1. CHAPTER SEVENTEEN
GLOBAL MANUFACTURING AND SUPPLY CHAIN
MANAGEMENT
Objectives
• To describe different dimensions of global manufacturing strategy
• To examine the elements of global supply chain management
• To show how quality affects the global supply chain
• To illustrate how supplier networks function
• To explain how inventory management is a key dimension of the global supply chain
• To present different alternatives for transporting products along the supply chain
from suppliers to customers
Chapter Overview
Important objectives shared by the global manufacturing and supply chain functions are
to simultaneously lower costs and increase quality by eliminating defects from both
processes. Chapter Seventeen examines supply chain networks to see how firms can
manage the various links most effectively. The chapter begins by discussing global
manufacturing strategy. It then moves on to explore supply chain management issues,
quality standards and supplier networks. The chapter concludes with a discussion of
inventory management and the development of effective transportation networks.
Chapter Outline
OPENING CASE: Samsonite’s Global Supply Chain
[See Map 17.1, Figures 17.1–3]
This case describes how Samsonite, a U.S.-based corporation that manufactures and
distributes both hardside and softside luggage, developed its global manufacturing and
distribution systems. Samsonite began its operations in 1910 in Denver, Colorado, but it
took many years to become a global firm after moving first through decentralized and
then centralized supply-chain structures. By the end of the 1960s, Samsonite was
manufacturing luggage in the Netherlands, Belgium, Spain, Mexico, and Japan; it was
also marketing luggage worldwide through a variety of distributors. During the 1990s,
Samsonite expanded throughout Eastern Europe and established several joint-venture
operations in China and other parts of Asia as well. As Samsonite expanded throughout
the world, it entered into subcontract arrangements in Asia and Eastern Europe for
outsourced parts and finished goods in order to supplement its own production. By 2002,
Samsonite’s European operations alone had grown to six company-owned production
facilities and one joint-venture facility, plus a series of subsidiaries, joint ventures, retail
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2. franchises, distributors and agents set up to service the European market. R&D is done
both in Europe and the United States.
Teaching Tip: Review the PowerPoint slides for Chapter Seventeen and select
those you find most useful for enhancing your lecture and class discussion. For
additional visual summaries of key chapter points, also review the figures in the text.
I. INTRODUCTION
The supply chain function encompasses the sourcing and coordination of materials,
information and funds from the initial raw material supplier to the final customer. It
concerns the management of the value-added process from the supplier’s supplier to
the customer’s customer. Suppliers can be part of the manufacturer’s organizational
structure, as in the case of a vertically integrated organization, or they can be
independent organizations. An important part of the supply chain function is
logistics (aka materials management), which encompasses the planning,
implementation and control of the efficient and effective flow and storage of
products and information from the point of origin to the final customer. Because the
supply chain is quite broad, the coordination of the network actually occurs through
interactions within the network. The greater the geographic spread of the firm, the
more difficult it becomes to manage the supply chain effectively.
II. GLOBAL MANUFACTURING STRATEGIES
The success of a global manufacturing strategy depends on four key factors: (i)
compatibility, (ii) configuration, (iii) coordination and (iv) control.
A. Manufacturing Compatibility
Compatibility refers to the degree of consistency between a firm’s foreign
direct investment decisions and its competitive strategy. Cost-minimization and
the drive for globalization force MNEs to pursue economies of scale in
manufacturing, often by producing at low labor-cost sites. Other key variables
include dependability, quality, flexibility and innovation.
B. Manufacturing Configuration
MNEs consider three basic configurations en route to developing their global
manufacturing strategies. They are:
• centralized manufacturing in a single country
(a global export approach)
• regionalized manufacturing in the specific regions served
(a regionalized marketing and manufacturing approach)
• local manufacturing in each country market served
(a multidomestic marketing and manufacturing approach).
C. Coordination and Control
Coordination represents the linking or integrating of participants all along the
global supply chain into a unified system. Control embraces systems, such as
organizational structure and performance measurement, which are designed to
help ensure strategies are implemented, monitored and revised, when
appropriate.
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3. III. INFORMATION TECHNOLOGY AND GLOBAL SUPPLY CHAIN
MANAGEMENT
Global supply chain management concerns the sourcing and coordination of
materials, information and funds from the initial raw material supplier to the final
customer. A comprehensive supply chain strategy should include the following 10
elements:
• customer service requirements
• plant and distribution center network design
• inventory management
• outsourcing and third-party logistics relationships
• key customer and supplier relationships
• business processes
• information systems
• organizational design and training requirements
• performance metrics
• performance goals.
The key to making a global information system work effectively is information.
Electronic data interchange (EDI) refers to the electronic movement of money and
information via computers and telecommunications equipment in a way that
effectively links suppliers, customers and third-party intermediaries, and ultimately
enhances customer value. Enterprise resource planning (ERP) refers to the use of
software to link information flows from different parts of a business and from
different parts of the world. E-commerce refers to the use of the Internet to link
suppliers with firms and firms with customers. An intranet can be used to help
automate and speed up internal processes in a company. The extranet refers to
using the Internet to link a company with external constituencies. Finally, the
Private Technology Exchange (PTX) refers to an online collaboration model that
brings manufacturers, distributors, resellers and customers together to execute trade
transactions and to share information regarding demand, production, availability, etc.
While many networks can in fact be managed via the Internet, others (especially
those in developing countries) cannot because of the lack of available, leading-edge
technology.
IV. QUALITY
Quality refers to meeting or exceeding the expectations of the customer. More
specifically, it incorporates conformance to specifications, value enhancement,
fitness for use, after-sales support and psychological impressions (image).
Acceptable quality level (AQL) is a premise that allows for a tolerable (negotiable)
level of defects that can be corrected through repair and service warranties. Zero
defects describe the refusal to tolerate defects of any kind.
A. Total Quality Management
Total quality management (TQM) stresses three principles: (i) customer
satisfaction, (ii) employee involvement and (iii) continuous improvements at
every level of the organization. The goal of TQM is to eliminate all defects. It
focuses on benchmarking world-class standards, product and service design,
process design and purchasing practices. Kaizen represents the Japanese process
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4. of continuous improvement, which requires identifying problems and enlisting
employees at all levels of the organization to help eliminate the problems. Six
Sigma is a highly focused quality-control system designed to scrutinize a firm’s
entire production system and eliminate defects, slash product cycle time and cut
costs across the board.
B. Quality Standards
The three different levels (types) of quality standards are: (i) a general level, (ii)
an industry specific level and (iii) a company level. The general level includes
International Organization for Standardization (ISO) ISO 9000:2000
certification, i.e., a set of five universal standards initially designed to harmonize
technical standards within the EU that is now accepted worldwide; it is applied
uniformly to companies in any industry and of any size in order to promote
quality at every level of an organization. Rather than judging the quality of a
product, ISO 9000:2000 evaluates the management of the manufacturing process
according to standards in 20 domains, from purchasing to design to training.
Industry-specific standards and company-specific standards represent the
quality-related requirements expected of suppliers.
V. SUPPLIER NETWORKS
Sourcing is the path a firm pursues in obtaining materials, components and final
products either from within or outside of the organization and from both domestic
and foreign locations. Global sourcing represents the first step in the process of
global materials management (logistics) (see Figures 17.7, 17.8). Firms pursue
global sourcing strategies in order to reduce costs, improve quality, increase their
exposure to worldwide technology, improve the delivery-of-supplies process,
strengthen the reliability of supply, gain access to strategic materials, establish a
presence in a foreign market, satisfy offset requirements and/or react to competitors’
offshore sourcing practices. The three major configurations that have emerged for
global sourcing are: (i) vertical integration (ii) outsourcing through industrial
clusters, and (iii) other outsourcing.
A. Make or Buy Decision
In determining whether to make or buy, MNEs should focus on making those
parts and performing those processes critical to a product and in which they
have a distinctive advantage. Other things can potentially be outsourced.
POINT-COUNTERPOINT: Should Firms Outsource Innovation?
POINT: Yes, firms should outsource innovation in order to effectively position
themselves in the highly competitive high tech and electronics industries. Suppliers’
capabilities continue to grow, making them important sources of innovation that can be
incorporated into final products. Outsourcing R&D can result in tremendous cost savings
and can greatly speed the R&D process.
COUNTERPOINT: Companies that outsource any R&D risk losing control of core
technologies. Outsourcing turns intellectual property into a commodity rather than a
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5. source of sustainable competitive advantage. Outsourcing R&D risks losing important
technology to current competitors, and also presents the possibility of having suppliers
and other partners turn into future competitors. A company without R&D is merely a
marketing front that has little identifiable intrinsic value. Outsourcing of manufacturing
is potentially harmful to competitiveness, but the outsourcing of innovation could be
disastrous to a company’s future fortunes.
B. Supplier Relations
When an MNE decides to outsource rather than integrate vertically, it must
determine the nature and extent of its involvement with suppliers.
C. Purchasing Function [See Figure 17.9]
Global progression in the purchasing function includes four phases:
• Domestic purchasing only
• Foreign buying based on need
• Foreign buying as a part of procurement strategy
• Integration of global procurement strategy
The last phase is reached when a firm realizes the benefits from the integration
and coordination of purchasing on a global basis. At this point, the MNE may
once again be faced with the centralization vs. decentralization dilemma. Global
sourcing options include:
• assigning domestic buyers international purchasing duties
• using foreign subsidiaries or business agents
• establishing international purchasing offices
• assigning the responsibility for global sourcing to a specific business unit or
units
• integrating and coordinating sourcing on a worldwide basis.
E-sourcing, i.e., the use of the Internet in the purchasing process is rapidly
growing in popularity.
VI. INVENTORY MANAGEMENT
Whether a firm decides to source from inside or outside the company or from
domestic or foreign suppliers, it needs to manage the flow and storage of inventory.
However, the distance, time, and uncertainty associated with foreign environments
will surely complicate the inventory management process.
A. Just-in-Time Systems
A just-in-time (JIT) manufacturing system reduces inventory costs by having
raw materials and components delivered just as they are needed in the
production process. JIT typically implies sole sourcing for specific parts in order
to get the supplier to commit to the stringent delivery and quality requirements
inherent in the system. A company’s inventory management strategy determines
the desired frequency and size of shipments and whether JIT will be used.
B. Foreign Trade Zones
Foreign trade zones (FTZs) are government-designated areas in which goods
can be stored, inspected and/or manufactured without being subject to formal
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6. customs procedures until they actually enter the country. A general-purpose
zone is usually established near a port of entry, such as a seaport, an airport, or a
border crossing. A subzone is under the same administrative domain but is
usually physically separate from a general-purpose zone. FTZs often serve as a
site to store inputs until they are needed at a particular production site. Exports
for which FTZs are used fall into one of the following categories:
• Foreign goods transshipped through U.S. zones to third countries
• Foreign goods processed in U.S. zones and then transshipped abroad
• Foreign goods processed or assembled in U.S. zones with some domestic
materials and parts, then reexported
• Goods produced wholly of foreign content in U.S. zones and then exported
• Domestic goods moved into a U.S. zone to achieve export status prior to
their actual exportation
VII. TRANSPORTATION NETWORKS
The international transportation of goods is extremely complicated with respect to
documentation, choice of carrier (air, land, ocean) and the decision to outsource the
function to a third-party intermediary or to establish internal transportation
capabilities. The key is to link manufacturers and suppliers on one end and
manufacturers and final customers on the other. Third-party intermediaries are a
critical factor in transportation networks. They can provide a host of services,
including packing, storing and shipping.
LOOKING TO THE FUTURE:
The Role of China in the Supply Chain
Because of low manufacturing wages and investments in capital equipment, China will
continue to be able to manufacture higher level products with better quality. China will
also be important as a location for outsourcing to third-party suppliers and will become
increasingly important as a base for all low cost manufacturing. Two factors will temper
the growing importance of China in global supply chains. One is the quality of Chinese
products. Although improving, Chinese manufacturing has still not reached the high
quality levels typically required by Japanese firms. The second factor is the future of the
Chinese currency—the yuan. If this currency is allowed to float against the dollar and
subsequently appreciates significantly, the cost advantages of Chinese manufacturers will
be harder to sustain.
CLOSING CASE: DENSO Corporation and Global Suppliers Relations
[See Maps 17.2–3]
Denso is a Japanese auto parts supplier and is the third-largest auto supplier in the world.
It is a major supplier to Toyota, but also supplies parts to all other auto manufacturers in
Japan. In order to increase revenues, Denso is making a big push to diversify by
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7. increasing sales to non-Japanese firms such as DaimlerChrysler. Denso serves the U.S.
market through plants in the U.S. and in Mexico. China is becoming increasing
important as its car market begins to grow rapidly. China is also becoming a source of
increased competition as Chinese auto parts makers grow.
QUESTIONS
1. What is driving DENSO’s globalization efforts, and what do you see as the major
challenges confronting the company?
Changes in automobile manufacturing locations and demand are influencing
DENSO’s globalization efforts. Growth has been stronger for the industry outside of
Japan, forcing DENSO to diversify geographically in order to grow. Anticipated
growth in countries like China and India will present major challenges to DENSO in
the future, as it tries to expand operations to meet demands for high quality and low
cost across the globe.
2. What challenges will DENSO face in maintaining its commitment to quality in the
future?
To satisfy Toyota’s rigid quality standards, DENSO has had to adopt TQM and
strive for zero defects. In addition, by complying with both ISO 9001 and QS9000,
DENSO qualifies as a supplier for auto manufacturers throughout Asia, Europe and
North America. Although kanban is thought to be on the decline, it is still widely
used, and mastery of the process gives DENSO an advantage with firms that rely on
that system. However, kanban shifts production and inventory management burdens
to suppliers and makes it more difficult for suppliers to manage their production
schedules. Nonetheless, given its expertise and certification, DENSO is well
positioned to compete as a global supplier to the automobile industry. In fact,
DENSO currently supplies parts to all companies manufacturing automobiles in
Japan.
3. From the standpoint of inventory management, why is it going to be difficult for
DENSO to supply companies other than Toyota?
Toyota still uses the kanban inventory control system, while DENSO’s other major
customers have abandoned kanban and now use more highly fluctuating demand
models. This requires DENSO to work within multiple systems and greatly
increases the complexity of balancing the inflow of supplies to production volumes
and customer needs.
WEB CONNECTION
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8. Teaching Tip: Visit www.prenhall.com/daniels for additional information and
links relating to the topics presented in Chapter Seventeen. Be sure to refer your
students to the online study guide, as well as the Internet exercises for Chapter
Seventeen.
_________________________
CHAPTER TERMINOLOGY:
supply chain, p. 602
logistics, p. 602
materials management, p. 602
compatibility, p. 604
coordination, p. 605
control, p. 605
electronic data interchange (EDI),
p. 607
enterprise resource planning (ERP),
p.607
e-commerce, p. 607
extranet, p. 608
intranet, p. 608
private technology exchange (PTX),
p. 608
quality, p. 608
zero defects, p. 609
acceptable quality level, p. 609
total quality management (TQM),
p. 609
six sigma, p. 610
International Organization for
Standardization (ISO), p. 610
sourcing, p. 611
vertical integration, p. 614
outsourcing, p. 614
just-in-time, p. 618
foreign trade zones (FTZs), p. 620
_________________________
ADDITIONAL EXERCISES: Global Manufacturing and Supply Chain
Management
Exercise 17.1. The total cost concept is a major concern in global manufacturing and
supply chain management. Strategic reorder points and economic order quantities
must be determined. The tradeoffs between (i) customer service and cost
minimization and (ii) control and flexibility must be considered. Contractual linkages
with the participants in the system must be negotiated and honored. Ask students to
discuss the challenges a firm faces in establishing its global manufacturing and
supply chain network given the dynamics of today’s competitive environment. Use
examples of firms in different types of industries as a basis for the discussion.
Exercise 17.2. A firm is considering whether to make a component in house or to
outsource it to an independent foreign supplier. Manufacturing the part in house will
require an investment in specialized assets; quality control and the protection of
intellectual property rights are major concerns. The most efficient and reliable
suppliers are located in countries whose currencies many foreign exchange analysts
expect will appreciate in the next decade; likewise, wage rates in those countries are
expected to rise. Ask students to discuss the pros and cons of manufacturing the
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9. component in house as opposed to outsourcing it. Should the firm consider foreign
direct investment as one of its options? Explain.
Exercise 17.3. The value-to-weight ratio is very important with respect to
manufacturing site location decisions because of its influence on transportation costs.
Other things being equal, products with a high value-to-weight ratio are good
candidates for exporting, while those with low value-to-weight ratios should be
manufactured in multiple locations close to major markets to minimize transportation
costs. For example, many electronic components have high value-to-weight ratios—
although they are expensive, they are very small and weigh very little. Even when
shipped halfway around the world, transportation accounts for a very small
percentage of the total delivered cost. Given that, ask students to consider why low
value but heavy products such as petroleum and refined sugar are shipped such great
distances. Why are products such as automobiles, which are bulky and can be so
easily damaged, also shipped great distances, rather than being manufactured
locally?
Exercise 17.4. Have students assume the role of top management at a major global
electronics company that is developing a wireless device capable of on-demand
music and video downloads from anywhere on the globe. What criteria should the
company use to make a decision on where to manufacture the device and whether to
outsource the manufacturing or control it internally?
Exercise 17.5. India and China are both very large emerging markets that are
becoming increasingly important in many MNEs global supply chains. What are the
advantages and disadvantages of sourcing from China as opposed to India? What
types of products or services are best suited for sourcing from India versus China?
Why?
Exercise 17.6. Have half the class assume the role of a large MNE and half the class
assume the role of a small potential supplier. What are the major concerns of the
MNE as it evaluates the smaller firm as a potential supplier? What concerns does the
small firm have as it attempts to develop a relationship with the MNE? Break
students up into small groups to discuss the issues.
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10. component in house as opposed to outsourcing it. Should the firm consider foreign
direct investment as one of its options? Explain.
Exercise 17.3. The value-to-weight ratio is very important with respect to
manufacturing site location decisions because of its influence on transportation costs.
Other things being equal, products with a high value-to-weight ratio are good
candidates for exporting, while those with low value-to-weight ratios should be
manufactured in multiple locations close to major markets to minimize transportation
costs. For example, many electronic components have high value-to-weight ratios—
although they are expensive, they are very small and weigh very little. Even when
shipped halfway around the world, transportation accounts for a very small
percentage of the total delivered cost. Given that, ask students to consider why low
value but heavy products such as petroleum and refined sugar are shipped such great
distances. Why are products such as automobiles, which are bulky and can be so
easily damaged, also shipped great distances, rather than being manufactured
locally?
Exercise 17.4. Have students assume the role of top management at a major global
electronics company that is developing a wireless device capable of on-demand
music and video downloads from anywhere on the globe. What criteria should the
company use to make a decision on where to manufacture the device and whether to
outsource the manufacturing or control it internally?
Exercise 17.5. India and China are both very large emerging markets that are
becoming increasingly important in many MNEs global supply chains. What are the
advantages and disadvantages of sourcing from China as opposed to India? What
types of products or services are best suited for sourcing from India versus China?
Why?
Exercise 17.6. Have half the class assume the role of a large MNE and half the class
assume the role of a small potential supplier. What are the major concerns of the
MNE as it evaluates the smaller firm as a potential supplier? What concerns does the
small firm have as it attempts to develop a relationship with the MNE? Break
students up into small groups to discuss the issues.
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