Chapter Fifteen

Global Production, Outsourcing, and

Logistics
 Introduction
• As trade barriers fall and global markets develop,
firms must confront a set of interrelated issues
– Where in the world should production 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 to vendors?
– How should a globally dispersed supply chain
be managed?
– Should the firm manage global logistics itself,
or should it outsource the management to
enterprises that specialize in this activity?
 Strategy, Production, and Logistics

• Production is the activities involved in creating

a product
– Can be both service and manufacturing
activities
• Logistics is the activity that controls the
transmission of physical materials through the
value chain
• Production and logistics are closely linked since
a firm’s ability to perform its production activities
efficiently depends on a timely supply of high
quality material inputs
 Strategy, Production, and Logistics

• Production and logistics functions have a

number of important strategic objectives
– Lower costs
– Increase product quality by eliminating defective products from both the
supply chain and the manufacturing process

• These objectives are interrelated

– Increasing productivity because time is not wasted producing poor-
quality products that cannot be sold, leading to a direct reduction in unit
costs
– Lowering rework and scrap costs associated with defective products
– Reducing the warranty costs and time associated with fixing defective
products
Relationship Between Quality and Costs
 Total Quality Management
• The total quality management (TQM)
philosophy was developed by a number of
American consultants such as W. Edwards
Deming, Josephy Juran, and A. V.
Feigenbaum
• Deming identified a number of steps that
should be included in any TQM program
– Management should embrace the philosophy that mistakes,
defects, and poor quality materials are not acceptable
– Supervisors should work more with employees and provide them
with the tools they need to do the job
– Management should create an environment in which employees will
not fear reporting problems
– Work standards should not only be defined as numbers or quotas,
but should include some notion of quality
 Six Sigma

• Six Sigma is the modern successor to TQM

– It is a statistically based philosophy that aims to
reduce defects, boost productivity, eliminate
waste, and cut costs throughout a company
• Production process operating at Six Sigma are
99.99966 percent accurate
– Only 3.4 defects per million units

• Six Sigma (6σ) is a set of techniques and tools for

process improvement. It was introduced by engineer Bill
Smith while working at Motorola in 1986. Jack Welch
made it central to his business strategy at GE in 1995.
 Six Sigma
• Continuous efforts to achieve stable and predictable process results
(e.g. by reducing process variation) are of vital importance to
business success.
• Manufacturing and business processes have characteristics that
can be defined, measured, analyzed, improved, and controlled.
• Achieving sustained quality improvement requires commitment from
the entire organization, particularly from top-level management.
Features that set Six Sigma apart from previous quality-improvement
initiatives include:
• A clear focus on achieving measurable and quantifiable financial
returns from any Six Sigma project.
• An increased emphasis on strong and passionate management
leadership and support.
• A clear commitment to making decisions on the basis of verifiable
data and statistical methods, rather than assumptions and
guesswork.
 Strategy, Production, and Logistics
• In addition to lowering costs and improving
quality, two other objectives have particular
importance
– Production and logistic functions must be able
to accommodate demands for local
responsiveness
– Production and logistics must be able to
respond quickly to shifts in customer demand
 Where to Produce
• For the firm contemplating international
production a number of factors must be
considered
– Country factors
– Technological factors
– Product factors
 Country Factors
• Optimum economic, political, and cultural
conditions
• Externalities
– Skilled labor pools
– Supporting industries
• Formal and informal trade barriers
• Exchange rate
 Technological Factors
• Fixed costs
• Minimum efficient scale
• Flexible manufacturing
– Reduce setup times for complex equipment
– Increase machine utilization
– Improve quality control
• Flexible machine cells to perform a variety of
operations
Typical Unit Cost Curve
 Manufacturing Location

• Arguments for concentrating production to

a few locations include
– Fixed costs are substantial
– Minimum efficient scale is high
– Flexible manufacturing technologies available

• Arguments to manufacture in all major

markets the firm operates in include
– Fixed costs are low
– Minimum efficient scale is low
– Flexible manufacturing technologies unavailable
– Trade barriers and transportation costs remain major
impediments
 Product Factors and Location Strategies

• Two product features affect location decisions:

– Value to weight ratio
– Product serves universal needs

• Two basic strategies

– Concentrating in a centralized location and
serving the world market
– Decentralizing them in various regional or
national locations close to major markets
when opposite conditions exist
 Role of Information Technology
and the Internet

• Firms increasingly use electronic data interchange

(EDI) to coordinate the flow of materials into
manufacturing, through manufacturing, and out to
customers

• EDI systems require computer links between a firm,

its suppliers, and its shippers; these electronic links
are then used
– To place orders with suppliers
– To register parts leaving a supplier
– To track them as they travel toward a manufacturing
plant
– To register their arrival
 Role of Information Technology
and the Internet
• EDI systems have resulted in
– Suppliers, shippers, and the purchasing firm communicate with each
other with no time delay
– Increased flexibility and responsiveness of the whole global supply
system
– Paperwork between suppliers, shippers, and the purchasing firm is
eliminated

• Web-based systems are rapidly transforming the

management of globally dispersed supply chains,
allowing even small firms to achieve a much better
balance between supply and demand

• Because the number of firms adopting these systems

has increased, those that don’t may find themselves at a
significant competitive disadvantage