CHAPTER # 16

MANAGEMENT OF
IINTERNATIONAL
BUSINESS
OPERATION
Faisal Shehzad
M.Com / M.Phill (PU)

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MANAGEMENT OF
INTERNATIONAL OPERATION
 When a firm possesses any specific technology and
decides to begin operation globally then it needs to
follow a sound operation strategy in order to gain
competitive advantage.
 This operation involve many decisions:
 Location for Production
 Management of Inventory
 Sourcing of Inputs
 International Logistics

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MANAGEMENT OF
INTERNATIONAL OPERATION
 The purpose of these decisions are as follow:
 Minimize cost of Production
 Ensure production flexibility
 Market responsiveness

 If a firm provides services then strategy would be

slightly different.

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LOCATION FOR PRODUCTION
 OPTIONS FOR LOCATION :
 The Traditionally theory suggests that:
 If the raw material carries heavy weight but loses its
weight during the manufacturing process then
manufacturing unit should be located near the source of
inputs.
 Form view point of cost and transportation, if input does
not matter very much then manufacturing unit should be
located near the market.

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LOCATION FOR PRODUCTION
DICKEN (1998) describes these option as:
1:Centralize the manufacturing operations at the parent unit
or any of the subsidiaries.
2: Decentralize of manufacturing operations at different
subsidiaries and distribution of the product in the
respective areas.
3: Location of the different parts of the manufacturing
process at different subsidiaries under a vertical integrated
framework.

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LOCATION FOR PRODUCTION
 FACTORS BEHIND SELECTION OF LOCATION:
 DUNNING (1980) describes five factors for selection.
1: Size and growth of market and the degree of competition in the
market
2: Availability of raw material and labor force of required skill
3: State of logistics and the degree of currency fluctuation
4: Political and legal environment
5: Cultural and linguistic environment
Not a single factor that determines the location decision rather it is a
combination of all factors that really works.

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LOCATION FOR PRODUCTION
 In fact, the purpose of considering the these factors is to:
 Minimize all type of cost in business
 Maintaining the quality
 Have flexibility in designing the product and in the volume
of production
SELECTING A LOCATION ( A Third Step) :
The most suitable location would be the one that has the
highest ratio of favorable points / unfavorable points.

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MANAGEMENT OF INVENTORY
 In an International firm, as compared to a domestic firm,
its management is complex in view of:
 International sourcing of inventory
 maintaining of inventory simultaneously in different
countries
 Longer transit time
 Lengthy customs procedures
 Political risk as well as exchange rate risk.
But there are some deviations from simple norm of inventory
management of a domestic firm.

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MANAGEMENT OF INVENTORY
 Deviation from the Economic Order Quantity (EOQ):
 The EOQ is the optimal size of inventory that a firm orders
at a particular point of time.
 Domestically the forms continues to follow EOQ.
 In internationally, firms normally possess a bigger stock
than the EOQ , this situation called STOCKPILING.
 If the probability of interruption in supply is very high, the
firm may go for stockpiling even it is not justified on the
grounds of higher cost.

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MANAGEMENT OF INVENTORY
 Shifting of Re-order Point:
 The general principal is that the next lot of inventory is to be
ordered when the existing stock comes down to the sum of safety
stock level and the lead time.
 Lead time means the time between placing an order and the
arrival of input.
 In case of international firms, the lead time is larger as the
different units are located far away apart in different parts of the
globe.
 Even after goods reach the port, there are lot of customs
formalities.
 So due to all these factors, the re-order point lies much earlier in
case of international firms.
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MANAGEMENT OF INVENTORY
 Just-in-time System:
 It means inputs reached the manufacturing location just
when they are required.
 Input means Raw material, spare parts and components.
 The purpose of adopting this technique is to reduce the
carrying cost and holding cost.
 VICKERY (1989) suggest few measures such as air
transportation, adjustment in expected lead time and so on.
 However the risk of not getting the desired input in time is
always there. So firm should be very careful while adopting this
method.

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 SOURCING OF INPUTS
 The broad objectives of the input sourcing decision are
cost minimization, regular and uninterrupted supply,
quality advantage, enhancement of service and fast
adjustment with the requirements.
 Risk minimization is the another factor influencing the
input sourcing policy.
 Hickman and Hickman (1992) consider political stability,
developed infrastructure and un-educated urban work
force as attributes of low risk procurement success.

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 SOURCING OF INPUTS
 Modes of Procurement:
 When the input is standardized, centralized procurement is
common.
 If the host govt. policies prefer local sourcing or if the
inputs are of specialized nature, available in a particular
locality, then procurement is often decentralized.
 Irrespective of centralized or decentralized, there are three
modes for this purpose.
1: Importation
2: Establishment of International Procurement offices(IPOs)
3: Sourcing through direct investment

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 SOURCING OF INPUTS
 Make or Buy Decision:
 It refers to procurement of inputs:
 From with in the firm
 From outside the firm
 Advantages of making Inputs within the firm:
 Full control over the quality and timing of supply
 Availability of input at lower cost
 Easy modification in design
 Maintenance of secrecy of technology
 Generation of profit through arbitrary pricing of inputs
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SOURCING OF INPUTS
 Advantages of buying inputs from outside
 No additional investment for input manufacturing
 No need for acquiring technology required for input
manufacturing, which may be inappropriate / obsolete
 Freedom to get inputs from the cheapest source
 Diversification of the sources of inputs leading to lower
political and exchange rate risk
 Operational flexibility in face of changing demand

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International Logistics
 Logistics are concerned with the movement of inputs
from supplier to the firm and of the final product from the
firm to the consumer.
 Its management is really significant in reference to
increase efficiency and minimizing cost.
 Two types of problems are faced by international firm
with reference to managing logistics internationally.
 One is known as general problems and second one is
know as special problems.

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International Logistics
 General Problems:
 Long distances that require more time and greater cost
 Changes in the exchange rate leading to foreign exchange
exposure
 Poor transport network
 Specific Problems:
 Modes of Transport
 warehousing facilities
 Packaging and labeling

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International Logistics
 Transportation Issues:
 In developed countries the transportation network (land, sea and
air) is normally well built.
 But in developing countries it is often not well built.
 With regards to modes of transport in international business it is
normally ocean and air transport that matter although land
transport also important to delivering the goods to port or airport.
 An appropriate mode of transport should be cost effective,
reliable and speedy.
 But firms should take decision carefully in selection of mode.

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International Logistics
 AIR TRANSPORT:
 Costlier mode.
 More suitable when commodity is perishable.
 More supportive when the weight-volume ratio of goods is
high.
 Ocean Transport:
 Liner service: provides a regular service on fixed route.
 Bulk service: provides contractual services, mean neither a
fixed timing nor a fixed route.

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International Logistics
 Packaging of Products:
 If the climate is highly humid or cold, special precautions have
to be taken while packaging.
 packaging of perishable goods also needs special care.
 Packaging material should not be so heavy because it become
costly when duty imposed on the basis of weight.
 Storage Facility:
 The size of the warehouse should be based on the demand for
products and the frequency of arrival of the products.
 Location of the warehouse also important, if we have to store a
final product then warehouses should be located near the market

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