Microsoft decided to outsource production of the X-Box console to Flextronics for four reasons: Flextronics had supply chain control through an industrial park strategy; a global presence; used web-based information systems; and Microsoft trusted them. As trade barriers fall, firms must decide where to locate production, whether to own foreign sites, and how to manage globally dispersed supply chains and logistics. Production and logistics aim to lower costs and improve quality through strategies like total quality management and Six Sigma. Location decisions consider country, technological, and product factors to determine a centralized or decentralized production strategy.

1. Global Production,
Outsourcing, and
Logistics

2. Opening Case
• When introducing the X-Box gaming console,
Microsoft had to decide if it should
manufacture the console or outsource
manufacturing to a 3rd party
– Microsoft primarily creates software and lacked
the manufacturing capabilities to make the X-
Box
• Microsoft decided to outsource production to
Flextronics for four reasons
– Flextronics had been pursuing an industrial park
strategy so that it could control its supply chain
– Flextronics had a global presence
– Flextronics could use Web-based information
systems to share information with Microsoft
– Microsoft trusted Flextronics

3. Introduction
• As trade barriers fall and global markets develop, firms
must 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 to vendors?
– How should a globally dispersed supply chain be
managed?
– Should the firm manage global logistics itself, or
should it outsource the management to
enterprises that specialize in this activity?

4. Strategy, Production,
and Logistics
• Production is the activities involved in creating a product
– Can be both service and manufacturing activities
• Logistics is the activity that controls the transmission of
physical materials through the value chain
• Production and logistics are closely linked since a firm’s
ability to perform its production activities efficiently
depends on a timely supply of high quality material
inputs

5. Strategy, Production,
and Logistics
• Production and logistics functions have a
number of important strategic objectives
– Lower costs
– Increase product quality by eliminating defective products from both the
supply chain and the manufacturing process
• These objectives are interrelated
– Increasing productivity because time is not wasted producing poor-
quality products that cannot be sold, leading to a direct reduction in unit
costs
– Lowering rework and scrap costs associated with defective products
– Reducing the warranty costs and time associated with fixing defective
products

6. Relationship Between
Quality and Costs

7. Total Quality Management
• The total quality management (TQM) philosophy
was developed by a number of American
consultants such as W. Edwards Deming, Josephy
Juran, and A. V. Feigenbaum
• Deming identified a number of steps that should
be included in any TQM program
– Management should embrace the philosophy that mistakes,
defects, and poor quality materials are not acceptable
– Supervisors should work more with employees and provide them
with the tools they need to do the job
– Management should create an environment in which employees will
not fear reporting problems
– Work standards should not only be defined as numbers or quotas,
but should include some notion of quality

8. Six Sigma
• Six Sigma is the modern successor to TQM
– It is a statistically based philosophy that aims
to reduce defects, boost productivity, eliminate
waste, and cut costs throughout a company
• Production process operating at Six Sigma are
99.99966 percent accurate
– Only 3.4 defects per million units

9. Strategy, Production,
and Logistics
• In addition to lowering costs and improving quality,
two other objectives have particular importance
– Production and logistic functions must be able
to accommodate demands for local
responsiveness
– Production and logistics must be able to
respond quickly to shifts in customer demand

10. Where to Produce
• For the firm contemplating international production
a number of factors must be considered
– Country factors
– Technological factors
– Product factors

11. Country Factors
• Optimum economic, political, and cultural conditions
• Externalities
– Skilled labor pools
– Supporting industries
• Formal and informal trade barriers
• Exchange rate

12. Technological Factors
• Fixed costs
• Minimum efficient scale
• Flexible manufacturing
– Reduce setup times for complex equipment
– Increase machine utilization
– Improve quality control
• Flexible machine cells to perform a variety of
operations
Mass
customization
Low cost
Product
customization

13. Typical Unit Cost Curve

14. Manufacturing Location
• Arguments for concentrating production to a
few locations include
– Fixed costs are substantial
– Minimum efficient scale is high
– Flexible manufacturing technologies available
• Arguments to manufacture in all major markets
the firm operates in include
– Fixed costs are low
– Minimum efficient scale is low
– Flexible manufacturing technologies unavailable
– Trade barriers and transportation costs remain major impediments

15. Product Factors and
Location Strategies
• Two product features affect location decisions:
– Value to weight ratio
– Product serves universal needs
• Two basic strategies
– Concentrating in a centralized location and
serving the world market
– Decentralizing them in various regional or
national locations close to major markets when
opposite conditions exist

16. Centralized Location
• Factor costs have substantial impact
• Low trade barriers
• Externalities favor certain location
• Stable exchange rates
• High fixed costs, high minimum efficient scale
relative to global demand or flexible manufacturing
technology
• Product’s value-to-weight ratio is high
• Product serves universal needs

17. Decentralized Location
• Factor costs do not have substantial impact
• High trade barriers
• Location externalities not important
• Exchange rates volatile
• Low fixed costs, low minimum efficient scale
• Flexible manufacturing technology unavailable
• Product’s value-to-weight ratio is low
• Significant differences in consumer tastes and
preferences exist between nations

18. Location Strategy and
Production

19. Strategic Role of
Foreign Factories
• Initially, established where labor costs low
• Later, important centers for design and final
assembly
• Upward migration caused by pressures to:
– Improve cost structure
– Customize product to meet customer demand
– An increasing abundance of advanced factors
of production

20. Make or Buy Decisions
• Should a firm make or buy the component parts that
go into their final product?
• Advantages of making own components:
– Lower costs if most efficient producer
– Facilitating specialized investments
– Proprietary product technology protection
– Improved scheduling

21. Advantages of
Buy Versus Make
• Strategic flexibility in sourcing components
• Lower firm’s cost structure
• Offsets
• Strategic alliances with suppliers give benefits of
vertical integration without the associated
organizational problems

22. Managing a
Global Supply Chain
• Objective of materials management in managing a
firm’s global supply chain
– Maintain lowest possible cost
– In a way that best serves the customer’s
needs
• Role of just-in time inventory
– Economize on inventory holding costs
– Speeds inventory turnover
– Drawback: no buffer stock

23. Role of Information Technology
and the Internet
• Firms increasingly use electronic data interchange (EDI)
to coordinate the flow of materials into manufacturing,
through manufacturing, and out to customers
• EDI systems require computer links between a firm, its
suppliers, and its shippers; these electronic links are then
used
– To place orders with suppliers
– To register parts leaving a supplier
– To track them as they travel toward a manufacturing
plant
– To register their arrival

24. Role of Information Technology
and the Internet
• EDI systems have resulted in
– Suppliers, shippers, and the purchasing firm communicate with each other
with no time delay
– Increased flexibility and responsiveness of the whole global supply system
– Paperwork between suppliers, shippers, and the purchasing firm is
eliminated
• Web-based systems are rapidly transforming the
management of globally dispersed supply chains,
allowing even small firms to achieve a much
better balance between supply and demand
• Because the number of firms adopting these
systems has increased, those that don’t may find
themselves at a significant competitive
disadvantage