Chapter 17 – Global Production and Supply Chain Management
Global Production and Supply Chain
Management
Learning objectives
Explain why production and logistics decisions are of central importance to many
multinational businesses.
Explain how country differences, production technology, and product features all
affect the choice of where to locate production activities.
Recognize how the role of foreign subsidiaries in production can be enhanced over
time as they accumulate knowledge.
Identify the factors that influence a firm’s decision of whether to source supplies from
within the company or from foreign suppliers.
Understand the functions of logistics and purchasing (sourcing) within global supply
chains
Describe what is required to efficiently coordinate a globally dispersed production
system.
This chapter focuses on two major activities—production and supply chain management,
and attempts to clarify how when they are performed internationally, the cost of value
creation can be lowered, and how value can be added by better serving customer needs.
The choice of an optimal manufacturing location must consider country factors,
technological factors, and product factors.
Foreign factories can improve their capabilities over time, and this can be of immense
strategic benefit to the firm. Managers need to view foreign factories as potential centers
of excellence and encourage and foster attempts by local managers to upgrade factory
capabilities.
An essential issue in many international businesses is determining which component
parts should be manufactured in-house and which should be outsourced to independent
suppliers.
The chapter also discusses the contributions of information technology to these activities.
This is especially important in the era of the Internet.
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Chapter 17 – Global Production and Supply Chain Management
The opening case explores technology giant Apple’s successful supply chain management
strategy and its effect on the company’s bottom line. The closing case explores clothing
retailer H&M’s use of supply chain management to source quality, low cost materials and
keep production costs low.
OUTLINE OF CHAPTER 17: GLOBAL PRODUCTION AND SUPPLY
CHAIN MANAGEMENT
Opening Case: Apple: The Best Supply Chains in the World?
Introduction
Strategy, Production, and Supply Chain Management
Where to Produce
Country Factors
Management Focus: Philips in China
Technological Factors
Production Factors
The Hidden Costs of Foreign Locations
Management Focus: GE Moves Manufacturing from China to the United
States
Make-or-Buy Decisions
Global Supply Chain Functions
Global Logistics
Global Purchasing
Managing a Global Supply Chain
Role of Just-in-Time Inventory
Role of Information Technology
Coordination in Global Supply Chains
Interorganizational Relationships
Chapter Summary
Critical Discussion Questions
Closing Case: H&M: The Retail-Clothing Giant
CLASSROOM DISCUSSION POINT
Using the auto industry, ask students to reflect on the production decisions of several
companies. Why does BMW produce cars in Alabama? Why does General Motors have a
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Chapter 17 – Global Production and Supply Chain Management
plant in China? Why does Nissan have design studios in Southern California? Try to get
students to address all of the basic production issues outlined below.
The five basic questions that deal with production are:
1. Where should production be located and should it be concentrated or dispersed?
2. What should be the long-term strategic role of foreign production sites? Should
the firm abandon a foreign site if factor costs change, or is there value to
maintaining an operation at a given location even if economic conditions change?
3. Should the firm own foreign production or should production be outsourced?
4. How should a globally dispersed supply chain be managed?
5. Should the firm manage the logistics or outsource their management?
LECTURE OUTLINE FOR CHAPTER
This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructor’s manual. The PPT slides include additional notes that can be viewed by
clicking on “view,” then on “notes.” The following provides a brief overview of each
Power Point slide along with teaching tips, and additional perspectives.
Slide 17-3 Production Issues For Firms
Where should foreign production be located? How should a globally dispersed supply
chain be managed?
Slides 17-4 and 17-5 Strategy, Production and Supply Chain Management
Firms need to identify how production and supply chain management can be
conducted internationally to:
lower the costs of value creation
add value by better serving customer needs
Slides 17-6 and 17-7 Improving Quality
To increase product quality, most firms today use the Six Sigma program which aims to
reduce defects, boost productivity, eliminate waste, and cut costs throughout a company.
Another Perspective: To extend the discussion on TQM and Six Sigma go to
{http://www.ge.com/en/company/companyinfo/quality/whatis.htm} to see how GE has
incorporated the concept.
Slide 17-8 Where to Produce?
Three factors are important when making location decisions:
1. country factors
2. technological factors
3. production factors
Slides 17-9 and 17-10 Country Factors
Country factors that can affect location decisions include:
the availability of skilled labor and supporting industries
formal and informal trade barriers
expectations about future exchange rate changes
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Chapter 17 – Global Production and Supply Chain Management
transportation costs
regulations affecting FDI
Another Perspective: The United States Central Intelligence Agency maintains a “country
profile” on each country in the world. The country profiles provide useful information to
companies contemplating doing business in a particular country. The country profiles
{https://www.cia.gov/library/publications/the-world-factbook/index.html} are available
to the public. Students can use the reports as a basis for comparing different production
locations.
Another Perspective: For additional information about a particular country, Yahoo
provides an easy-to-search bank of linked sources that provide information about almost
every country in the world. The site {http://dir.yahoo.com/government/countries} is
useful to make quick comparisons between countries to gauge their relative attractiveness
as production locations.
Slide 17-11 Think Like a Manager: Offshoring Product Development
Slides 17-12 through 17-14 Technological Factors
The type of technology a firm uses in its manufacturing can affect location decisions.
Three characteristics of manufacturing technology are of interest:
1. The level of fixed costs
2. The minimum efficient scale
3. The flexibility of the technology
Slide 17-15 What Should a Firm Do?
When fixed costs are substantial, the minimum efficient scale of production is high,
and/or flexible manufacturing technologies are available, the arguments for concentrating
production at a few choice locations are strong.
Slide 17-16 Production Factors
Two product factors impact location decisions:
1. The product’s value-to-weight ratio
2. Whether the product serves universal needs
Slide 17-17 Locating Production Facilities
There are two basic strategies for locating manufacturing facilities:
1. Concentrating them in the optimal location and serving the world market from there
2. Decentralizing them in various regional or national locations that are close to major
markets
Slides 17-18 through 17-20 The Strategic Role of Foreign Factories
The strategic role of foreign factories and the strategic advantage of a particular location
can change over time.
Foreign factories can have one of a number of strategic roles or designations, including:
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Chapter 17 – Global Production and Supply Chain Management
offshore factory
source factory
server factory
contributor
outpost factory
lead factory
Firms need to be aware of the hidden costs of foreign production. These costs can include
high employee turnover, low productivity, poor workmanship, and poor product quality.
Slide 17-21 Outsourcing Production: Make-or-Buy Decisions
Should an international business make or buy the component parts to go into their final
product? Make-or-buy decisions are important factors in many firms’ manufacturing
strategies.
Slides 17-22 and 17-23 The Advantages of Making Products
1. lower costs
2. facilitates investments in highly specialized assets
3. protects proprietary technology
4. facilitate the scheduling of adjacent processes
The benefits of manufacturing components in-house are greatest when:
highly specialized assets are involved
vertical integration is necessary for protecting proprietary technology
the firm is more efficient than external suppliers at performing a particular
activity
Slides 17-24 and 17-25 The Advantages of Buying Products
Buying component parts from independent suppliers:
gives the firm greater flexibility
helps drive down the firm’s cost structure
helps the firm capture orders from international customers
Slide 17-26 Factors Influencing the Make-or-Buy Decision
Slide 17-27 Functions of the Global Supply Chain: Logistics
Logistics is the part of the supply chain that plans, implements, and controls the effective
flows and inventory of raw material, component parts, and products used in
manufacturing.
The core activities performed in logistics are:
1. Global distribution center management
2. Inventory management
3. Packaging and materials handling
4. Transportation
5. Reverse logistics
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Chapter 17 – Global Production and Supply Chain Management
Slides 17-28 and 17-29 Functions of the Global Supply Chain: Purchasing
Purchasing is the part of the supply chain that involves worldwide buying of raw
material, component parts, and products used in manufacturing of the company’s
products and services.
The core activities performed in purchasing include development of an appropriate
strategy for global purchasing and selecting the type of purchasing strategy best suited for
the company.
Slide 17-30 The Role of Just-in-Time Inventory
The basic philosophy behind just-in-time (JIT) systems is to economize on inventory
holding costs by having materials arrive at a manufacturing plant just in time to enter the
production process, and not before.
Slide 17-31 The Role of Information Technology
Web-based information systems play a crucial role in materials management. They allow
firms to optimize production scheduling according to when components are expected to
arrive.
Slide 17-32 Coordinating Global Supply Chains
Global supply chain coordination refers to shared decision-making opportunities and
operational collaboration of key global supply chain activities.
To achieve operational integration and collaboration, six operational objectives should be
addressed:
1. Responsiveness
2. Variance reduction
3. Inventory reduction
4. Shipment consolidation
5. Quality
6. Life-cycle support
Another Perspective: Stanford University’s Graduate School of Business maintains a
website that is a forum for the dissemination of research and practical advice in the area
of global supply chain management. The site supplies current information that can help
extend a lecture on global materials management. The site is available at
{http://www.gsb.stanford.edu/scforum}.
Another Perspective: One company that specializes in global supply chain management is
EPIQ Technologies. To get a better idea of the issues in global supply chain management,
students may want to go to the company’s web site
{http://www.epiqtech.com/supply_chain-Global-Management.htm} and explore some of
the services that the company provides.
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Chapter 17 – Global Production and Supply Chain Management
Slides 17-33 through 17-37 Interorganizational Relationships
Interorganizational relationships range from those requiring a low degree of coordination
(with vendors or buyers, for example) to those requiring a high degree of coordination
(such as those with partners or clients).
Benefits of relationships with vendors (upstream) and buyers (downstream) include those
typical of a transactional exchange: costs equal to quality for the goods bought, but not
necessarily for the best goods in the marketplace.
Benefits of relationships with suppliers (upstream) and customers (downstream) is that
the firm will receive all the favorable characteristics that the raw materials, component
parts, and/or products have relative to the next best alternative in the global marketplace.
Benefits of relationships with partners (upstream) and clients (downstream) include the
one or two points of higher quality for the raw materials, component parts, and/or
products whose improvement will yield the greatest value to the customer for the
foreseeable future (quality greater than cost).
Another Perspective: Many small- and medium-sized U.S firms work closely with
suppliers in foreign markets to ensure they meet the needs of their customers. To learn
more, go to
{http://www.businessweek.com/managing/content/oct2010/ca20101026_400846.htm}.
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