International Business

Competing in the Global Marketplace

8e

By Charles W.L. Hill

Chapter 16

Global Production,
Outsourcing, and Logistics
 What Are the Main
Production Issues for Firms?
 Five interrelated questions:
1. Where should production activities be located?
2. What should be the long-term strategic role of foreign
production sites?
3. Should the firm own foreign production activities or
outsource them to independent vendors?
4. How should a globally dispersed supply chain be
managed, and what is the role of Internet-based
information technology (IT) in global logistics?
5. Should the firm manage global logistics itself or
outsource it to enterprises that specialize in this
activity?

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 How Are Strategy, Production,
and Logistics Related?
 Logistics - procurement and physical
transmission of material through the supply chain,
from suppliers to customers
 Questions: How can production and logistics
1. 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
2. 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?
 Most firms use the Six Sigma program - modern
successor to total quality management (TQM)
 aims to reduce defects, boost productivity,
eliminate waste, and cut costs throughout the
company
 In the European Union, firms must meet ISO 9000
standards before gaining access to the European
marketplace
 Improved quality reduces costs

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The Relationship Between Quality and Costs

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Where Should Production Be Located?
 Firms should locate production so that
production and logistics can
 can be locally responsive
 respond quickly to shifts in customer demand
 When contemplating international
production, firms should consider three
broad issues
1. Country factors
2. Technological factors
3. Product factors

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Why Are Country Factors Important?
 Manufacturing should be located where economic,
political, and cultural conditions are most
conducive to the performance of that activity
 Firms should consider
the availability of skilled labor and supporting
industries
formal and informal trade barriers
expectations about future exchange rate changes
transportation costs
regulations affecting FDI
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 Why Are Technological
Factors Important?
 Firms should consider
1. The level of fixed costs
 if fixed costs are high, produce in a single location
or a few locations, otherwise, multiple production
plants may be possible
2. The minimum efficient scale (the level of
output at which most plant-level scale economies
are exhausted)
 when minimum efficient scale is high, choose
centralized production in a single location or a
limited number of locations, otherwise, operate in
multiple locations so as to respond to local market
demands and hedge against currency risk
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 Why Are Technological
Factors Important?
3. Flexible manufacturing and mass customization
 flexible manufacturing technology or lean
production
 reduces set up times for complex equipment
 increases the utilization of individual machines
 improves quality control
 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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 What Should A Firm Do?
 Production should be concentrated in a few
locations when
fixed costs are substantial
the minimum efficient scale of production is high
flexible manufacturing technologies are available
 Production in multiple locations makes sense
when
both fixed costs and the minimum efficient scale of
production are relatively low
appropriate flexible manufacturing technologies
are not available

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Why Are Product Factors Important?
 Two product factors impact location
decisions
1. The product's value-to-weight ratio
 If the value-to-weight ratio is high, produce the
product in a single location and export to other
parts of the world, otherwise, there is greater
pressure to manufacture the product in multiple
locations across the world
2. Whether the product serves universal needs
 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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 What Is the Strategic Role of
Foreign Factories?
 The strategic role of foreign factories and the
strategic advantage of a particular location can
change over time
 factories established to take advantage of low cost
labor can evolve into facilities with advanced
design capabilities
 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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 What Is the Strategic Role of
Foreign Factories?
Many companies now see foreign factories
as globally dispersed centers of excellence
 supports the development of a transnational
strategy
 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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Should A Firm Outsource Production?
Should a firm make or buy the component
parts to go into its final product?
Make-or-buy decisions are important to
firms' manufacturing strategies
service firms also face make-or-buy decisions
decisions involving international markets are
more complex than those involving domestic
markets

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 Why Make?
 Vertical integration – in-house production may
be associated with
1. Lowering costs - if a firm is more efficient at that
production activity
2. Facilitating investments in highly specialized
assets - when substantial investments in
specialized assets are required
3. Protecting proprietary technology – when
component parts contain proprietary technology
4. easing the scheduling of adjacent processes -
planning, coordination, and scheduling of adjacent
processes can be easier with in-house production

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 Why Buy?
 Buying component parts or products can
1. Give the firm greater flexibility
2. Help drive down the firm's cost structure
because it avoids
 challenges of coordination and control of
additional subunits
 the lack of incentive associated with internal
suppliers
 the difficulties with setting appropriate
transfer prices
3. Help the firm capture orders from
international customers

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 How Do Firms Manage A
Global Supply Chain?
 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
 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
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 What Is the Role of
Just-In-Time Inventory?
 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
 JIT systems
 generate major cost savings from reduced
warehousing and inventory holding costs
 can help the firm spot defective parts right away
and boost product quality
 But, a JIT system leaves the firm with no buffer
stock of inventory to meet unexpected demand
or supply changes

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 What Is the Role of Information
Technology and the Internet?
 Web-based information systems play a crucial
role in materials management
 allow firms to optimize production scheduling
based on when components are expected to arrive
 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

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 Review Questions
1. In the EU countries, firms must meet __________
standards before gaining access to the
European marketplace
2. Firms should produce in multiple locations
when
a) fixed costs are low
b) fixed costs are substantial
c) the minimum efficient scale is high
d) flexible manufacturing technologies are
available

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 Review Questions
3. 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

4. When ___________, firms will favor decentralized

production.
a) there are substantial differences in culture
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 Questions
4. The choice of an optimal production location
must consider which three factors?

5. ___________ compasses the activities necessary to

get materials to a manufacturing facility,
through the manufacturing process, and out
through a distribution system to the end user

6. Many firms now see foreign factories as globally

dispersed centers of excellence, which supports
the development of a(n) _____ strategy.
a) global standardization c) transnational
b) International d) localization
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