SUPPLEMENT/ANCILLARY TITLE · Web viewGlobal Production, Outsourcing, and Logistics Chapter Outline OPENING CASE: Making the Amazon Kindle INTRODUCTION STRATEGY, PRODUCTION AND LOGISTICS

Chapter 15 - Global Production, Outsourcing, and Logistics

Global Production, Outsourcing, and Logistics

Chapter Outline

OPENING CASE: Making the Amazon Kindle

INTRODUCTION

STRATEGY, PRODUCTION AND LOGISTICS

WHERE TO PRODUCE

Country Factors Management Focus: Philips in China Technological Factors Product Factors Locating Production Facilities The Hidden Costs of Foreign Locations

THE STRATEGIC ROLE OF 0F A FOREIGN PRODUCTION SITE

Management Focus: Hewlett Packard in Singapore

OUTSOURCING PRODUCTION: MAKE-OR-BUY DECISIONS

The Advantages of Make The Advantages of Buy Trade-offs Strategic Alliances with Suppliers

MANAGING A GLOBAL SUPPLY CHAIN

The Role of Just-in-Time Inventory The Role of Information Technology and the Internet

SUMMARY

CRITICAL THINKING AND DISCUSSION QUESTIONS

CLOSING CASE: The Rise of the Indian Automobile Industry

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Learning Objectives

1. Explain why production and logistics decisions are of central importance to many multinational businesses.

2. Explain how country differences, production technology, and product features all affect the choice of where to locate production activities.

3. Recognize how the role of foreign subsidiaries in production can be enhanced over time as they accumulate knowledge.

4. Identify the factors that influence a firm’s decision of whether to source supplies from within the company, or from foreign suppliers.

5. Describe what is required to efficiently coordinate a globally dispersed production system.

Chapter Summary

This chapter explores the issues associated with global operations management. At the outset, the author defines the terms operations, production, and material management, and then goes on to discuss the importance of total quality management (TQM) and ISO 9000. Particular emphasis is placed on the topics of where international firms should locate their manufacturing operations and how international firms decided whether to make or buy component parts. In regards to the former, the author argues that country factors, technological factors, and product factors influence a manufacturer’s location decision. In regard to make-or-decisions, the author provides a balanced discussion of the advantages and disadvantages of buying components parts (in the world marketplace) opposed to making them in-house. The chapter concludes with separate discussion of the importance of strategic alliances, just-in-time manufacturing, and information technology to international firms.

Opening Case: Making the Amazon Kindle

Summary

The opening case explores how Amazon decided how and where to manufacture its Kindle ebook reader. Amazon needed to ensure that the price of the Kindle was low enough to compete with products from Apple and Barnes & Noble. In addition, it needed to ensure that the Kindle would have the functionality and reliability that buyers were looking for. To accomplish these goals, Amazon designed the product in the United States, but then outsourced most key components to companies in Taiwan, South Korea, and China. Discussion of the case can revolve around the following questions:

QUESTION 1: What were Amazon’s objectives with the Kindle? Why did the company decide to outsource much the product to companies in Asia rather than build its own production facilities?ANSWER 1: Amazon does not actually produce the Kindle, but instead sources parts from leading companies around the world. The product itself was designed in California where leading designers and tech people are located. The product uses components that are produced in various locations around the




world. For example, the display is produced by a company in Taiwan that was chosen because of its expertise in manufacturing this critical component of the Kindle. The wireless card that connects the product to Amazon’s digital bookstore is made in South Korea by a company that has expertise in making wireless chipsets. The Kindle’s microprocessor chip is produced by a Texas based firm that outsources its production to China and Taiwan. Each sourcing decision involved a balance between cost, reliability, and capability. Students will probably recognize that it would be very expensive and quite impractical for Amazon to produce all of these parts in-house.

QUESTION 2: How did Amazon choose its suppliers? What does your response tell you about finding optimal suppliers? How does today’s almost instantaneous communication facilitate Amazon’s production strategy? What risks does Amazon incur as a result of its decision to outsource to foreign suppliers?

ANSWER 2: Amazon chose its suppliers based on their ability to provide reliable suppliers of quality inputs. Most students will probably agree that Amazon will stay with its suppliers only as long as they continue to provide the best quality at the best price on a reliable schedule. Amazon can quickly alert suppliers when demand changes, and these changes can then be incorporated into production schedules. Students will agree that Amazon is at the mercy of its suppliers, but will probably note that this dependency is actually somewhat of a two-way street. Most suppliers will be unwilling to upset a key buyer. Some students might also point out that because Amazon is producing its product in Asia, it is open to distribution delays like those that occurred when the tsunami hit Japan.

Lecture Note: To extend this case, consider {http://www.pcmag.com/article2/0,2817,2396639,00.asp},{http://www.forbes.com/sites/stevedenning/2011/08/17/why-amazon-cant-make-a-kindle-in-the-usa/}, and {http://www.forbes.com/sites/stevedenning/2011/08/21/amazon-kindle-part-3-its-not-just-manufacturing/}.

Chapter Outline with Lecture Notes, Video Notes, and Teaching Tips

INTRODUCTION

A) In this chapter we look at five questions: Where in the world should productive activities be located? What should be the long-term strategic role of foreign production sites? Should the firm own foreign production activities, or is it better to outsource those activities to

independent vendors? How should a globally dispersed supply chain be managed, and what is the role of Internet-based

information technology in the management of global logistics? Should the firm manage global logistics itself, or should it outsource the management to

enterprises that specialize in this activity?



http://www.forbes.com/sites/stevedenning/2011/08/21/amazon-kindle-part-3-its-not-just-manufacturing/

http://www.forbes.com/sites/stevedenning/2011/08/21/amazon-kindle-part-3-its-not-just-manufacturing/

http://www.forbes.com/sites/stevedenning/2011/08/17/why-amazon-cant-make-a-kindle-in-the-usa/

http://www.pcmag.com/article2/0,2817,2396639,00.asp


STRATEGY, PRODUCTION, AND LOGISTICS

A) This chapter focuses on two activities - production and logistics - and attempts to clarify how these activities might be performed internationally to (1) lower the costs of value creation and (2) add value by better serving customer needs.

B) Production refers to activities involved in creating a product. Logistics refers to the procurement and physical transmission of material through the supply chain, from suppliers to customers.

C) The objectives of the production and logistics function are to lower the costs, and increase product quality by eliminating defective products from both the supply chain and the manufacturing process. These two objectives are interrelated (see Figure 15.1 in the text).

D) There are three ways in which improved quality control reduces costs. First, productivity increases because time is not wasted manufacturing poor quality products that cannot be sold. This saving leads to a direct reduction in unit costs. Second, increased product quality means lower re-work and scrap costs associated with defective products. Third, greater product quality means lower warranty costs and time fixing defective products. The net effect is to lower the costs of value creation by reducing both manufacturing and service costs.

E) The main management technique that companies are utilizing to boost their product quality is Six Sigma quality improvement methodology, a direct descendant of total quality management (TQM). TQM is a management philosophy that takes as its central focus the need to improve the quality of a company’s products and services.

F) Many companies have adopted a successor to TQM programs known as a Six Sigma program (a statistically based philosophy that aims to reduce defects, boost productivity, eliminate waste, and cut costs throughout a company.) The growth of international standards in some cases focused greater attention on the importance of product quality. In Europe, for example, the European Union requires that the quality of a firm’s manufacturing processes and products be certified under a quality standard known as ISO 9000 before the firm is allowed access to the European marketplace.

G) In addition to lowering costs and improving quality, international businesses have two further objectives. First, the production and logistics functions must be able to accommodate demands for local responsiveness. Second, production and logistics must be able to respond quickly to shifts in customer demand.

Lecture Note: To extend the discussion on TQM and Six Sigma go to {http://www.isixsigma.com/sixsigma/six_sigma.asp}.

Lecture Note: Each year CIO magazine {http://www.cio.com}publishes a list of the "Top 100" companies in terms of Supply Chain/Logistics Management. This list may be helpful in locating companies that are heavily involved in this issue.



http://www.cio.com/

http://www.isixsigma.com/sixsigma/six_sigma.asp


WHERE TO PRODUCE

A) Companies contemplating international production need to consider three broadly defined factors when making a location decision: country factors, technological factors, and product factors.

Country Factors

B) As discussed earlier in the book, country factors suggest that a firm should locate it various manufacturing activities in those locations where economic, political, and cultural conditions, including relative factor costs, are most conducive to the performance of that activity. However, regulations affecting FDI and trade can significantly affect the appropriateness of specific countries, as can expectations about future exchange rate changes. Teaching Tip: The United States Central Intelligence Agency has compiled an informative “country profile” on each country in the world. The country profiles can be downloaded at {https://www.cia.gov/library/publications/the-world-factbook/}. Students can use the reports as a basis for comparing different production locations.

Teaching Tip: For additional information about a particular country, Yahoo provides an easy-to-search bank of linked sources that provide information about almost every country in the world. The site is available at {http://www.yahoo.com/Government/Countries/}. The site can be used to make quick comparisons between countries to gauge their relative attractiveness as production locations.

Management Focus: Philips in China

Summary

This feature describes Philips NV’s operations in China. Philips, the Dutch consumer electronics, lighting, semiconductor, and medical equipment conglomerate, has been operating factories in China since 1985. By the mid-2000s, the company had invested more than $2.5 billion in China and operated 25 factories there. Today, the company operates 35 wholly owned subsidiaries and joint ventures employing 30,000 people. Initially, Philips believed that it would sell a large portion of its output to the local Chinese market. However, the company quickly discovered that the low wages that make China such an attractive production location also meant that the market for its products was smaller than anticipated. Philips’ solution was to export most of its output to the United States and elsewhere. Discussion of the feature can revolve around the following questions:

Suggested Discussion Questions

1. What makes China such an attractive production location for Philips? Are there other locations that share the same characteristics?

Discussion Points: Several factors make China an attractive production location for Phillips. 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 business there. Most students will



http://www.yahoo.com/Government/Countries/

https://www.cia.gov/library/publications/the-world-factbook/


argue that at least at the moment, China is the only country that offers these particular qualities. While other countries like Mexico and India also have low cost workforces, they do not have the industrial base that is present in China.

2. Philips wants to eventually turn China into a global supply base from which its products will be exported around the world. Consider the advantages and disadvantages of this strategy.

Discussion Points: Students should recognize that using China as a global supply base from which to serve the world offers several advantages to Phillips. By having a single production location, the company can capitalize on costs savings that come from economies of scale as well as the low wages in China. However, if economic, political, or other types of problems arise in the country, Phillips could be in serious trouble if it has no alternate locations to fill production gaps.

Teaching Tip: Students can explore the company in more depth by going to {http://www.philips.com/global/index.page}.

Lecture Note: To extend the discussion of this feature, consider {http://www.businessweek.com/ap/2012-09-11/philips-to-cut-2-200-jobs-by-2014}.

Video Note: In recent years, many companies have turned to China as a location for low cost production. However, in the light news of various tainted products produced being in China, some managers are questioning that strategy. The iGlobe Probe Sheds Light on Working Conditions in China explores working conditions in China and the potential for production problems.

Technological Factors

C) The type of technology a firm uses in its manufacturing can be pivotal in location decisions. Three characteristics of a manufacturing technology are of interest here: the level of fixed costs; its minimum efficient scale; and its flexibility.

Fixed Costs

D) In some cases the fixed costs of setting up a manufacturing plant are so high that a firm must serve the world market from a single location or from very few locations.

Minimum Efficient Scale

E) The larger the minimum efficient scale (the level of output at which most plant-level scale economies are exhausted) of a plant, the greater the argument for centralizing production in a single location or a limited number of locations.

Flexible Manufacturing and Mass Customization

F) The term flexible manufacturing technology or lean production as it is often called – covers a range of manufacturing technologies that are designed to (i) reduce set up times for complex equipment (ii)



http://www.businessweek.com/ap/2012-09-11/philips-to-cut-2-200-jobs-by-2014

http://www.businessweek.com/ap/2012-09-11/philips-to-cut-2-200-jobs-by-2014

http://www.philips.com/global/index.page


increase the utilization of individual machines through better scheduling, and (iii) improve quality control at all stages of the manufacturing process.

G) Flexible manufacturing technologies allow a company to produce a wider variety of end products at a unit cost that at one time could only be achieved through the mass production of a standardized output. The term mass customization has been coined to describe this ability. Mass customization implies that a firm may be able to customize its product range to suit the needs of different customer groups without bearing a cost penalty.

H) Flexible machine cells are another common flexible manufacturing technology. A flexible machine cell is a grouping of various types of machinery, a common materials handler, and a centralized cell controller (computer).

I) The adoption of flexible manufacturing technologies can help improve the competitive position of firms. Most importantly, from the perspective of an international business, flexible manufacturing technologies can assist in the process of customizing products to different national markets in accordance with demands for local responsiveness.

Summary

J) 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. Alternatively, when both fixed costs and the minimum efficient scale of production are relatively low, and when appropriate flexible manufacturing technologies are not available, the arguments for concentrating production at a few choice locations are not as compelling.

Product Factors

K) Two product factors impact location decisions. The first is the product's value-to-weight ratio because of its influence on transportation costs. If the value-to-weight ratio is high, it is practical to produce the product in a single location and export it to other parts of the world. If the value-to-weight ratio is low, there is greater pressure to manufacture the product in multiple locations across the world.

L) The other product feature that can influence location decisions is whether the product serves universal needs - needs that are the same all over the world. Since there are few national differences in consumer taste and preference for such products, the need for local responsiveness is reduced. This increases the attractiveness of concentrating manufacturing in a central location.

Locating Production Facilities

M) There are two basic strategies for locating manufacturing facilities: concentrating them in the optimal location and serving the world market from there, and decentralizing them in various regional or national locations that are close to major markets. The appropriate strategic choice is determined by the various country, technological, and product factors discussed in this section. A summary of this material is provided in Table 15.1 in the text.




Video Note: The apparel maker Hanesbrands has recently shifted production to Southeast Asia to take advantage of the cost savings in the new location. To learn more, consider the iGlobe Hanesbrands Relocates Manufacturing to Asia.

The Hidden Costs of Foreign Locations

N) Producing in low cost countries does not always make sense. Hidden costs of foreign locations include high employee turnover, shoddy workmanship, poor product quality, and low productivity among others.

Teaching Note: Some companies are moving production back to their home country because foreign production no longer offered the advantages it once had. To learn more, go to {http://www.businessweek.com/articles/2012-07-05/reshoring-of-jobs-looks-meager}.

THE STRATEGIC ROLE OF FOREIGN FACTORIES

A) The strategic role of foreign factories can change over time. A factory originally set up to make a standard product to serve a local market, or to take advantage of low cost inputs, can evolve into a facility with advanced design capabilities.

B) Similarly, the strategic advantage of a particular location can change as governmental regulations change and/or countries upgrade their factors of production.

C) As the strategic role of a factory is upgraded and a firm develops centers of excellence in different locations worldwide, it supports the development of a transnational strategy. A major aspect of a transnational strategy is a belief in global learning, or the idea that valuable knowledge does not reside just in a firm’s domestic operations, it may also be found in its foreign subsidiaries.

Management Focus: Hewlett Packard in Singapore

Summary

This feature explores the strategic decision making involved in establishing Hewlett Packard’s Singapore plant. The company initially used the plant as a low cost location to manufacture electronic components. Later, entire products were produced in Singapore. Still later, the Singapore plant was involved not only in production but also product design. Today, the plant is an important part of Hewlett Packard’s global network and is responsible for manufacturing and also product development and design. The following questions can provide the basis for the discussion of this feature:

Suggested Discussion Questions

1) What factors were important in Hewlett Packard’s initial decision to open a plant in Singapore? How did these factors contribute to the decision to increase responsibilities at the Singapore plant?



http://www.businessweek.com/articles/2012-07-05/reshoring-of-jobs-looks-meager


Discussion Points: Hewlett-Packard initially selected Singapore as a production location because the country offered a lower cost, well-educated workforce that spoke English. In addition, the country was economically stable, and had a good infrastructure. The lower cost, well-educated workforce enabled Hewlett-Packard to reduce its manufacturing and product development costs when the company decided to assign the responsibility for redesigning its handheld calculator to its Singapore facility. The success of this assignment was such that the company has continued to ask the facility to redesign other products.

2) Today, the Singapore plant is considered to be a “lead plant” for Hewlett Packard. How can the company help the plant continue to be a key component in Hewlett Packard’s global network?

Discussion Points: Many students will suggest that communication will be central to ensuring that the Singapore facility remains a lead plant for Hewlett-Packard. Already, the company has made the commitment to ensuring the Singapore facility is on the same page as the headquarters location by transferring engineers from Singapore to the United States, and back. Students will probably suggest that continuing to establish cross-border relationships and teams will be important as the company goes forward.

Teaching Tip: To further explore Hewlett-Packard’s international operations, go to {http://www.hp.com/}.

Lecture Note: To extend the discussion of this feature, consider {http://www.businessweek.com/technology/content/feb2010/tc20100223_442200.htm}.

OUTSOURCING PRODUCTION: MAKE-OR-BUY DECISIONS A) International businesses face sourcing decisions, and decisions about whether they should make or buy the component parts to go into their final product. Make-or-buy decisions are important factors in many firms' manufacturing strategies.

Lecture Note: To see how a firm might conduct a make-or-buy analysis, consider {http://www.businessweek.com/articles/2012-05-14/make-vs-dot-buy-is-not-the-question-to-ask}.

The Advantages of Make

B) The arguments that support making component parts in-house - vertical integration - are fourfold. Specifically, vertical integration may be associated with lower costs, facilitate investments in highly specialized assets, protect proprietary technology, and facilitate the scheduling of adjacent processes.

Lowering Costs

C) It may pay a firm to continue manufacturing a product or component part in-house, as opposed to outsourcing it to an independent manufacturer, if the firm is more efficient at that production activity than any other enterprise.

Facilitating Specialized Investments



http://www.businessweek.com/articles/2012-05-14/make-vs-dot-buy-is-not-the-question-to-ask

http://www.businessweek.com/technology/content/feb2010/tc20100223_442200.htm

http://www.hp.com/


D) When substantial investments in specialized assets, or assets whose value is contingent upon a particular relationship persisting, that are required to manufacture a component, the firm will prefer to make the component internally rather than contract it out to a supplier.

Protecting Proprietary Product Technology

E) In order to maintain control over its technology, a firm might prefer to make component parts that contain proprietary technology in-house, rather than have the parts made by independent suppliers.

Accumulating Dynamic Capabilities

F) Firms learn to be more effective and efficient over time. In other words, a firm’s capabilities are dynamic and learned through experience. Dynamic capabilities describes skills that become more valuable over time through learning.

Improving Scheduling

G) Vertical integration can also result in production cost savings as planning, coordination, and scheduling of adjacent processes becomes easier.

The Advantages of Buy

H) Buying component parts from independent suppliers can be advantageous in that it gives the firm greater flexibility, it can help drive down the firm's cost structure, and it may help the firm to capture orders from international customers.

Strategic Flexibility

I) The greatest advantage of buying component parts from independent suppliers is that the firm can maintain its flexibility, switching orders between suppliers as circumstances dictate. This is particularly important in the international context where changes in exchange rates and trade barriers might alter the attractiveness of various supply sources over time.

Lower Costs

J) Vertical integration into the manufacture of component parts involves an increase in the scope of the organization. The resulting increase in organizational complexity can be costly. There are three reasons for this. First, the greater the number of sub-units within an organization, the greater the problems of coordinating and controlling those units. Second, the firm that vertically integrates into component part manufacture may find that because its internal suppliers have a captive customer in the firm, internal suppliers lack an incentive to reduce costs. Third, leading directly on from the previous point, vertically integrated firms have to determine the appropriate price for goods transferred between sub-units within the firm. Setting appropriate transfer prices is a problem in any firm. The firm that buys its components from independent suppliers can avoid all of these problems.




Offsets

K) Another reason for outsourcing some manufacturing to independent suppliers based in other countries is that it may help the firm capture more orders from that country.

Trade-Offs

L) It is clear that trade offs are involved in make-or-buy decisions. The benefits of manufacturing components in-house seem to be greatest when highly specialized assets are involved, when vertical integration is necessary for protecting proprietary technology, or when the firm is simply more efficient than external suppliers at performing a particular activity.

Strategic Alliances with Suppliers

M) Several firms have tried to capture some of the benefits of vertical integration, without encountering the associated organizational problems, by entering into long-term strategic alliances with key suppliers. Although alliances with suppliers can help the firm to capture the benefits associated with vertical integration without dispensing entirely with the benefits of a market relationship, alliances do have their drawbacks. The firm that enters into a strategic alliance may find its strategic flexibility limited by commitments to alliance partners

MANAGING A GLOBAL SUPPLY CHAIN

A) Logistics encompasses the activities necessary to get materials to a manufacturing facility, through the manufacturing 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, customs barriers, and the like. Efficient logistics can have a major impact upon a firm's bottom line.

The Power of Just-in-Time (JIT)

B) The basic philosophy behind just-in-time (JIT) inventory 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.

C) Just-in-time systems generate major cost savings from reduced warehousing and inventory holding costs. In addition, JIT systems help the firm to spot defective parts and take them out of the manufacturing process - thereby boosting product qualityD) The drawback of a JIT system is that it leaves a firm with little inventory to respond to changes in demand or disruptions among suppliers.

The Role of Information Technology and the Internet

E) Web-based information systems play a crucial role in materials management. Electronic data interchange (EDI) facilitates the tracking of inputs, allows the firm to optimize its production schedule,




allows the firm and its suppliers to 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 approximately $500 million to construct and requires a highly skilled work force. The total value of the world market for this product over the next 10 years is estimated to be between $10 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)?

Answer: The firm should pursue a concentrated manufacturing because (1) the tariffs prevailing in the industry are low, (2) the cost of building a plant to produce the microprocessors is high, and (3) the product's value-to-weight ratio is high. All of these factors favor a concentrated versus a decentralized manufacturing strategy. 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 should locate its plant in a country that has a highly skilled pool of workers available. That criterion could limit the firm to developed nations. Second, in terms of technology factors, the firm is compelled to limit the number of its manufacturing facilities because of the high cost of constructing a plant. Third, in terms of product factors, the firm can manufacturer its product in a central location due to the relatively high value-weight ratio and the universal appeal of the product.

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 work force. The total value of the world market for this product over the new 10 years is estimated to be between $20 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)?

Answer: This question is a tougher call than the scenario depicted in Question #1. The firm should probably pursue a limited decentralized manufacturing strategy (meaning that the firm should not set up a plant in every country that it sells to, but should set up plants in several "regions" of the world). This strategy makes sense because (1) The tariffs prevailing in the industry are moderate (rather than low), (2) the cost of constructing a facility is relatively modest ($20 million), and (3) only a moderately skilled work force is needed (which is probably available in many low-cost regions of the world). 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 semi-skilled labor is inexpensive. In terms of technology factors, the firm is not constrained by a high fixed costs associated with its product, so technology is not a pervasive issue. Finally, product factors favor the firm locating in several locations throughout the world. The company's product has a low value-weight ratio, making it unattractive to produce the product in a central location and export it across the world.

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 non-recoverable 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: Manufacturing in-house would reduce the risk of currency appreciation and rising costs from independent suppliers. Specialized asset investment would make firm dependent on specific suppliers, however, technological know-how would be protected, and improved scheduling would be available. Outsourcing would be beneficial if the product using the component fails in the market because the supplier will bear the cost of the non-recoverable investment, and flexibility in case a better component can be designed or bought would be preserved. Outsourcing would also lower organizational and coordination costs. Based on what we know, manufacturing in-house may be slightly preferred, but other information could tip the decision the other way.

4. Reread the Management Focus on Philips in China 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?

Answer: a) China is an attractive production location for Philips for several reasons. The country has low wage rates, an educated workforce, a strong economy, is a member of the World Trade Organization, and has a stable exchange rate that is pegged to the U.S. dollar. In addition, China’s rapidly expanding industrial base is home to many companies that Philips uses as suppliers. b) Philips reliance on China as a major location for production could be risky if political, economic, or other problems disrupt production and therefore, the company’s ability to supply global markets. c) Some students may suggest that Philips by locating so much production in China has essentially put all of its eggs in one basket and that a strategy that disperses some production to other locations might be better. By hedging its risk, the company could avoid potential disruptions in its supply chain.

5. Explain how an efficient materials management function can help an international business compete more effectively in the global marketplace.

Answer: Given the complexity involved in coordination of material and product flows in a multinational enterprise (purchases, currency exchange, inbound and outbound transportation, production, inventory, communication, expediting, tariffs and duties), a materials management function can help to assure that these flows take place in the most efficient manner possible. A related advantage is that by having a materials management function, a firm may obtain improved information about the costs of different transport alternatives, and choose to reconfigure some of its flows to better take advantage of these costs. By being better able to utilize just in time techniques, the cost of production can be lowered while the quality is increased. The materials management function can also help an international business to develop information technology systems that allow it to better track the flow of goods throughout the firm.




Closing Case: The Rise and Fall of the Indian Automobile Industry

Summary

The closing case describes India’s evolution as a small car manufacturing hub for several global automakers. By 2016, India is expected to export 720,000 vehicles a year. South Korea’s Hyundai is leading the charge, exporting over one third of its Indian production. Suzuki and Nissan have both entered the Indian market more recently. Both companies see the Indian market as an important component in their future production and marketing strategies. Discussion of the case can revolve around the following questions:

QUESTION 1: What are the attractions of India as a base for producing automobiles both for domestic sale, and for export to other nations? ANSWER 1: From 2004 to 2011, India’s exports of automobiles jumped from 50,000 to 450,000 annually. South Korean automaker Hyundai led the way exporting more than one third of its Indian production. Now, other companies including BMW, Nissan, Ford, and Toyota are following Hyundai’s lead. The companies are attracted by India’s low cost, highly productive labor force that has the ability to produce high quality vehicles. In addition, India has a large number of engineers who are able to “think outside of the box” and develop models for both the burgeoning Indian market as well as for export markets.

QUESTION 2: Both Hyundai and Nissan made their investments in the southern Indian city if Chennai. What is the advantage to be had by investing in the same region as rivals?

ANSWER 2: Nissan’s decision to invest in the same city as Hyundai was probably driven by the support structure that Hyundai’s investment helped to create. When Hyundai initially built its operations it had to start from scratch, training employees, establishing a supplier network, and so on. By investing in Chennai, Nissan will be able to take advantage of Hyundai’s efforts. Moreover, it is likely that engineers and suppliers will continue to be attracted to the region making it even stronger in the future. Some students may liken the process to that which occurred in Silicon Valley when suppliers, researchers, engineers, and so on helped to establish the region as a dominant force in the computer industry.

QUESTION 3: What are the drawbacks of basing manufacturing in a country such as India? What other locations might be attractive?

ANSWER 3: One of the major challenges facing companies in India is its inadequate infrastructure. Roads are poor and overcrowded making it difficult for companies to implement the just-in-time system that is common for most automobile manufacturers. In addition, local suppliers are still hard to find and those that are available may not offer the quality levels companies demand. Students may suggest that companies could avoid some of these problems by locating production where the infrastructure is better developed, however, they may also note that doing so could also mean higher costs.




QUESTION 4: If Hyundai, Nissan, their suppliers and other automobile companies continue to make investments in the Chennai region of India, how might this region evolve over time? What does this suggest about manufacturing location strategy?

ANSWER 4: It has been suggested that over time, India’s Chennai region could develop into a mini Detroit where most global auto companies have a presence and where the supplier network and other supporting industries are well-established. Most students should recognize the importance of country factors in the choice of production location and that these factors can change over time. Consequently, it is imperative that companies continually reassess their manufacturing strategy.

Teaching Tip: To extend this case, consider {http://www.businessweek.com/ap/2012-04-18/daimler-invests-850m-in-india-opens-new-factory}, {http://www.businessweek.com/news/2011-11-10/china-auto-sales-fall-cars-plunge-in-india-as-loan-costs-rise.html}, and {http://www.businessweek.com/ap/2012-10-10/industry-group-cuts-india-car-sales-forecast}.

Continuous Case Concept

Several of the world’s automakers are in the process of revamping how they build their cars. Toyota for example, is building a global supply chain in Thailand. The goal is to develop a global operating platform allowing the company to build cars and supply components entirely from outside Japan. Similarly, South Korea’s Hyundai is hoping to improve its cost structure by acquiring steel and parts suppliers. All of the Japanese and Korean companies are shifting production offshore to minimize their exposure to exchange rate fluctuations. Toyota for example, recently signed an agreement with Mazda for the production of cars destined for the U.S. market. Production will take place in Mazda’s factories in Mexico. Ford is following a new strategy in which the company has only a few models that it sells across multiple markets. The company is hoping that its new One Ford approach will generate significant scale economies and other cost savings. One model developed under this strategy, the Fiesta, was designed in Europe, is already on sale in China, and will be introduced in the United States in 2010. With its new strategy, Ford is hoping to cut design and production costs, and also the time it takes to get a car to market.

Ask students to consider Hyundai’s strategy. What advantages does it gain by acquiring steel and part suppliers? What are the risks involved in this strategy? How will this allow Hyundai to better manage its supply chain?

Next, consider the move by the Asian automakers to shift production offshore. Does this strategy make sense? What are the long term implications of this strategy? Discuss the benefits of Toyota’s move to build a global platform to build cars using components from outside Japan. What new issues does this strategy create for the company?

Finally, discuss the decision by the Japanese and Koreans to ramp up production in Eastern Europe. What are the advantages of Eastern European production as compared to production in Western Europe? Are there any disadvantages? Consider Ford’s world car approach. What are the advantages of this strategy? Are there any drawbacks?



http://www.businessweek.com/ap/2012-10-10/industry-group-cuts-india-car-sales-forecast

http://www.businessweek.com/news/2011-11-10/china-auto-sales-fall-cars-plunge-in-india-as-loan-costs-rise.html

http://www.businessweek.com/news/2011-11-10/china-auto-sales-fall-cars-plunge-in-india-as-loan-costs-rise.html

http://www.businessweek.com/ap/2012-04-18/daimler-invests-850m-in-india-opens-new-factory

http://www.businessweek.com/ap/2012-04-18/daimler-invests-850m-in-india-opens-new-factory


This exercise works well as an introduction to the material in this chapter, or as an introduction to individual segments within the chapter. For example, the first question ties in well with the discussion of the make-or-buy decision, and the last question works well with the material on where to locate foreign production.

globalEDGE Exercises

Use the globalEDGE Resource Desk {http://globalEDGE.msu.edu/ResourceDesk/} to complete the following exercises.

Exercise 1

The data can be accessed by searching the phrase "Chartbook of International Labor Comparisons" at http://globaledge.msu.edu/Reference-Desk. The resource is called "A Chartbook of International Labor Comparisons: United States, Europe, and Asia," and can also be located under the globalEDGE categories of "Global" and "Statistical Data Sources". Once on the website, click on the most recent report available. Section 2 features the Labor Market Indicators, while Section 3 includes the Competitiveness Indicators for Manufacturing.

Search Phrase: "Chartbook of International Labor Comparisons"Resource Name: A Chartbook of International Labor Comparisons: United States, Europe, and AsiaResource Link: http://globaledge.msu.edu/global-resources/resource/101globalEDGE Categories: "Global" and "Statistical Data Sources"

Exercise 2

The International Association of Outsourcing Professionals (IAOP) ranking can be located by searching for the term "100 global outsourcing" at http://globaledge.msu.edu/Reference-Desk. The resource is titled "The Global Outsourcing 100" and provides the information to answer the question posed.

Search Phrase: "100 global outsourcing"Resource Name: The Global Outsourcing 100Resource Link: http://globaledge.msu.edu/global-resources/resource/1063globalEDGE Categories: "Rankings" and "Company Level"

Additional Readings and Sources of Information

Supply Chain Management: The Next Big Thing?http://www.businessweek.com/business-schools/supply-chain-management-the-next-big-thing-09122011.html

Make vs. Buy Is Not the Question to Ask http://www.businessweek.com/articles/2012-05-14/make-vs-dot-buy-is-not-the-question-to-ask




http://www.businessweek.com/business-schools/supply-chain-management-the-next-big-thing-09122011.html

http://www.businessweek.com/business-schools/supply-chain-management-the-next-big-thing-09122011.html

http://globaledge.msu.edu/global-resources/resource/1063

http://globaledge.msu.edu/Reference-Desk

http://globaledge.msu.edu/global-resources/resource/101

http://globaledge.msu.edu/Reference-Desk

http://globalEDGE.msu.edu/ResourceDesk/%7D%20


No Company Follows Apple’s Extended China Factory Audits http://www.businessweek.com/technology/no-company-follows-apples-expanded-china-factory-audits-02272012.html

Insourcing and Outsourcing: the Right Mixhttp://www.businessweek.com/managing/content/feb2010/ca2010024_507452.htm

Jobs, Jobs, Jobshttp://www.businessweek.com/articles/2012-03-19/jobs-jobs-jobs

India: A Growing Link in The Global Supply Chainhttp://www.businessweek.com/globalbiz/content/apr2009/gb20090410_901489.htm

Indian Outsourcing Companies Look For New Marketshttp://www.businessweek.com/globalbiz/content/oct2009/gb20091012_021104.htm

Strike Halts Hyundai’s India Productionhttp://www.businessweek.com/ap/financialnews/D9G6QP9O0.htm

Make vs. Buy Is Not the Question to Askhttp://www.businessweek.com/articles/2012-05-14/make-vs-dot-buy-is-not-the-question-to-ask




http://www.businessweek.com/ap/financialnews/D9G6QP9O0.htm

http://www.businessweek.com/globalbiz/content/oct2009/gb20091012_021104.htm

http://www.businessweek.com/globalbiz/content/apr2009/gb20090410_901489.htm

http://www.businessweek.com/articles/2012-03-19/jobs-jobs-jobs

http://www.businessweek.com/managing/content/feb2010/ca2010024_507452.htm

http://www.businessweek.com/technology/no-company-follows-apples-expanded-china-factory-audits-02272012.html

http://www.businessweek.com/technology/no-company-follows-apples-expanded-china-factory-audits-02272012.html

Documents

SUPPLEMENT/ANCILLARY TITLE · Web viewGlobal Production, Outsourcing, and Logistics Chapter Outline OPENING CASE: Making the Amazon Kindle INTRODUCTION STRATEGY, PRODUCTION AND LOGISTICS