CHAPTER 13
Global Operations and Supply-Chain Management
Chapter Outline
• Introduction
• Global Operations Management
• Global Procurement
o Advantages of Global Procurement
o Disadvantages of Global Procurement
o Outsourcing and Insourcing
• Global Production
o Advantages of Making
o Disadvantages of Making
• Location Decision
o Location of Production Facilities for Components and Raw Materials
o Location of Production Facilities for Products
o Relocation of Production Facilities
• Global Supply-Chain Management
o Improving Global Supply-Chain Management
o The Role of Information Technologies
Teaching Objectives
After covering this chapter, the student should be able to:
• Explain what global operations management is and how it operates.
• Describe the advantages and disadvantages of global procurement, and compare the
reasons why companies outsource and insource.
• Identify the advantages and disadvantages of global production.
• Discuss the considerations for locating and relocating production facilities.
• Illustrate the benefits of global supply-chain management, and describe how the Internet
and enterprise resource planning systems are affecting global supply chains.
COMPREHENSIVE LECTURE OUTLINE
I. Introduction. Businesses have increasingly used global operations and supply-chain
management as competitive weapons.
CLASS ACTIVITY: Use the Cultural Perspective case as an opportunity to allow students to
explore the impact of location choice of manufacturing facilities on the sustained competitive
advantage of Lenovo Group.
II. Global Operations Management. A production system is a system that businesses
use to create goods and services, or to produce the products. When the goods
dominate the value of the product, the production system is typically called a
manufacturing system. When the services dominate the value of the product, the
production system is commonly called a service system. A production system can be
modeled as a system that begins with inputs and creates from them outputs via a
production process. Exhibit 13.1 • A Production System Model. The sites where
production takes place are called production facilities. Products can be
conceptualized as being integrated by several goods and services called components.
The components will need to be produced from raw materials. When a production
process involves several steps, these steps are called production stages. Depending
upon the complexity of the production process, different production stages may need
to be assigned to different production facilities. Operations management refers to
the management of the direct resources that are involved in the production system of
a business organization. When all of the production system direct resources originate
from and reside in only one country, the term domestic operations management is
used. When one or more of the production system direct resources originate from or
are located in more than one country, the term global operations management is used.
Most of the activities in operations management can be grouped into four business
functions:
• Procurement is responsible for the acquisition of goods and services.
• Production is responsible for the transformation required by the
production process.
• Logistics is responsible for the movement of materials in the
production system.
• Research and Development (R&D) is responsible for the design of
new products.
DISCUSSION STARTER: REALITY CHECK 1.
Select a product that you recently purchased. Do some research to establish whether the
company that produced the product practices global operations management.
III. Global Procurement. A strategic decision business enterprises have to consider is which
components and raw materials should be produced in-house and which components and raw
materials should be acquired from suppliers. This is called the make-or-buy decision. A related
strategic decision that business firms face is whether or not the making or buying process should
be global.
• Advantages of Global Procurement. One advantage of buying is that the firm does not
need to invest in the complete production process. The firm can focus upon the
production stages and components with the most value added. A firm can also maximize
its flexibility by allocating its orders among the suppliers in a dynamic way. This is
particularly important with global suppliers when factors such as exchange rates, political
changes, trade barriers, or the occurrence of catastrophic events can alter the
attractiveness of a particular supplier. Producing globally the firm has access to more
suppliers, and global suppliers can usually provide lower costs than domestic suppliers.
Another advantage is that global suppliers are selling to many companies in the same
industry but in different countries, and achieve superior economies of scale and scope.
Additionally, sometimes global procurement is required as a result of a business practice
known as offsets, where to secure a contract the foreign vendor has to “offset” the
financial impact of the product acquisition by direct local procurement of the goods and
services relating to the acquired product, and indirect support of local priorities through
foreign direct investment, technology, and job creation.
• Disadvantages of Global Procurement. When a firm buys goods and services, it is
relying upon suppliers on important dimensions such as quality, delivery, and cost.
Another disadvantage of global procurement is that the profits the company could earn by
producing the goods and services in-house now go to the suppliers. Buying may also tip
the balance of power in favor of suppliers. Buying from suppliers could unintentionally
lead to suppliers becoming competitors. Procuring goods and services from suppliers can
also carry the risk of suppliers providing those same goods and services to the
competition.
• Outsourcing and Insourcing. When a firm has been “making” goods and services in-
house, and then decides to “buy” these goods and services from suppliers, it is said that
the firm has outsourced these goods and services. Domestic outsourcing means that the
firm doing the outsourcing and the supplier that will provide the outsourced good or
service are located in the same country. Global outsourcing means that the firm and
supplier are located in different countries. In some business circles, global outsourcing is
also called offshoring. The practice of outsourcing has rapidly grown in recent years. In
the 1940s only 20% of a typical American manufacturing company’s value-added in
production and operations came from outside sources; now this proportion has tripled to
60%. The nature of outsourcing contracts has changed over time as well. It used to be
arm’s-length agreement, but now it is structured more like a partnership agreement. Both
parties in some way share the risks and rewards of the outsourced activity. Companies
that focus only on product design and outsource all other production process functions
are called hollow corporations. When a firm has been buying goods and services from
suppliers, and then decides to “make” these goods and services in-house, it is said that the
firm has insourced these goods and services.
ECONOMIC PERSPECTIVES: Outsourcing Production of TVs. Use the Economic
Perspectives case as an opportunity to discuss the impact of an outsourcing decision on
manufacturing costs and consequently on a firm’s competitiveness.
Suggestion: You could ask students to do this case as individuals or in teams as a class activity.
Have the students read the case presented in the text and answer the questions at the end of the
case.
Questions:
1. What are some of the advantages for Sony, Toshiba, and LG Electronics to outsource TV
manufacturing from South Korea, Japan, and Mexico to plants in China and Taiwan?
2. Under which conditions do you think Sony, Toshiba, and LG Electronics may decide to
insource the manufacturing of TVs to companies in South Korea, Japan, and Mexico
DISCUSSION STARTER: REALITY CHECK 2.
Do you or does anyone you know work for a company that is outsourcing goods and services?
Describe some of the pros and cons of outsourcing for the company involved and for the world
economy.
IV. Global Production. Just as there are pros and cons of buying components, raw materials,
and products, there are advantages and disadvantages to making them in-house.
• Advantages of Making. One advantage of making components and raw materials
in-house is cost. Knowledge of the product may provide efficiency advantages
over potential suppliers. A closely-related advantage of in-house production is
cost control. If the company is making both the component and raw materials,
there will not be any surprising price increases from suppliers. Another advantage
is control over quality. Making components in-house also allows the company
more control over deliveries. In-house production is sometimes the only option
for components and raw materials that are highly specialized, particularly as a
matter of trust. When components and raw materials involve intellectual property,
making affords complete protection of the intellectual property.
• Disadvantages of Making. The primary disadvantage of making is that it
requires the company to have expertise in the production of the component or raw
materials. By making, the company may be missing out on the technological
advances that the suppliers may have. Another disadvantage of making is that the
“internal suppliers” may not have the incentive to improve their product since
they do not face competition. Companies sometimes resort to dual sourcing, or
producing in-house and purchasing from suppliers the components they need.
This provides the motivation to their internal suppliers to be as efficient as
external suppliers. Another disadvantage of making is that the firm may not be
able to gain the economies of scale that can be gained by a large supplier.
Additionally, by making, a firm could increase the complexity of its production
process. Lastly, a strategic disadvantage of making is that the firm incurs both
fixed and variable costs, while when buying, the firm only incurs variable costs.
This financial flexibility may prove crucial when fixed costs are considerable.
V. Location Decision. Once a business decides which components and raw materials will
be made in-house, a location decision will need to be made. This consists of determining if the
making will be done at one or more production facilities, and if these facilities should be located
in one or more countries. Businesses face the one-versus-many production facilities decision
when making location decisions.
• Location of Production Facilities for Components and Raw Materials. One
consideration for the one-versus-many production facilities decision is fixed costs. When
fixed costs are high, one production facility will be favored. Another consideration is the
notion of the minimum efficient scale and its comparison to demand. As volume
increases, unit costs decrease due to economies of scale and scope and learning curve
effects. However, there is a volume value called the minimum efficient scale, or the
point at which unit costs stabilize. When demand is equal to or lower than the minimum
efficient scale, one production facility location is preferred. When demand is higher,
several production facilities are economically feasible. The value-to-weight ratio is
another consideration. Goods with high value-to-weight ratios are expensive but do not
weigh very much. Goods with high value-to-weight ratios favor a single location to use
advantages of centralized production, while with low value-to-weight products it’s best
to have many production facilities close to the places where these components are
needed. Companies also need to consider the Heckscher-Ohlin Model in deciding in
which countries to locate production of components and raw materials. A company
would locate the production facilities in those countries that offer the best comparative
advantage. Another location consideration is the infrastructure that the country offers.
Most developing countries offer very competitive labor costs and availability, but many
lack the infrastructure of developed countries. Trade policies vary greatly from country
to country and also should be considered. Financial considerations such as transactions
risk, translation risk, and economic risk and government incentives are also important.
Finally, political considerations such as social stability, form of government, and public
attitudes toward foreign investment are all important in the location decision.
• Location of Production Facilities for Products. Companies also must decide where to
locate the production facilities for their products. There are three major considerations
that pertain to products. If a product can serve the needs of all customers around the
world, then the company may locate all production facilities in one country. If the
product must be customized for different countries, then multiple production facilities
will be needed. Another consideration is proximity to markets. Proximity to suppliers
and proximity to production facilities that provide the components and raw materials are
important considerations too. The third consideration in deciding upon production
facility location relates to the product’s image.
• Relocation of Production Facilities. As new opportunities appear around the world,
sometimes it will become desirable for a company to relocate a production facility.
DISCUSSION STARTER: REALITY CHECK 4.
Locate in the business press a recent case of a company relocating its production facilities.
Identify the winners and losers in that relocation decision.
VI. Global Supply-Chain Management. A supply chain encompasses all the activities
associated with the flow and transformation of goods and services from raw material to the end
user, including the corresponding flows of monetary funds and information. These activities are
typically performed by different business organizations identified as suppliers, manufacturers,
distributors, and retailers. Exhibit 13.2 • A Simple Supply Chain. When the companies in a
supply chain have locations in more than one country, the supply chain is considered a global
supply chain. Supply-chain management refers to the management of all the activities in the
supply chain in order to minimize the total costs of the supply chain and to maximize the value
of the product to the end user. Supply-chain management has become a new source of
competitive advantage.
• Improving Global Supply-Chain Management. The best run companies usually have
the best supply chain. Improving supply chain operations can typically rein in “double–
digit” productivity growth and reduce product cycles by 30–40%, allowing faster
response to customers. Major consulting companies around the world have developed
global supply-chain management consulting practices. Many problems global businesses
face are due to scandals regarding their products originating in substandard supply
chains, because some companies in the supply chain could not trace back to suppliers the
faulty components in the defective products. This caught the attention of many global
companies due to safety risks in their products. Concerns regarding the visibility of all
aspects of supply chains and the traceability of materials along supply chains were
focused upon.
• The Role of Information Technologies. The integration and coordination of global
supply chains would not be possible without information technologies such as the
Internet and enterprise resource planning systems. Telecommunication networks
include collections of computer hardware and software arranged to transmit information
from one place to another. Internetworking refers to the linking of separate networks
into an interconnected network, while each network remains independent. Enterprise
resource planning (ERP) systems refer to software packages designed to integrate the
majority of a firm’s business processes, execute all transactions related to integration of
the firm’s business processes, store each piece of data only once in an enterprise-wide
database, allow access to data and information in real time, and operate in a client-server
environment, either traditional or web-based. Exhibit 13.3 • Anatomy of an ERP
System. To serve the needs of global supply chains, ERP systems are multi-language,
multinational, and multi-currency. ERP systems are now being used in more than 100
countries and by nearly all major industries. ERP systems in combination with the
Internet have become the backbone in the coordination and collaboration of global
supply chains. The ERP system performs nearly every business transaction resulting
from the sale by integrating the required business processes within the company and
along its supply chain.
ETHICAL PERSPECTIVES: Supply Chain Disruptions. Use the Ethical Perspectives case as
an opportunity to discuss the impact of labor disputes and strikes in one company on the entire
supply chain of a corporation.
Questions:
1. If you worked for Honda, how would you determine fair wages for workers in the Foshan
2. What should the Chinese central government do regarding wages at Honda? Answer:
DISCUSSION STARTER: REALITY CHECK 5.
When you buy a ticket from a commercial airline via its website, you are interacting with its
ERP system. What evidence do you have that the airline is using an ERP system?
Assignments
End-of-Chapter Discussion Questions
1. How can global operations management be used as a source of competitive
advantage? Answer: Operations management can provide companies with a
2. List the factors that a firm should consider when making an outsourcing
decision. Answer: Global suppliers can usually provide lower costs than
3. Argue why some companies should pursue global production and other
companies should not. Answer: Goods with high value-to-weight ratios are
4. How should a business organization choose a location for its production
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then the company may locate all production facilities in one country. If the
product must be customized for different countries, then multiple production
facilities will be needed. Another consideration is proximity to markets.
Proximity to suppliers and proximity to production facilities that provide the
components and raw materials are important considerations too. The third
consideration in deciding upon production facility location relates to the
product’s image.
5. Do you think that supply-chain management and ERP Systems have helped
both businesses and consumers? Why or why not? Answer: ERP systems
Mini-Case Synopsis and Questions
The care industry transcends national boundaries. When one considers domestic
content as defined by NHTSA, cars or trucks sold by Detroit automakers could be
less American than cars or trucks sold by Japanese companies. Some models
produced by American-owned carmakers have a smaller share of domestic parts
than models produced by foreign-owned carmakers. Due to global supply chains, it
is difficult to identify and label products by nationality.
Questions:
1. How would you decide what defines an American car and an American car
2. What is the impact of global operations and supply-chain management on
Point/Counterpoint, Interpreting Global Business News, and Portfolio Projects
Students’ answers to these assignments will vary widely. Their writing should
reflect an understanding of the chapter’s basic concept, thorough research, and
logic and critical thinking skills.