International Business

Chapter Seventeen

Global Manufacturing and Supply Chain

Management

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Chapter Objectives

• To describe different dimensions of global manufacturing strategy

• To examine the elements of global supply chain manage-ment

• To show how quality affects the global supply chain• To illustrate how supplier networks function• To explain how inventory management is a key

dimen-sion of the global supply chain• To present different alternatives for transporting

prod-ucts along the supply chain from suppliers to customers

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Introduction

Supply chain management: the coordination of materials, information, and funds from the initial raw material supplier to the ultimate customer

Logistics (aka materials management): that part of the supply chain process responsible for planning, implementing, and controlling the efficient and effective flow and storage of inputs, goods, and related information from the point of origin to the point of consumption in order to meet customers’ requirementsThe supply chain is quite broad; the greater the geographic spread of

the firm, the more difficult it is to manage the supply chain effectively.

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Fig. 17.4: Global Manufacturing and Supply Chain Management in

International Business

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Global Manufacturing Strategies• Global supply chain: links the suppliers’ suppliers

with the customers’ customers, accounting for every step of the process between the raw material and the final consumer of the good or service

• The success of a global manufacturing strategy depends upon:– compatibility– configuration– coordination– control

Suppliers can be part of a vertically integrated firm’s own organizational structure, or suppliers can be independent, external

organizations.

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Fig. 17.5: The Global Supply Chain

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Manufacturing Compatibility

Compatibility: in the context of manufacturing strat-egy, the degree of consistency between a firm’s foreign direct investment decisions and its compe-titive strategy

Offshore manufacturing: manufacturing activities that occur within facilities of a firm that lie beyond the borders of its home country, i.e., foreign direct investment made specifically for the purpose of serving a firm’s domestic market

Maquilaora: a type of operation originally developed between the United States and Mexico in which components are shipped duty-free to the lower-labor-cost country, assembled, and then re-exported to the originating country

[continued]

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• Cost-minimization and the drive for globalization force MNEs to pursue economies of scale in manufacturing, often by producing at low labor-cost sites.

• Key decision variables include: – efficiency/cost: manufacturing cost reductions– dependability: the degree of trust in a company’s

products, delivery service, and price guarantees – quality: performance reliability, level of service, speed

of delivery, maintenance provisions – flexibility: the ability to make different models and

kinds of products and to adjust the volume of output– innovation: the ability to develop and maintain a

techno-logical edge

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Manufacturing Configuration

• The three basic configurations that MNEs consider en route to developing their global manufacturing strategies are: – centralized manufacturing in a single country

[a global export approach]– regionalized manufacturing in specific regions

served [a regionalized marketing and manufacturing approach]

– local manufacturing in each country market served [a multidomestic marketing and manufacturing approach]

Rationalization represents the specialization of production by product or process in different parts of the world in order to take advantage of varying costs of labor, capital, and raw

materials.

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Manufacturing Coordination and Control

Coordination: the linking and integrating of participants and activities throughout the (global) supply chain into a unified system

Control: embraces systems such as organiza-tional structure and performance measurement that are designed to help ensure that strategies are implemented, monitored, and revised, as appropriate • also, the metrics used to measure performance

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Global Supply Chain StrategyA comprehensive (global) supply chain strategy

should include the following elements:• customer service requirements • business processes• plant and distribution center • information systems network design • organizational design

and• inventory management training requirements• outsourcing and third-party • performance goals

logistics relationships • performance metrics• key customer and supplier relationships

Global supply chain management includes and integrates participants and activities that lie both within and beyond the firm in the quest

to improve customer satisfaction and enhance profitability.

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Information Technology and Global Supply Chain ManagementElectronic data interchange (EDI): the electronic

movement of money and information via computers and telecommunications equipment in a way that effectively links suppliers, customers, and third-party intermediaries and ultimately enhances customer value

Enterprise resource planning (ERP): the use of software to link information flows from different parts of a business and from different parts of the world

E-commerce: the use of the Internet to link suppliers with firms and firms with customers

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• The extranet: the use of the Internet to link an organization with external constituencies

• Private Technology Exchange (PTX): an online collaboration model that brings manufacturers, distributors, resellers, and customers together in order to execute trade transactions and to share information regarding demand, production, availability, etc.

While many networks can be managed via the Internet, others (especially those in developing countries) cannot

because of the lack of available, leading-edge technology.

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Quality

Quality: conformance to specifications, value en-hancement, fitness for use, after-sales support, and psychological impressions (image)

Acceptable quality level (AQL): a premise that allows for a tolerable (negotiable) level of defects that can be corrected through repair and service warranties

Zero defects: an idea perfected by Japanese manu-facturers who refuse to tolerate defects of any kind

Kaizen: the Japanese process of continuous improve-ment, which requires identifying problems and enlisting employees at all levels of the organization to help eliminate them

[continued]

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Total Quality Management (TQM): a process whose goal is to eliminate all defects

• Total quality management (TQM) stresses three basic principles as it focuses on eliminating all defects:– customer satisfaction– employee involvement– continuous improvements at every level in the

organizationSix Sigma: a highly focused quality-control system

designed to scrutinize a firm’s entire production system in order to eliminate defects, slash product cycle time, and cut costs across the board

Executives who have adopted the zero-defects philosophy claim that as defects decline, long-run production costs also

decline.

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Quality Standards

• The three levels of quality standards include:– the general level

• the Deming Award [for demonstrated excellence in quality]

• the Malcolm Baldrige National Quality Award [for demon-strated quality strategies and achievements]

• ISO 9000 certification [for the documentation of worker performance of every function that affects quality and the installation of mechanisms to ensure that documented processes are followed]

– the industry-specific level [industry-wide standards designed for suppliers to follow]

– the company level [standards designed by individual firms for their suppliers to follow]

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Quality Standards: ISO

International Organization for Standardization (ISO): founded in 1947 in Geneva, Switzerland, to facilitate the international coordination and unification of industrial standards

• ISO 9000: a global set of quality standards intended to pro-mote quality at every level within an organization

• ISO 9000:2000: a set of five universal standards designed to harmonize technical standards within the EU that is now accepted worldwide

• ISO 14000: concerned with environmental management and what firms do to improve their environmental performance

From the beginning, the ISO has partnered with the Int’l Electrotechnical Commission, the originator of global technical

standards, and also collaborates with the Int’l Telecommunications Union and the WTO.

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Supplier Networks

Sourcing: the process of securing inputs (raw mate-rials, components, and supplies) either internally or externally for a firm’s productive processes

Outsourcing: the sourcing of inputs from external suppliers, i.e., the buy decision

• The three major configurations that have emerged for the global sourcing function are:– vertical integration– outsourcing through industrial clusters, including the

Japanese keiretsu – independent outsourcing

Global sourcing represents the first step in the global materials management process.

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Fig. 17.7: Global Sourcing and Production Strategy

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Global Sourcing Strategies

Firms pursue global sourcing strategies in order to:• reduce costs• improve quality• increase exposure to worldwide technology• improve the delivery-of-supplies (logistics) process• strengthen the reliability of supply by supplementing

domestic supplies with foreign suppliers• gain access to materials that are only available abroad• establish a presence in a foreign market• satisfy offset (countertrade) requirements• react to competitors’ sourcing practices

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Fig. 17.8: The Global Component Network for Ford’s European Manufacturing of the

Escort

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The Make or Buy Decision

Make or buy decision: determining which productive activities should be performed internally (make) and which ones should be subcontracted to independent companies (buy)

• The relationships that a firm establishes with its external suppliers are largely based upon: – its competitive strategy– the nature of its products– the competitive environment– the level of experience of its suppliers– the capabilities of its suppliers– the degree of trust the firm places in its suppliers

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The Purchasing Function

The global progression of the purchasing function includes the following four phases:

• domestic purchasing only• foreign purchasing based on need• foreign purchasing as a part of the

procurement strategy• *integration of the global procurement

strategy[*At this point, the firm may once again be concerned

with the centralization vs. decentralization dilemma.][continued]

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Global sourcing options include: – assigning international purchasing duties to

domestic purchasing agents – using foreign subsidiaries or business agents– establishing international purchasing offices– assigning the responsibility for global sourcing

to a specific business unit or units– integrating and coordinating sourcing on a

worldwide basis

[E-sourcing, i.e., the use of the Internet in the purchasing process, is growing rapidly in popularity.]

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Fig. 17.9: Assessing the Organization’s Global Sourcing

Needs and Strategy

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Inventory Management

Inventory management: the planning and control of the levels, flows, and storage of inputs, unfinished, and finished goods

Just-in time manufacturing (JIT): a system that reduces inventory costs by having inputs delivered just as they are needed for the production process

[typically implies sole sourcing for specific inputs]

Foreign trade zones (FTZs): government-designated areas in which goods can be stored, inspected, and/or manufactured without being subject to formal customs procedures until they actually enter a country

The distance, time, and uncertainty associated with foreign environments will surely complicate the inventory management

process.

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Transportation and Logistics

• The international transportation of goods is extremely complicated with respect to:– documentation– choice of carrier(s)– the decision to outsource or insource services

• Logistics management requires the ability to gather, track, and process large quantities of information.

• To be effective, logistics companies must implement key technologies, including communications systems, satellite tracking systems, bar-coding applications, and automated materials handling systems.

Third-party intermediaries may provide a host of logistics-related services.

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Implications/Conclusions

• Important objectives shared by the global manufacturing and supply chain functions are to simultaneously lower costs and increase quality by eliminating defects from both processes.

• A firms should focus on making those products and performing those activities that are critical to its operations and in which it has a distinct advantage.

• Cost-minimization strategies and the drive for global efficiencies often force MNEs to move offshore to lower-cost manufacturing areas, especially in Asia and East Europe.

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• Firms will go through a variety of purchasing ap-proaches and configurations as they become more committed to global sourcing.

• When a firm sources inputs from suppliers around the world, distance, time, and the uncertainty of the international political and economic environments can make it difficult to manage inventory flows accurately.

• Firms are turning to the capabilities of the Internet in large numbers in order to efficiently and effec-tively link suppliers with manufacturers and manu-facturers with end-use customers.