Lecture 28 inter national opration managgement

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  • 1. INTERNATIONAL BUSINESS MANAGEMENT LESSON 28: INTERNATIONAL OPERATIONS MANAGEMENTLesson Objectives The alternate objective is to deliver products to market with• To understand the process of Global Supply Chain variety, responsiveness, timeliness and efficiency. Corporate Management strategy must include organizing; coordinating and executing the processor product flow as a competitive necessity and as a• To understand how to distinguish make or buy decision source of potential competitive advantage. The strategic• To understand the process of Global Sourcing requirements of international business determine the extent,• To clearly distinguish between the concepts of characteristics and strategic direction of the supply chain. Some “Partnering” and “Relationship Marketing” businesses are only involved with international operations to• To have a clear cut understanding on Buyer-Supplier secure a supply of materials and components; marketing is Relationships domestic. Other businesses manufacture and export from a home base an~ procure materials overseas. Some corporations• To understand the various components of International serving global markets rationalize production using interna- Logistics tional factory networks for supply.• To understand the various Global Manufacturing A company’s supply chain encompasses the coordination of Strategies materials, information, and funds from the initial raw material• To decide about the Location Strategies supplier to the ultimate.2 It is the management of the value-• To have an understanding on Country evaluation and added process from the suppliers’ supplier to the customers’ Selection Criterion customer.3 The scope of supply chain, thus, encompassesInteraction almost the entire system of business process.The term international operations management is used in this According to Houlihan, the underlying concept of the supplychapter in a very broad sense to include all functional aspects chain embraces the following points:4related to the conduct of international business. • The supply chain identifies the complete process ofOperations management is becoming more and more interna- providing goods and services to the final user.tional in its scope. Even a firm, which markets the products • It includes all parties and logistics operations from supplieronly within the domestic market, may be conducting its to customer within a single system.business operations internationally like sourcing the inputs or • The scope of the supply chain includes procurement,finished products internationally or manufacturing the product production and distribution operations.abroad. A dynamic company will take advantage of the • The supply chain extends across organizational boundaries.favorable conditions that exist anywhere in the world. • It is coordinated through an information system accessibleConceptual Discussion to all members.The business system involves the integration and managementof diverse activities. On the one extreme, a firm may undertake • The primary objective of the supply chain is service toall of these different activities, carrying on the whole production customers. This must be balanced against costs and assets.process and doing all the other operations encompassing the • Objectives of individual supply chain members are achievedbusiness system. On the other extreme, a firm can outsource through the performance of the chain as a whole.most of these. Many firms now concentrate on its core The above exposition of the scope of the supply chaincompetence/business and outsource the rest. The multinational connotes that operations management is, by and large, supplyNike, for example, concentrates itself on the two strategic ends chain management (note, particularly, the third point). As theof the business - R&D and marketing - and gets its products supply chain becomes more complex, there is an increasing needmanufactured by independent subcontractors located in to integrate each stage as part of a larger system.different countries as per the design and other’s specificationsgiven b1 the company, with the result that while Nike directly Make or Buyemploys about 9,000 people it indirectl1 employs about 7,5000 One of the critical considerations in the supply chain manage-people. In fact, many products put to the market by a number ment is make or buy. Globalization, having increased the scopeof companies embody substantial outsourced parts/compo- of sourcing, has made the make or buy question more relevant.nents. Table 9.1 gives a summary of the advantages and disadvantages of both the make and buys options.Global Supply Chain Management The make or buy decision is influenced by a number of factors.Operations management, in fact, is, to a very large extent, The organizational technological environment may affect thesupply chain management. As Scary and Larsen observe, buying decision. Some of the firms that outsource components“managing the supply chain is vital for international business. © Copy Right: Rai University11.625.1 175
  • 2. design or redesign the component parts in-house and select the Information Economy. Hardware needs software, and theINTERNATIONAL BUSINESS MANAGEMENT suppliers who can offer the best combination of quality, price, Internet needs high-speed phone lines. No one, alone, can ‘;” service and delivery. In other words, in such cases, called make to build the infrastructure for the new economy. It’s a whole new print, the buying company provides the product technology to the system made up of many complimentary parts.”7 As they supplier who has the required process technology. Some firms want further exemplify, “in fact, most businesses succeed only if the product technology also to be developed by the supplier. In others also succeed. The demand for Intel chips increases when some cases both the supplier and buyer work in collaboration Microsoft creates more powerful software. ‘-8[ Microsoft to develop proper solution to the problem. becomes more valuable when Intel produces faster chips. It’s mutual success rather (;’Z than mutual destruction. It’s win- Global Sourcing win. The cold war is over and along with it the old assumptions Buy strategy is greatly benefited by the opportunities for global about competition.”8 sourcing. The major factors determining the input-output ratio, output volume, cost and quality are the appropriateness and The benefits reaped by the Japanese industry by the collabora- cost of technology and the quality and cost of other inputs. A tive relationship have encouraged industry in other parts of the great advantage of globalization is the opportunity to source world, particularly North America and Western Europe, to them from the best source anywhere in the world. rethink and restrategise the supplier-customer relationship. For example, Philips has laid down supplier partnership as one of The trend of global sourcing and production sharing has been the five principles of its quality philosophy and the growing. multination31 cultivates supplier relationships based on trust According to a survey by Purchasing, the reasons for offshore and cooperation, sharing experience and expertise to benefit not purchases are the following, listed in the order of importance. 5 only the buyer and the supplier but also the end customer. 1. Lower price. Philips and its suppliers jointly develop technology, solve 2. Better quality problems, learn from experience and try to avoid errors and 3. Only source available misunderstandings. 4. More advanced technology A look at the three categories of suppliers of Philips has would indicate the emerging pattern Of buyer supplier relationships. 5. More consistent attitude 1. Supplier-Partners: These are the most important suppliers, 6. More co-operative delivery albeit might be the smallest group among the three. Philips 7. Counter trade requirements builds intense, involved relationships with them and the It may be noted that besides the above, outsourcing has certain important focus of the cooperation is innovation, the other advantages. It reduces the capital and manpower require- development of new expertise and new opportunities. These ments. It may also impart more flexibility to adjust to certain suppliers might well have essential knowledge and/or conditions like a recession. expertise that Philips could not otherwise access or develop International sourcing accounts for an estimated one-third of for itself. This makes these suppliers extremely significant the world trade. Many developing countries have taken a lot of strategically as their loss could seriously undermine Philip’s advantage of this trend. Although India did not benefit current business and future direction. significantly in the past, India is emerging as a major sourcing 2. Preferred suppliers: This category is less important than the destination for a variety of products. first and there is not the same degree of mutual dependence as in the first category. The company works closely with them Partnering / Relationship Marketing on issues such as quality, logistics and price to gain mutual Buyer-supplier relationship is emerging as a very important benefit. The suppliers may also adopt themselves, to some strategic element in industrial marketing. The conventional win- extent, to suit Philip’s requirements. lose approach is giving way to a dynamic and enduring win- -win mind set. It is pointed out that “never before in the history of 3. Commercial Suppliers: These are the least important man’s industrial endeavor has the value of building effective suppliers and although the company will encourage better and responsive relationships between suppliers and customers performance in terms of quality ete. it is unlikely to get been more crucial to the survival of free-market enterprise than involved in helping the supplier to achieve it. today.”6 According to Anderson and Narus, partnering “is a process The collaborating relationship between the supplier and where a customer firm and supplier firm form strong and customer is known by different names such as company extensive social, economic, service, and technical ties over marketing, partnering partnership-sourcing relationships time, with the intent of lowering total costs and/or marketing and co-petition. increasing value, thereby achieving mutual benefit.”9 As Nalebuff and Branden burger point out, “one strategy that International Logistics co-opetition emphasizes is working with what we term An important dimension of the supply chain is logistics, also ‘complementary.’ A complement or is the opposite of a sometimes called materials management. to According to the competitor. It’s someone who makes your products and Council of Logistics Management, USA, logistics management services more, rather than less, valuable. Not surprisingly, the is the “process of planning, implementing and controlling the complement or concept is especially relevant to the builders of efficient, cost effective flow and storage of raw materials, in- © Copy Right: Rai University 176 11.625.1
  • 3. process inventory, finished goods, and related information compatibility, configuration, coordination, and control. INTERNATIONAL BUSINESS MANAGEMENTfrom point of origin to point of consumption for the purpose Compatibility in this context is the degree of consistencyof conforming to customer requirements.” between the foreign investment decision and the company’sThe difference between supply chain management and materials competitive strategy. Company strategies that managers mustmanagement is on degree. Materials management, or logistics, consider are:focuses much more on the transport and storage of materials Efficiency/cost - reduction of manufacturing costs.and final goods, whereas supply chain management extends Dependability - degree of trust in a company’s products and itsbeyond that to include the management of supplier and delivery and price promises.customer relations. • Quality - performance reliability, service quality, speed ofLogistics, also known by such other names as marketing delivery, and maintenance quality of the product(s).logistics, industrial logistics/ business logistics/ distribution/channels of distribution logistics/ distribution engineering • Flexibility - ability of the production process to makematerials logistics management supply chain management is a different kinds of products and to adjust the volume ofvery important component of operations management. output. • Innovation - ability to develop new products and ideas.Components of LogisticsLogistics encompasses the total movement concept, covering Cost minimization strategies often prompt companies to optthe entire range of operations concerned with the movement of for offshore manufacturing locations like developing countriesmaterials and products to, through, and out of the firm to the and for outsourcing. Factors like characteristics of supplier.consumer. It includes a variety of activities such as inventory Firms in respect of, dependability flexibility, quality andmanagement, warehousing and storage, transportation, innovation influence the make or buy decision, choice ofmaterials handling, order processing, distribution, communica- vendors etc. in case of the make situations, the choice oftions, packaging, salvage and scrap disposal, returned goods production location will be based on evaluation of the locationhandling, customer service etc. with its environment vis-a-vis the above critical factors.Some of the major components of logistics are the following: Manufacturing Configuration refers to the strategy of centraliza-Fixed Facilities Location: tion or dispersion of manufacturing facilities. There are broadlyThe major consideration is the location of fixed facilities like three broad categories of manufacturing configuration, viz.,production and warehousing in such a way as to maximize the centralized facility, regional facilities, and multi-domestictotal efficiency of the logistics system. Factors like future facilities. The choice of the configuration strategy is influencedpotential of the markets, future plans of the company, by several factors such as scale economies, nature of technologycompetitive factors, political stability, etc. are also important and skill requirements, firm strategies such as internalization orconsiderations. externalization, international orientation and the organisational mode of the company, foreign market prospects and otherInventory Management: characteristics ete.The main objective of inventory management is to minimize Coordination and Control which are two sides of the samethe cost of the inventory while ensuring smooth supplies. coin, refer to the integration, monitoring and taking of requiredDevelopments in inventory management by the customers actions to ensure that the implementation of he plans progressorder processing and in the total logistics system have made as envisaged.inventory management both challenging and efficient. Location StrategyOrder Processing: The location of production facilities of a global corporationThe efficiency of order processing by the client as well as the may be influenced by a number of factors.company have important implications for inventory levels andother aspects of the logistics. Rapid order processing shortens Nature of Organizationthe order cycle and allows for lower safety stocks on the part of The organizational model is a major determinant of thethe client. Exporters from developing countries like India face location. For example, in a Multinational Company, thethe challenge of coping up with such situations. subsidiaries do most of the production for their respectiveMaterial Handling and Transportation: Material handling and markets. In an International Company and Global Company,transportation are also an important part of the logistics there is tendency to centralize core production activities in themanagement. The technologies in use in material handling and home country. The transnational corporation is characterised bytransportation affect the efficiency of logistics. globally integrated networks of production facilities and other factors.(See the chapter on Multinational Enterprises for aGlobal Manufacturing Strategies. description of the important characteristics of the differentLocation of the manufacturing facilities is one of the most organizational models.}important of the global operations management decisions. Cost4 Cs of Global Manufacturing Given other factors (like political factors, organizational modelThe success of a global manufacturing strategy depends on four and strategic orientation etc.), the overall cost of operations iskey factors: often the most important consideration in the location © Copy Right: Rai University11.625.1 177
  • 4. decision-making. Important factors, which determine the cost, Government Policies and RegulationsINTERNATIONAL BUSINESS MANAGEMENT include the following: Government regulations like foreign investment policy, 1. Scale Economies: Where there are large-scale economies in environmental regulations, local content stipulations, labour production, production tends to concentrate in one or very laws, taxation, assistances and incentives, dividend policies ete., limited number of locations. Such concentration may be in influence the location. the home country or foreign countries. Social and Political Factors 2. Nature of Assembly Operations: If there is large economies Social and political factors such as attitude towards foreign of scale in production of components and if the assembly business, domestic harmony and peace ete also influence the operations are labour-intensive, the locations of location decision. components manufacture and assembly operations could be Country Evaluation and Select different. The assembly operations may be carried out in The global market, made up of well over 200 independent countries where the labour is very cheap. nations with their own distinctive characteristics is too vast 3. Taxes and Transport Costs: The import duty structure also indeed. It would be very difficult for a company to operate in all influences the location of production phases. If the import these markets. There are barriers, which make entry to a number duty is very high on finished product and comparatively low of markets impossible or very difficult. There may be markets, on components it would encourage assembling of the which are not profitable or are not worth the trouble. Further, product in the foreign market, coterie~ paribus. If the cost there may be markets, which are very risky due to political or of transporting the finished product is significantly higher other reasons. Moreover, the company resources may not than for the components, export in the CKD form would be permit the operation in a large number of countries. There are, preferred and the assembling of the product would be done of course, companies, which operate in majority of the in the foreign market. This will be particularly attractive if the countries of the world. These companies have not achieved labour is cheap in the foreign market. Sometimes the import such a massive expansion overnight. It has been a gradual duty and transport cost will favour the complete or most of expansion achieved over a long period. Further, all types of the manufacturing activity in the foreign market. business do not lend themselves for such substantial interna- Exchange Rate Variation tional expansion. It is, therefore, necessary to make an Exchange rate fluctuations may also influence the import vs. evaluation of the prospective markets and make rank list of manufacturing decision. A depreciation of the foreign currency them for the company to operate in. vis-à-vis the home currency will make imports into the foreign Market Selection Process country costly and this may encourage production within the The important steps involved in the market selection process foreign market. are depicted in figure 9.1. Availability and Cost of Inputs International Business Objectives Availability and cost of inputs (including land and infrastruc- The first step in any management decision making process is to ture), obviously, are critical factors influencing the location determine/ascertain the objectives. The market selected to serve decision. The infrastructure and other facilities and incentives are a particular international business objective need not necessarily the attraction of export processing/special economic zones. be the best suited to achieve some other international marketing Logistical Factors objective. Various markets may have different degrees of Certain locations are preferred because of logistical reasons - the attractiveness from the point of view of different objectives. cost and ease of moving products to various markets. Some More about this is stated under the subtitle firm related factors locations (Singapore, for example) are indeed regarded as the little later in this chapter. hub of international operations. Parameters for Selection Product Life Cycle and Pattern of For proper evaluation and selection of the markets, it is Demand essential to clearly lay down the parameters and criteria for The stage in the product life cycle may influence the location of evaluation. Important parameters often used for market production base. As explained in the International Product .Life selection are shown in the evaluation matrix described elsewhere Cycle Theory, when the product is in the declining stage of the in this chapter. life cycle or when the technology/product becomes standard- Preliminary Screening ized, the production base tends to shift to the developing After determining the criteria for market selection, the next countries. important step in market selection process is to conduct a Nature of Product preliminary screening of the markets. The objective of the Nature of the product, like Perish ability, weight-losing or preliminary screening process is to eliminate the markets which weight-adding characteristic during production process ete. also are obviously not potential enough as revealed by a cursory influence the location decision. look. © Copy Right: Rai University 178 11.625.1
  • 5. The parameters used for the preliminary screening may vary The planned business strategy may also influence the market INTERNATIONAL BUSINESS MANAGEMENTfrom product to product. However, parameters like the size of selection. For example, a market considered the most importantpopulation, per capita income, structure of the economy, from the point of view of exporting need not necessarily be theinfrastructural factors, political conditions ete. are commonly one that would be selected for locating production base or aused. Information about some of the factors would enable a sales office. A company that has plans for large expansion ofcompany to eliminate certain markets from its consideration. foreign business may choose a market, to start with, which canFor example, in a country where there is no telecasting, there is serve as a hub of international business.obviously no market for T.Y. sets. Similarly if the rural areas are • The market selection is also influenced by the internationalnot electrified, there may be no demand for electrical agricultural orientation (refer chapter 1 for details) of the company.pump sets. If the household income of the majority of a • Another very important determinant is the companycountry with a small population is very low, the demand for resources comprising financial, human, technological andcostly consumer durables will be limited. Further, there may be managerial factors.countries which should be omitted due to political reasons,including government polices. • The dynamism and philosophy of the top management and the internal power relations may also influence the marketA lot of information required for the preliminary screening is selection decision.available from such publications as the Statistical Year Book ofthe United Nations and the World Bank’s World Development Market-Related FactorsReport. There are a number of market related factors which need to beShort-listing of Markets carefully evaluated for market selection. The market relatedPreliminary screening enables to eliminate markets, which factors may be broadly grouped into general factors and specificobviously do not merit consideration at the very outset. There factors. General factors are factors general to the market as awould be a large number of markets left even after the prelimi- whole where as the specific factors are factors which are specificnary screening. They are further screened with the help of more to the industry concerned.information than was used at the preliminary screening stage. General FactorsThe objective is to distill out a small number of markets, which 1. Economic Factors: Include factors like economic stability,are likely to satisfy the company’s criteria for market selection for CDP growth trends, income distribution, per capita income,a detailed analysis for ranking them and final selection. sectoral distribution of CDP and trends, nature of andEvaluation and Selection trends in foreign trade and Bop, indebtedness, etc.A thorough evaluation of the short-listed markets is done with 2. Economic Policy: Includes industrial policy, foreignreference to the specific parameters and criteria and the markets investment policy, commercial policy, monetary policy, fiscalare ranked on the basis of their overall attractiveness. One or policy and other economic policies.more market(s) is/are selected from the rank list. For further 3. Business Regulations: Regulations of business like industrialdetails, see the section evaluation matrix. licensing; restrictions on growth, takeovers, mergers etc.,Determinants of Market Selection restrictions on foreign remittances, repatriations etc; tax laws;The market selection is normally based on two sets of factors, import restrictions and local content stipulations; exportviz., the firm-related factors and the market related factors. obligations and so on.Firm Related Factors 4. Currency Stability: Stability of the national currency is anotherA firm whose export objective is only to sell out a marginal very important Consideration in the market selection.surplus will select a foreign market suited to serve this purpose. 5. Political Factors: Character of the political system includingAnother firm with the same product, which wants to export a the nature and behavior of the ruling party/parties andvery large quantity, forming a very significant share of its total opposition party/parties, the government system etc. andoutput, may have different considerations than he fir firm in political stability are among the most importantmarket selection. In the case of the second firm, as the total determinants of market selection.quantity involved is large and 0" It forms a significant share of 6. Ethnic Factors: Ethnic factors like ethnic characteristics,its total output, market diversification would be important to including ethnic differences, and their implications forminimize the risk. If we think of a third firms which also the business, ethnic harmony etc. should also be analyzed.wants to export the same product as the first two firms but 7. Infrastructure: Infrastructure facilities seriously affectwhich wants to export several other products also, the market(s) business. For example, power shortage could causewhich it selects may perhaps be different from what the first considerable production losses. Shipping and othertwo firms have chosen; it would give more importance to the communication bottlenecks could cause lot of delays andtotal exports of all its products than that of any single product. loss of business, in addition to high costs.Further, the market selection may be influenced by otherobjectives like growth. When business growth is an important 8. Bureaucracy and Procedures: The nature and behavior of theobjective, growth potential of the market will be an important bureaucracy and the procedural system or styles are alsocriterion for selection. important factors to be considered. © Copy Right: Rai University11.625.1 179
  • 6. 9. Market Hub: The ability of a market to act as a hub, a baseINTERNATIONAL BUSINESS MANAGEMENT from where the company can operate in a contiguous region or countries, is a very important factor in the market selection of a company with plans for expansion of international business. South Africa, for example, could be such a hub for the entire sub-Saharan Africa. A large number of Indian companies have opened offices in Singapore to use it as a hub to trade with the booming markets of South-East Asia and the Pacific. Singapore is attractive for Indian companies because of its infrastructure, tax incentives and the large Indian population. A company, which sets up, an operational headquarters (OHQ) in Singapore has to pay only 10 per cent corporate tax against the normal 30 per cent. Indian industrialists feel that Sweden could be used as a base for exporting to third countries, especially the Baltic states. They also feel that the Swedish industrialists could use India as a sourcing ground to manufacture goods for export to the Asia- Pacific. Specific Factors Besides the general factors, there are a number of factors specific to the industry which need to be analysed for evaluating the market. Important specific factors are: 1. Trends in domestic production and consumption and estimates for the future of the product(s) concerned 2. Trends in imports and exports and estimates for the future 3. Nature of competition 4. Government policy and regulations pertaining to the industry 5. Infrastructure relevant to the industry 6. Supply conditions of raw materials and other inputs 7. Trade practices and customs 8. Cultural factors and consumer characteristics 9. Market characteristics including the number and nature of market segments, price trends etc. Evaluation Matrix An evaluation matrix is often used for ranking the markets with reference to their attractive less for the company. The evaluation matrix will include the relevant general and specific factors. These factors will be expressed in such specific terms so that they lend themselves for clear measurement and evolution. The countries to be evaluated may be listed on the horizontal axis and the factors on the vertical ax; Each factor is assigned a raw score and a weightage. The weighted score is obtained by multiplying the raw score with the respective weightage. Comparing the total weighted scores ranks markets. Notes: © Copy Right: Rai University 180 11.625.1