Chapter 7

MSc. Pham Thi Phuong

Email: phamthiphuong@vnu.edu.vn
Tel: +84 986 030 195

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Hill, Charles WL. Global business today, 7th Chapter
Edition, New York: McGraw-Hill Irwin, 2011. 14

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

2. Explain how country differences, production technology, and product

OBJECTIVES

features all affect the choice of where to locate production activities.

LEARNING

3. Discuss 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. Articulate what is required to efficiently coordinate a globally dispersed

production system

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CONTENTS
1. Strategy, Production & Logistics

2. Where to Produce?

3. The strategic role of Foreign Factories

4. Outsourcing Production: Make-or-Buy Decisions

5. Managing a Global Supply Chain

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 PART
01
Strategy, Production & Logistics

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THE VALUE CHAIN

VALUE

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 PRODUCTION
activities involved in
creating a product
STRATEGY
LOGISTICS
activities that control the
transmission of physical
materials through the
supply chain
Lower the costs of value creation
• disperse production to the most
efficient locations
• manage the global supply chain
efficiently to better match supply
and demand
Add value by better serving
customer needs
• eliminate defective products from
the supply chain and the
manufacturing process
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How Can Quality Be Improved?

Six Sigma - A direct descendant of ISO 9000 standards - European Union

Total Quality Management (TQM)
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How Can Quality Be Improved?

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 PART
02
Where to Produce?

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Where to
Produce?
Firms should locate production so that:
Country factors
• production and logistics can be locally
responsive Technological factors
• production and logistics can respond
quickly to shifts in customer demand Product factors

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Where to Produce?
Economic Political Cultural
conditions conditions conditions

Country factors

Benefits Risks Costs

à most conducive to the performance of production activity

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Country factors

FIRMS SHOULD CONSIDER

Ø the availability of skilled labor and supporting industries

Ø formal and informal trade barriers

Ø expectations about future exchange rate changes

Ø transportation costs

Ø regulations affecting FDI

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Where to Produce?
Technological factors

Fixed costs Minimum efficient scale

Fixed costs setting up a production the level of output at which most plant-level
plant scale economies are exhausted

Ø High à produce in a single Ø High à centralized production in a single

location or a few locations location or a limited number of locations

Ø Low à multiple production Ø Low à respond to local market demands

plants and hedge against currency risk by
operating in multiple locations

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A typical unit-cost curve

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Where to Produce?
Technological factors

Flexibility of the technology

Ø Flexible manufacturing technology or lean production

• reduces set up times for complex equipment

• increases the utilization of individual machines

• improves quality control

Ø Flexible manufacturing allows firms to produce a wide variety of end

products at a relatively low unit cost

• Mass customization

• Flexible machine cells

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Where to Produce?Technological factors

Centralized production Multiple locations

• Fixed costs are substantial • Both fixed costs and the

minimum efficient scale of
• The minimum efficient scale production are relatively low
of production is high
• Appropriate flexible
• Flexible manufacturing manufacturing technologies
technologies are available are not available

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Where to Produce?
Product factors
The product's value-to-
weight ratio
Ø High à produce in a single
location and export to other
parts of the world
Ø Low à greater pressure to
manufacture the product in
multiple locations across the
world
Whether the product
serves universal needs
Ø When products serve universal
needs, the need for local
responsiveness falls, and
concentrating manufacturing in
a central location makes sense
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Location Strategy and Production

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 PART
03
The strategic role of Foreign Factories

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Case study: Hewlett-Packard in Singapore

How does the strategic role of

Singapore HP plants to the
HP’s global network change
over the time?

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22
The strategic role of Foreign Factories

v The strategic role of foreign factories and the strategic advantage of a

particular location can change over time

Ø Factories established to take advantage of low cost labour can evolve

into facilities with advanced design capabilities

v Improvement in a facility comes from

1. Pressure to lower costs or respond to local markets

2. An increase in the availability of advanced factors of production

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23
The strategic role of Foreign Factories

v Many companies now see foreign factories as globally dispersed centers of

excellence

Ø supports the development of a transnational strategy

Ø global learning - valuable knowledge can be found in foreign subsidiaries

• implies that firms are less likely to switch production to new locations
simply because some underlying variable like wage rates has changed

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24
 PART
04
Outsourcing Production: Make-or-Buy Decisions

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 Make-or-Buy
Decisions
Make-or-buy decisions are important to firms'
manufacturing strategies
Should a firm make or buy
• Service firms also face make-or-buy decisions
the component parts to go
• Decisions involving international markets are
into its final product?
more complex than those involving domestic
markets

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26
 Make
Vertical integration: making
component parts in-house
• Lower costs: if a firm is more efficient
at that production activity than any
other enterprise
• Facilitate investments in highly
specialized assets
• Protect proprietary product
technology
• Improve the scheduling of adjacent
processes
Buy
• Greater strategic flexibility
• Drive down the firm's cost structure
ü avoids challenges of coordination
and control of additional subunits
ü avoids the lack of incentive
associated with internal suppliers
ü avoids the difficulties with setting
appropriate transfer prices
• Help the firm capture orders from
international customers
27
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 Do Strategic Alliances With Suppliers
Make Sense?

v Sometimes, firms can capture the benefits of vertical

integration without the associated organizational problems by
forming long-term strategic alliances with key suppliers

v However, these commitments may actually limit strategic

flexibility

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28
 PART
05
Managing a Global Supply Chain

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Managing a Global Supply Chain
v 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

v The goal is to
⬥ manage a global supply chain at the lowest possible cost and in a way
that best serves customer needs

⬥ establish a competitive advantage through superior customer service

Managing a Global Supply Chain
v Just-in-time (JIT) systems economize on inventory holding costs by
having materials arrive at a manufacturing plant just in time to enter
the production process
v JIT systems
⬥ generate major cost savings from reduced warehousing and inventory holding
costs
⬥ can help the firm spot defective parts and take them out of the manufacturing
process to boost product quality

v But, a JIT system leaves the firm with no buffer stock of inventory to
meet unexpected demand or supply changes
What Is The Role Of Information Technology And The Internet?

v Web-based information systems play a crucial role in materials

management
⬥ allow firms to optimize production scheduling according to when components are
expected to arrive

v Electronic Data Interchange (EDI)

⬥ facilitates the tracking of inputs

⬥ allows the firm to optimize its production schedule

⬥ lets the firm and its suppliers communicate in real time
⬥ eliminates the flow of paperwork between the firm and its suppliers
 REVIEW
QUESTION

Your Company Name 33

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 Review Question

What allows firms to increase efficiency by

improving capacity utilization and reducing
work-in-progress?

a) mass customization
b) Six Sigma technology
c) ISO 9000
d) flexible machine cells

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 Review Question

Firms should produce in multiple locations when

a) fixed costs are low
b) fixed costs are substantial
c) the minimum efficient scale of production is high
d) flexible manufacturing technologies are available

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 Review Question

All of the following are key factors that influence the

decision of where to produce except

a) country factors
b) competitor factors
c) technological factors
d) product factors

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 Review Question

When _______, firms will favor decentralized production.

a) there are substantial differences in political economy

b) fixed costs are high
c) the product’s value-to-weight ratio is high
d) exchange rates are volatile

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 Review Question

Concentrated production makes sense when

a) minimum efficient scale is high

b) location externalities are not important
c) the product does not serve universal needs
d) there are few trade barriers

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 Review Question

Which of the following is not an advantage of

buying from independent suppliers?

a) it gives the firm greater flexibility

b) it helps drive down the firm's cost structure
c) it protects proprietary property
d) it helps the firm to capture orders from international
customers
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