Intl biz lesson8


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International business course at ESEC BCN. Bachelor 3.
Lesson 8: Global supply management

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Intl biz lesson8

  1. 1. International BusinessGlobal supply managementProfessor: Marc Arza
  2. 2. 1. International business, supply chain & logisticsExporting is not enough. Globalization has taken international business from exporting(centralizing all activities in the home market and selling abroad) to managing a globalsupply chain where every step of the supply chain is taken abroad to the place offering amore advantageous context.Defining the supply chain: “The coordination of materials, infomation and funds fromthe initial raw material supplier to the ultimate costumer. (...) It is the management of thevalue-added process from the suppliers supplier to the costumers costumer”. FromInternational Business by John D. DanielsGlobalization has, therefore, put logistics at the center of international businessmanagement. Logistics can be defined as “that part of the supply chain process thatplans, implements, and controls the efficient, effective flow and storage of goods,services and related information from the point of origin to the point of consumption inorder to meet the costumer requirements”. From the US Council of LogisticsManagement.
  3. 3. 1. International business, supply chain & logisticsA global supply chain strategy requires that each step of the value-added process is takento the place where it is going to be more efficient (which does not only mean betterpriced). Finances, design, production, stockage, accounting and costumer service are justa few of the most important steps of any supply chain. Finances may come from a countrywith low interest rates and a stable exchange rate while design may be centered in a highcost but creative city as Barcelona or Stockholm and production be moved to Vietnamwhile costumer service goes to Morocco.Until today the production side of the global supply chain is probably the most developpedand may be used as a reference for the overall process. Wether to manufacture or sourcefrom a third party and where to manufacture are two of the basic decisions involved withthe supply chain management of production activities in international business.
  4. 4. 1. International business, supply chain & logistics
  5. 5. 2. Where to manufactureAn essential decision facing aninternational firm is where to locate itsmanufacturing activities to achieve thetwin goals of minimizing costs andimproving product quality. For the firmcontemplating international production,a number of factors must beconsidered. These factors can begrouped under three broad headings:country factors, technological factors,and product factors.
  6. 6. 2. Where to manufactureCountry factors: Political economy, culture, and relative factor costs differ from countryto country. Other things being equal, a firm should locate its various manufacturingactivities where the economic, political, and cultural conditions, including relative factorcosts, are conducive to the performance of those activitiesOther country factors that impinge on location decisions include formal and informal tradebarriers and rules and regulations regarding foreign direct investment . For example,although relative factor costs may make a country look attractive as a location forperforming a manufacturing activity, regulations prohibiting foreign direct investment mayeliminate this option. Similarly, a consideration of factor costs might suggest that a firmshould source production of a certain component from a particular country, but tradebarriers could make this uneconomical.Another country factor is expected future movements in its exchange rate Currencyappreciation can transform a lowcost location into a high - cost location.
  7. 7. 2. Where to manufactureTechnological factors: Three characteristics of a manufacturing technology are ofinterest here: the level of its fixed costs, its minimum efficient scale, and its flexibility.Fixed costs: In some cases the fixed costs of setting up a manufacturing plant are sohigh that a firm must serve the world market from a single location or from a very fewlocations. But a relatively low level of fixed costs can make it economical to perform aparticular activity in several locations at once.Minimum efficient cost: The larger the minimum efficient scale of a plant, the greater theargument for centralizing production in a single location or a limited number of locations.Alternatively, when the minimum efficient scale of production is relatively low, it may beeconomical to manufacture a product at several locations.Flexible manufacturing technologies: A range of manufacturing technologies that aredesigned to (a) reduce setup times for complex equipment, (b) increase utilization ofindividual machines through better scheduling, and (c) improve quality control at allstages of the manufacturing process. Flexible manufacturing technologies allow acompany to produce a wider variety of end products at a unit cost that at one time couldbe achieved only through the mass production of a standardized output.
  8. 8. 2. Where to manufactureTwo product features affect location decisions. The first is the products value-to-weight ratio because of its influence on transportation costs. Many electronic componentsand pharmaceuticals have high value-to-weight ratios; they are expensive and they do notweigh very much. Thus, even if they are shipped halfway around the world, theirtransportation costs account for a very small percentage of total costs. Given this, otherthings being equal, there is great pressure to manufacture these products in the optimallocation and to serve the world market from there. The opposite holds for products withlow value-to-weight ratios.. Thus, other things being equal, there is great pressure tomanufacture these products in multiple locations close to major markets to reducetransportation costs.The other product feature that can influence location decisions is whether the productserves universal needs, needs that are the same all over the world. Since there are fewnational differences in consumer taste and preference for such products, the need forlocal responsiveness is reduced. This increases the attractiveness of concentratingmanufacturing at an optimal location.
  9. 9. 2. Where to manufacture
  10. 10. 3. Make or buyInternational businesses frequently face sourcing decisions, decisions about whetherthey should make or buy the component parts that go into their final product. Should thefirm vertically integrate to manufacture its own component parts or should it outsourcethem, or buy them from independent suppliers? Make-or-buy decisions are importantfactors of many firms manufacturing strategies.Make-or-buy decisions pose plenty of problems for purely domestic businesses but evenmore problems for international businesses. These decisions in the international arenaare complicated by the volatility of countries political economies, exchange ratemovements, changes in relative factor costs, and the like.
  11. 11. 3. Make or buyThe arguments that support making component parts in-house--vertical integration--arefourfold.Lower Costs: It may pay a firm to continue manufacturing a product or component partin-house if the firm is more efficient at that production activity than any other enterprise.Facilitating Specialized Investments: When one firm must invest in specialized assetsto supply another, mutual dependency is created. In such circumstances, each party fearsthe other will abuse the relationship by seeking more favorable terms. When substantialinvestments in specialized assets are required to manufacture a component, the firm willprefer to make the component internally rather than contract it out to a supplier.Proprietary Product Technology Protection: Proprietary product technology istechnology unique to a firm. If it enables the firm to produce a product containing superiorfeatures, proprietary technology can give the firm a competitive advantage. The firmwould not want this technology to fall into the hands of competitors.Improved Scheduling: The weakest argument for vertical integration is that productioncost savings result from it because it makes planning, coordination, and scheduling ofadjacent processes easier. This is particularly important in firms with just-in-time inventorysystems. However, ownership is not the issue here. A company may achieve tightscheduling with its globally dispersed parts suppliers without vertical integration.
  12. 12. 3. Make or buyThe advantages of buying component parts from independent suppliers are that it givesthe firm greater flexibility, it can help drive down the firms cost structure, and it may helpthe firm to capture orders from international customers.Strategic Flexibility: The great advantage of buying component parts from independentsuppliers is that the firm can maintain its flexibility, switching orders between suppliers ascircumstances dictate. Adapting to changing exchange rates or demand location.Lower Costs: Although Outsourcing may lower the firms cost structure. Verticalintegration into the manufacture of component parts increases an organizations scope,and the resulting increase in organizational complexity can raise a firms cost structure.Offsets: Another reason for outsourcing some manufacturing to independent suppliersbased in other countries is that it may help the firm capture more orders from that country.The practice of offsets is common in the commercial aerospace industry. For example,before Air India places a large order with Boeing, the Indian government might ask Boeingto push some subcontracting work toward Indian manufacturers.
  13. 13. 4. Coordinating a global manufacturing systemMaterials management, which encompasses logistics, embraces the activitiesnecessary to get materials to a manufacturing facility, through the manufacturingprocess, and out through a distribution system to the end user.The twin objectives of materials management are to achieve this at the lowest possiblecost and in a way that best serves customer needs, thereby lowering the costs of valuecreation and helping the firm establish a competitive advantage through superiorcustomer service. Materials management is a major undertaking in a firm with aglobally dispersed manufacturing system and global markets and logistics end upbecoming the center of such a company.One of the side effects of a global supply chain lies in complexity wich represents a riskincrease and may be potentially damaging to the company in case of unexpecteddifficutlies or management mistakes.
  14. 14. 5. Global supply chain disastersFoxmeyer’s 1996 Distribution Disaster: New order management and warehouseautomation systems lead to inability to ship product and failure to achieve expectedsavings; bankruptcy and sale of the company followThe WebVan Story: $25 million automated warehouses just make no sense given themarket; company goes from billions in market gap to gone in just months in 2001Adidas 1996 Warehouse Meltdown: Not well known story, adidas can’t get a first andthen second warehouse system and also its DC automation to work. Inability to shipleads to market share losses that persist for a long timeToys R Christmas 1999: On-line retail division can’t make Christmas deliverycommitments to thousands; infamous “We’re sorry” emails on Dec. 23; eventually,Amazon takes over fulfillmentNike’s 2001 Planning System Perplexity: New planning system causes inventory andorder woes, blamed for $100 revenue miss as stock loses 20%Aris Isotoner’s Sourcing Calamity in 1994: Then a division of Sara Lee, Isotonerdecides to shut successful Manila glove/slipper plant to chase even lower costselsewhere; costs rise, quality plummets, revenue cut by 50%; soon sold to Totes Inc.