978-1259929441 Chapter 17 Part 2

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Chapter 17 ‒ Global Production and Supply Chain Management

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{http://www.epiqtech.com/supply_chain-Global-Management.htm} and explore some of

the services that the company provides.

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: One industry where benefits of relationships with upstream and

downstream activities occur is in the electric car industry. To learn more, go to:

{https://www.bloomberg.com/news/articles/2017-11-27/electric-cars-success-leaves-

toyota-isolated-with-hydrogen-bet}.

CRITICAL THINKING AND DISCUSSION QUESTIONS

QUESTION 1: An electronics firm is considering how best to supply the world market

for microprocessors used in consumer and industrial electronic products. A

manufacturing plant costs approximately $500 million to construct and requires a highly

skilled workforce. The total value of the world market for this product over the next 10

years is estimated to be between $10 billion and $15 billion. The tariffs prevailing in this

industry are currently low. Should the firm favor concentrated manufacturing or

decentralized manufacturing? What kind of location(s) should the firm favor for its

plant(s)?

ANSWER 1: The firm should pursue a concentrated manufacturing strategy because (1)

the tariffs prevailing in the industry are low; (2) the cost of building a plant to produce

the microprocessors is high; and (3) the product’s value-to-weight ratio is high. All of

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McGraw-Hill Education.

the number of its manufacturing facilities because of the high cost of constructing a plant.

Third, in terms of product factors, the firm can manufacture its product in a central

location due to the relatively high value-weight ratio and the universal appeal of the

product.

QUESTION 2: A chemical firm is considering how best to supply the world market for

sulfuric acid. A manufacturing plant costs approximately $20 million to construct and

requires a moderately skilled workforce. The total value of the world market for this

product over the next 10 years is estimated to be between $20 billion and $30 billion. The

tariffs prevailing in this industry are moderate. Should the firm favor concentrated

manufacturing or decentralized manufacturing? What kind of location(s) should the firm

seek for its plant(s)?

ANSWER 2: This question is a tougher call than the scenario depicted in Question 1. The

firm should probably pursue a limited decentralized manufacturing strategy (meaning that

the firm should not set up a plant in every country that it sells to, but should set up plants

in several “regions” of the world). This strategy makes sense because (1) the tariffs

prevailing in the industry are moderate (rather than low); (2) the cost of constructing a

QUESTION 3: A firm must decide whether to make a component part in-house, or to

contract it out to an independent supplier. Manufacturing the part requires a

nonrecoverable investment in specialized assets. The most efficient suppliers are located

in countries with currencies that many foreign exchange analysts expect to appreciate

substantially over the next decade. What are the pros and cons of (a) manufacturing the

component in-house and (b) outsourcing manufacturing to an independent supplier?

Which option would you recommend? Why?

ANSWER 3: Manufacturing in-house would reduce the risk of currency appreciation and

rising costs from independent suppliers. Specialized asset investment would make the

firm dependent on specific suppliers; however, technological know-how would be

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QUESTION 4: Reread the Management Focus on IKEA Production in China and then

answer the following questions:

a. What are the major benefits to IKEA of shifting so much of its global production to

China?

b. What are the risks associated with a heavy concentration of manufacturing assets in

China?

c. What strategies might IKEA adopt to maximize the benefits and mitigate the risks

associated with moving so much product?

ANSWER 4:

a. China is an attractive production location for IKEA for several reasons. Perhaps the

most important factor is the country’s cheap wages. In addition, locating production in

on costs savings that come from economies of scale as well as the low wages.

b. Most students will recognize that IKEA is taking a risk by concentrating its

c. Some students might recommend that IKEA consider forming joint ventures with local

Another Perspective: To learn more about IKEA’s global operations, go to:

{https://www.cnbc.com/2017/01/15/ikeas-strategy-stick-to-the-retail-basics-and-expand-

in-the-us.html}.

CLOSING CASE: Amazon’s Global Supply Chains

Summary

The closing case explores Amazon global supply chain channels and strategy. As the

world’s largest online retailers, some $160 billion passes through Amazon’s channels.

Amazon is currently considering expanding its reach by launching its own global

shipping and logistics operation. Discussion of the case can begin with the following

questions.

QUESTION 1: Do you think Amazon will become customers’ favorite retail shopping

interaction, taking over the retail shopping from companies like Walmart and Target, for

example, in the next few years? Will customers buying commodity products such as

toothpaste and other relatively low cost items want to do that in brick-and-mortar stores

or have it shipped directly to their doorstep in two days or less?

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ANSWER 1: Most students will probably agree that there will always be a place for

brick-and-mortar stores. Students may note that shopping is not always simply the

QUESTION 2: Some people say that the prices for the product associated with Amazon

Prime are always higher than if you buy the same product on Amazon or elsewhere

without the guaranteed two-day shipping. But, what do you think customers are buying

when they use Prime—the quick service of getting it in two days or the guarantee that

they will get the product in two days?

ANSWER 2: The instant gratification of having a product in hand that comes with a

QUESTION 3: Should Amazon, and companies like it, get into the supply chain and

logistics business and start having their own shipping platforms? Do you think operating

global supply chains can become one of Amazon’s core competencies, is it already a

competency they profit from, or should they focus on simply connecting buyers and

sellers online?

ANSWER 3: Student responses will vary. Most students, though, will probably argue that

Another Perspective: For more information on the Amazon and potential supply chain

strategies, go to: {https://www.computerworld.com/article/3032656/retail-it/amazons-

supply-chain-move-could-prove-devastating.html},

{https://www.bloomberg.com/features/2016-amazon-delivery/}, and

{http://www.digitalistmag.com/digital-supply-networks/2017/09/08/amazon-effect-on-

supply-chain-05350754}.

MHE INTERNATIONAL BUSINESS VIDEO LIBRARY

Please click here to visit our International Business Video Library which provides an

ongoing stream of updated video suggestions correlated by key concept and major topic.

Every new clip posted is supported by teaching notes and discussion questions. Please

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feel free to leave comments in the library that you feel might be helpful to your

colleagues.

INCORPORATING globalEDGE™ EXERCISES

Use the globalEDGE™ site {globaledge.msu.edu/} to complete the following exercises:

Exercise 1

The globalization of production makes many people aware of the differences in

manufacturing costs worldwide. The U.S. Department of Labor’s Bureau of International

Labor Affairs publishes a Chartbook of International Labor Comparisons. Locate the

latest edition of this report, and identify the hourly compensation costs for manufacturing

workers in China, Brazil, Mexico, Turkey, Germany, and the United States.

Exercise 2

The World Bank’s Logistics Performance Index (LPI) assesses the trade logistics

environment and performance of countries. Locate the most recent LPI ranking. What

components for each country are examined to construct the index? Identify the top 10

logistics performers. Prepare an executive summary highlighting the key findings from

the LPI. How are these findings helpful for companies trying to build a competitive

supply chain network?

Answers to Exercises

Exercise 1 Answer

Exercise 2 Answer

Additional Info:

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McGraw-Hill Education.

Based on a worldwide survey of operators on the ground—such as global freight

forwarders and express carriers—the Logistics Performance Index (LPI) measures the

logistics “friendliness” of 155 countries. It helps countries identify the challenges and

opportunities they face in their trade logistics performance and what they can do to

improve. It is published every two to three years.