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CHAPTER 17
International Operations Management
Chapter Objectives
After studying this chapter, students should be able to:
1. Describe the nature of international operations management.
2. Analyze the supply chain management and vertical integration
decisions facing international production managers.
4. Explain how firms control quality and discuss total quality management
in international business.
5. Analyze how international firms control the information their managers
need to make effective decisions.
LECTURE OUTLINE
OPENING CASE: Racing to Market
The opening case details the operations management system of Benetton Group SPA,
an Italian clothing manufacturer, and Inditex, the Spanish parent company of Zara, a
major European clothing retailer. Information technology is a critical part of the operation
of both of the companies.
Key Points
• Benetton Group SPA, an Italian clothing chain, began in 1955 as a one-knitter
operation. The company quickly grew, prompting the company to build a new factory
and set up operations as a full-line apparel marketer.
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• Benetton owes its success to Italian styling and reasonable prices, and also to its
operations management system. Retail operations are decentralized so that store
managers can respond quickly to local preferences and buying patterns. Design and
• Information related to absolute sales levels, sales trends and patterns, and inventory
distributions can be tracked for individual stores, for clusters of stores, by country,
and on a global basis. This information can then be used to plan and adjust
production activity to meet buying trends. Bar codes and scanners facilitate the
production process at the Benetton factories, and also the inventory management
process.
• Zara employs operations programs similar to Benetton, however, with some
modifications.
• Zara manufactures their products in Spain, Portugal, Turkey, and Morocco; however,
they schedule smaller production quantities and with a fast inventory turnover, since
• Benetton was a pioneer in Mass Customization; however, they were only able to
change product line once per season, while on the other hand Zara was able to alter
its entire product offerings within a few weeks.
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CHAPTER SUMMARY
Chapter 17 explores international operations management. The chapter begins with a
discussion of the strategic context of international operations management and its
THE NATURE OF INTERNATIONAL OPERATIONS MANAGEMENT
• International operations management is the set of activities used by an
international business to transform different kinds of resource inputs (material, labor,
and so forth) into final goods and services. See Figure 17.1 here.
• A properly designed and managed operating system plays a major role in
The Strategic Context of International Operations Management
• International operations management must be closely aligned with a firm’s strategy.
In fact, the way in which a firm structures and manages its operations function is
influenced by its strategy.
Complexities of International Operations Management
• All operations managers must deal with resource, location, and logistics issues.
• International operations management is a far more complex task than domestic
operations management. At the international level, managers must contend with
suppliers from different countries, different government regulations wherever the firm
PRODUCTION MANAGEMENT
• International operations management decisions, processes, and issues involving the
creation of tangible goods is called production management. International
operations management decisions, processes, and issues involving the creation of
intangible services is referred to as service operations management.
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Supply Chain Management and Vertical Integration
• Supply chain management is the set of processes and steps used by an
organization in acquiring the various resources and materials it needs to create its
own products and services. Supply chain management is usually seen as a strategic
issue because of its implications for product cost, product quality, and internal
demands for capital.
• Vertical integration is the extent to which an organization provides its own
resources or obtains its resources from other sources. The text notes that British
Petroleum (BP) is a fully integrated firm, while Heineken NV practices relatively little
vertical integration.
BRINGING THE WORLD INTO FOCUS
Dealing with the Unexpected
This box describes the relationship between manufacturers and suppliers. The box
notes that at times, Mother Nature can step in and create problems. The article
shows what impact the March 2011 earthquake in Japan had on the worldwide
supply of auto parts for manufacturers such as Toyota, General Motors, and Honda.
• A firm may also be able to develop new business opportunities by making rather than
buying. The text notes, for example, that British Petroleum has capitalized on such
an opportunity with its chemical division.
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• Risk. A firm can reduce its risk by buying components from external suppliers rather
than making them inhouse because it avoids a potential situation whereby its
investment does not earn an adequate rate of return.
• Investments in Facilities, Technology, and People. Buying from external suppliers
Location Decisions
• A firm that chooses to make rather than buy inputs must consider several sets of
factors including country-related issues, product-related issues, government policies,
and organizational issues.
Country-Related Issues
• Resource availability and cost, infrastructure, and country-of–origin marketing
effects can all influence the choice of location for an international facility.
• Classical trade theories and the Hecksher-Ohlin theory suggest that countries
Product-Related Issues A product’s value-to-weight ratio, the required production
technology, and the importance of customer feedback may also influence location
decisions.
• A product’s value–to-weight ratio affects the fraction of transportation costs in the
product’s delivered price. The production technology used to manufacture a
Government Policies
• The location decision is also affected by government policies. In particular, the
stability of the political process can affect location decisions because firms tend
to prefer relatively stable environments as compared to unstable ones.
• National trade policies are also a factor in location decisions. The text notes, for
example, that several Japanese auto producers established operations in the
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Organizational Issues
• A firm’s business strategy may influence location decisions. For example, a firm
that is following a price leadership strategy must locate operations in low-cost
areas, while a firm that is emphasizing product quality must locate its facilities in
areas that have adequate supplies of skilled labor and managerial talent. The
text provides several examples of how the business strategies of various firms
influence location decisions.
• A firm’s organizational structure (see Chapter 14) may also affect location
decisions. For example, the text notes that a global area structure decentralizes
• International logistics is the managing of the flow of materials, parts, supplies, and
other resources from suppliers to the firm; materials, parts, supplies, and other
resources within and between units of the firm itself; and finished products, services,
and goods from the firm to customers.
• The first two sets of activities are typically called materials management. The third
set of activities is usually called physical distribution, or simply distribution.
Distribution issues were discussed in Chapter 16 as they related to the firm’s
marketing function.
BRINGING THE WORLD INTO FOCUS
Cutting Cost to the Bone
This section discusses Ratan Tata and his vow to design, develop, and build an
• There are three basic differences between domestic and international materials
management: first is the greater distance involved in shipping; second is the sheer
number of transport modes that are likely to be involved; and third is the fact that the
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regulatory context for international materials management is much more complex
than that for domestic materials management.
• In addition, other logistics and materials management issues such as packaging
become more complex. The text provides an example of the complexity involved in
international logistics and materials management by following a shipment of
INTERNATIONAL SERVICE OPERATIONS
• An international service business is a firm that transforms resources into an
intangible output that creates utility for its customers. The service sector is becoming
increasingly important in many countries today, especially developed countries. In
the U.S., for example, the relative percentage of service sector jobs has risen
steadily throughout this century.
• Services are often intangible, are not storable, require customer participation, and
are linked with tangible goods. Because services are intangible, it may be difficult to
assess their value or quality.
• Because services have a high degree of perishability, capacity planning becomes a
critical task. Capacity planning is deciding how many customers a firm will be able
• Governments may attempt to protect local professionals and ensure that domestic
standards and credentials are upheld by restricting the ability of foreigners to practice
certain professions, such as law or medicine. Other services may be heavily
regulated. The text notes, for example, that the banking industry in the U.S. must
follow strict regulations.
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Managing Service Operations
Managing Productivity in International Business
• Productivity is an economic measure of efficiency that summarizes the value of
Managing Quality in International Business
• Quality is the totality of features and characteristics of a product or service that bear
on its ability to satisfy stated or implied needs.
• The International Standards Organization (ISO) has been working to develop and
Managing Information in International Business
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CHAPTER REVIEW
1. How does a firm’s corporate strategy affect its operations management?
A firm’s corporate strategy should direct the planning and implementation of its operations
2. How do production management and service operations management differ?
Production management refers to operations management decisions, processes, and issues
3. What is supply chain management? What is vertical integration?
Supply chain management refers to the set of processes and steps a firm uses to acquire
4. What basic set of factors must a firm consider when selecting a location for a production
facility?
A firm must consider several sets of factors including country-related issues, product-related
5. What basic factors must be addressed when managing international service operations?
There are several basic factors that must be addressed when managing international
service operations, including the intangibility of services that may make it difficult to assess a
6. Why is it important for organizations to control productivity?
Productivity is key to the success and survival of the firm. As firms increase their
QUESTIONS FOR DISCUSSION
1. How does international operations management relate to international marketing (discussed
in Chapter 16)?
International operations management refers to the activities involved in transforming inputs
2. How are a firm’s strategy and operations management interrelated?
A firm’s strategy should drive the firm’s operations management process. For example, if a
firm is pursuing a strategy of product differentiation, then its operations management should
3. How do each of the basic business strategies (differentiation, cost leadership, and focus)
relate to operations management?
Each of the basic business strategies is related to operations management in that
4. What are the basic similarities and differences between production management and
service operations management?
Production management refers to operations management decisions, processes, and issues
that involve the creation of tangible goods. Service operations management refers to
5. Why are services most closely associated with developed, industrialized economies?
6. List 10 products you use for which quality is important in your purchasing decision. Which
countries, if any, have reputations (good or bad) for each of these particular products?
7. What types of information are particularly important to an international firm?
Any data that can improve a manager’s decision are important. It is important that the data
be timely, accurate, and relevant. Information is needed on every aspect of the firm’s
BUILDING GLOBAL SKILLS
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Essence of the exercise
This exercise asks students, working in groups of six, to play the role of manager at the Eldora
Answers to the follow-up questions:
Other Applications
This exercise asks students to consider a number of variables that could affect a company’s
CLOSING CASE
OUT SUPPLY-CHAINING THE KING OF SUPPLY CHAINERS
The closing case discusses the success of the U.K. based food retailer, Tesco. It successfully
competes against Wal-Mart in Europe, and has recently entered the U.S. market on the west
coast with a chain called Fresh & Easy. They focus on quality private label products and
extremely competitive prices.
Key Points
• Wal-Mart is the largest retailer with revenues of $419 billion in 2010, and the key to
their success is supply chain management.
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• Tesco is Wal-Mart’s rival in Europe, and they are now the third largest retailer in the
World.
• In November 2007, Tesco entered the U.S. market, with a chain of food stores called
Fresh & Easy in California, Arizona and Nevada.
• Each of the outlets were a 10,000 square foot convenience type store that offered
quality specialty products at extremely competitive prices.
Case Questions
1. What might Wal-Mart do to counter Tesco’s actions?
2. Tesco, of course is a food retailer. How vulnerable might Wal-Mart be to similar
competition from a non-food retailer?
Tesco has successfully developed its brand into the non-food sector in many of their
larger stores in Europe. This can be opened up to discussion among students,
3. The global recession has slowed down Tesco’s plans for expansion. Why might
Tesco have been more harmed by the recession than Wal-Mart?