BUS 305

1. Chapter 15
Global Operations
and Supply Chain
Management
McGraw-Hill/Irwin Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. 15-2
Learning Objectives
• LO1 Understand the concept of supply chain
management.
• LO2 Recognize the relationship between design and
supply chain management.
• LO3 Describe the five global sourcing arrangements.
• LO4 Understand the increasing role of electronic
purchasing for global sourcing.
• LO5 Appreciate the importance of the added costs of
global sourcing.
• LO6 Explain the potential of global standardization
of production processes and procedures, and identify
impediments to standardization efforts.
• LO1 Understand the concept of supply chain
management.
• LO2 Recognize the relationship between design and
supply chain management.
• LO3 Describe the five global sourcing arrangements.
• LO4 Understand the increasing role of electronic
purchasing for global sourcing.
• LO5 Appreciate the importance of the added costs of
global sourcing.
• LO6 Explain the potential of global standardization
of production processes and procedures, and identify
impediments to standardization efforts.

3. 15-3
Managing Global Supply Chains
• Supply Chain
Management
• “the process of
coordinating and
integrating the flow of
materials, information,
finances, and services
within and among
companies in the value
chain from suppliers to
the ultimate consumer”
• Supply Chain
Management
• “the process of
coordinating and
integrating the flow of
materials, information,
finances, and services
within and among
companies in the value
chain from suppliers to
the ultimate consumer”
• Integral part of global
quality & cost
management:
– Supply chain costs are 50+%
of assets and 80+% of
revenues
– Inventory carried at each
stage of supply chain; ties up
$$
– Ultimate goal: reduce
inventory
– Supply chains must be
synchronized to minimize
buffer inventories
– Management of GSC gives
competitive advantage
• Integral part of global
quality & cost
management:
– Supply chain costs are 50+%
of assets and 80+% of
revenues
– Inventory carried at each
stage of supply chain; ties up
$$
– Ultimate goal: reduce
inventory
– Supply chains must be
synchronized to minimize
buffer inventories
– Management of GSC gives
competitive advantage

4. 15-4

5. 15-5
Design of Products and Services
• Design is related fundamentally to the type of inputs required
• Important consideration: extent of standardization or adaptation
of products
• “Over-the-Wall” approach is a traditional approach using
sequential design based on addressing production-related
problems
• Cross-functional participation is the alternative approach
addressing design-related sourcing and manufacturing problems
• Design is related fundamentally to the type of inputs required
• Important consideration: extent of standardization or adaptation
of products
• “Over-the-Wall” approach is a traditional approach using
sequential design based on addressing production-related
problems
• Cross-functional participation is the alternative approach
addressing design-related sourcing and manufacturing problems

6. 15-6
Sourcing Globally
• Reasons for Sourcing
Globally:
– Lower prices
– No local availability
of certain products
– Competition using
better designed or
quality components
not available locally
• Reasons for Sourcing
Globally:
– Lower prices
– No local availability
of certain products
– Competition using
better designed or
quality components
not available locally
• Offshoring
– “relocating some or
all of a business’s
activities or processes
to a foreign location”
• Decision: Set up
own facilities or
outsource
production?
• Offshoring
– “relocating some or
all of a business’s
activities or processes
to a foreign location”
• Decision: Set up
own facilities or
outsource
production?

7. 15-7
Global Sourcing
Arrangements
Global Sourcing
Arrangements
1. Wholly owned
subsidiary
2. Overseas joint venture
3. In-bond plant
contractor
4. Overseas independent
contractor
5. Independent overseas
manufacturer
Importance of
Global Sourcing
Importance of
Global Sourcing
• Intrafirm trade between
parent and foreign affiliates
30-40% of exports and 35-
45% of imports in U.S.
• U.S.: % of purchased
materials in cost of goods sold
is rising:
– More complex products
– More focus on core business
– Outsource activities lacking
competitive ability
– Globally locate “quick
response” suppliers

8. 15-8
The Increasing Use of Electronic
Purchasing for Global Sourcing
• Growth of E-procurement exchanges:
– Identify potential suppliers or customers
– Facilitate efficient and dynamic interactions among
prospective buyers and suppliers
– Recognize strategic function of purchasing
– Indirect procurement – purchasing goods &
services not part of finished goods (maintenance,
supplies, office equipment, etc.) can account for
70% of total purchases
– Valuable for small and mid-sized companies
• Growth of E-procurement exchanges:
– Identify potential suppliers or customers
– Facilitate efficient and dynamic interactions among
prospective buyers and suppliers
– Recognize strategic function of purchasing
– Indirect procurement – purchasing goods &
services not part of finished goods (maintenance,
supplies, office equipment, etc.) can account for
70% of total purchases
– Valuable for small and mid-sized companies

9. 15-9
Options for Global
Electronic Procurement
• E-purchases are typically catalog purchases
• Suppliers update catalogs in real time
• Buyers & suppliers can use standard bid/quote
system
• Industry sponsored exchanges can facilitate:
– Letters of credit
– Contracting for logistics and distribution
– Monitoring prices and order flows daily
• E-purchases are typically catalog purchases
• Suppliers update catalogs in real time
• Buyers & suppliers can use standard bid/quote
system
• Industry sponsored exchanges can facilitate:
– Letters of credit
– Contracting for logistics and distribution
– Monitoring prices and order flows daily

10. 15-10
Benefits of Global Electronic
Procurement Systems
• Streamline operations
• Cut costs
• Improve productivity in supply chain
management and customer response
• Cut invoice and ordering errors
• Enhance efficiency
• Streamline supply chains
• Reach new markets
• Streamline operations
• Cut costs
• Improve productivity in supply chain
management and customer response
• Cut invoice and ordering errors
• Enhance efficiency
• Streamline supply chains
• Reach new markets

11. 15-11
Problems with Global Sourcing
• Initial lower costs may
not really be lower when
all costs are connected
to the purchase
• New costing techniques:
– “Life-cycle costing” being used to
analyze over life of product
– Full-costing
– Activity-based costing
• Tied to firm’s strategic
objectives with explicit
supplier objectives
• Initial lower costs may
not really be lower when
all costs are connected
to the purchase
• New costing techniques:
– “Life-cycle costing” being used to
analyze over life of product
– Full-costing
– Activity-based costing
• Tied to firm’s strategic
objectives with explicit
supplier objectives
• Added Costs of Importing:
1. International freight,
insurance, and packing (10-
12%)
2. Import duties (0-50%)
3. Customhouse broker’s fees (3-
5%)
4. Transit or pipeline inventory
(5-15%)
5. Cost of letter of credit (1%)
6. International travel and
communication costs (2-8%)
7. Company import specialists
(5%)
8. Reworking of products out of
specification (0-15%)
• Added Costs of Importing:
1. International freight,
insurance, and packing (10-
12%)
2. Import duties (0-50%)
3. Customhouse broker’s fees (3-
5%)
4. Transit or pipeline inventory
(5-15%)
5. Cost of letter of credit (1%)
6. International travel and
communication costs (2-8%)
7. Company import specialists
(5%)
8. Reworking of products out of
specification (0-15%)

12. 15-12
Other Disadvantages
• Price increase due to
home currency losing
value due to FX rate
fluctuations
– Quote in home
country currency to
avoid exchange risk
– If home country is
unstable, quote in
seller’s currency
– Hedge
• Price increase due to
home currency losing
value due to FX rate
fluctuations
– Quote in home
country currency to
avoid exchange risk
– If home country is
unstable, quote in
seller’s currency
– Hedge
• E-procurement & E-
commerce issues:
– Integrated in, not
isolated from firm’s
business system
– Security
– Compatibility with
other foreign country
E-standards
– Potential
anticompetitive effects
of collaboration
• E-procurement & E-
commerce issues:
– Integrated in, not
isolated from firm’s
business system
– Security
– Compatibility with
other foreign country
E-standards
– Potential
anticompetitive effects
of collaboration

13. 15-13
Manufacturing Systems
• International firms have manufacturing
facilities at various levels of development.
• Different levels affect cost and quality.
• Manufacturing systems can vary based on
high to low technology within the same
company.
• Manufacturing system in place affect how the
global supply chain is set up and managed.
• International firms have manufacturing
facilities at various levels of development.
• Different levels affect cost and quality.
• Manufacturing systems can vary based on
high to low technology within the same
company.
• Manufacturing system in place affect how the
global supply chain is set up and managed.

14. 15-14
Advanced Production Techniques can
Enhance Quality and Lower Costs
• International competition requires companies
to achieve efficiency and effectiveness in
international production
• Systems being implemented to improve
competitiveness:
– Just-in-time supply chains (JIT)
– Highly synchronized manufacturing systems
– Computer-integrated manufacturing (CIM) using
computers and robots
• International competition requires companies
to achieve efficiency and effectiveness in
international production
• Systems being implemented to improve
competitiveness:
– Just-in-time supply chains (JIT)
– Highly synchronized manufacturing systems
– Computer-integrated manufacturing (CIM) using
computers and robots

15. 15-15
Logistics
• Logistics
– “managerial functions associated with movement of
materials, work in progress or finished goods”
• Supply chain management effectiveness is based on
interface of logistics with sourcing, manufacturing,
design, engineering, and marketing
• Many firms outsource logistics to specialists
specifically for international logistics
• 3rd
party logistics suppliers also offer warehousing,
distribution management and customs & brokerage
services
• Logistics
– “managerial functions associated with movement of
materials, work in progress or finished goods”
• Supply chain management effectiveness is based on
interface of logistics with sourcing, manufacturing,
design, engineering, and marketing
• Many firms outsource logistics to specialists
specifically for international logistics
• 3rd
party logistics suppliers also offer warehousing,
distribution management and customs & brokerage
services

16. 15-16
Standardization and the
Management of Global Operations
• Standards
– “documented agreements on technical
specifications or other precise criteria used
consistently as guidelines, rules, or
definitions of the characteristics of a
product, process, or service”
• Standards
– “documented agreements on technical
specifications or other precise criteria used
consistently as guidelines, rules, or
definitions of the characteristics of a
product, process, or service”

17. 15-17
Benefits of Standardization of
Global Operations
• Ensures that materials, products, processes and
services are appropriate for their purpose
• Developed across product lines and for various
functions:
– American Society for Testing and Materials (ASTM)
– ISO 9000 (International Organization for Standards) most
used in Europe for quality
– ISO 9001 most comprehensive standard
– Other industry-specific standards
• Ensures that materials, products, processes and
services are appropriate for their purpose
• Developed across product lines and for various
functions:
– American Society for Testing and Materials (ASTM)
– ISO 9000 (International Organization for Standards) most
used in Europe for quality
– ISO 9001 most comprehensive standard
– Other industry-specific standards

18. 15-18
Organization and Staffing
• Standardized manufacturing systems
impact organization and staffing:
– Simpler and Less Costly when Standardized
• Replication requires smaller staffs
– Logistics of Supply
• Organizing production into 1 logistical supply chain and
standardizing processes increases profits
• Standardized manufacturing systems
impact organization and staffing:
– Simpler and Less Costly when Standardized
• Replication requires smaller staffs
– Logistics of Supply
• Organizing production into 1 logistical supply chain and
standardizing processes increases profits

19. 15-19
Organization and Staffing
• Manufacturing Rationalization
– “division of production among a number of production units,
thus enabling each to proc duce only a limited number of
components for all of the firm’s assembly plants”
• Product Mix must first be rationalized for manufacturing
rationalization
• Not viable if wide consumer taste and preference differences
• Manufacturing Rationalization
– “division of production among a number of production units,
thus enabling each to proc duce only a limited number of
components for all of the firm’s assembly plants”
• Product Mix must first be rationalized for manufacturing
rationalization
• Not viable if wide consumer taste and preference differences
• Purchasing
– Headquarters assists when subsidiaries can’t procure locally
– Unified buying passes volume discounts to subsidiaries
• Purchasing
– Headquarters assists when subsidiaries can’t procure locally
– Unified buying passes volume discounts to subsidiaries

20. 15-20
ControlControl
• Quality Control
– Standardized production
equipment makes quality control
of foreign affiliates easier
– Home office can spot and
address deviations
• Production and
Maintenance Control
– Single standard reduces
maintenance & production
control, allows for evaluation of
local management effectiveness,
and transfer of maintenance
experience to reduce stoppages
and breakdowns
• Quality Control
– Standardized production
equipment makes quality control
of foreign affiliates easier
– Home office can spot and
address deviations
• Production and
Maintenance Control
– Single standard reduces
maintenance & production
control, allows for evaluation of
local management effectiveness,
and transfer of maintenance
experience to reduce stoppages
and breakdowns
PlanningPlanning
1. Design engineers need only copy
the drawings and lists of materials
that they have in their files.
2. Vendors requested to furnish
equipment that they have supplied
previously.
3. Technical department can send the
current manufacturing
specifications without alteration.
4. Labor trainers experienced in the
operation of the machinery can be
sent to the new location without
undergoing special training on new
equipment.
5. Reasonably accurate forecasts of
plant erection time and output can
be based on experience with
existing facilities.
1. Design engineers need only copy
the drawings and lists of materials
that they have in their files.
2. Vendors requested to furnish
equipment that they have supplied
previously.
3. Technical department can send the
current manufacturing
specifications without alteration.
4. Labor trainers experienced in the
operation of the machinery can be
sent to the new location without
undergoing special training on new
equipment.
5. Reasonably accurate forecasts of
plant erection time and output can
be based on experience with
existing facilities.

21. 15-21
Impediments to Standardization
of Global Operations
Environmental ForcesEnvironmental Forces
• Easier for ICs to standardize TQM concepts and
synchronous manufacturing overseas than to
standardize actual manufacturing facilities
because of foreign environmental forces
• 3 Types of Environmental Forces:
1. Economic Forces
2. Cultural Forces
3. Political Forces
• Easier for ICs to standardize TQM concepts and
synchronous manufacturing overseas than to
standardize actual manufacturing facilities
because of foreign environmental forces
• 3 Types of Environmental Forces:
1. Economic Forces
2. Cultural Forces
3. Political Forces

22. 15-22
Impediments to Standardization
of Global Operations
Economic ForcesEconomic Forces
– Largest barrier to production standardization is wide market sizes
– Choices :
• Capital-intensive process using automated, semimanual-output
machinery
• Labor-intensive process using people and general-purpose equipment
with lower production capacity
• Computer-integrated manufacturing (CIM) in industrialized and
advanced developing nations. Leads to mass customization
– Designers must factor in local cost of production
– Backward Vertical Integration
• “Facilities are established to manufacture inputs used in the production
of firm’s final products”
– Largest barrier to production standardization is wide market sizes
– Choices :
• Capital-intensive process using automated, semimanual-output
machinery
• Labor-intensive process using people and general-purpose equipment
with lower production capacity
• Computer-integrated manufacturing (CIM) in industrialized and
advanced developing nations. Leads to mass customization
– Designers must factor in local cost of production
– Backward Vertical Integration
• “Facilities are established to manufacture inputs used in the production
of firm’s final products”

23. 15-23
Impediments to Standardization
of Global Operations
Cultural ForcesCultural Forces
Capital-intensive process used in industrialized
nations with large market and high labor costs
Used in developing countries lacking skilled workers
Use of specialized machines with attending unskilled labor
trained in technical schools
Attitudes of educational administrators directed resources to
professional education not trades or vocational education
All host governments requirements must be met.
Capital-intensive process used in industrialized
nations with large market and high labor costs
Used in developing countries lacking skilled workers
Use of specialized machines with attending unskilled labor
trained in technical schools
Attitudes of educational administrators directed resources to
professional education not trades or vocational education
All host governments requirements must be met.

24. 15-24
Impediments to Standardization
of Global Operations
Political ForcesPolitical Forces
• Local Paradox:
– Country needs new jobs favoring labor-intensive processes
– Government insists on most modern equipment because only
advanced manufacturing technologies can compete globally
– Reluctant to use “inferior” or untried alternatives
– Low-productivity technology will keep local country dependant on
industrialized countries
– Result: developing countries can enact laws banning import of used
machinery
• Local Paradox:
– Country needs new jobs favoring labor-intensive processes
– Government insists on most modern equipment because only
advanced manufacturing technologies can compete globally
– Reluctant to use “inferior” or untried alternatives
– Low-productivity technology will keep local country dependant on
industrialized countries
– Result: developing countries can enact laws banning import of used
machinery

25. 15-25
Some Design Solutions
Hybrid DesignHybrid Design
• Used in plant design in
developing countries
• Engineers use hybrid of:
– capital-intensive
processes essential for
quality
– Labor-intensive processes
use abundant unskilled
labor
• Used in plant design in
developing countries
• Engineers use hybrid of:
– capital-intensive
processes essential for
quality
– Labor-intensive processes
use abundant unskilled
labor
Intermediate TechnologyIntermediate Technology
• Issue: How to avoid high
capital costs, create jobs,
and retain product
quality?
• Intermediate Technology
– “production methods between
capital- and labor-intensive
methods”
– Technology transfer difficult
– Higher start-up and transfer
costs may reduce savings
• Issue: How to avoid high
capital costs, create jobs,
and retain product
quality?
• Intermediate Technology
– “production methods between
capital- and labor-intensive
methods”
– Technology transfer difficult
– Higher start-up and transfer
costs may reduce savings

26. 15-26
Local Manufacturing System
Basis for OrganizationBasis for Organization
• Local manufacturing plant
typically scaled-down version
of parent
• Similar organizational
structure to parent
• Smaller scale of foreign
operations puts all
departments in one location
• Local manufacturing plant
typically scaled-down version
of parent
• Similar organizational
structure to parent
• Smaller scale of foreign
operations puts all
departments in one location
Horizontal and VerticalHorizontal and Vertical
• Local organization rarely
integrated
• Added investment deters
vertical integration
• Some countries dictate % of
local content in finished
goods
• Subsidiaries rarely use
horizontal integration
• Overseas affiliates become
conglomerate when parent
acquires a multinational
• Local organization rarely
integrated
• Added investment deters
vertical integration
• Some countries dictate % of
local content in finished
goods
• Subsidiaries rarely use
horizontal integration
• Overseas affiliates become
conglomerate when parent
acquires a multinational

27. 15-27
GLOBAL gauntlet
• Is Offshore
Outsourcing Ending
Its Run?
• Is Offshore
Outsourcing Ending
Its Run?
• What factors determine
whether manufacturing
activities will remain in—or
come back to---high-cost
countries such as the U.S.?
• What are the implications of
your analysis for economic
• prosperity—and job creation—
in these countries?
• What factors determine
whether manufacturing
activities will remain in—or
come back to---high-cost
countries such as the U.S.?
• What are the implications of
your analysis for economic
• prosperity—and job creation—
in these countries?