International Business

Chapter Seventeen
Global Manufacturing and
Supply Chain Management
Chapter Objectives

• To describe different dimensions of global manufacturing

strategy
• To examine the elements of global supply chain manage-
ment
• To show how quality affects the global supply chain
• To illustrate how supplier networks function
• To explain how inventory management is a key dimen-
sion of the global supply chain
• To present different alternatives for transporting prod-
ucts along the supply chain from suppliers to customers

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Introduction

Supply chain management: the coordination of

materials, information, and funds from the initial
raw material supplier to the ultimate customer
Logistics (aka materials management): that part of
the supply chain process responsible for planning,
implementing, and controlling the efficient and
effective flow and storage of inputs, goods, and
related information from the point of origin to the
point of consumption in order to meet customers’
requirements
The supply chain is quite broad; the greater the geographic spread of the
firm, the more difficult it is to manage the supply chain effectively.

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Fig. 17.4: Global Manufacturing and Supply
Chain Management in International Business

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Global Manufacturing Strategies
• Global supply chain: links the suppliers’ suppliers
with the customers’ customers, accounting for every
step of the process between the raw material and
the final consumer of the good or service
• The success of a global manufacturing strategy
depends upon:
– compatibility
– configuration
– coordination
– control
Suppliers can be part of a vertically integrated firm’s own organizational
structure, or suppliers can be independent, external organizations.

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Fig. 17.5: The Global Supply Chain

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Manufacturing Compatibility
Compatibility: in the context of manufacturing strat-
egy, the degree of consistency between a firm’s
foreign direct investment decisions and its compe-
titive strategy
Offshore manufacturing: manufacturing activities
that occur within facilities of a firm that lie beyond
the borders of its home country, i.e., foreign direct
investment made specifically for the purpose of
serving a firm’s domestic market
Maquilaora: a type of operation originally developed
between the United States and Mexico in which components
are shipped duty-free to the lower-labor-cost country,
assembled, and then re-exported to the originating country
[continued]

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• Cost-minimization and the drive for globalization force
MNEs to pursue economies of scale in manufacturing,
often by producing at low labor-cost sites.
• Key decision variables include:
– efficiency/cost: manufacturing cost reductions
– dependability: the degree of trust in a company’s products,
delivery service, and price guarantees
– quality: performance reliability, level of service, speed of
delivery, maintenance provisions
– flexibility: the ability to make different models and kinds of
products and to adjust the volume of output
– innovation: the ability to develop and maintain a techno-
logical edge

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Manufacturing Configuration

• The three basic configurations that MNEs consider

en route to developing their global manufacturing
strategies are:
– centralized manufacturing in a single country
[a global export approach]
– regionalized manufacturing in specific regions served
[a regionalized marketing and manufacturing approach]
– local manufacturing in each country market served
[a multidomestic marketing and manufacturing approach]
Rationalization represents the specialization of production by
product or process in different parts of the world in order to take
advantage of varying costs of labor, capital, and raw materials.

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Manufacturing Coordination and
Control
Coordination: the linking and integrating of
participants and activities throughout the
(global) supply chain into a unified system
Control: embraces systems such as organiza-
tional structure and performance measurement
that are designed to help ensure that strategies
are implemented, monitored, and revised, as
appropriate
• also, the metrics used to measure performance

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Global Supply Chain Strategy

A comprehensive (global) supply chain strategy should

include the following elements:
• customer service requirements • business processes
• plant and distribution center • information systems
network design • organizational design and
• inventory management training requirements
• outsourcing and third-party • performance goals
logistics relationships • performance metrics
• key customer and supplier
relationships
Global supply chain management includes and integrates participants
and activities that lie both within and beyond the firm in the quest to
improve customer satisfaction and enhance profitability.

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Information Technology and
Global Supply Chain Management
Electronic data interchange (EDI): the electronic
movement of money and information via computers
and telecommunications equipment in a way that
effectively links suppliers, customers, and third-
party intermediaries and ultimately enhances
customer value
Enterprise resource planning (ERP): the use of
software to link information flows from different
parts of a business and from different parts of the
world
E-commerce: the use of the Internet to link suppliers
with firms and firms with customers
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• The extranet: the use of the Internet to link an
organization with external constituencies
• Private Technology Exchange (PTX): an online
collaboration model that brings manufacturers,
distributors, resellers, and customers together in
order to execute trade transactions and to share
information regarding demand, production,
availability, etc.
While many networks can be managed via the Internet,
others (especially those in developing countries) cannot
because of the lack of available, leading-edge technology.

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Quality
Quality: conformance to specifications, value en-
hancement, fitness for use, after-sales support,
and psychological impressions (image)
Acceptable quality level (AQL): a premise that allows
for a tolerable (negotiable) level of defects that can
be corrected through repair and service warranties
Zero defects: an idea perfected by Japanese manu-
facturers who refuse to tolerate defects of any kind
Kaizen: the Japanese process of continuous improve-
ment, which requires identifying problems and
enlisting employees at all levels of the organization
to help eliminate them [continued]

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Total Quality Management (TQM): a process whose
goal is to eliminate all defects
• Total quality management (TQM) stresses three basic
principles as it focuses on eliminating all defects:
– customer satisfaction
– employee involvement
– continuous improvements at every level in the organization
Six Sigma: a highly focused quality-control system
designed to scrutinize a firm’s entire production
system in order to eliminate defects, slash product
cycle time, and cut costs across the board
Executives who have adopted the zero-defects philosophy
claim that as defects decline, long-run production costs also decline.

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Quality Standards
• The three levels of quality standards include:
– the general level
• the Deming Award [for demonstrated excellence in quality]
• the Malcolm Baldrige National Quality Award [for demon-
strated quality strategies and achievements]
• ISO 9000 certification [for the documentation of worker
performance of every function that affects quality and the
installation of mechanisms to ensure that documented
processes are followed]
– the industry-specific level [industry-wide standards
designed for suppliers to follow]
– the company level [standards designed by individual
firms for their suppliers to follow]

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Quality Standards: ISO
International Organization for Standardization (ISO):
founded in 1947 in Geneva, Switzerland, to facilitate
the international coordination and unification of
industrial standards
• ISO 9000: a global set of quality standards intended to pro-
mote quality at every level within an organization
• ISO 9000:2000: a set of five universal standards designed
to harmonize technical standards within the EU that is now
accepted worldwide
• ISO 14000: concerned with environmental management and
what firms do to improve their environmental performance
From the beginning, the ISO has partnered with the Int’l Electrotechnical
Commission, the originator of global technical standards, and also
collaborates with the Int’l Telecommunications Union and the WTO.

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Supplier Networks
Sourcing: the process of securing inputs (raw mate-
rials, components, and supplies) either internally or
externally for a firm’s productive processes
Outsourcing: the sourcing of inputs from external
suppliers, i.e., the buy decision
• The three major configurations that have emerged for
the global sourcing function are:
– vertical integration
– outsourcing through industrial clusters, including the
Japanese keiretsu
– independent outsourcing
Global sourcing represents the first step
in the global materials management process.

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Fig. 17.7: Global Sourcing and
Production Strategy

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Global Sourcing Strategies
Firms pursue global sourcing strategies in order to:
• reduce costs
• improve quality
• increase exposure to worldwide technology
• improve the delivery-of-supplies (logistics) process
• strengthen the reliability of supply by supplementing
domestic supplies with foreign suppliers
• gain access to materials that are only available abroad
• establish a presence in a foreign market
• satisfy offset (countertrade) requirements
• react to competitors’ sourcing practices

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Fig. 17.8: The Global Component Network for
Ford’s European Manufacturing of the Escort

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The Make or Buy Decision
Make or buy decision: determining which productive
activities should be performed internally (make) and
which ones should be subcontracted to independent
companies (buy)
• The relationships that a firm establishes with its external
suppliers are largely based upon:
– its competitive strategy
– the nature of its products
– the competitive environment
– the level of experience of its suppliers
– the capabilities of its suppliers
– the degree of trust the firm places in its suppliers

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The Purchasing Function

The global progression of the purchasing function

includes the following four phases:
• domestic purchasing only
• foreign purchasing based on need
• foreign purchasing as a part of the procurement
strategy
• *integration of the global procurement strategy
[*At this point, the firm may once again be concerned
with the centralization vs. decentralization dilemma.]
[continued]

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Global sourcing options include:
– assigning international purchasing duties to domestic
purchasing agents
– using foreign subsidiaries or business agents
– establishing international purchasing offices
– assigning the responsibility for global sourcing to a
specific business unit or units
– integrating and coordinating sourcing on a worldwide
basis
[E-sourcing, i.e., the use of the Internet in the
purchasing process, is growing rapidly in popularity.]

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Fig. 17.9: Assessing the Organization’s
Global Sourcing Needs and Strategy

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Inventory Management
Inventory management: the planning and control of the
levels, flows, and storage of inputs, unfinished, and
finished goods
Just-in time manufacturing (JIT): a system that reduces
inventory costs by having inputs delivered just as they
are needed for the production process
[typically implies sole sourcing for specific inputs]
Foreign trade zones (FTZs): government-designated
areas in which goods can be stored, inspected, and/or
manufactured without being subject to formal customs
procedures until they actually enter a country
The distance, time, and uncertainty associated with foreign environments
will surely complicate the inventory management process.

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Transportation and Logistics
• The international transportation of goods is extremely
complicated with respect to:
– documentation
– choice of carrier(s)
– the decision to outsource or insource services
• Logistics management requires the ability to gather,
track, and process large quantities of information.
• To be effective, logistics companies must implement key
technologies, including communications systems,
satellite tracking systems, bar-coding applications, and
automated materials handling systems.
Third-party intermediaries may provide a host of logistics-related services.

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Implications/Conclusions

• Important objectives shared by the global

manufacturing and supply chain functions are to
simultaneously lower costs and increase quality by
eliminating defects from both processes.
• A firms should focus on making those products and
performing those activities that are critical to its
operations and in which it has a distinct advantage.
• Cost-minimization strategies and the drive for global
efficiencies often force MNEs to move offshore to
lower-cost manufacturing areas, especially in Asia
and East Europe.

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• Firms will go through a variety of purchasing ap-
proaches and configurations as they become more
committed to global sourcing.
• When a firm sources inputs from suppliers around
the world, distance, time, and the uncertainty of the
international political and economic environments
can make it difficult to manage inventory flows
accurately.
• Firms are turning to the capabilities of the Internet
in large numbers in order to efficiently and effec-
tively link suppliers with manufacturers and manu-
facturers with end-use customers.

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