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CHAPTER 16
1 Global Operations and Supply Chain Management
2 Learning Objectives
3LO 16-1 Understand the concept of supply chain management.
4LO 16-2 Recognize the relationship between design and supply chain management.
5LO 16-3 Describe the five global sourcing arrangements.
6LO 16-4 Understand the increasing role of electronic purchasing for global sourcing.
7LO 16-5 Appreciate the importance of the added costs of global sourcing.
8LO 16-6 Explain the potential of global standardization of production processes and procedures, and
identify impediments to standardization efforts.
NOTE:
International business statistics, data, and facts about countries, regions, governments, and companies can
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9 Overview
Global markets and global competition have pushed ICs to search for methods to lower costs and improve
product quality. These same pressures have resulted in a new focus on supply chain management, the
process of coordinating and integrating the flow of materials, information, finances, and services within
and among companies in the value chain from suppliers to the ultimate consumer.
10 Suggestions and Comments
1. Supply chain management (SCM) is an area of growing importance to which students may want to
pay attention.
2. Our teaching experience with this chapter suggests that students are aware of SCM through the
general attention outsourcing has received and the consumer support experiences many of them
will have had.
11
12 Student Involvement Exercises
1. Identify problems that a marketing manager might have with establishing and implementing a
newly internationalized supply chain, both backward and forward. How would the manager
negotiate with vendors and suppliers? How would the manager negotiate with distributors,
wholesalers or retailers? An interesting discussion usually follows on the different needs and
interests of each group and how internationalization of the supply chain can impact their
operational costs and profitability.
2. Overby Manufacturing of Boston has begun to build a plant in Bangkok and management is
choosing American personnel who will be sent to fill the top administrative positions. The Vice
President for Procurement wants to send a promising young buyer to head up the purchasing
department of the new operation, but the Personnel Manager in the home office insists that
someone from Bangkok should be hired for the position. What are the arguments for each position?
What would you recommend?
13
14 Guest Lecturers
1. An overseas purchasing agent or someone who has been involved in designing or implementing
electronic purchasing system, ISO application, or a Six Sigma process.
2. Someone with international quality control experience could be an interesting guest speaker. For
example, a person from the Technical Department of the international operations of a multinational
can relate experiences about getting along with locally-sourced inputs in emerging markets while
trying to maintain company quality standards.
3. Someone who has had overseas production experience (many in the technical department of the
local multinational have been factory managers) can discuss with the class about production
problems and difficulties in motivating workers, installing systems transferred from the U.S. (such
as inventory management or Six Sigma), etc.
Worldview
The focus of this Worldview explores “Cognizant Technology Solutions: Sourcing Low-Cost Talent
Internationally to Achieve Global Competitive Advantage.” Cognizant is employing low cost
technical personnel, particularly within India, in combination with local service teams to create an
innovative “offshore-onshore” business model that enables the company compete on price, speed, and
adaptability. In conjunction with this business model, the company has invested in an advanced
international communications infrastructure to facilitate effective coordination of its internationally
dispersed teams. This internationalized model in business services is interesting to students and can
provide the basis for insightful class discussion. Asking questions such as, “What benefits might result
from the use of a multi-nation client management team approach?” and “What challenges might result
from such a set-up, and how could they be managed?,” will serve as a starting point for class discussion
on some of the key strategic, operational, organizational, and external environmental issues that face
companies that attempt to develop and implement innovative international business models.
Global Debate
This Global Gauntlet explores “Is Offshore Outsourcing Ending Its Run?” Outsourcing is rapidly
changing from low-cost products assembled by unskilled labor in third world countries to more highly
skilled professional jobs and services that have traditionally been located in high cost countries. This
serves as a starting point for discussion, stimulated by asking such questions as, “What factors will
determine if manufacturing will remain or return to high-cost countries?” and “What are the implications
on economic prosperity and job creation in these countries?”
15
The Global Path Ahead
The focus of this The Global Path Ahead explores a student’s efforts to become involved in international
sustainable economic development issues through participation in the establishment of an appropriate
technology school in a rural community in Guatemala. The discussion examines some of the background
of the program as well as the nature of the student’s involvement. Some of the challenges of establishing
an effective program are discussed, as well as challenges and rewards associated with living and working
abroad in a less-developed context. The Resources for Your Global Career section provides a range of
useful suggested resources relevant to a career in global logistics and supply chain management,
including a range of informative sites associated with sustainability issues in supply chains.
Mini-Case, “Balagny Clothing Company Outsources Domestic Production”
1. Identify specific concepts in the case found in this chapter and discuss their relevance to the problems
facing the company.
a) Outsourcing and offshoring – Companies tend to jump on the “band wagon” and follow other
companies in an effort to not be left behind. Balagny Clothing appears to not have done its
homework first, and entered into poorly designed agreements.
b) Global supply chain management – Balagny Clothing had a poor supply chain in China and could
be considered as a supply chain only in its broadest sense. A supply chain by definition “involves
the application of a total systems approach to managing the overall flow of materials,
information, finances, and services within and among companies in the value chain (pg. 505).
Because Balagny had so little control within their supply chain, they did not have a total systems
approach but rather a system with parts having little to no integration as suggested by a true
supply chain. The effort to manufacture in Mexico should reveal a much better supply chain
because of lessons learned in China. Establishing a good supply chain means that all partners
enjoy transparent communications and information and are trusted to do what is best for the chain
rather than themselves.
c) Logistics – The ability to efficiently move product from point A to B is integral to lowering costs.
The Balagny Clothing company’s original plans were a logistical nightmare. In the Mexican
maquiladora, Balagny Clothing will have to develop a system for border crossings where freight
can be moved from the U.S. and back again and be within the time allowance needed to keep the
under-72 hour transportation rule. Required contingency plans include: Mexican and U.S.
holidays, weather forcing roads and bridges to close, cross docking of freight in order for the
appropriate licensed transportation lines in each country to travel and deliver their contents.
d) Organization and staffing – A new organization structure must developed that will allow for the
continual monitoring and subsequent production adjustments coming from both offshore sources.
In addition, bi-lingual representatives will be needed to communicate more efficiently with both
the Chinese and Mexican facilities.
e) Planning – Better forecasting techniques will be needed to regulate production flows.
Construction of a new factory in a foreign country (Mexico) calls for different personnel and
techniques.
f) Environmental forces – Both cultural and economic forces are involved in locating a factory to
another country. The company must address the transferability of their domestic pay systems,
benefits and management techniques. Other issues such as holidays and overtime must be
considered when scheduling production rates and delivery times. One of the main economic
forces that must be considered is the currency fluctuation between the U.S. dollar and Mexican
peso. These fluctuations will vary the cost of labor in Mexico. This becomes more critical than
the China arrangement because in China there are contractual agreements that will be negotiated
for future orders. Therefore, any currency fluctuations will not be felt until current contracts
expire and future ones are negotiated. In Mexico, however, the currency fluctuation must be
addressed on a daily basis because this factory is a wholly owned subsidiary and money will be
sent to Mexico at least once per week. This is needed to pay wages and any other outstanding
invoices from vendors in Mexico
g) Design of the manufacturing systems – The China location resulted in a longer- than-desired
operations pipeline resulting in high inventories. Relocating some of the manufacturing just
across the U.S. – Mexico border allows for the product to be shipped and received within a 72
hour window.
h) Operations of the manufacturing systems – Output levels and quality issues were two of several
major problems incurred by Balagny Clothing’s China operation. By establishing a reliable
supply chain for their new Mexican operation, Balagny Clothing should have the ability to more
closely monitor both the work flow and quality of the product and its components.
2. Considering all of the problems incurred in China and the immense effort and capital needed to
startup the Mexico operation, would it have been a better idea for Balagny Clothing to keep its
domestic operations? Why or why not?
In order for the company to retain and grow its market share in a low-cost provider strategy,
Balagny must keep its prices in line with its competition. Given the vast differences in labor costs and
the high percentage of labor involved in producing garments, Balagny has no choice but to move
enough of its production to low labor cost areas.
An alternative strategy could have been to keep a portion of its domestic operations where the
average costs between domestic and offshore produces a cost of goods sold in line with their
competition. With this strategy, the company’s costs would be higher than the case scenario, but lower
than full domestic production. By keeping a portion of its production in a domestic factory staffed by
experienced workers, Balagny would have had the advantage of testing new production methods then
moving the newly developed techniques and practices into the offshore plant.
16 Lecture Outline
I. Opening Section
The opening section provides an interesting discussion of how Zara transformed the fashion
industry by engaging in an extensive and innovative reorganization of the company’s approach
to supply chain management. This discussion provides a useful overview of many of the
concepts discussed in the chapter.
II. Managing Global Supply Chains (Fig. 16.1)
A. Supply chain refers to activities involved in producing products and services and how they are
linked together
B. Supply chains are integral to global quality and cost management
C. Operations in each step of the supply chain must be synchronized
III. Design of Products and Services
A. Operations can be standardized or adapted
B. Traditional “over-the-wall” approach – sequential steps to design
C. Alternative approaches – cross-functional participation in each stage of design
IV. Sourcing Globally
To improve competitiveness, international and domestic companies seek ways to lower costs
while improving their products. A common solution is outsourcing. Any activity in the value chain
can be outsourced.
A. Reasons for Sourcing Globally:
1. The primary reason is to obtain lower prices. In addition, certain products may not be
available locally. Firms’ competitors may be using components of better quality or better
design.
2. When deciding to source internationally, companies either set up their own facilities or
outsource the production to other companies. Outsourcing has become an increasingly
common option for companies as they focus scarce resources on their core competencies
and leverage the skills of other companies to reduce costs and capital investments,
improve flexibility and speed of response, enhance quality, or provide other strategic
benefits. Any part of the value chain can be outsourced. Done properly, including a strong
link to strategy, outsourcing can deliver dramatic increases in value for companies and
their customers.
3. The value of global sourcing is the existence of suppliers with improved competitiveness
in terms of cost, quality, timeliness, and other relevant dimensions.
4. The rate at which developing nations shift to more sophisticated processes is often more
rapid than the initial emergence of these processes in a developed country. In part, this
may be due to an emerging nation’s ability to transfer technology and processes
previously invented and commercialized in the more developed nations, thus avoiding the
cost and time of inventing these technologies on its own.
5. The ability to effectively and efficiently use global sources has been enhanced by the
drop in cost of communications, widespread use of standardized interfaces such as World
Wide Web browsers, and the increasing pace at which companies are automating and
digitizing data.
B. Global Sourcing Arrangements
1. Wholly owned subsidiary – established in a country with low cost labor or producing a
product not made in the home country.
2. Overseas joint venture – established where labor costs are lower to supply components to the
home country.
3. In-bond plant contractor – home country plant sends components to be machined and
assembled or just assembled by an independent contractor in an in-bond plant.
4. Overseas independent contractor – common in the clothing industry in which firms with no
production facilities such as DKNY, Liz Claiborne, and Nike, contract with foreign
manufacturers to make clothing to their specifications with their label.
5. Independent overseas manufacturer.
C. Importance of Global Sourcing
1. Intrafirm trade (trade between U.S. parent companies and their foreign affiliates)
a. Accounts for 30% to 40% of U.S. exports
b. Accounts for 35% to 45 % of U.S. imports.
2. Cost of Goods Sold is rising, because of:
a. Greater product complexity
b. Increasing focus on firm’s core business
c. Outsourcing of tasks that the firm lacks strong competitive ability in
d. Pressure to reduce concept-to-market cycle times
D. The Increasing Use of Electronic Purchasing for Global Sourcing
Entering exporter and the product name in a search engine will bring up Web sites of
exporters around the world that have on-line catalogs and information on how to order their
products – e-procurement. The purchasing function, neglected for many years in many
companies, is increasingly being viewed as a strategic function, a trend encouraged
by rapid development of E-procurement. Indirect procurement is used to purchase items not
include in finished goods but necessary for business operations
1. Options for Global Electronic Procurement
E-purchasing: catalog purchases. Suppliers provide catalog of available products, and the
offerings and prices can be adjusted in real time according to availability and the need to
move particular products. Electronic exchanges permit buyers and sellers to interact
through a standard bid/quote system in which buyers can post their purchasing needs
online for all prospective suppliers to view, and suppliers can then submit private quotes
to the buyer.
2. Benefits of Global Electronic Procurement Systems
E-purchasing has substantial benefits, in savings and breadth of offerings because
suppliers can be global:
a. Catalogs updated in real time
b. Adjusting prices based on inventory levels and need to move specific products
c. Standardized bid/quote systems
d. Facilitation of letters of credit
e. Contracting for logistics and distribution
f. Monitoring daily prices and order flows
E. Problems with Global Sourcing
Companies making foreign purchases may find that the supposedly low price of the import is not
low when all costs are considered. Global sourcing decisions must be closely linked to
organizational strategy, and explicit objectives for supplies should be defined and incorporated in
supply contracts with incentives to avoid supply problems.
1. Added Costs.
This section discusses actions management may have their companies take to be certain
of added costs, and potential for added fees.
2. Following are the costs of importing with an estimated percentage of the quoted price that
each adds:
a. International freight, insurance, and packing (10-12%)
b. Import duties (0-50%)
c. Customhouse broker fees (3-5%)
d. Inventory in the pipeline (5-15%)
e. Cost of letter of credit (1%)
f. International travel and communications (2-8%)
g. Company import specialists (5%)
h. Rework of products out of specifications (0-15%)
3. Other Disadvantages
a. Importers can face an increase in price because the home currency has lost value as a
result of exchange rate fluctuation. To address this risk (discussed in Chapter 17),
hedging may be used.
b. Some efforts at developing e-procurement systems have been done in isolation from
the company’s overall business systems and have subsequently failed to achieve their
potential benefits, especially when using suppliers with which the company is not
familiar.
c. Traditional functions of purchasing still must be accomplished before purchasing via
e-procurement.
d. Security can also be a significant concern for e-procurement, including allowing
competitors or customers to see proprietary details of their business. Different
country standards are also a concern when attempting to implement international
e-procurement systems.
V. Manufacturing Systems. Because international firms maintain manufacturing facilities in
countries at various levels of development, manufacturing systems often vary considerably in cost
and quality from country to country and even in the same country.
A. Advanced Production Techniques can Enhance Quality and Lower Cost
1. Advanced production systems are widely used
2. Examples are just-in-time supply chains, synchronized manufacturing systems and
computer-integrated manufacturing (CIM)
16.1 V. Logistics
A. The managerial functions associated with the movement of materials such as raw materials
into work-in-progress or finished goods. Outsourcing is an increasingly explored option.
B. Logistics services include:
1. Shipping
2. Warehousing
3. Distribution management
4. Brokerage services
VI. Standardization and the Management of Global Operations
Standards – documented agreements or precise criteria used as guidelines, rules, definitions of a
product, service or process.
A. Benefits of Standardization of Global Operations
1. Ensures that materials, products, processes, and services are appropriate for intended
purpose
2. In most countries, standards are developed across product lines and for various functions
3. International Organization for Standardization (ISO) – ISO 9000 & ISO 9001
B. Organization and Staffing
1. Simpler and Less Costly When Standardized
a. Replication cuts costs by using less staff and labor hours
b. Standardized manufacturing increases HQ effectiveness in keeping product specs
current
2. Logistics of Supply
a. One integrated supply chain increases profits
b. Standardization guarantees interchangeable parts manufactured in different plants
3. Rationalization
Change from subsidiary manufacturing only for national market to manufacturing for all
markets
4. Purchasing
Unified purchasing passes volume discounts to subsidiaries
C. Control
1. Quality Control
2. Production and Maintenance Control
D. Planning
1. Design engineers need only copy drawings and lists of materials in their files.
2. Vendors requested to furnish previously supplied equipment.
3. Technical department sends current manufacturing specs without alteration.
4. Experienced labor trainers sent to new location not needing special training on new
equipment.
5. Reasonably accurate forecasts on plant erection time and output are based on experience
with existing facilities.
VII. Impediments to Standardization of Globalization Operations
A. Environmental Forces
The foreign environmental forces, especially the economic, cultural and political, often
intervene to cause diversity in the units of a multiplant operation.
1. Economic Forces
a. Production requirements vary among plants because of differences in market
size.
b. Plant designer has option of selecting:
a. Capital-intensive processes incorporating automated, high-output
machinery
b. Labor-intensive processes which employ more people operating
semi-manual, general-purpose machinery
c. Computer-integrated manufacturing (CIM) is becoming available but its
high cost and high technological content limits its application to
industrialized nations.
c. Automated machines are high output but inflexible as to range of work they do.
d. Cost of production – Automation increases productivity per worker, but output may
be so high that machine is used only part of time. Labor costs may be lower, but
capital costs can be higher.
e. Lack of floor space may require a few high capacity machines.
f. This specialized machinery does require process materials to be supplied that are
within narrow limits as to size and quality.
a. Local suppliers may be unable to furnish them within such tight
specifications.
b. Firm may overcome this problem by backward vertical integration even
when it would be preferable economically to purchase the materials from
local vendors.
2. Cultural Forces
a. The lack of trained operators for semi-manual general purpose machinery may be
sufficient reason to install highly automated equipment.
b. Absenteeism–if the few highly skilled people necessary to operate the automated
machinery do not come to work, the entire plant may be shut down. Some plants
maintain an extra backup crew to overcome this problem.
3. Political Forces
a. Government officials often insist that the most modern equipment be installed, even
when high unemployment would favor using labor-intensive processes.
b. The reasons may be local pride or fear that “old fashioned” processes will not
produce goods of export quality.
B. Some Design Solutions
1. Hybrid Design
The plant may incorporate capital-intensive processes where they are considered essential
for product quality and labor-intensive procedures to take advantage of low cost labor.
2. Intermediate Technology
a. Many LDC governments are searching for something between capital-intensive and
labor-intensive processes.
b. This requires companies to develop manufacturing methods with which they may
have no experience.
VIII. Local Manufacturing System
A. Basis for Organization – The local production organization is commonly a scaled- down
version of the parent company’s organization.
B. Horizontal and Vertical Integration
1. The overseas affiliate is rarely as integrated as is the parent.
2. Additional investment is required and the parent does not want to lose sales to its captive
customers, the foreign affiliates, of the inputs that the more highly integrated parent
frequently produces.
3. Some countries may require local content in finished products.
4. Overseas affiliates may become conglomerates when parent acquires a MNC.
c
