attention(重点与难点)
重点 Strategic ,Manufacturing and Logistic
Make or buy decision
难点 Where to manufacture

Teaching Design (主要教学方法)


 Instructing
 Case studies
 Discussion in the class
 Practice in Business Plan

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Opening Case
 What was the bottle neck when Ling & Fung needed to develop faster
globally?
 What is the key point in an efficient logistic system?
 Is production in home country better than in oversea plant? Why or why
not?

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 is it better to 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?

9.1 Strategy, Production, And Logistics


Firms need to identify how production and logistics can be conducted
internationally to:
 lower the costs of value creation
 add value by better serving customer needs
Here,
 Production refers to activities involved in creating a product
 Logistics refers to the procurement and physical transmission of material
through the supply chain, from suppliers to customers 物流是指采购原料
物流是指采购原料
并通过供应链将原料实物从供货商传递到顾客手中。
To lower costs,
costs, firms can:
 disperse production to those locations where activities can be performed
most efficiently
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 manage the global supply chain efficiently to better match supply and
demand
To improve quality,
quality, firms can:
 eliminate defective products from the supply chain and the manufacturing
process
 Improved quality will also reduce costs
 To increase product quality, most firms today use the Six Sigma program
which aims to reduce defects, boost productivity, eliminate waste, and cut
costs throughout a company
 Six Sigma, a direct descendant of total quality management (TQM), has a
goal of improving product quality
 In the European Union, firms must meet the standards set forth by ISO
9000 before the firm is allowed access to the European marketplace

Figure: The relationship between Quality and Costs


International companies have two other important production and logistics
objectives:
 production and logistics functions must be able to accommodate demands
for local responsiveness
 production and logistics must be able to respond quickly to shifts in
customer demand

9.2 Where To Produce

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Three factors are important when making location decisions:


9.2.1 country factors
 Firms should locate manufacturing activities in those locations where
economic, political, and cultural conditions, including relative factor costs,
are most conducive to the performance of that activity

Country factors that can affect location decisions include:


 the availability of skilled labor and supporting industries
 formal and informal trade barriers
 expectations about future exchange rate changes
 transportation costs
 regulations affecting FDI

9.2.2 technological factors


 The type of technology a firm uses in its manufacturing can affect location
decisions
Three characteristics of a manufacturing technology are of interest:
(1). The level of fixed costs:
 If the fixed costs of setting up a manufacturing plant are high, it might
make sense to serve the world market from a single location or from a few
locations
 When fixed costs are relatively low, multiple production plants may be
possible
 Producing in multiple locations allows firms to respond to local markets
and reduces dependency on a single location
(2). The minimum efficient scale:
 The larger the minimum efficient scale (the level of output at which most
plant-level scale economies are exhausted) of a plant, the more likely
centralized production in a single location or a limited number of locations
makes sense
 A low minimum efficient scale allows the firm to respond to local market
demands and hedge against currency risk by operating in multiple
locations
(3). The flexibility of the technology:
flexible manufacturing technology or lean production covers a range of
manufacturing technologies that are designed to:
 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

• Flexible manufacturing technologies allow a company to produce a wide


variety of end products at a unit cost that at one time could only be
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achieved through the mass production of a standardized output 精 益 生 产


(柔性生产技术)是指用以改进工作安排,减少(复杂设备的)设置次数并加
强质量控制的生产技术。
• Mass customization implies that a firm may be able to customize its
product range to suit the needs of different customer groups without
bearing a cost penalty 规模定制是指单位成本下的最终产品的多样化生产,
这以前只能进行大批量生产标准化的产品才能达到。
• Flexible machine cells (grouping of various types of machinery, a
common materials handler, and a centralized cell controller) are another
common flexible manufacturing technology 柔性机器单元是指柔性的生产技
术,在该技术中,一组各种类型的机器,一台普通的材料处理机和一个集成的
单元控制器用于生产一组产品。

Adopting flexible manufacturing technologies can help improve the


competitive position of firms by allowing the firm to customize products to
different national markets in accordance with demands for local
responsiveness
Summary
Concentrating production at a few choice locations makes sense when:
• fixed costs are substantial
• the minimum efficient scale of production is high
• flexible manufacturing technologies are available
Concentrating production at a few choice locations is not as compelling when:
• both fixed costs and the minimum efficient scale of production are
relatively low
• appropriate flexible manufacturing technologies are not available

9.2.3
9.2.3 Product
Product factors
Two product factors impact location decisions:
(1). the product's value-to-weight ratio:
 If the value-to-weight ratio is high, it is practical to produce the product in
a single location and export it 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, increasing the attractiveness of concentrating manufacturing in a
central location
 Since there are few national differences in consumer taste and preference
for such products, the need for local responsiveness is reduced, increasing
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the attractiveness of concentrating manufacturing in a central location.

Locating Production Facilities


There are two basic strategies for locating manufacturing facilities:
• concentrating them in the optimal location and serving the world market
from there

• decentralizing them in various regional or national locations that are close


to major markets

The appropriate strategic choice is determined by various country, technological,


and product factors.

9.3 The Strategic Role Of Foreign Factories

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 The strategic role of foreign factories and the strategic advantage of a


particular location can change over time
 Factories initially established to take advantage of low cost labor can
evolve into facilities with advanced design capabilities
 Improvement in a facility comes from two sources:
1. pressure to lower costs or respond to local markets
2. an increase in the availability of advanced factors of production
 Many companies now see foreign factories as globally dispersed centers of
excellence
 This philosophy supports the development of a transnational strategy
 A major aspect of a transnational strategy is a belief in global learning, or
the idea that valuable knowledge does not reside just in a firm’s domestic
operations, it may also be found in its foreign subsidiaries
 This implies that firms are less likely to switch production to new
locations simply because some underlying variable like wage rates has
changed

9. 4 Outsourcing Production: Make-or-Buy Decisions


 Should an international business make or buy the component parts to go

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into their final product?


 Make-or-buy decisions are important factors in many firms' manufacturing
strategies
 Today, service firms also face make-or-buy decisions as they choose which
activities to outsource and which to keep in-house
 Make-or-buy decisions involving international markets are more complex
than those involving domestic markets

9.4.1 The Advantages Of Make


Vertical integration (making component parts in-house) can:
1. lower costs - if a firm is more efficient at that production activity than any
other enterprise, it may pay the firm to continue manufacturing a product or
component part in-house
2. facilitate investments in highly specialized assets - internal 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
3. protect proprietary technology - a firm might prefer to make component
parts that contain proprietary technology in-house in order to maintain control
over the technology
4. facilitate the scheduling of adjacent processes - the weakest argument for
vertical integration is that the resulting production cost savings make planning,
coordination, and scheduling of adjacent processes easier

9.4.2 The Advantages Of Buy


Buying component parts from independent suppliers:
1. gives the firm greater flexibility
 By buying component parts from independent suppliers, the firm can
maintain its flexibility, switching orders between suppliers as
circumstances dictate
 This is particularly important when changes in exchange rates and trade

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barriers alter the attractiveness of various supply sources over time


2. helps drive down the firm's cost structure
Firms that buy components from independent suppliers avoid:
 the challenges involved with coordinating and controlling the additional
subunits that are associated with vertical integration
 the lack of incentive associated with internal suppliers
 the difficulties with setting appropriate transfer prices
3. helps the firm capture orders from international customers
 Outsourcing can help firms capture more orders from suppliers’ countries

9.4.3 Trade-Offs
The benefits of manufacturing components in-house are greatest when:
 highly specialized assets are involved
 vertical integration is necessary for protecting proprietary technology
 the firm is more efficient than external suppliers at performing a particular
activity

9.4.4 Strategic Alliances with Suppliers

• Firms have tried to capture some of the benefits of vertical integration,


without encountering the associated organizational problems, by entering
into long-term strategic alliances with key suppliers

• While such alliances can help the firm to capture the benefits associated
with vertical integration firms may find their strategic flexibility limited by
commitments to alliance partners

9.5 Managing A Global Supply Chain


 Logistics encompasses the activities necessary to get materials to a
manufacturing facility, through the manufacturing process, and out

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through a distribution system to the end user


The objectives of logistics are:
 To manage a global supply chain at the lowest possible cost and in a way
that best serves customer needs
 To help the firm establish a competitive advantage through superior
customer service
9.2.1 The Role Of Just-in-Time Inventory
 The basic philosophy behind just-in-time (JIT) 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
 JIT systems generate major cost savings from reduced warehousing and
inventory holding costs
 JIT systems can help the firm spot defective parts and take them out of the
manufacturing process to boost product quality
 However, a JIT system leaves the firm with no buffer stock of inventory to
meet unexpected demand or supply changes
9.5.2 The Role Of Information Technology And The Internet
 Web-based information systems play a crucial role in materials
management
 They 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

Assignments

Problem sets:

● Page 451,
451, Q1-3
Q1-3
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●Closing case

Reading Assignments (阅读任务)


Read Chapter 14

For next class:


 Read Chapter 15
 Prepare Opening case

Business Plan Project


周一下午辅导时间在国贸系完成初稿的各组讨论, 修改初稿

CRITICAL DISCUSSION QUESTIONS AND ANSWERS


课后练习参考答案

1. An electronics firm is considering how best to supply the world market for
microprocessors used in consumer and industrial electronic products. A
manufacturing plant cost approximately $500 million to construct and
requires a highly skilled work force. The total value of the world market for
this product over the next 10 years is estimated to be between $10 and $15
billion. The tariffs prevailing in this industry are currently low. What kind
of manufacturing strategy do you think the firm should adopt - concentrated

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or decentralized? What kind of location(s) should the firm favor for its
plant(s)?
Answer: The firm should pursue a concentrated manufacturing because (1) the
tariffs prevailing in the industry are low, (2) the cost of building a plant to produce
the microprocessors is high, and (3) the product's value-to-weight ratio is high.
All of these factors favor a concentrated vs. a decentralized manufacturing
strategy. In terms of location, the company should consider three factors: country
factors, technology factors, and product factors. First, in terms of country factors,
the firm should locate its plant in a country that has a highly skilled pool of
workers available. That criterion probably limits the firm to developed nations.
Second, in terms of technology factors, the firm is compelled to limit the number
of its manufacturing facilities because of the high cost of constructing a plant.
Third, in terms of product factors, the firm can manufacturer its product in a
central location due to the relatively high value-weight ratio and the universal
appeal of the product.

2. A chemical firm is considering how best to supply the world market for
sulfuric acid. A manufacturing plant costs approximately $20 million to
construct and requires a moderately skilled work force. The total value of
the world market for this product over the new 10 years is estimated to be
between $20 and $30 billion. The tariffs prevailing in this industry are
moderate. Should the firm favor concentrated manufacturing or
decentralized manufacturing? What kind of location(s) should the firm seek
for its plant(s)?
Answer: This question is a tougher call than the scenario depicted in Question #1.
The firm should probably pursue a limited decentralized manufacturing strategy
(meaning that the firm should not set up a plant in every country that it sells to,
but should set up plants in several "regions" of the world). This strategy makes
sense because (1) The tariffs prevailing in the industry are moderate (rather than
low), (2) the cost of constructing a facility is relatively modest ($20 million), and
(3) only a moderately skilled work force is needed (which is probably available in
many low-cost regions of the world). The firm should select its location based on
country factors, technology factors and product factors. In terms of country
factors, the firm should find locations where semi-skilled labor is inexpensive. In
terms of technology factors, the firm is not constrained by a high fixed costs
associated with its product, so technology is not a pervasive issue. Finally,
product factors favor the firm locating in several locations throughout the world.
The company's product has a low value-weight ratio, making it unattractive to
produce the product in a central location and export it across the world.

3. A firm must decide whether to make a component part in-house or to


contract it out to an independent supplier. Manufacturing the part requires a
nonrecoverable investment in specialized assets. The most efficient suppliers
are located in countries with currencies that many foreign exchange analysts
expect to appreciate substantially over the next decade. What are the pros
and cons of (a) manufacturing the component in-house and (b) outsourcing
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manufacture to an independent supplier? Which option would you


recommend? Why?
Answer: Manufacturing in-house would reduce the risk of currency appreciation
and rising costs from independent suppliers. Specialized asset investment would
make firm dependent on specific suppliers, however, technological know-how
would be protected, and improved scheduling would be available. Out-sourcing
would be beneficial if the product using the component fails in the market because
the supplier will bear the cost of the non-recoverable investment, and flexibility in
case a better component can be designed or bought would be preserved.
Outsourcing would also lower organizational and coordination costs. Based on
what we know, manufacturing in house may be slightly preferred, but other
information could tip the decision the other way.

4. Explain how an efficient materials management function can help an


international business compete more effectively in the global marketplace.
Answer: Given the complexity involved in coordination of material and product
flows in a multinational enterprise (purchases, currency exchange, inbound and
outbound transportation, production, inventory, communication, expediting, tariffs
and duties), a materials management function can help to assure that these flows
take place in the most efficient manner possible. A related advantage is that by
having a materials management function, a firm may obtain improved information
about the costs of different transport alternatives, and choose to reconfigure some
of its flows to better take advantage of these costs. By being better able to utilize
just in time techniques, the cost of production can be lowered while the quality is
increased. The materials management function can also help an international
business to develop information technology systems that allow it to better track
the flow of goods throughout the firm.

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