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Chapter 17 ‒ Global Production and Supply Chain Management
17-1
Global Production and Supply Chain
Management
Learning objectives
• Explain why global
production and supply chain
management decisions are of
central importance to many
global companies.
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 manage a global
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
time, and this can be an 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.
The opening case explores the strategy of e-commerce
giant Alibaba. With operations in 190 countries, a
strong global supply chain strategy is essential to the
company’s success. The closing case explores online
retailer Amazon’s strategy and potential plan to launch
its own global shipping and logistics service. The
company currently passes about $160 billion in sales
17
Chapter 17 ‒ Global Production and Supply Chain Management
17-2
OUTLINE OF CHAPTER 17: GLOBAL PRODUCTION AND SUPPLY
CHAIN MANAGEMENT
Opening Case: Alibaba and Global Supply Chains
Introduction
Strategy, Production, and Supply Chain Management
Where to Produce
Country Factors
Management Focus: IKEA Production in China
Technological Factors
Production Factors
The Hidden Costs of Foreign Locations
Management Focus: H&M and Its Order Timing
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
Chapter 17 ‒ Global Production and Supply Chain Management
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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
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 in
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?
OPENING CASE: Alibaba and Global Supply Chains
Summary
The opening case explores the strategy of e-commerce giant Alibaba. The Chinese
company is the world’s largest e-commerce platform facilitating sales between
companies and customers. Alibaba’s goal is to facilitate $1 trillion in product sales
annually. Discussion of the case can begin with the following questions:
QUESTION 1: Alibaba is the world’s largest e-commerce platform. How did it achieve
that status? How has Alibaba’s differentiation strategy contributed to its success?
ANSWER 1: Alibaba focuses on several key areas including partner connections, buyer
QUESTION 2: What makes Alibaba attractive to the suppliers and manufacturers that
partner with the company?
ANSWER 2: The main attraction to small and medium-sized manufacturers and suppliers
QUESTION 3: Alibaba has set itself a goal of reaching $1 billion in product sales
annually. How does the e-commerce giant plan on reaching that goal?
Chapter 17 ‒ Global Production and Supply Chain Management
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ANSWER 3: Alibaba’s growth plans in China are important to its overall goal of
markets.
Another Perspective: For more information on Alibaba’s long-term strategy, go to:
{https://www.forbes.com/sites/greatspeculations/2016/10/13/a-closer-look-at-alibabas-
long-term-strategy/#eefdd2bc0e9c/} and {http://fortune.com/2017/03/24/jack-ma-
alibaba-china-ecommerce-world-greatest-leaders/}.
LECTURE OUTLINE FOR CHAPTER
This lecture outline follows the Power Point Presentation (PPT) provided along with this
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 17-4 Production Issues for Firms
Where should foreign production be located? How should a globally dispersed supply
chain be managed?
Slides 17-5 – 17-11 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
Improving Quality
To increase product quality, most firms today use the Six Sigma program (a direct
descendant of total quality management) that aims to reduce defects, boost productivity,
eliminate waste, and cut costs throughout a company.
Slides 17-12 – 17-19 Where to Produce?
Three factors are important when making location decisions:
1. Country factors
2. Technological factors
Chapter 17 ‒ Global Production and Supply Chain Management
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3. Production factors
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
• 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.
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
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.
Mass customization describes the ability of companies to use flexible manufacturing
technology to reconcile two goals that were once thought to be incompatible: low cost
and product customization.
Production Factors
Two product factors impact location decisions:
1. The product's value-to-weight ratio
2. Whether the product serves universal needs
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
Chapter 17 ‒ Global Production and Supply Chain Management
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The Strategic Role of Foreign Factories
The strategic role of foreign factories and the strategic advantage of a particular location
can change over time. One factor to consider is global learning.
Foreign factories can have one of a number of strategic roles or designations, including:
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.
Slides 17-20 – 17-22 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.
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
Slide 17-23 – 17-29 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
Chapter 17 ‒ Global Production and Supply Chain Management
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Copyright © 2019 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
2. Global inventory management
3. Packaging and materials handling
4. Transportation
5. Reverse logistics
Slides 17-29 – 17-37 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.
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
