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GLOBAL PRODUCTION,

OUTSOURCING & LOGISTICS


Learning Objectives:
• What is production management and optimal
production location?
• How much production should be performed in-
house and how much should be outsourced?
• How best should companies coordinate globally
dispersed supply chain?
Logistics
(Supply Chain Management & Materials Management)
• SCM is the process of coordination of materials, information
and funds from the initial raw materials supplier to the
ultimate buyer/consumer
• Logistics (MM) – part of SCM process that plans,
implements and controls the flow and storage of
goods/services from the point of origin to the point of
consumption (in order to meet customers’ requirements)
• Logistics (MM) only part of SCM as it deals with transport
and storage
• SCM extends beyond, to cover management of suppliers and
customer relations
Production Management
Strategic Objectives
• Lower costs:
- disperse manufacturing activities to efficient
global locations
• Increase productivity
- using Total Quality Management
• Accommodate demands for local responsiveness
- decentralise production
• Respond quickly to shifts in customer demand -
time-based competition extremely important
Relationship between Quality and Costs

• Increased quality leads to:


- increased productivity
- lower rework and scrap costs
- lower warranty and rework costs
• Results:
- lower manufacturing costs
- lower service costs
=> increased profits through lowering costs
Kaizen

• Customer orientation • Kamban

• TQC • Quality improvement

• QC cycles • JIT

• Suggestion system • Zero defects

• Automation • Small-group activities

• Discipline in the workplace • Co-operative labour-management


relations
• TPM
• Productivity improvement
• New product development
Perception of job functions
Japanese companies
Top mgt Innovatio
n Kaizen
Middle mgt
Supervisors Maintenance
Workers

Western companies

Top mgt Innovation


Middle mgt Maintenance
Supervisors
Workers
Source: Imai
Case Study:
Li & Fung

• What is the basic business of Li &


Fung?
• Why firms such as The Limited do not
handle these activities by themselves?
The top 100 non-financial TNCs, ranked by foreign assets

8 Toyota Motor Motor vehicles


22 Sony Electrical and Electronic equipment
29 Honda Motor Motor vehicles
32 Nissan Motor Motor vehicles
42 Mitsui & Company Wholeshale trade
56 Hitachi Electrical and Electronic equipment
62 Matsushita El. Industrial Electrical and Electronic
71 Canon Electrical and Electronic equipment
72 Sumitomo Wholeshale trade
77 Nissho Iwai Wholeshale trade
79 Japan Tobacco Tobacco
80 Itochu Wholeshale trade
81 Bridgestone Rubber/tyres
84 Fujitsu Electrical and Electronic equipment
89 Marubeni Wholeshale trade
96 Mitsubishi Motors Wholeshale trade
Where to produce?
The theory of international plant location
suggests the following variables:
• Country factors
• Technological factors
• Product factors
• The unexpected
Country factors
• political economy
• culture
• relative cost factors
=> influence the benefits/costs/risks balance
Besides,
- formal and informal trade barriers
- rules and regulations regarding FDI -
movements of exchange rates
- timing [see article on Singapore]
Technological factors

• Manufacturing technology may lead to producing in


one or in multiple locations, depending upon: - its
level of fixed costs -
minimum efficient scale (MES) - flexible
manufacturing (lean production) a) -
reduces setup costs -
increases machine utilisation -
improves quality control =>
mass customisation - flexible machine
cells [see article on Ford]
Manufacturing location
• Single or few locations when:
- substantial fixed costs
- high MES
- flexible manufacturing technologies available
• Multiple locations (if it meets local demands!): -
low fixed costs - low
MES -
unavailable flexible technologies
Trade barriers and transportation costs remain serious
impediments! So does the need for product customisation! (see
the case of automobiles)
Product factors and location strategies

• Two product features affect location decision: -


value to weight ratio - whether
the product serves universal needs
• Two basic strategies:
- concentrating in a centralised location and
serving the world market from there -
decentralising them in various regional or national
locations close to major markets when opposite
conditions exist
Centralised location
• Factor costs have substantial impact
• Low trade barriers
• Externalities favour certain locations (skilled labour
pools, supporting industries)
• Stable exchange rates
• High fixed costs, high MES relative to global demand
• Flexible manufacturing technology available
• Product’s value-to-weigh ratio is high
• Product serves universal needs
Decentralised location
• Factor costs do not have substantial impact
• High barriers to trade
• Location externalities not important
• Exchange rates volatile
• Low fixed costs, low MES
• Flexible manufacturing technology unavailable
• Products’ value-to-weigh is low
• Significant differences in consumer tastes and
preferences exist between countries
Location Strategy: An application
• An electronics firm is considering how best to supply the
world market for microprocessors used in consumer and
industrial electronic products. A manufacturing plant costs
approximately $500 million to construct and requires highly
skilled work force. The total value of the world market over
the next ten years for this product is estimated to be in the $10
to 15 billion range. The tariffs prevailing in this industry are
currently low. Should the firm favour concentrated
manufacturing or decentralised manufacturing? What kind of
locations should the firm choose for its plant (s)?
Location Strategy: An application
• 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 workforce. The total value of the world
market over the next ten years for this product is estimated to
be in the $20 to 30 billion range. The tariffs prevailing in this
industry are moderate. Should the firm favour concentrated
manufacturing or decentralised manufacturing? What kind of
locations should the firm choose for its plant (s)?
Strategic role of foreign factories
• Initially, established where labour costs were low
• Subsequently, important centres for design and final
assembly [ex: HP in Singapore]
Why?
- pressure to improve costs
- pressure to customise product
- upgraded national factors of production
=> from low-cost manufacturing facilities to dispersed
centres of excellence (consistent with global learning
argument!)
Make or Buy Decisions
• Should a firm make or buy the component parts that
go into their final product?
• Intra-firm sourcing (i.e. the ‘make’ option or vertical
integration): - very
significant in the US (30% of total exports, 40%
of total imports); in Europe and Japan (30% of total
imports and exports)
• Inter-firm sourcing (i.e. the ‘buy’ option from
independent suppliers/ reliance upon market forces):
also significant by today’s standards
Advantages of making own components

• Lower costs if most efficient producer


• Facilitates investment in specialised assets
• Protects proprietary product technology
• Improves scheduling (esp. when just-in-time
system adopted)
Advantages of buy versus make
• Strategic flexibility in sourcing components from
optimal location (political factors permitting)
• Lower costs, by avoiding -
bureaucratic inefficiencies - lack of
incentives among internal suppliers - transfer
pricing decisions
• Increased sales abroad (offsets)
• Strategic alliances with suppliers give benefits of
vertical integration without the associated
organisational problems
Case Study: Outsourcing in Japan

• Why are the Taiwanese electronics


companies positive about business
prospects in Japan?
• Why are their Japanese counterparts
reluctant to outsource to Taiwan?
• What alternatives do they prefer and
why?
New developments in
international outsourcing
• Outsourcing services [see articles on India]
- why does India presents great outsourcing
opportunity in IT-enabled services? -
why do independent centres encounter wider
problems? - what
can Indian government do to
encourage this trend? - what are
the prospects of India in this respect?
- what
opportunities does India offers to the banking
sector?
Make or Buy: An Application
• A firm has to decide whether to make a component
part in-house or to contract out manufacturing to an
independent supplier. Manufacturing the part requires
a non-recoverable investment in specialised 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 the cons of:
(a) manufacturing the component in-house; (b)
out-sourcing manufacture to an independent supplier?
Which option would you recommend and why?
The role of Information Technology
• To track component parts across the globe to an
assembly plant and optimise and adjust production
scheduling when necessary
• Electronic data interchange (EDI)
- used to coordinate flow of materials between a
firm’s suppliers, shippers and customers -
communicate without time delay -
minimising paperwork -
significant competitive advantage [see
article in The Economist on management and IT, April 9th,
2005]
Case Study: Competitive Advantage at Dell
• What are the consequences for Dells cost structure
and profitability of replacing inventories with
information?
• Do you think that Dell’s model can be imitated by
other PC manufacturers and manufacturers in other
industries?
• What factors might make it difficult for other firms
to adopt Dell’s model?
• What are the potential risks associated with Dell’s
supply chain strategy?
Selected readings for seminar 6:
• T. G. Andrews et al “Information tracking” in The
changing face of Multinationals in Southeast Asia
(London: Routledge, 2003)
• P. M. Swamidass and M. Kotabe “Component
sourcing strategies of multinationals: an empirical
study of European and Japanese multinationals”,
Journal of International Business Studies 24, no 1,
1993
• M. Kotabe and J. Y. Murray “Determinants of intra-
firm sourcing and market performance”, International
Business Journal, vol. 5, no. 2, 1994