Brief of global production

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