Global Manufacturing and Material Management

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Global Manufacturing &Global Manufacturing &Materials managementMaterials management

Global Supply Chain Management & Global Supply Chain Management & Outsourced ManufacturingOutsourced Manufacturing

Chapter 3

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Learning ObjectivesLearning ObjectivesAfter reading this chapter ,you will understand

following:1. A Firm as value chain2. The role of strategy3. Profiting from Globalization4. Strategic Choice5. Strategic Alliance6. Manufacturing & Materials management in global

business .7. Locating Manufacturing facilities8. Make or buy decisions.9. Coordinating Global Manufacturing system

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The Value Chain

To analyze the specific activities through which firms can create a competitive advantage, it is useful to model the firm as a chain of value-creating activities.

Michael Porter identified a set of interrelated generic activities common to a wide range of firms. The resulting model is known as the value chainand is depicted below:

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The Value ChainThe Value Chain

InboundLogistics

> Operations >OutboundLogistics

>Marketing& Sales

> Service

Primary Value Chain ActivitiesPrimary Value Chain Activities

The goal of these activities is to create value that exceeds the cost of providing the product or service, thus generating a profit margin.

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The Value Chain

Inbound logistics include the receiving, warehousing, and inventory control of input materials.

Operations are the value-creating activities that transform the inputs into the final product.

Outbound logistics are the activities required to get the finished product to the customer, including warehousing, order fulfillment, etc.

Marketing & Sales are those activities associated with getting buyers to purchase the product, including channel selection, advertising, pricing, etc.

Service activities are those that maintain and enhance the product's value including customer support, repair services, etc.

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The Value Chain

Any or all of these primary activities may be vital in developing a competitive advantage. For example, logistics activities are critical for a provider of distribution services,and service activities may be the key focus for a firm offering on-site maintenance contracts for office equipment.

These five categories are generic and portrayed here in a general manner. Each generic activity includes specific activities that vary by industry.

Support ActivitiesThe primary value chain activities described above are

facilitated by support activities. Porter identified four generic categories of support activities, the details of which are industry-specific.

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The Value ChainProcurement - the function of purchasing the raw

materials and other inputs used in the value-creating activities.

Technology Development - includes research and development, process automation, and other technology development used to support the value-chain activities.

Human Resource Management - the activities associated with recruiting, development, and compensation of employees.

Firm Infrastructure - includes activities such as finance, legal, quality management, etc.

Support activities often are viewed as "overhead", but some firms successfully have used them to develop a competitive advantage, for example, to develop a cost advantage through innovative management of information systems.

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The Value Chain

Value Chain Analysis

In order to better understand the activities leading to a competitive advantage, one can begin with the generic value chain and then identify the relevant firm-specific activities. Process flows can be mapped, and these flows used to isolate the individual value-creating activities.

Once the discrete activities are defined, linkages between activities should be identified. A linkage exists if the performance or cost of one activity affects that of another. Competitive advantage may be obtained by optimizing and coordinating linked activities.

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The Value Chain

The value chain also is useful in outsourcing decisions. Understanding the linkages between activities can lead to more optimal make-or-buy decisions that can result in either a cost advantage or a differentiation advantage.

The Value SystemThe firm's value chain links to the value chains of

upstream suppliers and downstream buyers. The result is a larger stream of activities known as the value system. The development of a competitive advantage depends not only on the firm-specific value chain, but also on the value system of which the firm is a part.

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The Value Chain

The value chain also is useful in outsourcing decisions. Understanding the linkages between activities can lead to more optimal make-or-buy decisions that can result in either a cost advantage or a differentiation advantage.

The Value SystemThe firm's value chain links to the value chains of

upstream suppliers and downstream buyers. The result is a larger stream of activities known as the value system. The development of a competitive advantage depends not only on the firm-specific value chain, but also on the value system of which the firm is a part.

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The role of Strategy

Globalization involves decision making on following lines•Deciding whether to go global•Deciding which market to enter•Deciding how to enter market•Learning to handle difference•Adjusting the management process•Selecting a managerial approach•Deciding organization structure

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The role of StrategyDeciding which market to enter:This depend on 1.Volume of foreign sales2.Number of countries to market3.The types of countries to enterMost companies start small when they go abroad.Some prefer to stay small ,viewing foreign sales as small part of there business.Other companies have bigger plan,seeing foreign sales as equal or even more important than local business

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The type of countries to enter depends on the type of product,geographical factors,income & population,Political climate & other related factors.The goal is to determine potential of each country.It goes without saying that the countries which assures long run return on investment must be selected for entering the market.International business generally make political risk assessment before entering into any foreign market.

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Indicators of market potential• Demographic Characteristics1. Size of population & rate of growth2. Degree of urbanization3. Population density4. Age structure• Geographic Characteristics1. Physical size of the country2. Topological Characteristics3.

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Indicators of market potential• Economic factors1. GNP per capita2. Income distribution3. Rate of growth of GNP4. Rate of investment to GNP• Technological factors1. Level of technology skills2. Existing production technology3. Education levels4. Existing consumption technology Cont..

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Indicators of market potential• Economic factors1. GNP per capita2. Income distribution3. Rate of growth of GNP4. Rate of investment to GNP• Technological factors1. Level of technology skills2. Existing production technology3. Education levels4.

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Indicators of market potential• Socio –cultural factors1. Dominant values2. Life style patterns3. Ethic groups4. Linguistics fragmentation• National goals & plans1. Industry priorities2. Infrastructure investment plans

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Strategic Choice

There are four basic strategies are used by firms to enter and compete in the international Environment.

They are:1. International Strategy2. Multi domestic Strategy3. Global Strategy4. Transnational StrategyThe appropriateness of each strategy varies with the

extent of pressures for cost reduction and total responsiveness

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Strategic Choice

Global Strategy

Multi domestic Strategy

International Strategy

Transnational Strategy

Low

Low

High

High

Pressure for local responsiveness

Cos

t pre

ssur

es

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Types of Strategic Actions

Needs of the EnvironmentS

trat

egic

Foc

us

What business to do

Capability Development

Managing Efficiency

How to compete in a given

market

Dynamic

External

Internal

Static

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Cooperative Strategy

Cooperative strategy is a strategy in which firmsCooperative strategy is a strategy in which firmswork togetherto achieve a shared objective

Cooperating with other firms is a strategy thatCooperating with other firms is a strategy thatcreates value for a customerexceeds the cost of constructing customer value in other waysestablishes a favorable position relative to competition

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Strategic Alliance

A strategic alliance is a cooperative strategy in A strategic alliance is a cooperative strategy in whichwhich

firms combine some of their resources and capabilitiesto create a competitive advantage

A strategic alliance involvesA strategic alliance involvesexchange and sharing of resources and capabilitiesco-development or distribution of goods or services

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CombinedCombinedResourcesResources

CapabilitiesCapabilitiesCore CompetenciesCore Competencies

ResourcesResourcesCapabilitiesCapabilities

Core CompetenciesCore Competencies

ResourcesResourcesCapabilitiesCapabilities

Core CompetenciesCore Competencies

Strategic Alliance

Firm AFirm A Firm BFirm B

Mutual interests in designing, manufacturing,Mutual interests in designing, manufacturing,or distributing goods or servicesor distributing goods or services

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Types of Cooperative Strategies

Joint venture: two or more firms create an : two or more firms create an independent company by combining parts of their independent company by combining parts of their assetsassetsEquity strategic alliance: partners who own : partners who own different percentages of equity in a new venturedifferent percentages of equity in a new ventureNonequity strategic alliances: contractual : contractual agreements given to a company to supply, agreements given to a company to supply, produce, or distribute a firmproduce, or distribute a firm’’s goods or services s goods or services without equity sharingwithout equity sharing

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Market Reason

Slow Cycle • Gain access to a restricted market• Establish a franchise in a new market• Maintain market stability (e.g., establishing

standards)

Reasons for Strategic Alliances by Market Type

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MarketMarket ReasonReason

Fast CycleFast Cycle •• Speed up development of new goods or Speed up development of new goods or serviceservice

•• Speed up new market entrySpeed up new market entry•• Maintain market leadershipMaintain market leadership•• Form an industry technology standardForm an industry technology standard•• Share risky R&D expensesShare risky R&D expenses•• Overcome uncertaintyOvercome uncertainty


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Market Reason

Standard Cycle • Gain market power (reduce industry overcapacity)

• Gain access to complementary resources

• Establish economies of scale• Overcome trade barriers• Meet competitive challenges from other

competitors• Pool resources for very large capital

projects• Learn new business techniques


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Approaches for Managing Cooperative Strategies

cost minimizationcost minimizationformal contracts specify how the cooperative strategy is to be monitored and how partner behavior is to be controlled

opportunity maximizationopportunity maximizationmaximize partnership’s value-creation opportunitiespartners take advantage of unexpected opportunities to learn from each other and to explore additional marketplace possibilitiesfewer formal, limiting, contracts

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Manufacturing & Materials Management Manufacturing & Materials Management in global businessin global business

Production is the process by which raw materials and other inputs are converted into finished goods.Manufacturing refers to the process of producing tangible goods only.Nature of production can be better understood if we view the manufacturing function fro three angles•Production as a System•Production as an organizational function•Decision making in production

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A system is understood as a whole which can not be taken apart.There systems are classified into three types.•Production System•Conversion subsystem•Control SubsystemProduction system receives inputs in the form of

1) Capital.2) Utilities.3) Personnel.4)Information Cont..

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Inputs of a Production System•External

Legal, Economic, Social, Technological

•Market Competition, Customer Desires, Product Info.

•Primary ResourcesMaterials, Personnel, Capital, Utilities

Cont..

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Conversion Subsystem

•Physical (Manufacturing) •Vocational Services (Transportation) •Exchange Services (Retailing) •Storage Services (Warehousing) •Other Private Services (Insurance) •Government Services (Federal)

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1. Production System:A system whose function is to convert a set of

inputs into a set of desired outputs

2. Conversion Sub-System:A Sub-System of larger production system where

inputs are converted into outputs3.Control Subsystem:A subsystem of a larger production system where

a portion of the output is monitored for feedback signals

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Production System ModelProduction System Model

InputsInputs ConversionSubsystemConversionSubsystem

OutputsOutputs

Environment

Market

PrimaryResources

Physical Lavational service

Storage serviceBusiness service

Government service

Goods orservices

Control Subsystem

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Where to Manufacture?Where to Manufacture?Country FactorsTechnology FactorsCustomization and Cost EfficiencyProduct FactorsLocating Manufacturing FacilitiesMaking Global Sourcing DecisionLogistics Management in MNCsGlobal Supply Chain ManagementTransfer of Knowledge from Home Country to the Host CountryParent Subsidiary RelationshipNew Product DevelopmentUnleashing Innovation in Subsidiaries.

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Locating Manufacturing Locating Manufacturing FacilitiesFacilities

Reducing costs and improving quality are the two inter dependent objectives of operations management. R&D initiatives help derive competitive advantage a they make companies better equipped to respond faster to changes in market demands.

Three factors determine location of a factory: country, technology and product. Country factors include political stability, the FDI policy and the lobbying power of domestic industrialists and economic stability which is determined by factors like exchange rate. Land and labor costs of a country are crucial in deciding the location of manufacturing facility.

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Technological developments also impact vocational decisions. The higher the level of investment required, the stronger the case for centralized manufacturing. Moreover, economies of scale might require companies to concentrate manufacturing in a few locations. But some companies like Levi's have proved that customization and cost efficiency can go together.

Companies are often confronted with 'make or buy' questions. Global sourcing has been put to use effectively by many MNC's. The major advantages of sourcing components are that financial and operational risks can be reduced and fixed costs of investments in people, plant and machinery can be avoided.

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The risk of dependence on the supplier can be mitigated either by vertical integration or by holding equity in the supplier's firms.

There are three types of integration. Backward integration is said to occur when the firm produces its own raw material and component parts. In forward integration, a raw material manufacturer may produce finished goods.

Horizontal integration occurs when a firm acquires its competitor to expand capacity or to gain market share. Global Logistics and Supply Chain Management (SCM) are emerging as strategic tools to help companies focus on core competencies and achieve cost efficiency.

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Logistics management involves managing the flow of goods from the supplier to manufacturing facilities across the world and then distributing the finished goods to the consumer.

SCM is a wider concept that integrates the activity of demand forecasting and inventory management with other functions of logistics management. Forecasting of demand is often difficult because of the bull-whip effect which is the distortion of demand information due to certain reasons.

Companies have recognized the importance of the R&D function. However, most companies still do not empower the subsidiaries to innovate. While companies like Nestle justify the centralization of R&D,

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‘‘Make or BuyMake or Buy’’ decisiondecision

The ‘make or buy’ decision is one of the most critical supply chain, strategic decisions. The supply management organization has a key role in this decision.

The decision is important for a number of reasons. It determines and defines an organization’s core competencies. It determines what level of investment the business should make internally as well as with suppliers.

The ‘make or buy’ decision involves financial and capability issues as companies ask: ‘Do we have the expertise to manufacture a quality product and deliver it at a competitive cost?’

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Since some industrial tasks cannot be effectively accomplished in- house because of lack of equipment, trained personnel, or material, the answer to the question is often ‘no.’ So, non-core products and services are contracted to outside suppliers.

High Tech CompaniesLet us look at a high-tech company’s ‘make or buy’

decision-making. Following the rule, ‘can’t be all things to all customers,’ high tech companies focus their internal resources on some core technology while depending on strategically outsourced innovations to complement their efforts.]

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In general, high tech companies such as Intel and Microsoft competitively position themselves based on their core knowledge competencies so that internal development (‘make’ decision) provides the most competitive advantage. In areas away from chip design and software development, they may outsource, license, or purchase required competencies.

‘Make or Buy' Due Diligence If a company sources a product or service, then it can

work with existing suppliers or find new suppliers. As much as possible, companies don’t want surprises or variability. They want consistency.

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They want to work with known people, known relationships, and known processes. It’s pretty simple; life and business work better when we work with known. Again, think variability. We don’t want unknown variability, unknown risk, unknown people, unknown processes, or unknown suppliers.

The solution is to encourage supply-partnering relationships. Customers and suppliers must trust each other to share key process information, technologies, cost/delivery/quality targets, and even investments. This frankly isn’t easy. It requires trust that a nondisclosure agreement can’t enforce.

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The ‘make’ decision also isn’t easy for a supplier. The supplier may even pass on the opportunity to provide the product or service.

The products may not be worthwhile to manufacture. The products may be low volume or ‘one of a kind’ that may require new production equipment or provide insufficient margins.

Is the customer willing to pay for the added supplier investment? Many questions - few easy answers. The ‘make or buy’ decision usually comes down to optimizing many factors

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Alternate Sourcing OptionsAlso, the ‘make or buy’ decision involves a ‘risk/reward’

or ‘cost/benefit’ analysis. For example, low value products are usually commodity and non-strategic items.

As well, there are multiple suppliers who can produce this commodity so the risk of losing a commodity source or finding competitive bidders is relatively low.

If the supplier provides a high value, innovative product or process technology, the company may partner with a supplier or bring the product in-house.

What does a company do if a new or existent supplier can’t produce the product to the customer’s requirements?

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The customer has several options. It can find a new supplier or it can work with an existing supplier. The customer may even improve the supplier’s capabilities. How? The customer can provide technical assistance, machines, incentives, or even pay the cost of improving the supplier’s capabilities.

And, there is the ‘risk-reward’ decision of switching suppliers. This isn’t negligible. The risk or cost of an unknown supplier may be too high. When should a company change a supplier? The change should occur when the cost, pain or risk of keeping the supplier exceed the cost of finding a new supplier.

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MakeMake--oror--Buy DecisionsBuy Decisions

1.1. Maintain core competenceMaintain core competence2.2. Lower production costLower production cost3.3. Unsuitable suppliersUnsuitable suppliers4.4. Assure adequate supply (quantity or delivery)Assure adequate supply (quantity or delivery)5.5. Utilize surplus labor or facilitiesUtilize surplus labor or facilities6.6. Obtain desired qualityObtain desired quality7.7. Remove supplier collusionRemove supplier collusion8.8. Obtain unique item that would entail a prohibitive Obtain unique item that would entail a prohibitive

commitment for a suppliercommitment for a supplier9.9. Protect personnel from a layoffProtect personnel from a layoff10.10. Protect proprietary design or qualityProtect proprietary design or quality11.11. Increase or maintain size of companyIncrease or maintain size of company

Reasons for MakingReasons for Making

Table 11.4Table 11.4

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MakeMake--oror--Buy DecisionsBuy Decisions

1.1. Frees management to deal with its primary Frees management to deal with its primary businessbusiness

2.2. Lower acquisition costLower acquisition cost3.3. Preserve supplier commitmentPreserve supplier commitment4.4. Obtain technical or management abilityObtain technical or management ability5.5. Inadequate capacityInadequate capacity6.6. Reduce inventory costsReduce inventory costs7.7. Ensure alternative sourcesEnsure alternative sources8.8. Inadequate managerial or technical resourcesInadequate managerial or technical resources9.9. ReciprocityReciprocity10.10. Item is protected by a patent or trade secretItem is protected by a patent or trade secret

Reasons for BuyingReasons for Buying

Table 11.4Table 11.4

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Just in time Inventory systemJust in time Inventory system

Just In Time (JIT) is an inventory strategy implemented to improve the return on investment of a business by reducing in-process inventory and its associated costs. The process is driven by a series of signals, or Kanban (看板Kanban?), that tell production processes when to make the next part. Kanban are usually 'tickets' but can be simple visual signals, such as the presence or absence of a part on a shelf. When implemented correctly, JIT can lead to dramatic improvements in a manufacturing organization's return on investment, quality, and efficiency.

New stock is ordered when stock drops to the re-order level. This saves warehouse space and costs. However, one drawback of the JIT system is that the re-order level is determined by historical demand.

http://en.wikipedia.org/wiki/Help:Japanese

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Just in time Inventory systemJust in time Inventory system

If demand rises above the historical average demand, the firm will deplete inventory faster than usual and cause customer service issues. To meet a 95% service rate a firm must carry about 3 standard deviations of demand in safety stock. Forecasted shifts in demand should be planned for around the Kanban until trends can be established to reset the appropriate Kanban level. Others[1] have suggested that recycling Kanban faster can also help flex the system by as much as 10-30%. In recent years manufacturers have touted a trailing 13 week average as a better predictor than most forecasters could provide.]

A related term is Kaizen which is an approach to productivity improvement literally meaning "continuous improvement" of process.

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