978-0134200057 Chapter 18 Lecture Notes

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CHAPTER EIGHTEEN

GLOBAL OPERATIONS AND SUPPLY-CHAIN

MANAGEMENT

OBJECTIVES

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

management

18-5 Summarize how quality management is important in global operations and supply

chain management

CHAPTER OVERVIEW

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

CHAPTER OUTLINE

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.

I. GLOBAL SUPPLY-CHAIN MANAGEMENT

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.

II. GLOBAL SUPPLY-CHAIN AND OPERATIONS MANAGEMENT

STRATEGIES

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

strategy.

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

country

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.

III. GLOBAL SOURCING

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

chaining.

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.

POINT-COUNTERPOINT:

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.

IV. INFORMATION TECHNOLOGY AND GLOBAL SUPPLY CHAIN

MANAGEMENT

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

satisfaction

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

value.

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.

V. QUALITY

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.

LOOKING TO THE FUTURE:

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

Management

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

Economy.)

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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