Global Business Today Eleventh Edition Chapter 15
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Global Production and Supply Chain
Management
Table of Contents
Learning Objectives
Chapter Summary
Chapter Opening Activity
Chapter Outline
Opening Case: Procter & Gamble Remakes Its Global Supply Chains
Introduction
Strategy, Production, and Supply Chain Management
Where to Produce
Make-or-Buy Decisions
Global Supply Chain Functions
Managing a Global Supply Chain
End-of-Chapter Resources
Critical Thinking and Discussion Questions
globalEDGE™ Research Task
Closing Case: Alibaba and Global Supply Chains
Continuous Case Concept
Additional Readings and Sources of Information
Global Business Today Eleventh Edition Chapter 15
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Learning Objectives
15-1 Explain why production and supply chain management decisions are of central importance
to many global companies.
15-2 Explain how country differences, production technology, and production factors all affect
the choice of where to locate production activities.
15-3 Recognize how the role of foreign subsidiaries in production can be enhanced over time as
they accumulate knowledge.
15-4 Identify the factors that influence a firm’s decision of whether to source supplies from
within the company or from foreign suppliers.
15-5 Understand the functions of logistics and purchasing (sourcing) within global supply
chains.
15-6 Describe what is required to efficiently manage a global supply chain.
Chapter Summary
This chapter explores the issues associated with global operations management. At the outset, the
terms operations, production, and material management are defined, and then it goes on to
discuss the importance of total quality management (TQM) and ISO 9000. Particular emphasis is
placed on the topics of where international firms should locate their manufacturing operations
and how international firms decide whether to make or buy component parts. With regard to the
former, the chapter discusses how country factors, technological factors, and production factors
influence a manufacturer’s location decision. The chapter provides a balanced discussion of the
advantages and disadvantages of buying components parts (in the world marketplace) opposed to
making them in-house. The chapter concludes with a discussion of what is required to efficiently
manage a global supply chain.
Chapter Opening Activity
Form small groups, and ask students to research a few large, public manufacturing companies in
that have expanded internationally by putting production facilities in other countries in Southeast
Asia, Latin America, Europe, or Africa. Ask them to find out if these manufacturing facilities
produce there to export back to the firm’s home country, for export to third countries, or for sale
in local markets. Students can research companies using Standard & Poor’s, Merchant Online,
company websites, the Financial Times, Wall Street Journal, and Bloomberg Businessweek to
learn about the manufacturing configurations. The examples will help illustrate a later discussion
about motives for doing business internationally, and centralized and decentralized production
location decisions.
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Chapter Outline
Procter & Gamble Remakes Its Global Supply Chains
opening case
Summary
The opening case explores Procter & Gamble’s fight to stay relevant in a rapidly evolving
industry. Procter & Gamble, founded in 1837, has long been a player in consumer-packaged
goods. With brands like Crest and Tide, Procter & Gamble’s products can be found in homes
around the world. Despite having these strong brands, Procter & Gamble has been forced to
develop extensive supply chain management skills in order to stay relevant in an industry
dominated by companies like Alibaba and Amazon, which facilitate sales of small- and medium-
sized companies’ products. Today, Procter & Gamble runs a complex supply chain management
system focusing on efficiency and effectiveness, working with core suppliers to continually
replenish and deliver supplies of its products.
Discussion Questions
1. Reflect on Procter & Gamble’s strengths in global supply chain management as well as its
personal care and home care products businesses. Which strength do you feel is more important
to the future of the company?
2. What are Procter & Gamble’s strategic suppliers? Why are they so important to the company?
How do the suppliers benefit from the relationship?
Global Business Today Eleventh Edition Chapter 15
Lecture Note: To extend this case, consider exploring Procter & Gamble’s recent decision to
raise prices on many of its core products. Go to https://www.wsj.com/articles/procter-gamble-
reports-slightly-higher-sales-drop-in-prices-1533040191.
Introduction
A) In this chapter, we look at five questions:
• Where in the world should productive activities be located?
• What should be the long-term strategic role of foreign production sites?
• Should the firm own foreign production activities, or is it better to outsource those
activities to independent vendors?
• How should a globally dispersed supply chain be managed, and what is the role of
Internet-based information technology in the management of global logistics?
• Should the firm manage global logistics itself, or should it outsource the management to
enterprises that specialize in this activity?
Strategy, Production, and Supply Chain Management
A) This chapter focuses on two activities—production and supply chain management, and
attempts to clarify how these activities might be performed internationally to (1) lower the costs
of value creation and (2) add value by better serving customer needs.
B) Production refers to activities involved in creating a product. Supply Chain management
refers to the integration and coordination of logistics, purchasing, operations, and market
channels from raw material to the end-customer. These two activities are closely linked because
a firm’s ability to perform its production activities efficiently depends on a timely supply of
high-quality material and information inputs, for which purchasing and logistics are critical
functions.
Did You Know Video Clip
The video clip asks: “Did You Know global supply chains are not just about transportation?”
Discussion Questions
1. What is a global supply chain, and what does global supply chain management mean?
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2. What are GSC professionals involved in?
3. Would you be interested in working as a global supply chain professional?
Lecture Note: To learn more about global supply chain management, consider
http://www.inboundlogistics.com/cms/article/challenges-for-todays-global-supply chain-cost-
profitability-and-personalization and https://www.forbes.com/sites/kevinomarah/2017/08/10/ten-
timeless-truths-of-supply chain/#39f79e027bab.
C) The objectives of the production and supply chain management functions (purchasing and
logistics) are to lower the costs and increase product quality by eliminating defective products
from both the supply chain (both upstream and downstream) and the manufacturing process.
These two objectives are interrelated (see Figure 15.1 in the text).
D) There are three ways in which improved quality control reduces costs. First, productivity
increases because time is not wasted manufacturing poor quality products that cannot be sold.
This savings leads to a direct reduction in unit costs. Second, increased product quality means
lower re-work and scrap costs associated with defective products. Third, greater product quality
means lower warranty costs and less time fixing defective products. The net effect is to lower the
costs of value creation by reducing both manufacturing and service costs.
E) The main management technique that companies are utilizing to boost their product quality is
Six Sigma quality improvement methodology, a direct descendant of total quality management
(TQM). TQM is a management philosophy that takes as its central focus the need to improve the
quality of a company’s products and services.
F) Many companies have adopted a successor to TQM programs known as a Six Sigma program
(a statistically based philosophy that aims to reduce defects, boost productivity, eliminate waste,
and cut costs throughout a company.) The growth of international standards in some cases
focused greater attention on the importance of product quality. The European Union, for
example, requires that the quality of a firm’s manufacturing processes and products be certified
under a quality standard known as ISO 9000 before the firm is allowed access to the European
marketplace.
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G) In addition to lowering costs and improving quality, international businesses have two further
objectives. First, the production and supply chain functions must be able to accommodate
demands for local responsiveness. Second, production and the supply chain must be able to
respond quickly to shifts in customer demand.
Lecture Note: To extend the discussion on TQM and Six Sigma go to
https://www.isixsigma.com/new-to-six-sigma/getting-started/what-six-sigma.
CONNECT
Video Case
Global Supply Chains
Summary
This activity focuses on global supply chains. The decisions companies need to make about
where to locate production facilities and whether to outsource are important. International
businesses must also consider how to coordinate and integrate logistics, purchasing, operations,
and market channel activities.
Activity
Students are asked to watch a video on global supply chains and then respond to a series of
questions related to the video.
Class Discussion
Understanding global production and supply chain management is important for international
managers. Discuss the value of making decisions for these activities a central part of the
organization’s strategic planning.
Where to Produce
A) Companies contemplating international production need to consider three broadly defined
factors when making a location decision: country factors, technological factors, and product
factors.
CONNECT
Video Case
Volkswagen’s Jurgen Stackmann on the New Jetta, Atlas, and Electric Cars
Summary
This activity focuses on global production and global supply chain decisions. Managers making
decisions in this area must be cognizant of the country factors that have implications for these
decisions.
Activity
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Class Discussion
International businesses make complex decisions about where to locate production activities and
how to manage the global supply chain. Discuss why these decisions are so complex.
COUNTRY FACTORS
B) As discussed earlier, country factors suggest that a firm should locate its various
manufacturing activities in those locations where economic, political, and cultural conditions,
including relative factor costs, are most conducive to the performance of that activity. However,
regulations affecting FDI and trade can significantly affect the appropriateness of specific
countries, as can expectations about future exchange rate changes.
Teaching Tip: The United States Central Intelligence Agency has compiled an informative
“country profile” on each country in the world. The country profiles can be downloaded at
https://www.cia.gov/library/publications/the-world-factbook. Students can use the reports as a
basis for comparing different production locations.
management FOCUS: IKEA Production in China
Summary
This feature describes IKEA’s production in China. IKEA, founded in 1943, is a global leader in
the low-cost, high-style home furnishings market. The company prides itself on its design and
maintains that part of its business at its headquarters in Sweden. To keep its prices low, the
company relies on suppliers in China and other Asian countries. Today, IKEA relies on China
for more than 20 percent of its global procurement, using some 300 Chinese suppliers.
Discussion Questions
1. What makes China such an attractive production location for IKEA? Are there other locations
that share the same characteristics?
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2. Would it make sense for IKEA to make China into a global supply base from which its
products will be exported around the world? Consider the advantages and disadvantages of this
strategy.
TECHNOLOGICAL FACTORS
C) The type of technology a firm uses in its manufacturing can be pivotal in location decisions.
Three characteristics of a manufacturing technology are of interest here: the level of fixed costs,
its minimum efficient scale, and its flexibility.
Fixed Costs
D) In some cases, the fixed costs of setting up a manufacturing plant are so high that a firm must
serve the world market from a single location or from very few locations.
Minimum Efficient Scale
E) The larger the minimum efficient scale (the level of output at which most plant-level scale
economies are exhausted) of a plant, the greater the argument for centralizing production in a
single location or a limited number of locations.
Flexible Manufacturing and Mass Customization
F) The term flexible manufacturing technology—or lean production as it is often called—
covers a range of manufacturing technologies that are designed to (1) reduce set up times for
complex equipment, (2) increase the utilization of individual machines through better
scheduling, and (3) improve quality control at all stages of the manufacturing process.
G) Flexible manufacturing technologies allow a company to produce a wider variety of end
products at a unit cost that at one time could only be achieved through the mass production of a
standardized output. The term mass customization has been coined to describe this ability. Mass
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customization implies that a firm may be able to customize its product range to suit the needs of
different customer groups without bearing a cost penalty.
H) Flexible machine cells are another common flexible manufacturing technology. A flexible
machine cell is a grouping of various types of machinery, a common materials handler, and a
centralized cell controller (computer).
I) The adoption of flexible manufacturing technologies can help improve the competitive
position of firms. Most importantly, from the perspective of an international business, flexible
manufacturing technologies can assist in the process of customizing products to different
national markets in accordance with demands for local responsiveness.
PRODUCTION FACTORS
J) Several production factors feature prominently into the reasons why production facilities are
located and used in a certain way worldwide. They include (1) product features, (2) locating
production facilities, and (3) strategic roles for production facilities.
Product Features
K) Two product factors impact location decisions. The first is the product’s value-to-weight ratio
because of its influence on transportation costs. If the value-to-weight ratio is high, it is practical
to produce the product in a single location and export it to other parts of the world. If the value-
to-weight ratio is low, there is greater pressure to manufacture the product in multiple locations
across the world.
L) The other product feature that can influence location decisions is whether the product serves
universal needs—needs that are the same all over the world. Since there are few national
differences in consumer taste and preference for such products, the need for local responsiveness
is reduced. This increases the attractiveness of concentrating manufacturing in a central location.
Locating Production Facilities
M) There are two basic strategies for locating manufacturing facilities: concentrating them in the
optimal location and serving the world market from there, and decentralizing them in various
regional or national locations that are close to major markets. The appropriate strategic choice is
determined by the various country, technological, and product factors discussed in this section. A
summary of this material is provided in Table 15.1 in the text.
CONNECT
Case Analysis
Whether to Concentrate or Decentralize Production
Summary
This activity explores the decision faced by international firms about where to locate their
production facilities. In making the decision, firms must consider country factors, technological
factors, and product factors.
Global Business Today Eleventh Edition Chapter 15
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Activity
Students are asked to read a short case about locating production facilities and then respond to
questions about the case.
Class Discussion
The decision of where to locate production facilities involves a consideration of country factors,
technological factors, and product factors. Discuss how these factors might influence a firm’s
location decision.
Strategic Roles for Production Facilities
N) Since the early 1990s, multinationals have opted to set up production facilities outside their
home countries 10 times for every 1 time they have opted to create such facilities at home. In
doing so, they hope to capture the gains associated with a globally dispersed global production
system.
O) This trend is expected to continue, so managers need to consider the strategic role assigned to
a foreign factory. A major consideration is the importance of global learning, or the idea that
valuable knowledge does not reside just in a firm’s domestic operations, it may also be found in
its foreign subsidiaries. Foreign factories that upgrade their capabilities over time are creating
valuable knowledge that could benefit the whole organization.
P) Foreign factories can have one of a number of strategic roles or designations: offshore factory,
source factory, server factory, contributor factory, outpost factory, or lead factory.
Q) An offshore factory is a factory that is developed and set up mainly for producing
component parts or finished goods at a lower cost than producing them at home or in any other
market. The primary purpose of a source factory is to drive down costs in the global supply
chain. A server factory is linked into the global supply chain for a global firm to supply specific
country or regional markets around the world. A contributor factory also serves a specific
country or world region, and it also has responsibilities for product and process engineering and
development. An outpost factory can be viewed as an intelligence–gathering unit. It is often
placed near a competitor’s headquarters or main operations, near the most-demanding customers,
or near key suppliers of unique and critically important parts. A lead factory is intended to
create new processes, products, and technologies that can be used throughout the global firm in
all parts of the world.
Video Note: To explore the McDonald’s supply chain in Russia, consider McDonald’s: Russia
Watchdog Widens Probe into Food Chain in the International Business Library at
http://bit.ly/MHEIBVideo. Click “Ctrl+F” on your keyboard to search for the video title.
Additionally, our McGraw-Hill Education International Business Video Library at
http://bit.ly/MHEIBVideo 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 feel free to leave comments in the library that you feel might be
helpful to your colleagues.
Global Business Today Eleventh Edition Chapter 15
THE HIDDEN COSTS OF FOREIGN LOCATIONS
R) Producing in low-cost countries does not always make sense. Hidden costs of foreign
locations include high employee turnover, shoddy workmanship, poor product quality, and low
productivity among others.
Teaching Note: Some companies are moving production back to their home country because
foreign production no longer offered the advantages it once had. To learn more, go to
http://www.bloomberg.com/news/articles/2016-07-14/wal-mart-s-owls-have-returned-to–
america-but-the-jobs-haven-t and
https://www.usatoday.com/story/money/business/2018/06/28/manufacturers-bringing-most-jobs-
back-to-america/36438051.
Video Note: Countries have been facing reduced productivity recently. In fact, the debate
centers around whether there has been overinvestment in technology or employees. To learn
more, go to http://www.bloomberg.com/news/articles/2016-08-24/productivity-in-the-u-s-looks-
bad-but-it-s-golden-compared-with-global-peers.
management FOCUS: Amazon’s Global Supply Chains
Summary
This feature explores the breadth of activities Amazon has developed over the years. Established
in 1994 as an online bookstore, the company has become known as the largest online retailer and
provides access to an assortment of products for customers. In addition to its retail storefront,
Amazon has developed strong capabilities in inventory management, global supply chains, and
technology to link to customers.
Discussion Questions
1. How difficult has it been for Amazon to keep pace with customer expectations? Based on how
the company originated, do you think Amazon was positioned well for its development into the
variety of offerings it presents today to customers?
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2. How has Amazon utilized its online retail capabilities to benefit other companies? Do you
think this is a good thing for the companies Amazon is assisting?
Make-or-Buy Decisions
A) International businesses face sourcing decisions, and decisions about whether they should
make or buy the component parts to go into their final product. Make-or-buy decisions are
important factors in many firms’ manufacturing strategies and are often based on two critical
factors: cost and production capacity.
B) Elements that favor a make decision, beyond the core elements of cost and production
capacity, include quality control, proprietary technology, having control, excess capacity, limited
suppliers, assurance of continual supply, and industry drivers (see Figure 15.3).
C) Elements that favor a make decision, beyond the core elements of cost and production
capacity, include inventory planning, brand preference, multisource policies, small volumes,
nonessential items, lack of expertise, and supplier competencies (see Figure 15.4).
CONNECT
Case Analysis
Deciding Whether to Make or Buy
Summary
This activity explores the make-or-buy decision in international firms. International businesses
need to decide whether to make their products in-house or whether to outsource the activity to a
company. The decision to make or buy is influenced by a number of factors including the
volatility of a country’s political economy, exchange rate fluctuations, factor costs, and so on.
Activity
Students are asked to read a short case on the make-or-buy decision and then respond to
questions about the case.