efficient production and logistics functions
This chapter explained how efficient production and logistics functions can improve an international business’s competitive position by lowering the costs of value creation and by performing value creation activities in such ways that customer service is enhanced and value added is maximized. We looked closely at three issues central to international production and logistics: where to produce, what to make and what to buy, and how to coordinate a globally dispersed manufacturing and supply system. The chapter made the following points:
1. The choice of an optimal production location must consider country factors, technological factors, and product factors.
2. Country factors include the influence of factor costs, political economy, and national culture on production costs, along with the presence of location externalities.
3. Technological factors include the fixed costs of setting up production facilities, the minimum efficient scale of production, and the availability of flexible manufacturing technologies that allow for mass customization.
4. Product factors include the value-to-weight ratio of the product and whether the product serves universal needs.
5. Location strategies either concentrate or decentralize manufacturing. The choice should be made in light of country, technological, and product factors. All location decisions involve trade-offs.
6. 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 to encourage and foster attempts by local managers to upgrade factory capabilities.
7. 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.
8. Making components in-house facilitates investments in specialized assets and helps the firm protect its proprietary technology. It may improve scheduling between adjacent stages in the value chain also. In-house production also makes sense if the firm is an efficient, low-cost producer of a technology.
9. Buying components from independent suppliers facilitates strategic flexibility and helps the firm avoid the organizational problems associated with extensive vertical integration. Outsourcing might also be employed as part of an “offset” policy, which is designed to win more orders for the firm from a country by pushing some subcontracting work to that country.
10. Several firms have tried to attain the benefits of vertical integration and avoid its associated organizational problems by entering long-term strategic alliances with essential suppliers.
11. Although alliances with suppliers can give a firm the benefits of vertical integration without dispensing entirely with the benefits of a market relationship, alliances have drawbacks. The firm that enters a strategic alliance may find its strategic flexibility limited by commitments to alliance partners.
12. Logistics encompasses all the activities that move materials to a production facility, through the production process, and out through a distribution system to the end user. The logistics function is complicated in an international business by distance, time, exchange rates, custom barriers, and other things.
13. Just-in-time systems generate major cost savings from reducing warehousing and inventory holding costs and from reducing the need to write off excess inventory. In addition, JIT systems help the firm spot defective parts and remove them from the manufacturing process quickly, thereby improving product quality.
14. Information technology, particularly Internet-based electronic data interchange, plays a major role in materials management. EDI facilitates the tracking of inputs, allows the firm to optimize its production schedule, lets the firm and its suppliers communicate in real time, and eliminates the flow of paperwork between a firm and its suppliers.
Critical Thinking and Discussion Questions
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 about $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. Should the firm adopt a concentrated or decentralized manufacturing strategy? What kind of location(s) should the firm favor for its plant(s)?
2. A chemical firm is considering how best to supply the world market for sulfuric acid. A manufacturing plant costs about $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. Should the firm favor concentrated manufacturing or decentralized manufacturing? What kind of location(s) should the firm seek for its plant(s)?
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?
4. Reread the Management Focus on Philips in China and then answer the following questions:
a. What are the 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?
d. Explain how an efficient logistics function can help an international business compete more effectively in the global marketplace.
http://globalEDGE.msu.edu Research Task
Global Production, Outsourcing, and Logistics
Use the globalEDGE Resource Desk (http://globaledge.msu.edu/Reference-Desk) to complete the following exercises: