International Operations

The Stages of Internationalisation

Indirect Exports
Direct Exports
International Company
Multinational (Multi-domestic Company)
Global Company
Transnational Company
 International

Parent company
Sources of core Knowledge
competencies Keep developed at center
centralized, others Core Source and transferred to
decentralized foreign subunits

Transferred

Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary

Adapting and leveraging parent company competencies

 Multinational

Parent company

Knowledge
Decentralized and developed and
nationally self-sufficient retained within
each subunit

Subsidiary Subsidiary Subsidiary Subsidiary

self-sufficient self-sufficient self-sufficient self-sufficient

Sensing and exploiting local opportunities

 Global

Centralized and Knowledge

Parent company developed and
globally scaled
retained a center

Subsidiary Subsidiary Subsidiary Subsidiary Subsidiary

Implementing parent company strategies

 Transnational

Dispersed, Parent company Knowledge

interdependent developed jointly and
and specialized interdependent shared world wide
and specialized
Subsidiary
interdependent Subsidiary
and specialized interdependent
and specialized

Subsidiary Subsidiary
interdependent interdependent
and specialized and specialized

Differentiated contributions by foreign

subunits to integrated world wide operations
At which stage of
internationalisation we are
in?
What is Operation Management?

Production is the creation of goods

and services.

Operation Management is the set of

activities that creates value in the
form of goods and services by
transforming inputs into outputs.
Global Operations Management

Global Operations Management included the establishment

of an integrated network of worldwide facilities of procuring,
producing, distributing and servicing products and services.
Four major decision dimensions are:
A. Location decision
B. Production decision
C. Sourcing decision
D. Logistical decision
A. Location Decision Parameters
1. Cost Parameters
Labour costs
Operational costs
Taxation
Incentives

2. Proximity Parameters
Market proximity
Supplier proximity
Logistical proximity
Infrastructural proximity
Location Decision Parameters
3. Facilities Parameters
Professional
Intellectual
Quality of life

4. Learning Parameters
Learning from the market
Learning from the competitors
Learning from the institutions

5. Regulations
Target Country regulations on
Oil and Gas
Exploration Policy
FDI route and limit
Decision Point?
B. Global Production Strategies
A. Globally Concentrated Production

All productions occurs at a single location.

Products are exported to world markets
 Four Production Strategies
B. Host Market Production

Each production unit produces a range of products and serves the national
market in which it is located. No sale across national boundaries.
Individual plant size limited by the size of the national market.
Four Production Strategies
C. Product Specialisation for a Global or Regional Market

Each production unit produces only the product for sale throughout a
regional market of several countries. Individual plant size very large
because of scale economies offered by the large regional market.
Four Production Strategies
D. Transnational Vertical Integration

Each production unit performs a Each production unit performs a

separate part of a production separate part in a production process
sequence. Units are linked across and ships its output to a final assembly
national boundaries in a chain-like plant in another country.
sequence.
 Global Production Strategy
Plant Competencies:
Global hub LEAD
Supply global markets
Product developments
Multi-product improvement SOURCE CONTRIBUTOR
Process development
Process improvement
Procurement
OFFSHORE SERVER
Logistics
Maintain process
Production only
OUTPOST

Access to low production cost Access to knowledge & skills Proximity to market

Primary Strategic Reason

Types of Global Production Facilities
The Offshore Factory works on design coming from other
locations. The role is to reduce cost of production for re-exporting or
for re-working with other components
The Source Factory the offshore factory role plus the
responsibilities for procurement, production planning, process
modifications, re-designs and logistics
The Server Factory primary role to produce products or
components for local or regional markets. Autonomous production
planning and modification but dependent on technology and critical
component inputs
The Contributor Factory role is to produce for local or regional
markets but with a wider range of responsibilities in terms of local
sourcing, product redesign and process modification
Types of Global Production Facilities
(Contd)
The Outpost Factory An outpost factory is a strategic factory for
a multinational company in terms of collecting local information from
competitors as well as from the market. An outpost factory role is
usually the secondary strategic role of an offshore factory.

The Lead Factory A lead factory creates new processes,

products and technologies for the entire company by acting as a
learning agent. Lead factory is currently a new trend for high tech
companies in locating their strategic learning in China and India
where increasingly more lead factories are being established.
 Role of Foreign Factories:
A Strategic
High
Mix
Site Competence

Source Lead Contributor

Offshore Outpost Server

Low

Access to low- Access to skills Proximity to

cost production and knowledge market

Strategic reasons for locating

Decision Point?
C. Global Sourcing: 5 important reasons
for global sourcing
1. Lower price available from
foreign sources
2. Availability of foreign products
not available locally
3. Firms worldwide operation
and attitude
4. Advanced technology
available from foreign sources
5. Higher-quality products
available from foreign sources
 Global Sourcing Arrangements
1. Wholly owned subsidiary
Established in a country with low-
cost labour to supply components
Subsidiary may produce product
not made in home country
2. Overseas joint venture
Labour costs are lower than those
in the home country to supply
components to the home country
3. In-bond plant contractor
Home country plant sends
components
4. Overseas independent contractor
Firms with no production facilities
Common in the clothing industry
5. Independent overseas contractor
 Problems with Global Sourcing
Added Cost of Importing
International freight, insurance and
packing (10-12%)
Import duties (0-50%)
Customhouse brokers fees (3-5%)
Inventory in the pipeline (5-15%)
Cost of letter of credit (1%)
International travel & communication
cost (2-8%)
Company import specialists (5%)
Reworking of products out of
specification (0-15%)
 Global Sourcing
Outsourced
Procurement Outsourced Central Outsourced Dispersed
Procurement Procurement

One Global purchasing agent Local purchasing agents take

care of sourcing needs acc to
Degree of takes care of sourcing needs
Vertical global specifications
Integration of Li & Fang
Procurement Host Multinational
Function Corporations
Central Internal Procurement Dispersed Internal
Procurement
Central purchasing department
Internal sources globally Local subsidiaries source
Procurement locally according to global
Major Airlines specifications

McDonalds, Carrefour

Centralised Decentralised
Procurement Procurement

Degree of Centralisation of Procurement Decisions

Decision Point?
 D. International Logistics
The design and management of a system that controls the
forward and reverse flow of materials, services, and
information into, through, and out of the international
corporation
Factors affecting International Logistics
Distance: geographic, political and culture, administrative
Exchange Rate Fluctuation: hard vs. soft Currency Zone
Regulatory Systems: government rules and system, e.g.
tariffs
Approaches of International Logistics
Centralized vs. Decentralized Logistics Management

Outsourcing Logistics Services

 Logistical Modes
Transportation
Ocean Shipping: liner service and bulk shipping
Air Freight: nature of the product
Intermodal Transportation

Materials Handling
Inventory Control
Warehousing
Packaging
Selecting a Mode of Transport

Period between departure and arrival of carrier is longer for

ocean than for air
Transit Time Perishable products require shorter transit times

Significant reliability issues

Vagarities of nature may impose delays
Predictability Tracking becomes important

Cost of Priced on the basis of both cost and value

The manager must decide when the higher cost of airfreight
Transportation can be justified

Noneconomic Preferential policies by government

Factors International quota systems of transportation

31
Ocean Shipping
Container ships (or 'box ships') carry their cargo packed into standard 20' or 40'
containers that are stacked both on and below deck. Smaller 'feeder' ships carry
containers on coastal and inland waters.
Roll-on/roll-off (ro-ro) vessels carry both road haulage and passenger vehicles.
General cargo ships carry loose-packaged cargo of all types.
Bulk carriers carry unpackaged goods - usually large volumes of single-commodity
goods such as grain, coal, fertilisers and ore.
Tankers carry liquids (such as oil and gas) in bulk.

Merchant ships primarily do business in two different ways:

Liner vessels operate on fixed routes, to fixed schedules and usually with a standard
tariff. Liner trades are dominated by container ships, roll-on/roll-off carriers and
general cargo ships.
Charter ('tramp') vessels operate entirely according to the demands of the person
chartering them. Their ports of loading and discharge are set by the charter, as is their
cost, which depends on immediate supply and demand conditions. Most tankers and
bulk carriers operate in the charter markets.
Types of Oil Tankers

Deadweight tonnage (also known asdeadweight; abbreviated to DWT, D.W.T.,d.w.t., or dwt) is a

measure of how much weight a ship is carrying or can safely carry. It is the sum of the weights of
cargo, fuel, fresh water, ballast water, provisions, passengers, and crew
Global Logistics Management
Issues in freight forwarding
Special issues of free-trade zone
Different port facilities
Different regulatory constraints
Different environmental constraints
The Impact of International Logistics
Logistics cost comprise between 10 and 30 percent of the
total landed cost of an international order
Research shows that the environment facing logistics
managers in the next 10 years will be dynamic and explosive
Technological advances and progress in communication
systems and information-processing capabilities will be
particularly significant in the design and management of
logistics systems
E.g. Use of active RFID tags
Logistics may well become the key dimension by which firms
distinguish themselves internationally
Global Logistics
Three Major Functions
A. Allocation consists of deciding which products, in which
quantity, and when/where they are going to be sent. Five
major parameters:
o demand for the product in a particular place
o degree of specialisation of production or procurement unit
o capacity of production or procurement unit
o level of acceptable inventories
o estimated transportation time
Global Logistics
Three Major Functions
B. Distribution consists of selecting the various channels
to be used in the chain. E.g.:
o The factor warehouse organises grouping and supply of
distribution centres and handling of large costs
o The distribution centre in charge of proximity storage and
supply to dealers
o The advanced inventory is dedicated to the OEMs and can be
located in a factory or on a carrier site located near the customers
sites
Global Logistics
Three Major Functions

C. Transportation handles the physical flow.

Options:
o Your own fleet

o Rented trucking services

o Messenger services

o Charter Services
 Research and Development Activities

There are two types of international R&D centers:

1. Corporate Laboratory which concentrates on

research directed by corporate headquarters

2. Support Laboratory which acts as a technical

service center