Chapter 17 – Global Production and Supply Chain Management
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Global Production and Supply Chain
Management
Learning objectives
• Explain how country
differences, production
technology, and product factors
all affect the choice of where to
locate production activities.
• Identify the factors that
influence a firm’s decision of
whether to source supplies from
within the company or from
foreign suppliers.
This chapter focuses on two major activities—production
and supply chain management, and attempts to clarify how
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.
information technology to these activities. This is
especially important in the era of the Internet.
The opening case explores technology giant Apple’s
successful supply chain management strategy and its
effect on the company’s bottom line. The closing case
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Chapter 17 – Global Production and Supply Chain Management
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OUTLINE OF CHAPTER 17: GLOBAL PRODUCTION AND SUPPLY
CHAIN MANAGEMENT
Opening Case: Apple: The Best Supply Chains in the World?
Introduction
Strategy, Production, and Supply Chain Management
Where to Produce
Country Factors
Make-or-Buy Decisions
Global Supply Chain Functions
Global Logistics
Global Purchasing
Managing a Global Supply Chain
Role of Just-in-Time Inventory
Chapter Summary
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.
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The five basic questions that deal with production are:
1. Where should production be located and should it be concentrated or dispersed?
OPENING CASE: Apple: The Best Supply Chains in the World?
Summary
The opening case explores the supply chain management techniques used by information
technology company Apple. Apple is considered to have one of the world’s largest and
most efficient supply chains, a fact that has contributed to its becoming the world’s most
valuable brand. Discussion of the case can revolve around the following questions:
QUESTION 1: Why did Apple decide to outsource much of its production to companies
around the world rather than build its own production facilities?
ANSWER 1: Apple’s core strength is in conceptualizing and designing new products that
QUESTION 2: What makes Apple’s supply chains so productive and efficient?
ANSWER 2: Apple exerts a significant amount of control over its supply chain. Because
QUESTION 3: What do some of Apple’s recent problems tell you about the risks of
developing an extensive supply chain?
ANSWER 3: The issues with employee mistreatment at the Foxconn manufacturing
facility in China underscore the difficulties that companies face in monitoring the
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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.
Slides 17-4 and 17-5 Strategy, Production and Supply Chain Management
Firms need to identify how production and supply chain management can be
conducted internationally to:
• lower the costs of value creation
• add value by better serving customer needs
Slides 17-6 and 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.
Slide 17-8 Where to Produce?
Three factors are important when making location decisions:
1. country factors
2. technological factors
3. production factors
Slides 17-9 and 17-10 Country Factors
Country factors that can affect location decisions include:
• the availability of skilled labor and supporting industries
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Slide 17-11 Think Like a Manager: Offshoring Product Development
Slides 17-12 through 17-14 Technological Factors
The type of technology a firm uses in its manufacturing can affect location decisions.
Three characteristics of manufacturing technology are of interest:
Slide 17-15 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 17-16 Production Factors
Slide 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 through 17-20 The Strategic Role of Foreign Factories
The strategic role of foreign factories and the strategic advantage of a particular location
can change over time.
Foreign factories can have one of a number of strategic roles or designations, including:
• offshore factory
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Slide 17-21 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.
Slides 17-22 and 17-23 The Advantages of Making Products
1. lower costs
2. facilitates investments in highly specialized assets
3. protects proprietary technology
Slides 17-24 and 17-25 The Advantages of Buying Products
Buying component parts from independent suppliers:
• gives the firm greater flexibility
• helps drive down the firm’s cost structure
• helps the firm capture orders from international customers
The core activities performed in logistics are:
1. Global distribution center management
Slides 17-28 and 17-29 Functions of the Global Supply Chain: Purchasing
Purchasing is the part of the supply chain that involves worldwide buying of raw
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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.
Slide 17-32 Coordinating Global Supply Chains
Global supply chain coordination refers to shared decision-making opportunities and
operational collaboration of key global supply chain activities.
To achieve operational integration and collaboration, six operational objectives should be
addressed:
1. Responsiveness
2. Variance reduction
Another Perspective: Stanford University’s Graduate School of Business maintains a
website that is a forum for the dissemination of research and practical advice in the area
Slides 17-33 through 17-37 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).
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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.
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 10 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
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
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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
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 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
QUESTION 4: Reread the Management Focus on Philips in China and 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?
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ANSWER 4:
a. China is an attractive production location for Philips for several reasons. Perhaps the
most important factor is the country’s cheap wages. In addition, the Chinese workforce is
well educated, the economy is strong, and many of the company’s suppliers are doing
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: Logistics refers to 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. Because mobile phone manufacturing requires the production and
QUESTION 6: What type of interorganizational relationship should a global company
consider in (a) the inbound portion of its supply chains if the goal is to buy commodity-
oriented component parts for its own production and (b) the outbound portion of its
supply chains if the goal is to establish a strong partnership in reaching end-customers?
ANSWER 6: In the upstream/inbound portion of the supply chain, the company should
consider a vendor relationship for sourcing its component part. A vendor relationship
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CLOSING CASE: H&M: The Retail-Clothing Giant
Summary
The closing case explores the use of supply chains by global clothing retailer H&M. The
company relies on a network of over 900 suppliers and 1,900 factories to source textiles
and manufacture clothing. Discussion of the case can revolve around the following
questions.
QUESTION 1: Does it surprise you that the second-largest clothing retailer is selling in
stores in only 54 countries plus an additional 10 countries online? Why do you think it is
not covering more of the world’s countries?
ANSWER 1: As a fashion retailer, H&M must remain responsive to changes in customer
QUESTION 2: H&M does not own any of the factories that produce its clothes. Instead,
it relies on some 1,900 factories and 900 suppliers to create what its team designed.
These factories and suppliers are mostly in Europe and Asia. How can H&M ensure that
its customers receive the quality expected in the clothing?
ANSWER 2: H&M employs a team of approximately 80 employees whose sole
QUESTION 3: H&M stresses sustainability in its promotional campaigns. How can it
ensure that the working conditions are appropriate for the 1.6 million people that serve in
its supplier network? Is it even H&M’s role to ensure that the working conditions and
environmental impact are great in every market it engages in?
ANSWER 3: Student responses will vary. Some may argue that H&M should not be held
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manufacturing, which may have beneficial marketing effects and strengthen the
company’s brand.
QUESTION 4: If you worked for H&M, what would you suggest that it focus on to
become even larger than it is now? Should it have its own factories? Should it expand to
more than the 64 countries (54 with stores and 10 online) that it is in now? Should it
control more of the global supply chains?
ANSWER 4: Student responses will vary. Some may suggest that the company should
expand into regions with developing economies, such as South America and sub-Saharan
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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
workers in China, Brazil, Mexico, Turkey, Germany, and the United States.
Exercise 1 Answer
Search phrase: Chartbook of International Labor Comparisons
Resource Name: A Chartbook of International Labor Comparisons: United States, Europe
Additional Info:
Chapter 17 – Global Production and Supply Chain Management
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
the LPI. How are these findings helpful for companies trying to build a competitive
supply chain network?
Exercise 2 Answer
Search phrase: Logistics Performance Index
Resource Name: Logistics Performance Index (LPI)