Chapter 17 ‒ Global Production and Supply Chain Management
Global Production and Supply Chain
Management
Learning Objectives
• LO17-1: Explain why global
production and supply chain
management decisions are of
central importance to many
global companies.
• LO17-2: Explain how country
differences, production
technology, and production
factors all affect the choice of
where to locate production
activities.
• LO17-3: Recognize how the role
of foreign subsidiaries in
production can be enhanced over
time as they accumulate
knowledge.
This chapter focuses on two major activities—
production and supply chain 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 an 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.
17
Chapter 17 ‒ Global Production and Supply Chain Management
OUTLINE OF CHAPTER 17: GLOBAL PRODUCTION AND
SUPPLY CHAIN MANAGEMENT
Opening Case: Blockchain Technology and Global Supply Chains
Introduction
Strategy, Production, and Supply Chain Management
Where to Produce
Country Factors
Management Focus: IKEA Production in China
Technological Factors
Production Factors
The Hidden Costs of Foreign Locations
Management Focus: Amazon’s Global Supply Chains
Make-or-Buy Decisions
Chapter 17 ‒ Global Production and Supply Chain Management
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 in
maintaining an operation at a given location even if economic conditions change?
OPENING CASE: Blockchain Technology and Global Supply Chains
Summary
The opening case explores the development of blockchain technology and how it has the
potential to transform global supply chains. The real-time access of data associated with
blockchain technology allows for greater transparency and efficiency enabling companies
to optimize their global supply chains. Discussion of the case can begin with the
following questions:
QUESTION 1: Why is blockchain technology being viewed as a potential gamechanger
for global supply chains? How does the transparency associated with blockchains change
the nature of global supply chains?
ANSWER 1: Transparency is probably one of the most important benefits of blockchain
technology for the global supply chain. One of the biggest challenges facing firms as they
invest in building their global supply chains is trusting that the various players in the
QUESTION 2: How could the traceability feature of blockchain technology improve the
safety of the global food supply? Why is this especially beneficial in an era of
globalization?
ANSWER 2: Globalization has changed the global food supply especially for agricultural
products allowing out of season products to be imported and consumed anywhere at any
time of the year. Because products may now be sourced from around the world, the
Chapter 17 ‒ Global Production and Supply Chain Management
QUESTION 3: How can blockchain technology be a gamechanger in manufacturing?
How can companies use the technology to optimize manufacturing?
ANSWER 3: Blockchain technology offers real-time data on the movement of goods.
Companies can use this information to optimize their manufacturing and distribution.
Students may point out that this feature of blockchain technology can be especially
LECTURE OUTLINE
This lecture outline follows the Power Point Presentation (PPT) provided along with this
instructor’s manual. The following provides a brief overview of each Power Point slide
along with teaching tips and additional perspectives.
Slide 17-3 Introduction
Where should foreign production be located? How should a globally dispersed supply
chain be managed?
Slides 17-4 – 17-10 Strategy, Production, and Supply Chain Management
Firms need to identify how production and supply chain management can be
conducted internationally to:
Chapter 17 ‒ Global Production and Supply Chain Management
Logistics is the part of the supply chain that plans, implements, and controls the effective
flows and inventory of raw material, component parts, and products used in
manufacturing.
The upstream supply chain includes all of the organizations (e.g., suppliers) and
resources that are involved in the portion of the supply chain from raw materials to the
production facility (this is sometimes also called the inbound supply chain).
Slides 17-11 – 17-17 Where to Produce
Three factors are important when making location decisions:
1. Country factors
2. Technological factors
3. Production factors
Country Factors
Country factors that can affect location decisions include:
• The availability of skilled labor and supporting industries
• Formal and informal trade barriers
• Expectations about future exchange rate changes
Chapter 17 ‒ Global Production and Supply Chain Management
Three characteristics of manufacturing technology are of interest:
1. The level of fixed costs
2. The minimum efficient scale
Production Factors
Two product factors impact location decisions:
1. The product’s value-to-weight ratio
2. Whether the product serves universal needs
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
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.
The strategic role of foreign factories and the strategic advantage of a particular location
can change over time. One factor to consider is global learning.
Chapter 17 ‒ Global Production and Supply Chain Management
Foreign factories can have one of a number of strategic roles or designations, including:
• Offshore factory
• Source factory
• Server factory
• Contributor
• Outpost factory
• Lead factory
The Hidden Costs of Foreign Locations
Firms need to be aware of the hidden costs of foreign production. These costs can include
high employee turnover, low productivity, poor workmanship, and poor product quality.
CONNECT
Case Analysis
Amazon’s Global Supply Chain
Summary
This activity focuses on Amazon’s global supply chain. 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 read a short case on Amazon’s global supply chain and then respond to a
series of questions related to the case.
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. How does Amazon approach its global supply chain?
Chapter 17 ‒ Global Production and Supply Chain Management
The Advantages of Making Products
1. Lower costs
2. Facilitates investments in highly specialized assets
3. Protects proprietary technology
4. Facilitate the scheduling of adjacent processes
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.
Chapter 17 ‒ Global Production and Supply Chain Management
3. Packaging and materials handling
4. Transportation
5. Reverse logistics
Purchasing is the part of the supply chain that involves worldwide buying of raw
material, component parts, and products used in manufacturing of the company’s
products and services.
Global Purchasing
The core activities performed in purchasing include development of an appropriate
strategy for global purchasing and selecting the type of purchasing strategy best suited for
the company.
CONNECT
Click and Drag
Managing the Global Supply Chain
Summary
This activity focuses on managing the global supply chain. International businesses that are
effective at managing their global supply chain can expect to reduce costs through greater
efficiency.
Slides 17-28 – 17-34 Managing a Global Supply Chain
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.
Role of Information Technology
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.
Chapter 17 ‒ Global Production and Supply Chain Management
To achieve operational integration and collaboration, six operational objectives should be
addressed:
1. Responsiveness
2. Variance reduction
3. Inventory reduction
4. Shipment consolidation
5. Quality
6. Life-cycle support
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.
Chapter 17 ‒ Global Production and Supply Chain Management
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. What kind of location(s) should the firm favor for its plant(s)?
ANSWER 1: In terms of location, the company should consider three factors: country
factors, technology factors, and product factors. First, in terms of country factors, the firm
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. What kind of location(s) should the firm
seek for its plant(s)?
ANSWER 2: The firm should select its location based on country factors, technology
factors, and product factors. In terms of country factors, the firm should find locations
where semiskilled labor is inexpensive. In terms of technology factors, the firm is not
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
Chapter 17 ‒ Global Production and Supply Chain Management
QUESTION 4: Reread the Management Focus “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
China provides IKEA with a local base from which to support its strategy of rapid
expansion in Asia. By having a production location in Asia, the company can capitalize
on costs savings that come from economies of scale as well as the low wages.
QUESTION 5: Explain how the global supply chain functions of (a) logistics and (b)
purchasing can be used to strategically leverage the global supply chains for a
manufacturing company producing mobile phones.
ANSWER 5: Margins in the mobile phone industry tend to be very small, making it
especially important for firms to be cognizant of efficiencies in logistics and purchasing.
Students will probably suggest that because mobile phones are relatively small and
lightweight, centralized distribution centers could be appropriate for the company. In
Chapter 17 ‒ Global Production and Supply Chain Management
QUESTION 6: What type of interorganizational relationship should a global company
consider in the (a) inbound portion of its supply chains if the goal is to buy commodity-
oriented component parts for its own production and (b) outbound portion of its supply
chains if the goal is to establish a strong partnership in reaching end-customers?
ANSWER 6: The company will probably opt for a loosely coordinated relationship for the
inbound products. Since the firm is purchasing commodity-oriented inputs, a
transactional focus is appropriate because it gives the firm the ability to readily change
CLOSING CASE: Proctor & Gamble Remakes Its Global Supply
Chains
Summary
The closing 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 smaller- 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 of the case can begin with the following questions:
QUESTION 1: P&G is the world’s leading manufacturer of consumer products, but
most customers do not really know the P&G brand. Does that matter, or should P&G
brand more of their products under the P&G brand (instead of Bounty, Crest, Tide, and so
on)?
ANSWER 1: Students may be divided on this question. Some will argue that given that
P&G sells brands like Tide and Crest that are already globally recognized, trying to
rebrand under the P&G label is not necessary and could be confusing to buyers. Students
may also note that because P&G sells multiple brands within the same product category,
Chapter 17 ‒ Global Production and Supply Chain Management
QUESTION 2: Considering P&G’s massive product portfolio and the company’s
enormous size, what global supply chain efficiencies do you think P&G has that other
companies cannot match given the size and scope of P&G?
ANSWER 2: Responses to this question will vary by student. Many will focus on the role
of purchasing and logistics and point out that P&G is in a unique position to maximize its
global purchasing and secure the best price for raw materials and encourage suppliers and
QUESTION 3: Given P&G’s focus on synergy and supplier partnerships, how many of
P&G’s suppliers do you think should be labeled strategic, and how many should be
considered just transactional relationships, and why?
ANSWER 3: Student responses will vary. With 70,000 suppliers located around the
world, P&G will have a wide range of relationships and levels of synergy. As part of its
new strategy for engaging with its suppliers, P&G has laid out a set of core principles to
guide its relationships: Best Total Value; Honest, Ethical, and Fair Dealings; Externally
Linked Supply Solutions; Competition and Collaboration; and Supplier Incumbency.
Most students, though, will probably agree that P&G’s purchases of commodity type raw
Chapter 17 ‒ Global Production and Supply Chain Management
MHE INTERNATIONAL BUSINESS VIDEO LIBRARY
CONNECT
Geography
Summary
This activity is designed to test the student’s knowledge of geography. Questions related to
chapter material are asked, requiring students to understand the topics and the locations of the
countries involved.
Activity
Students are asked to respond to a series of question related to the geographic location of several
countries.
INCORPORATING globalEDGE™ 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
Chapter 17 ‒ Global Production and Supply Chain Management
the LPI. How are these findings helpful for companies trying to build a competitive
supply chain network?
Answers to Exercises
Additional Info:
The Chartbook is published annually by the U.S. Department of Labor and is useful for
exploring how key labor market and other national economic measurements compare
across countries. The report is accessible both as web pages and as a PDF file.
Exercise 2 Answer
Additional Info:
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.