Chapter 16 - Global Operations and Supply Chain Management
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
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