Chapter 17 – Global Production, Outsourcing, and Logistics
17-1
Global Production, Outsourcing, and Logistics
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.
• Describe what is required to
efficiently coordinate a globally
dispersed production system.
This chapter focuses on two major activities—production
and materials 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.
The opening case explores Amazon’s manufacturing
strategy for its popular ebook reader, the Kindle. Amazon
relies on companies through Asia for most of the Kindle’s
key components. The closing case examines why India
has become a hot production location for automakers.
17
Chapter 17 – Global Production, Outsourcing, and Logistics
17-2
OUTLINE OF CHAPTER 17: GLOBAL PRODUCTION,
OUTSOURCING, AND LOGISTICS
Opening Case: Making the Amazon Kindle
Introduction
Strategy, Production, and Logistics
Where to Produce
Country Factors
Technological Factors
Product Factors
Locating Production Facilities
The Hidden Costs of Foreign Locations
Management Focus: Phillips in China
The Strategic Role of Foreign Production Sites
Management Focus: Hewlett-Packard in Singapore
Outsourcing Production: Make-or-Buy Decisions
The Advantages of Make
The Advantages of Buy
Trade-offs
Strategic Alliances with Suppliers
Managing a Global Supply Chain
The Role of Just-in-Time Inventory
The Role of Information Technology and the Internet
Chapter Summary
Critical Discussion Questions
Closing Case: The Rise of the Indian Automobile Industry
Chapter 17 – Global Production, Outsourcing, and Logistics
17-3
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 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?
OPENING CASE: Making Amazon’s Kindle
Summary
The opening case describes how Amazon decided how and where to manufacture its
Kindle ebook reader. Amazon needed to ensure that the price of the Kindle was low
enough to compete with products from Apple and Barnes & Noble. In addition, it needed
to ensure that the Kindle would have the functionality and reliability that buyers were
looking for. To accomplish these goals, Amazon designed the product in the United
States, but then outsourced most key components to companies in Taiwan, South Korea,
and China. Discussion of the case can revolve around the following questions:
1. What were Amazon’s objectives with the Kindle? Why did the company decide to
outsource much the product to companies in Asia rather than build its own production
facilities?
2. How did Amazon choose its suppliers? What does your response tell you about
finding optimal suppliers? How does today’s almost instantaneous communication
facilitate Amazon’s production strategy?
3. What risks does Amazon incur as a result of its decision to outsource to foreign
suppliers?
Chapter 17 – Global Production, Outsourcing, and Logistics
17-4
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 17-4-17-5 Strategy, Production and Logistics
Firms need to identify how production and logistics can be conducted internationally to:
• lower the costs of value creation
• add value by better serving customer needs
Slides 17-6-17-7 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. product factors
Slides 17-9-17-10 Country Factors
Country factors that can affect location decisions include:
• the availability of skilled labor and supporting industries
• formal and informal trade barriers
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
Chapter 17 – Global Production, Outsourcing, and Logistics
17-5
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://www.yahoo.com/Government/Countries/},
is useful to make quick comparisons between countries to gauge their relative
attractiveness as production locations.
Slides 17-11-17-13 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
Slide 17-14 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 17-15 Product Factors
Two product factors impact location decisions:
1. The product’s value-to-weight ratio
2. Whether the product serves universal needs
Slides 17-16-17-17 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 17-18-17-19 The Strategic Role of Foreign Factories
The strategic role of foreign factories and the strategic advantage of a particular location
can change over time.
Improvement in a facility comes from two sources:
Slide 17-20 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.
Chapter 17 – Global Production, Outsourcing, and Logistics
17-6
Slides 17-21-17-22 The Advantages of Make
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:
Slides 17-23-17-24 The Advantages of Buy
Buying component parts from independent suppliers:
Slide 17-25 Strategic Alliances with Suppliers
Firms can capture the benefits of vertical integration without the associated
organizational problems by forming long-term strategic alliances with key suppliers.
However, these commitments may actually limit strategic flexibility.
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}.
Slide 17-26 Managing the Global Supply Chain
Logistics encompasses the activities necessary to get materials to a manufacturing
facility, through the manufacturing process, and out through a distribution system to the
end user
Another Perspective: Stanford University maintains a web site that is a forum for the
dissemination of research and practical advice in the area of global supply chain
Another Perspective: One company that specializes in global supply chain management is
EPIQ. 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 the company provides.
Chapter 17 – Global Production, Outsourcing, and Logistics
17-7
Slide 17-27 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 17-28 The Role of Information Technology and the Internet
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.
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 work force. The total value of the world market over the next ten years for this
product 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 these
factors favor a concentrated manufacturing strategy. In terms of location, the company
QUESTION 2: A chemical firm is considering how best to supply the world market for
sulfuric acid. A manufacturing plant costs approximately $20million 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 $20billion and $30 billion
range. 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
Chapter 17 – Global Production, Outsourcing, and Logistics
17-8
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 non–
recoverable 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 manufacture 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
QUESTION 4: Reread the Management Focus on Philips in China then answer the
following questions:
a) What are the major benefits to Philips 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 Philips adopt to maximize the benefits and mitigate the risks
associated with moving so much product development and production activity to
developing nations like China?
ANSWER 4:
a) China is an attractive production location for Phillips for several reasons. Perhaps the
most important factor is the country’s cheap wages. In addition, the Chinese workforce is
b) Most students will recognize that Philips is taking a risk by concentrating its
manufacturing in China. If economic, political, or other types of problems arise in the
Chapter 17 – Global Production, Outsourcing, and Logistics
17-9
c) Some students might recommend that Philips consider forming joint ventures with
local firms to gain some protection against the threat of nationalization or other adverse
QUESTION 5: Explain how an efficient materials management function can help an
international business to compete more effectively in the global market place.
ANSWER 5: Given the complexity involved in coordination of material and product
flows in a multinational enterprise (purchases, currency exchange, inbound and outbound
transportation, production, inventory, communication, expediting, tariffs and duties), a
CLOSING CASE: The Rise and Fall of the Indian Automobile Industry
Summary
The closing case describes India’s evolution as a small car manufacturing hub for several
global automakers. By 2012, India is expected to export half a million vehicles a year.
South Korea’s Hyundai is leading the charge, exporting over one third of its Indian
production. Suzuki and Nissan have both entered the Indian market more recently. Both
companies see the Indian market as an important component in their future production
and marketing strategies. Discussion of the case can revolve around the following
questions.
QUESTION 1: What are the attractions of India as a base for producing automobiles for
domestic sale, and for export to other nations?
ANSWER 1: From 2003 to 2008, India’s exports of automobiles jumped five fold.
South Korean automaker Hyundai led the way exporting more than one third of its Indian
Chapter 17 – Global Production, Outsourcing, and Logistics
17–10
QUESTION 2: Both Hyundai and Nissan made their investments in the southern Indian
city if Chennai. Is there an advantage to be had by investing in the same region as rivals?
What is it?
ANSWER 2: Nissan’s decision to invest in the same city as Hyundai was probably driven
by the support structure that Hyundai’s investment helped to create. When Hyundai
initially built its operations it had to start from scratch, training employees, establishing a
QUESTION 3: What are the drawbacks of basing manufacturing in a country like India?
What other locations might be attractive?
ANSWER 3: One of the major challenges facing companies in India is its inadequate
QUESTION 4: If Hyundai, Nissan, their suppliers and other automobile companies
continue to make investments in the Chennai region of India, how might this region
evolve over time? What does this suggest about manufacturing location strategy?
ANSWER 4: It has been suggested that over time, India’s Chennai region could develop
into a mini Detroit where most global auto companies have a presence and where the
Chapter 17 – Global Production, Outsourcing, and Logistics
17–11
INTEGRATING iGLOBES
There are several iGLOBE video clips that can be integrated with the material presented
in this chapter. In particular, you might consider the following:
Title: Will Japan’s Crisis Disrupt Global Economic Recovery?
Run Time: 6:49
Abstract: This video explores the global economic impact of the recent earthquake and
tsunami disasters in Japan.
Key Concepts: exports, outsourcing, offshore manufacturing, foreign direct
investment, firm strategy, global economy, globalization, global supply chain
Notes: As Japan continues to assess damage caused by a recent earthquake and tsunami,
questions are arising as to what the disaster means for the rest of the world. When a
strong earthquake followed by a huge tsunami wave hit Japan earlier this year, no one
was prepared for the full extent of the complete devastation caused by the two events.
Compounding the problem was the news that nuclear reactors in the region had also been
Japan is the third largest economy in the world, and therefore plays an active and vital
role in the global economy both as a consumer and as a supplier. The damage in Japan is
threatening the supply of numerous parts used in the manufacture of other products in
other markets forcing companies in other countries to adjust their strategies as they wait
to see what happens next. This uncertainty may be one of the biggest challenges for
foreign companies. Japan is one of the world’s largest suppliers of semiconductors and
In addition to the issues related to manufacturing, there is grave concern regarding
Japan’s approach to energy and how the recent devastation might affect the price of oil.
In an effort to reduce its dependence on fossil fuels, Japan had turned to nuclear power as
a main source of energy. However, the damage to the reactors has raised the issue of
Chapter 17 – Global Production, Outsourcing, and Logistics
17–12
Discussion Questions:
1. Reflect on the implications of the recent natural disasters in Japan. How might
Japanese companies like Toyota and Honda that operate in the United States be affected?
2. How might U.S. companies that rely on parts from Japan be affected by the recent
earthquake and tsunami? Consider the implications of the disaster for U.S. consumers.
3. The damage to Japan’s nuclear reactors has raised new questions regarding the safety
of nuclear energy. Discuss the global implications of a potential decision by Japan to
lessen its dependency on nuclear energy and increase its consumption of fossil fuels.
4. Consider Japan’s role in the global economy. How might a slow recovery in Japan
affect economic growth in the rest of the world? What does your response tell you about
the interdependency of markets in today’s world?
INTEGRATING VIDEOS
There are also several longer video clips that can be integrated with the material
presented in this chapter. In particular, you might consider the following from
International Business DVD Volume 6:
Title: Hazardous Manufacturing
Learning Objectives
The purpose of this video is to help you:
❖ Explore corporate social responsibility for multinational companies.
❖ Identify problems associated with offshore manufacturing and the buyer-supplier
relationship.
❖ Recognize the impact of foreign companies on the host country.
❖ Understand how companies can incorporate social responsibility into their strategies.
Chapter 17 – Global Production, Outsourcing, and Logistics
17–13
Key Words
❖ Corporate ethics
❖ Corporate social responsibility
❖ Foreign direct investment
❖ Impact of the multinational company on the host country
❖ Globalization
Synopsis
An investigation by the London Sunday Times has revealed that tons of waste is being
illegally dumped on the outskirts of Maseru in Africa. Some of the illegal waste is
tagged with the names of companies like Gap and Levi Strauss. The waste is coming
from garment manufacturers that supply large well-known multinational companies.
The arrival of garment manufacturing to the area was supposed to have been a good thing
for the region. Indeed, contracts with companies like Gap and Levi Strauss created
thousands of new jobs in Lesotho. However, as a condition of being awarded a
manufacturing contract, the companies agreed to adhere to strict codes of social and
environmental responsibility, promises they have seemingly broken. At the textile mill
When the problems were initially reported, Gap, which takes pride in its reputation as
being a socially responsible organization, quickly moved to investigate and correct the
situation. The company conducted its own ground investigation and also hired an outside
firm to explore the issue. One factory was put on immediate notice until the issues were
Chapter 17 – Global Production, Outsourcing, and Logistics
17–14
Discussion Questions
1. Should multinational companies doing business in developing companies behave
according to local standards or according to the standards in their home countries?
2. What was the real cost of the jobs created through contracts with Levi Strauss and
Gap? In your opinion, was the country more concerned with job creation and the
economic development that could ensue than damage to the environment? Did Africa in
essence trade the environment for jobs?
3. In your opinion, should Gap and Levi Strauss be held responsible for the
environmental violations that occur at their suppliers’ operations? Why or why not?
4. In your opinion, was the response by Gap to the investigation by the London Sunday
Times appropriate? What steps should companies like Levi Strauss and Gap take to
ensure that problems like the ones in Maseru do not occur again?
INCORPORATING globalEDGE™ EXERCISES
Use the globalEDGE™ site {http://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 Australia, Germany, Mexico, Portugal, Singapore, and the U.S.
Exercise 2
The internationalization of manufacturing has become predominant in the global
marketplace. In fact, the Industry Week magazine ranks the world’s largest manufacturing
companies by sales revenue. Identify the largest Finnish and South African
manufacturing companies as provided in the most recent ranking by paying special
attention to the industries in which these companies operate.
Answers to the Exercises
Exercise 1
The Chartbook of International Labor Comparisons can be located by searching for the
Chapter 17 – Global Production, Outsourcing, and Logistics
17–15
Exercise 2
The Industry Week magazine ranking can be located by searching for the term “Industry
Week” at http://globaledge.msu.edu/ResourceDesk/. The resource is titled
“IndustryWeek: IW 1000 – World’s Largest Manufacturing Companies” and is located