Solution Manual
Book Title
International Business 16th Edition

978-0134200057 Chapter 18 Lecture Notes

July 24, 2019
18-1 Define what is meant by global supply-chain management
18-2 Describe the different facets of global operations strategies
18-3 Show how global sourcing is an important aspect of global supply-chain and
operations management
18-4 Explain how information technology is used in global operations and supply-chain
18-5 Summarize how quality management is important in global operations and supply
chain management
Important objectives shared by the global operations and supply chain functions are to
simultaneously lower costs and increase quality by eliminating defects from both
processes. In the chapter, we will discuss the international dimensions of the global
supply chain, focusing on the upstream processes of the purchasing function and supplier
networks; operations strategy; the role of information technology in global supply-chain
management; and quality management as it affects operations
OPENING CASE: Apple’s Global Supply Chain
This case describes how Apple Inc., an American multinational corporation
headquartered in Cupertino, California, that designs, develops, and sells consumer
electronics, computer software, and personal computers developed its global
manufacturing and distribution systems.
Most companies agree that effective supply-chain management is one of their most
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important tools in reducing costs and boosting revenue.
A. What Is Supply Chain Management?
As illustrated in Figure 18.1, the supply chain is the network that links together
the different aspects of the value chain, from sourcing and procurement to
conversion through operations to the final consumer. Supply-chain
management refers to activities in the value chain that occur outside the
company, whereas operations management (also known as logistics
management) refers to internal activities. Suppliers can be part of the
company’s organizational structure, such as in a vertically integrated company,
or they can be independent of it.
Recall Apple’s change in manufacturing strategy over time. Issues of
location-specific advantage, firm-specific assets, and internalization all played a part
in the changing strategy.
A. Operations Management Strategy
The success of a global operations strategy depends on four key factors:
compatibility, configuration, coordination, and control.
1. Compatibility. Compatibility refers to the degree of consistency between
a firm’s foreign investment decisions and the company’s competitive
Efficiency/cost—reduction of operational costs
Dependability—degree of trust in a company’s products, its delivery,
and its price promises
Quality—performance reliability, good service, speed of delivery, and
dependable product maintenance
Innovation—ability to develop new products and ideas
Flexibility—ability of the production process to make a variety of
products and adjust the volume of output
Manufacturing Configuration. MNEs must consider three basic
configurations in establishing a global manufacturing strategy:
a. Centralized Manufacturing. Centralized manufacturing in one
b. Regional Manufacturing. Manufacturing facilities in specific
regions to service those regions
c. Multidomestic Manufacturing. As MNEs expand markets
internationally, they may be forced to manufacture products in
individual markets where they can be closer to consumers and meet
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individual needs. This is consistent with a multi-domestic strategy as
discussed in Chapter 12
a. Offshoring, Nearshoring, and Onshoring.
Offshore manufacturing—any investment that takes place in a
country other than the home country.
Nearshoring implies moving the supply chain closer to the home
market, such as Mexico for U.S. firms or Prague for German firms.
Reshoring or onshoring means bringing back production to the
home country from offshore locations.
2. Coordination and Control. Coordination represents the linking or
integrating of participants all along the global supply chain into a unified
system. Control embraces systems, such as organizational structure and
performance measurement, which are designed to help ensure strategies are
implemented, monitored, and revised, when appropriate.
Global sourcing is the first step in the process of materials management, which
includes obtaining a supply of inputs used in the production process, inventory
management, and transportation between suppliers, manufacturers, and customers.
The term sourcing is used in a variety of ways. Outsourcing, for instance, refers to a
situation in which one company externalizes a process or function to another
company. Another way to look at outsourcing is supply chaining “which is a method
of collaborating horizontally among suppliers, retailers, and customers to create
value.” Supply chaining is slightly different from traditional outsourcing, which
focuses more on a business process, but far more extensive and complicated since it
relates more directly to the final product sold to customers. Apple’s use of Foxconn
as a contract manufacturer for products such as the iPhone is technically supply
A. Why Global Sourcing?
Companies pursue global sourcing strategies for a number of reasons:
To reduce costs through cheaper labor, laxer work rules, and lower
land and facilities costs
To improve quality
To increase exposure to worldwide technology
To improve the delivery-of-supplies process
To strengthen the reliability of supply by supplementing domestic
suppliers with foreign ones
To gain access to materials that are only available abroad, possibly
because of technical specifications or product capabilities
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To establish a presence in a foreign market
To satisfy offset requirements
To react to competitors’ offshore sourcing practices
B. Major Sourcing Configurations
1. Vertical Integration. The company owns the entire supplier network,
or at least a significant part of it.
2. Industrial Clusters. Buyers and suppliers locate in close proximity
to facilitate doing business.
a. Keiretsus. Japanese Keiretsus are groups of independent
companies that work together to manage the flow of goods and
services along the entire value chain.
C. The Make or Buy Decision
In determining whether to make or buy, MNEs should focus on making those
parts and performing those processes critical to a product and in which they
have a distinctive advantage. Other things can potentially be outsourced.
Should Firms Outsource Innovation?
POINT: Yes, firms should outsource innovation to effectively position themselves in the
highly competitive high-tech and electronics industries. Suppliers’ capabilities continue
to grow, making them important sources of innovation that can be incorporated into final
products. Outsourcing R&D can result in tremendous cost savings and can greatly speed
the R&D process.
COUNTERPOINT: Companies that outsource any R&D risk losing control of core
technologies. Outsourcing turns intellectual property into a commodity rather than a
source of sustainable competitive advantage. Outsourcing R&D risks losing important
technology to current competitors, and also presents the possibility of having suppliers
and other partners turn into future competitors. A company without R&D is merely a
marketing front that has little identifiable intrinsic value. Outsourcing of manufacturing
is potentially harmful to competitiveness, but the outsourcing of innovation could be
disastrous to a company’s future fortunes.
D. Supplier Relations
When an MNE decides to outsource rather than integrate vertically, it must
determine the nature and extent of its involvement with suppliers.
E. Conflict Minerals
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Conflict minerals are certain minerals that come from warring areas that
generate revenues to fund conflicts.
F. The Purchasing Function
Global progression in the purchasing function includes four phases:
1. Domestic purchasing only
2. Foreign buying based on need
3. Foreign buying as a part of procurement strategy
4. Integration of global procurement strategy
The last phase is reached when a firm realizes the benefits from the
integration and coordination of purchasing on a global basis. At this point,
the MNE may once again be faced with the centralization vs.
decentralization dilemma.
A comprehensive supply-chain strategy is most effective with a strong commitment
to information technology (IT), which aids in quick and efficient production,
proficient inventory management, effective supplier communication, and customer
A. Electronic Data Interchange (EDI). Electronic data interchange (EDI)
refers to 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
B. Enterprise Resource Planning/Material Requirements Planning
Enterprise resource planning (ERP) refers to the use of software to link
information flows from different parts of a business and from different parts of
the world. An extension of ERP is material requirements planning (MRP), a
computerized information system that addresses complex inventory situations
and calculates the demand for parts from the production schedules of the
companies that use the parts.
C. Radio Frequency ID (RFID). Radio frequency ID (RFID) is a system that
labels products with an electronic tag that stores and transmits information
regarding the product’s origin, destination, and quantity.
D. E-Commerce. E-Commerce refers to the use of the Internet to link suppliers
with firms and firms with customers.
1. Extranets and Intranets. An intranet can be used to help automate
and speed up internal processes in a company. The term extranet refers to
using the Internet to link a company with external constituencies. Private
Technology Exchange (PTX) refers to an online collaboration model that
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brings manufacturers, distributors, resellers, and customers together to
execute trade transactions and to share information regarding demand,
production, availability, etc.
2. “The Digital Divide.” While many networks can, in fact, be managed
via the Internet, others (especially those in developing countries) cannot
because of the lack of available, leading-edge technology.
Quality refers to meeting or exceeding the expectations of the customer. More
specifically, it incorporates conformance to specifications, value enhancement,
fitness for use, after-sales support, and psychological impressions (image).
A. Zero Defects
Acceptable quality level (AQL) is a premise that allows for a tolerable
(negotiable) level of defects that can be corrected through repair and service
warranties. Zero defects describe the refusal to tolerate defects of any kind.
B. Lean Manufacturing and Total Quality Management (TQM)
Total quality management (TQM) is a process that stresses three principles:
customer satisfaction, continuous improvement, and employee involvement. The
goal of TQM is to eliminate all defects. The goal is to eliminate all defects.
TQM often focuses on benchmarking world-class standards, product and service
design, process design, and purchasing.
a. Risks in Foreign Sourcing. Foreign sourcing can create big risks for
companies that use lean manufacturing and JIT because interruptions in
the supply line can cause havoc.
b. The Kanban System. A kanban system facilitates JIT by using cards to
control the flow of production through a factory.
C. Six Sigma
Six Sigma is a highly focused quality-control system designed to scrutinize a
firm’s entire production system and eliminate defects, slash product cycle time,
and cut costs across the board.
D. Quality Standards
There are three different levels of quality standards: general, industry-specific,
and company specific.
1. General-Level Standards. The International Organization for
Standardization (ISO) was created to facilitate the international
coordination and unification of industrial standards. It partners with the IEC
(International Electrotechnical Commission), the International
Telecommunications Union, and the World Trade Organization, and
represents a network of standard setters in 158 countries around the world.
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a. ISO 9000 and ISO 14000. ISO 9000:2000 is a set of universal
standards initially designed to harmonize technical standards within the
EU that are now accepted worldwide; it is applied uniformly to
companies in any industry and of any size in order to promote quality at
every level of an organization. Rather than judging the quality of a
product, ISO 9000:2000 evaluates the management of the
manufacturing process according to standards in 20 domains, from
purchasing to design to training. ISO 14000 is concerned with
environmental management and what the company does to improve its
environmental performance.
2. Industry-Specific Standards. Industry-specific standards represent the
quality-related requirements expected of suppliers.
3. Company-Specific Standards. Individual companies also set their own
standards for suppliers to meet if they are going to continue to supply them.
Uncertainty and the Global Supply Chain
As firms have outsourced more of their operations and supply lines have grown longer,
greater risk has arisen that something will disrupt that supply. With the threat of a terrorist
attack or global political events disrupting the supply chain, some companies have sought
multiple sources to reduce this uncertainty. Some firms have also created
scenario-building schemes in the event of a disruption. Looking at “what-if” scenarios is
probably a necessary procedure in an uncertain world.
ADDITIONAL EXERCISES: Global Operations and Supply Chain
Exercise 18.1. The total cost concept is a major concern in global operations and
supply chain management. Strategic reorder points and economic order quantities
must be determined. The tradeoffs between (i) customer service and cost
minimization and (ii) control and flexibility must be considered. Contractual linkages
with the participants in the system must be negotiated and honored. Ask students to
discuss the challenges a firm faces in establishing its global manufacturing and
supply chain network given the dynamics of today’s competitive environment. Use
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examples of firms in different types of industries as a basis for the discussion. (LO:
2, Learning Outcome: To examine the elements of global supply-chain management,
AACSB: Dynamics of the Global Economy.)
Exercise 18.2. A firm is considering whether to make a component in-house or to
outsource it to an independent foreign supplier. Manufacturing the part in-house will
require an investment in specialized assets; quality control and the protection of
intellectual property rights are major concerns. The most efficient and reliable
suppliers are located in countries whose currencies many foreign exchange analysts
expect will appreciate in the next decade; likewise, wage rates in those countries are
expected to rise. Ask students to discuss the pros and cons of manufacturing the
component in-house as opposed to outsourcing it. Should the firm consider foreign
direct investment as one of its options? Explain. (LO: 1, Learning Outcome: To
describe the different dimensions of a global manufacturing strategy, AACSB:
Analytical Skills.)
Exercise 18.3. The value-to-weight ratio is very important with respect to
manufacturing site location decisions because of its influence on transportation costs.
Other things being equal, products with a high value-to-weight ratio are good
candidates for exporting, while those with low value-to-weight ratios should be
manufactured in multiple locations close to major markets to minimize transportation
costs. For example, many electronic components have high value-to-weight ratios—
although they are expensive, they are very small and weigh very little. Even when
shipped halfway around the world, transportation accounts for a very small
percentage of the total delivered cost. Given that, ask students to consider why low
value but heavy products such as petroleum and refined sugar are shipped such great
distances. Why are products such as automobiles, which are bulky and can be so
easily damaged, also shipped great distances, rather than being manufactured
locally? (LO: 4, Learning Outcome: To illustrate how supplier networks function,
AACSB: Analytical Skills.)
Exercise 18.4. Have students assume the role of top management at a major global
electronics company that is developing a wireless device capable of on-demand
music and video downloads from anywhere on the globe. What criteria should the
company use to make a decision on where to manufacture the device and whether to
outsource the manufacturing or control it internally? (LO: 6, Learning Outcome:
Discuss how to establish successful transportation networks as part of the global
supply chain, AACSB: Analytical Skills.)
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Exercise 18.5. India and China are both very large emerging markets that are
becoming increasingly important in many MNEs’ global supply chains. What are the
advantages and disadvantages of sourcing from China as opposed to India? What
types of products or services are best suited for sourcing from India versus China?
Why? (LO: 6, Learning Outcome: Discuss how to establish successful transportation
networks as part of the global supply chain, AACSB: Dynamics of the Global
Exercise 18.6. Have half the students assume the role of a large MNE and half the
class assume the role of a small potential supplier. What are the major concerns of
the MNE as it evaluates the smaller firm as a potential supplier? What concerns does
the small firm have as it attempts to develop a relationship with the MNE? Break
students up into small groups to discuss the issues. (LO: 4, Learning Outcome: To
illustrate how supplier networks function, AACSB: Analytical Skills.)
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