International Business Management

Global Production,
Outsourcing, and Logistics
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Production and Logistics

• Production is the activities involved in creating a

product
- Can be both service and manufacturing activities
• Logistics is the activity that controls the transmission
of physical materials through the value chain

• The commercial activity of transporting goods to

customers.

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Strategy, Production,
and Logistics

• Strategic Objectives of Production and logistics functions:

- Lower costs
- Increase product quality by eliminating defective products from both the
supply chain and the manufacturing process
• These objectives are interrelated
- Increasing productivity because time is not wasted producing poor-
quality products that cannot be sold, leading to a direct reduction in unit
costs
- Lowering rework and scrap costs associated with defective products
- Reducing the warranty costs and time associated with fixing defective
products

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Relationship Between
Quality and Costs

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Total Quality Management

TQM is the systematic process in the context of continuous

improvement and quality management initiatives that improves
customer satisfaction

Total Quality Management (TQM) is enhancement to the traditional

way of doing business.

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Six Sigma

• Six Sigma is the modern successor to TQM

- It is a statistically based philosophy that aims to reduce
defects, boost productivity, eliminate waste, and cut costs
throughout a company
• Production process operating at Six Sigma are
99.99966 percent accurate
- Only 3.4 defects per million units

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Where to Produce

• For the firm contemplating international production a

number of factors must be considered
- Country factors
- Technological factors
- Product factors

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Country Factors

• Optimum economic, political, and cultural conditions

• Externalities
- Skilled labor pools
- Supporting industries
• Formal and informal trade barriers
• Exchange rate

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Technological Factors

• Fixed costs
• Minimum efficient scale
• Flexible manufacturing Mass
- Reduce setup times for complex equipment customization
- Increase machine utilization Low cost
- Improve quality control Product
customization
• Flexible machine cells to perform a variety of
operations

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 16 - 10

Typical Unit Cost Curve

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Manufacturing Location

• Arguments for concentrating production to a few locations

include
- Fixed costs are substantial
- Minimum efficient scale is high
- Flexible manufacturing technologies available
• Arguments to manufacture in all major markets the firm operates
in include
- Fixed costs are low
- Minimum efficient scale is low
- Flexible manufacturing technologies unavailable
- Trade barriers and transportation costs remain major impediments

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Product Factors and

Location Strategies

• Two product features affect location decisions:

- Value to weight ratio
- Product serves universal needs
• Two basic strategies
- Concentrating in a centralized location and serving the
world market
- Decentralizing them in various regional or national locations
close to major markets when opposite conditions exist

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Centralized Location

• Factor costs have substantial impact

• Low trade barriers
• Externalities favor certain location
• Stable exchange rates
• High fixed costs, high minimum efficient scale
relative to global demand or flexible manufacturing
technology
• Product’s value-to-weight ratio is high
• Product serves universal needs

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Decentralized Location

• Factor costs do not have substantial impact

• High trade barriers
• Location externalities not important
• Exchange rates volatile
• Low fixed costs, low minimum efficient scale
• Flexible manufacturing technology unavailable
• Product’s value-to-weight ratio is low
• Significant differences in consumer tastes and
preferences exist between nations

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Strategic Role of
Foreign Factories
• Initially, established where labor costs low
• Later, important centers for design and final assembly
• Upward migration caused by pressures to:
- Improve cost structure
- Customize product to meet customer demand
- An increasing abundance of advanced factors of
production

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Make or Buy Decisions

• Should a firm make or buy the component parts that

go into their final product?
• Advantages of making own components:
- Lower costs if most efficient producer
- Facilitating specialized investments
- Product technology protection
- Improved scheduling

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Advantages of
Buy(Global Sourcing)

• Strategic flexibility in sourcing components

• Lower firm’s cost structure
• Strategic alliances with suppliers give benefits of
vertical integration without the associated
organizational problems
• Cost Saving

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Managing a
Global Supply Chain

• Objective of materials management in managing a

firm’s global supply chain
- Maintain lowest possible cost
- In a way that best serves the customer’s needs
• Role of just-in time inventory
- Economize on inventory holding costs
- Speeds inventory turnover
- Drawback: no buffer stock

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Role of Information Technology

and the Internet

• Firms increasingly use electronic data interchange (EDI) to

coordinate the flow of materials into manufacturing,
through manufacturing, and out to customers
• EDI systems require computer links between a firm, its
suppliers, and its shippers; these electronic links are then
used
- To place orders with suppliers
- To register parts leaving a supplier
- To track them as they travel toward a manufacturing
plant
- To register their arrival

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Role of Information Technology

and the Internet

• EDI systems have resulted in

- Suppliers, shippers, and the purchasing firm communicate with each
other with no time delay
- Increased flexibility and responsiveness of the whole global supply
system
- Paperwork between suppliers, shippers, and the purchasing firm is
eliminated
• Web-based systems are rapidly transforming the management
of globally dispersed supply chains, allowing even small firms
to achieve a much better balance between supply and demand
• Because the number of firms adopting these systems has
increased, those that don’t may find themselves at a significant
competitive disadvantage

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