INTERNATIONAL BUSINESS MANAGEMENT

CHAPTER 5
GLOBAL PRODUCTION
AND
SUPPLY CHAIN MANAGEMENT

Lecturer: Dr. Phung Nam Phuong

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMENT

1 2 3
Explain why global production Explain how country differences, Recognize how the role of foreign
and supply chain management production technology, and subsidiaries in production can be
decisions are of central production factors all affect the enhanced over time as they
importance to many global choice of where to locate accumulate knowledge.
companies. production activities.

4 5 6
Identify the factors that influence Understand the functions of Describe what is required to
a firm’s decision of whether to logistics and purchasing efficiently manage a global
source supplies from within the (sourcing) within global supply supply chain.
company or from foreign chains.
suppliers.

Learning Objectives
Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

INTRODUCTION
As trade barriers fall and global markets develop, many firms increasingly 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 those activities to independent vendors?

How should a globally dispersed supply chain be managed, and what is the role
of information technology in the management of global logistics, purchasing
(sourcing), and operations?

Should the company manage global supply chains itself, or should it outsource
the management to enterprises that specialize in this activity?

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

STRATEGY, PRODUCTION AND SUPPLY CHAIN

MANAGEMENT
 Production: both service and
manufacturing activities.
 Supply chain management: the
integration and coordination of logistics,
purchasing, operations, and market
channel activities from raw material to
the end-customer.
 Production and supply chain
management might be performed
internationally to:
• Lower the costs of value creation.
• Add value by better serving customer Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

STRATEGY, PRODUCTION AND SUPPLY CHAIN

MANAGEMENT
 Production and supply chain
management (purchasing & logistics) are
closely linked.
• Purchasing represents the part of the
supply chain that involves worldwide buying
of raw material, component parts, and
products used in manufacturing of the
company’s products and services.
• Logistics is the part of the supply chain that
plans, implements, and controls the effective
flows and inventory of raw material,
component parts, and products used in
manufacturing. Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

STRATEGY, PRODUCTION
AND SUPPLY CHAIN
MANAGEMENT  Important strategic objectives of the
production and supply chain
management functions of an
international firm:
(1) Ensuring that the total cost of
moving from raw materials to finished
goods is as low as possible for the value
provided to the end-customer.
 Dispersing production activities to
various locations around the globe where
each activity can be performed most
efficiently.
 Managing the global supply chain
efficiently to better match
Lecturer: supply and
Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

STRATEGY, PRODUCTION AND SUPPLY CHAIN MANAGEMENT

 Important strategic objectives of the production and supply

chain management functions of an international firm (con’t):

(2) Increasing product (or service) quality by establishing

process-based quality standards and eliminating defective raw
material, component parts, and products from the manufacturing
process and the supply chain (the upstream and downstream
portions).
• The upstream supply chain (the inbound supply chain) includes
all of the organizations (e.g., suppliers) and re-sources that are
involved in the portion of the supply chain from raw materials to
the production facility.
• The downstream supply chain (the outbound supply chain)
includes all of the organizations (e.g., wholesaler, retailer) that
are involved in the portion of the supply chain from the
Lecturer: Dr. Phung Nam
production facility to the end-customer.
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

STRATEGY, PRODUCTION AND SUPPLY CHAIN MANAGEMENT

 The firm that improves its quality control will also reduce its costs of value
creation.
Improve
productivity Figure 1: The
relationship between
Lower
quality and costs.
manufacturing
costs
Improve
Lower rework
performance Increase
and scrap costs
reliability profits
Lower service
costs
Lower warranty
costs

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

STRATEGY, PRODUCTION AND SUPPLY CHAIN MANAGEMENT

 Some tools that international managers now use to increase the reliability of their product
offering:
• Six Sigma • ISO 9000

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

STRATEGY, PRODUCTION AND SUPPLY CHAIN MANAGEMENT

 Six Sigma:
• The modern successor to the total quality
management.
• Six Sigma is a statistically based philosophy
that aims to reduce defects, boost productivity,
eliminate waste, and cut costs throughout a
company.
• At Six Sigma, a production process would be
99.99966 percent accurate, creating just 3.4
defects per million units.
• The Six Sigma program is particularly
informative in structuring global processes that
multinational corporations can follow in quality
and productivity initiatives.
Lecturer: Dr. Phung Nam
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STRATEGY, PRODUCTION AND SUPPLY CHAIN MANAGEMENT

 ISO-9000

• The European Union requires that the

quality of a firm’s manufacturing
processes and products be certified
under a quality standard known as ISO
9000 before the firm is allowed access
to the EU marketplace.
• Though the ISO 9000 certification
process has proved to be somewhat
bureaucratic and costly for many firms,
it does focus management attention on
the need to improve the quality of
products and processes.
Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

STRATEGY, PRODUCTION AND SUPPLY CHAIN MANAGEMENT

 In addition to lowering costs and improving

quality, two other objectives have
particular importance in international
businesses:
• Production and supply chain functions must
be able to accommodate demands for local
responsiveness.
• Production and supply chain management
must be able to respond quickly to shifts in
customer demand.

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

WHERE TO PRODUCE

Country Technologic Production

factors al factors factors

Where to produce?
Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMENT

WHERE TO PRODUCE
(1) Country Factors
• Political and economic systems,
culture - influence the benefits, costs,
and risks of doing business in a
country.
• Formal and informal trade barriers.
• Transportation costs.
• Rules and regulations regarding
foreign direct investment.
• Expected future movements in its
exchange rate.
Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

WHERE TO PRODUCE
(2) Technological Factors
• The type of technology a firm uses to
perform specific manufacturing activities
can be pivotal in location decisions.
• Three characteristics of a manufacturing
technology are of interest here:
(a) The level of fixed costs
(b) The minimum efficient scale
(c) The flexibility of thetechnology
manufacturing

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

WHERE TO PRODUCE
(2) Technological factors (con’t)

(a) Fixed Costs

 The fixed costs of setting up a production plant are

so high: serving the world market from a single
location or from very few locations.

 Having risks because of too depending on one

location.
 The fixed costs of setting up a production plant
are low: performing a particular activity in several
locations at once.

 Allowing the firm to better accommodate

demands for local responsiveness.

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

WHERE TO PRODUCE
(2) Technological factors (con’t)

(b) Minimum Efficient Scale

 As plant output expands, unit costs
decrease because:

Unit Costs
• The greater utilization of capital
equipment.
• The productivity gains that come with
specialization of employees within the
Minimum
plant. Efficient
Scale
 Minimum efficient scale of output: the
Volume
level of output at which most plant-
level scale economies are exhausted.
Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

WHERE TO PRODUCE
(2) Technological factors (con’t)

(c) Flexible Manufacturing and Mass

Customization
Flexible manufacturing technologies allow
the company to produce a wider variety
of end products at a unit cost that at one
time could be achieved only through the
mass production of a standardized output.
 Flexible manufacturing technologies (lean
production) covers a range of
manufacturing technologies designed to:
• Reducing setup times for complex
equipment.
• Increasing the utilization of individual
machines through better scheduling.
• Improving quality control at all stages of
the manufacturing process.

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

WHERE TO PRODUCE
(2) Technological factors (con’t)

(c) Flexible Manufacturing and Mass

Customization (con’t)

 Some common flexible manufacturing technologies:

• Mass customization: the ability of companies to
use flexible manufacturing technology to reconcile
two goals that were once thought to be
incompatible: low cost and product customization.
• A flexible machine cell

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

WHERE TO PRODUCE
(2) Technological factors (con’t)

(c) Flexible Manufacturing and Mass

Customization (con’t)  Mass production has some problems:
• Long production runs created massive
inventories that had to be stored in large
warehouses.

 expensive
• If the initial machine settings were wrong,
long production runs resulted in the
production of a large number of defects
(i.e., waste).
• The mass production system was unable
to accommodate consumer preferences for
product diversity.
Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMENT

WHERE TO PRODUCE
(3) Production Factors

Product features

Locating production facilities

Strategic roles for production facilities

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

WHERE TO PRODUCE
(3) Production Factors (con’t)
 Product Features

Two product features affect location

decisions.
• The product’s value-to-weight ratio
because of its influence on
transportation costs.
• Whether the product serves universal
needs, needs that are the same all
over the world?

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

WHERE TO PRODUCE
(3) Production Factors (con’t)
 Locating Production Facilities
There are two basic strategies for
locating production facilities:
• Concentrating them in a
centralized location and serving
the world market from there.
• Decentralizing them in various
regional or national locations that
are close to major markets.

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

WHERE TO PRODUCE

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

WHERE TO PRODUCE
(3) Production Factors (con’t)
c) Strategic roles for production facilities

Foreign factories can have one of a number of strategic roles or designations:

• Offshore factory
• Source factory
• Server factory
• Contributor factory
• Outpost factory
• Lead factory

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMENT

WHERE TO PRODUCE
3) Production Factors (con’t)
c) Strategic roles for production facilities (con’t)

 An offshore factory
• An offshore factory is one that is developed
and set up mainly for producing component
parts or finished goods at a lower cost than
producing them at home or in any other
market.
kept to a minimuminto
 Investments achieve greater
everything shouldcost-efficiencies.
ideally
be

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

WHERE TO PRODUCE
(3) Production Factors (con’t)
c) Strategic roles for production facilities (con’t)
• Aiming to drive down costs in the
 A source factory
global supply chain.

• Managers have more of a say in certain

decisions.

• Be at the top of the standards in the

global supply chain, and these
factories are used and treated just like
any factory in the global firm’s home
country.

• Should be located where production

costs are low, where infrastructure is
well developed, and where it is
relatively easy to find a knowledgeable
and skilled workforce to make the
products. Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMENT

WHERE TO PRODUCE
(3) Production Factors (con’t)
c) Strategic roles for production facilities (con’t)
 A server factory

• A server factory is linked into the global supply chain for a global firm to supply
specific country or regional markets around the globe.
• A server factory is set up to overcome intangible and tangible barriers in the
global marketplace.

- Overcoming tariff barriers, reduce taxes, and reinvest money made in the
region.

- Reducing or eliminating costly global supply chain operations.

• Managers at a server factory typically have more authority to make minor
customizations to please their customers, but they still do not have much more
input than managers in an offshore factory relative to the home country factories
of the same global firm. Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

WHERE TO PRODUCE
3) Production Factors (con’t)
Strategic roles for production facilities (con’t)
 A contributor factory

• A contributor also serves a specific

country or world region.

• A contributor factory has

responsibilities for product and process
engineering and development.
 having much more of a choice in terms
of which suppliers to use for raw
materials and component parts.

• A contributor factory has its own

infrastructure when it comes to
development, engineering, and
production.
Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

WHERE TO PRODUCE
(3) Production Factors (con’t)
c) Strategic roles for production facilities (con’t)

 An outpost factory

• An outpost factory can be viewed as an

intelligence-gathering unit, so its location is
often placed near:
- A competitor’s headquarters or main
operations.
- The most demanding customers.
- Key suppliers of unique and critically
important parts.
• An outpost factory also has a function to fill in
Lecturer: Dr. Phung Nam
production = a server and/or offshore factory.
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

WHERE TO PRODUCE
(3) Production Factors (con’t)
c) Strategic roles for production facilities (con’t)
 A lead factory

• A lead factory is intended to create new

processes, products, and technologies that
can be used throughout the global firm in all
parts of the world.

• This is where cutting-edge production should

take place or at least be tested for
implementation in other parts of the firm’s
production network.

• Managers and employees at the site have a

direct connection to and say in which
suppliers to use, what designs to implement,
and other issues that are of critical
importance to the core competencies of Nam
Lecturer: Dr. Phung the
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

WHERE TO PRODUCE

 There may be some “hidden

costs” to basing production in a
foreign location:

• High employee turnover

• Shoddy workmanship
• Poor product quality
• Low productivity

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

MAKE-OR-BUY DECISONS
(1) What is a make-or-buy decision?

 The make-or-buy decision for a global firm is the

strategic decision concerning whether to produce an
item in-house (“make”) or purchase it from an outside
supplier (“buy”).
• If the decision is to make it in-house, there are certain
implications for that firm’s global supply chains (e.g.,
where to purchase raw materials and component parts).
• If the decision is to buy the product, that decision also
has certain im- plications (e.g., quality control and
competitive priorities management).
Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

MAKE-OR-BUY DECISONS
(1) What is a make-or-buy decision?

 The make-or-buy decision is often

based largely on two critical factors:
• Costs: raw materials, component
parts, and any other inputs into the
process, along with the costs of
finishing the product.
• Production capacity: an opportunity
cost.

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

MAKE-OR-BUY DECISONS

Figure 2: Operationally Figure 3: Operationally

favouring a make favouring a buy decision
decision

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

GLOBAL SUPPLY CHAIN FUNCTION

(1) Global Logistics

Logistics is the part of the supply chain that plans, implements, and controls the
effective flows and inventory of raw material, component parts, and products used
in manufacturing.
The core activities performed in logistics are:
a) Global distribution center management
b) Inventory management
c) Packaging and materials handling
d) Transportation
e) Reverse logistics

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

GLOBAL SUPPLY CHAIN FUNCTION

(1) Global Logistics (con’t)
a) A global distribution center
 A global distribution center (or warehouse) is a facility that positions and allows
customization of products for delivery to worldwide wholesalers or retailers or directly to
consumers anywhere in the world.
 Distribution centers (DCs) are used by manufacturers, importers, exporters, wholesalers,
retailers, transportation companies, and customs agencies to store products and provide
a location where customization can be facilitated.
 DCs are the foundation of a global supply network because:
• Allowing either a single location or satellite warehouses to store quantities and
assortments of products.
• Allowing for value-added customization.
Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

GLOBAL SUPPLY CHAIN FUNCTION

(1) Global Logistics (con’t)
b) Global inventory management

 Global inventory management can

be viewed as the decision-making
process regarding the raw materials,
work-in-process (component parts),
and finished goods inventory for a
multinational corporation.
• How much inventory to hold
• In what form to hold it
• Where to locate it in the supply chain

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

GLOBAL SUPPLY CHAIN FUNCTION

(1) Global Logistics (con’t)
c) Packaging

• Primary packaging holds the product itself. These are the

packages brought home from the store, usually a retailer, by
the end-consumer.
• Secondary packaging is designed to contain several primary
packages. Bulk buying or warehouse store customers may take
secondary packages home or retailers can use secondary
packaging as an aid when stocking shelves in the store.
• Transit packaging comes into use when a number of primary
and secondary packages are assembled on a pallet or unit load
for transportation.
Lecturer: Dr. Phung Nam
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GLOBAL SUPPLY CHAIN FUNCTION

(1) Global Logistics (con’t)
c) Packaging (con’t)

Packaging is intended to achieve a set of multilayered functions: Perform - Protect -

Inform.
Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

GLOBAL SUPPLY CHAIN FUNCTION

(1) Global Logistics (con’t)

c) Packaging (con’t)
 Protect refers to the package’s
ability to:

• Contain the products properly.

• Reserve the products to maintain

their freshness or newness.

• Provide the necessary security and

safety to ensure that the products
reach their end destination in their
intended shape.

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

GLOBAL SUPPLY CHAIN FUNCTION

(1) Global Logistics (con’t)

c) Packaging (con’t)
 Perform refers to:

• The ability of the product in the

package to handle being transported
between nodes in the global supply
chain.

• The ability of the product to be stored

for typical lengths of time for a
particular product category.

• The package providing the convenience

expected by both the supply chain
partners and the end-customers.

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

GLOBAL SUPPLY CHAIN FUNCTION

(1) Global Logistics (con’t)
c) Packaging (con’t)

 Inform refers to the package’s inclusion of:

• Logical and sufficient instructions for the use of
the products inside the package, including
specific requirements to satisfy local
regulations.
• A statement of a compelling product guarantee.
• Information about service for the product if and
when it is needed.

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMENT

GLOBAL SUPPLY CHAIN FUNCTION

(1) Global Logistics (con’t)
d) Transportation
 Transportation refers to the movement of raw
material, component parts, and finished goods
throughout the global supply chain.
 Global supply chains are directly or indirectly
responsible for transporting raw materials from
their suppliers to the production facilities, work-
in-process and finished goods inventories
between plants and distribution centers, and
finished goods from distribution centers to
customers.

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

GLOBAL SUPPLY CHAIN FUNCTION

(1) Global Logistics (con’t)

d) Transportation (con’t)

The primary drivers of transportation rates and the resulting aggregate cost are:

• Distance: longer distances require more fuel and more time from vehicle operators,
so transport rates increase with distance.

• Transport mode: influencing rates because of the different technologies involved

(ocean, air, or land).

• Size of load: larger shipments are relatively less expensive than smaller shipments.

• Load characteristics: product density, value, perishability, potential for damage,

and other such factors.

• Oil prices: 10-40% of most carrier costs depending on the mode.

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

GLOBAL SUPPLY CHAIN FUNCTION

(1) Global Logistics (con’t)

e) Reverse logistics
• Reverse logistics is the process of planning,
implementing, and controlling the efficient,
cost-effective flow of raw materials, in-
process inventory, finished goods, and related
information from the point of consumption to
the point of origin for the purpose of
recapturing value or proper disposal.
• The ultimate goal is to optimize the after-
market activity or make it more efficient, thus
saving money and environmental resources.
Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

GLOBAL PURCHASING

 Purchasing represents the part of

the supply chain that involves
worldwide buying of raw material,
component parts, and products
used in manufacturing of the
company’s products and services.
 Core activities: an appropriate
type of purchasing strategy for
global purchasing.

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

GLOBAL PURCHASING
 Five strategic levels of purchasing — from domestic to international:

• Level I: Companies engage in domestic purchasing activities only.

• Level II: Companies engage in international purchasing activities only as needed.

 the approach to international purchasing is often reactive and uncoordinated

amongbuying
the locations within the firm and/or across the various units that make up the
firm, such as strategic business units and functional units.

• Level III: companies engage in international purchasing activities as part of the

firm’s overall supply chain management strategy.

international purchasing
 companies begin tostrategy canthat
recognize be very effective
a well- in elevating
formulated the firm’s
and well-executed
competitive edge in the marketplace.
worldwide

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

GLOBAL PURCHASING

 Five strategic levels of purchasing — from domestic to

international:
• Level IV refers to global purchasing activities that are integrated
across worldwide locations.
 This
firm’s involves
buying integration
locations and coordination of purchasing strategies
worldwide.
across the

• Level V involves engaging in global purchasing activities that are

integrated across worldwide locations and functional groups.
purchasing processes, and supplier selection efforts globally.
 The firm integrates and coordinates the purchasing of common
items,

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

GLOBAL PURCHASING
 Outsourcing Terms and Options

A multinational corporation buys products or services from

one of its suppliers that produces them somewhere else,
Outsourcing
whether domestically or globally. In that sense, it also
refers to external purchasing in relation to purchasing
strategy.
A multinational corporation decides to stop outsourcing
products or services and instead starts to produce them
Insourcing
internally; insourcing is the opposite of outsourcing. Thus it
refers to internal purchasing in the context of purchasing
strategy.
A multinational corporation buys products or services from
one of its suppliers that produces them somewhere globally
Offshoring (outside the
MNCs home country). Offshoring is thus a form of global
external purchasing in terms of purchasing strategy.
Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

GLOBAL PURCHASING
 Outsourcing Terms and Options (con’t)

A multinational corporation buys products or services from

one of its suppliers in a country other than the one in which
Offshore outsourcing the product is manufactured or the service is developed.
This again is a form of global external purchasing in terms
of purchasing strategy.
A multinational corporation transfers business or
information technology processes to suppliers in a nearby
country, often
Nearshoring
one that shares a border with the firm’s own country. While
nearshoring is not a purchasing activity per se, it involves
facilitating global external purchasing.
A multinational corporation uses both its own employees
from inside the firm and an external supplier to perform
certain tasks, often in concert with each other. This applies
Co-sourcing to all four forms of purchasing strategy. It implies that the
relationship between the firm and its supplier is rather
strategic in nature—often, this involves the top suppliers in
Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

MANAGING A GLOBAL SUPPLY CHAIN

Four main areas are of concern in

managing a global supply chain:
(1) The role of just-in-time inventory
(2) The role of information technology
(3) Coordination in global supply chains
(4) Interorganizational relationships in
global supply chains

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

MANAGING A GLOBAL SUPPLY CHAIN

(1) Role of Just-In-Time (JIT)

Inventory
The basic philosophy behind just-in-
time (JIT) inventory systems is to
economize on inventory holding costs
by having materials arrive at a
manufacturing plant just in time to
enter the production process and not
before. Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

MANAGING A GLOBAL SUPPLY CHAIN

(1) Role of Just-In-Time (JIT) Inventory (con’t)
 Benefits of JIT inventory systems:
• Saving costs from speeding up inventory turnover.
 Reducing inventory holding costs, such as warehousing and
storage costs.
 Reduce the amount of working capital it needs to finance
inventory, freeing capital for other uses and/or lowering the
total capital requirements of the enterprise.
 Boosting the company’s profitability as measured by return
on capital invested. It also means the company is less likely to
have excess unsold inventory that it has to write off against
earnings or price low to sell.
Lecturer: Dr. Phung Nam
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(1) Role of Just-In-Time (JIT) Inventory (con’t)

 Benefits of JIT inventory systems
(con’t)
• Improving product quality.

Under a JIT system, parts enter the

manufacturing process immediately; they
are not warehoused.

 Allowing defective inputs to be spotted

right away.

Lecturer: Dr. Phung Nam

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(1) Role of Just-In-Time (JIT) Inventory (con’t)
 The drawback of a JIT system is that it leaves a firm without a buffer stock of
inventory.
 To reduce the risks associated with depending on one supplier for an important
input, some firms source these inputs from several suppliers located in
different countries.

Lecturer: Dr. Phung Nam

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(2) Role of Information Technology

 By tracking component parts as they make their way

across the globe toward an assembly plant,
information systems enable a firm to optimize its
production scheduling according to when components
are expected to arrive.
 By locating component parts in the supply chain
precisely, good information systems allow the firm to
accelerate production when needed by pulling key
components out of the regular supply chain and
having them flown to the manufacturing plant.

Lecturer: Dr. Phung Nam

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MANAGING A GLOBAL SUPPLY CHAIN

(2) Role of Information Technology

 Some form of supply chain information system:

• Electronic data interchange (EDI) refers to the electronic interchange of data between two
or more companies.

• Enterprise resource planning (ERP) is a wide-ranging business planning and control system
that includes supply chain-related subsystems (e.g., materials requirements planning, or
MRP).

• Collaborative planning, forecasting, and replenishment (CPFR) was developed to fill the
interorganizational connections that ERP cannot fill.

• Vendor management of inventory (VMI) allows for a holistic overview of the supply chain
with a single point of control for all inventory management.

• A warehouse management system (WMS) operates in concert with ERP systems; for
example, an ERP system defines material requirements, and these are transmitted to a
distribution center for a WMS.
Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMENT

MANAGING A GLOBAL SUPPLY CHAIN

(3) Coordination in global supply chains

Global supply chain coordination refers to shared decision-making opportunities and

operational collaboration of key global supply chain activities.

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

MANAGING A GLOBAL SUPPLY CHAIN

(3) Coordination in global supply chains (con’t)
 Shared decision making
• What? such as joint consideration of replenishment, inventory holding costs,
collaborative planning, costs of different processes, frequency of orders, batch size,
and product development.
• Why? creating a more integrated, coherent, efficient, and effective global supply
chain.
• Where? Shared decision making by supply chain members both inside an
organization (e.g., logistics, purchasing, operations, and marketing channels
employees) and across organizations (e.g., raw materials producers, transportation
companies, manufacturers, wholesalers, retailers).
Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMEN

MANAGING A GLOBAL SUPPLY CHAIN

(3) Coordination in global supply chains (con’t)
 Shared decision making (con’t)
 To achieve operational integration and collaboration within a global supply chain, six
operational objectives should be addressed:

• Responsiveness refers to a global firm’s ability to satisfy customers’ requirements across

global supply chain functions in a timely manner.

• Variance reduction refers to integrating a control system across global supply chain
functions to eliminate global supply chain disruptions.

• Inventory reduction refers to integrating an inventory system, controlling asset

commitment, and turning velocity across global supply chain functions.

Lecturer: Dr. Phung Nam

 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMENT

MANAGING A GLOBAL SUPPLY CHAIN

(3) Coordination in global supply chains (con’t)

 Shared decision making (con’t)

 Six operational objectives should be addressed (con’t):

• Shipment consolidation refers to using various programs to combine small

shipments and provide timely, consolidated movement.
• Quality refers to integrating a system so that it achieves zero defects
throughout global supply chains.
• Life-cycle support refers to integrating the activities of reverse logistics,
recycling, after-market service, product recall, and product disposal across
global supply chain functions.

Lecturer: Dr. Phung Nam

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MANAGING A GLOBAL SUPPLY CHAIN

(3) Coordination in global supply chains (con’t)
 Interorganizational Relationships
Interorganizational relationships is based on trust and commitment.

For the downstream/outbound

For the upstream/inbound portion
portion
of the global supply chain
of the global supply chain
Three logical scenarios of interacting Three logical scenarios of interacting
organizations are labeled as vendors, organizations are labeled as buyers,
suppliers, and partners. customers, and clients.

Each scenario is based on the degree of Each scenario is based on the degree of
coordination, integration, and coordination, integration, and
transactional versus relationship transactional versus relationship focus
emphasis that the firm should adopt in that the firm should adopt in partnering
partnering with other entities in the with other entities in the global supply
global supply chain. chain.
Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMENT

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• A firm uses vendors to obtain raw

materials and component parts
through a transactional
relationship that can change easily.
Vendor Supplier Partner
• A firm may use suppliers to obtain
raw materials and parts and
maintain a relationship with those
suppliers based on experience and
performance.

• A firm may engage with partners to Low Coordination High Coordination

obtain raw materials and parts, Low Integration High Integration
maintaining a relationship based Transactional Focus Relationship Focus
on trust and commitment.
Figure 4: The upstream (or inbound) supply chain
relationships
Lecturer: Dr. Phung Nam
 CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN MANAGEMENT

MANAGING A GLOBAL SUPPLY CHAIN

• A firm may sell products and parts to

buyers through a transactional
Buyer Custome Client relationship that can change easily.
r • A firm may sell products and parts to
customers and maintain a
relationship that is based on
experience and performance.

Low Coordination High Coordination • A firm may sell products and parts to
Low Integration High Integration clients and maintain a relationship
Transactional Focus Relationship Focus that is based on trust and
commitment.

Figure 5: The downstream (or outbound) supply chain

relationships Lecturer: Dr. Phung Nam
CHAPTER 5 - GLOBAL PRODUCTION AND SUPPLY CHAIN
MANAGEMENT

Thank you !

END