This document discusses key aspects of managing global supply chains and international business. It covers: 1) Defining supply chains and the importance of logistics in international business management. 2) Factors to consider when deciding where to locate manufacturing activities, including country factors like costs and regulations, technological factors like fixed costs and minimum efficient scale, and product factors like value-to-weight ratios. 3) Considerations for "make or buy" decisions about whether to manufacture components internally or outsource them, balancing advantages of vertical integration vs flexibility and potential cost savings of outsourcing.

1. International Business
Global supply management
Professor: Marc Arza
marc@futura.cat

2. 1. International business, supply chain & logistics
Exporting is not enough. Globalization has taken international business from exporting
(centralizing all activities in the home market and selling abroad) to managing a global
supply chain where every step of the supply chain is taken abroad to the place offering a
more advantageous context.
Defining the supply chain: “The coordination of materials, infomation and funds from
the initial raw material supplier to the ultimate costumer. (...) It is the management of the
value-added process from the supplier's supplier to the costumer's costumer”. From
International Business by John D. Daniels
Globalization has, therefore, put logistics at the center of international business
management. Logistics can be defined as “that part of the supply chain process that
plans, 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 in
order to meet the costumer requirements”. From the US Council of Logistics
Management.

3. 1. International business, supply chain & logistics
A global supply chain strategy requires that each step of the value-added process is taken
to the place where it is going to be more efficient (which does not only mean better
priced). Finances, design, production, stockage, accounting and costumer service are just
a few of the most important steps of any supply chain. Finances may come from a country
with low interest rates and a stable exchange rate while design may be centered in a high
cost but creative city as Barcelona or Stockholm and production be moved to Vietnam
while costumer service goes to Morocco.
Until today the production side of the global supply chain is probably the most developped
and may be used as a reference for the overall process. Wether to manufacture or source
from a third party and where to manufacture are two of the basic decisions involved with
the supply chain management of production activities in international business.

4. 1. International business, supply chain & logistics

5. 2. Where to manufacture
An essential decision facing an
international firm is where to locate its
manufacturing activities to achieve the
twin goals of minimizing costs and
improving product quality. For the firm
contemplating international production,
a number of factors must be
considered. These factors can be
grouped under three broad headings:
country factors, technological factors,
and product factors.

6. 2. Where to manufacture
Country factors: Political economy, culture, and relative factor costs differ from country
to country. Other things being equal, a firm should locate its various manufacturing
activities where the economic, political, and cultural conditions, including relative factor
costs, are conducive to the performance of those activities
Other country factors that impinge on location decisions include formal and informal trade
barriers and rules and regulations regarding foreign direct investment . For example,
although relative factor costs may make a country look attractive as a location for
performing a manufacturing activity, regulations prohibiting foreign direct investment may
eliminate this option. Similarly, a consideration of factor costs might suggest that a firm
should source production of a certain component from a particular country, but trade
barriers could make this uneconomical.
Another country factor is expected future movements in its exchange rate Currency
appreciation can transform a lowcost location into a high - cost location.

7. 2. Where to manufacture
Technological factors: Three characteristics of a manufacturing technology are of
interest 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 so
high that a firm must serve the world market from a single location or from a very few
locations. But a relatively low level of fixed costs can make it economical to perform a
particular activity in several locations at once.
Minimum efficient cost: The larger the minimum efficient scale of a plant, the greater the
argument 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 be
economical to manufacture a product at several locations.
Flexible manufacturing technologies: A range of manufacturing technologies that are
designed to (a) reduce setup times for complex equipment, (b) increase utilization of
individual machines through better scheduling, and (c) improve quality control at all
stages of the manufacturing process. Flexible manufacturing technologies allow a
company to produce a wider variety of end products at a unit cost that at one time could
be achieved only through the mass production of a standardized output.

8. 2. Where to manufacture
Two product features affect location decisions. The first is the product's value-to-
weight ratio because of its influence on transportation costs. Many electronic components
and pharmaceuticals have high value-to-weight ratios; they are expensive and they do not
weigh very much. Thus, even if they are shipped halfway around the world, their
transportation costs account for a very small percentage of total costs. Given this, other
things being equal, there is great pressure to manufacture these products in the optimal
location and to serve the world market from there. The opposite holds for products with
low value-to-weight ratios.. Thus, other things being equal, there is great pressure to
manufacture these products in multiple locations close to major markets to reduce
transportation costs.
The other product feature that can influence location decisions is whether the product
serves universal needs, needs that are the same all over the world. Since there are few
national differences in consumer taste and preference for such products, the need for
local responsiveness is reduced. This increases the attractiveness of concentrating
manufacturing at an optimal location.

9. 2. Where to manufacture

10. 3. Make or buy
International businesses frequently face sourcing decisions, decisions about whether
they should make or buy the component parts that go into their final product. Should the
firm vertically integrate to manufacture its own component parts or should it outsource
them, or buy them from independent suppliers? Make-or-buy decisions are important
factors of many firms' manufacturing strategies.
Make-or-buy decisions pose plenty of problems for purely domestic businesses but even
more problems for international businesses. These decisions in the international arena
are complicated by the volatility of countries' political economies, exchange rate
movements, changes in relative factor costs, and the like.

11. 3. Make or buy
The arguments that support making component parts in-house--vertical integration--are
fourfold.
Lower Costs: It may pay a firm to continue manufacturing a product or component part
in-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 assets
to supply another, mutual dependency is created. In such circumstances, each party fears
the other will abuse the relationship by seeking more favorable terms. When substantial
investments in specialized assets are required to manufacture a component, the firm will
prefer to make the component internally rather than contract it out to a supplier.
Proprietary Product Technology Protection: Proprietary product technology is
technology unique to a firm. If it enables the firm to produce a product containing superior
features, proprietary technology can give the firm a competitive advantage. The firm
would not want this technology to fall into the hands of competitors.
Improved Scheduling: The weakest argument for vertical integration is that production
cost savings result from it because it makes planning, coordination, and scheduling of
adjacent processes easier. This is particularly important in firms with just-in-time inventory
systems. However, ownership is not the issue here. A company may achieve tight
scheduling with its globally dispersed parts suppliers without vertical integration.

12. 3. Make or buy
The advantages of buying component parts from independent suppliers are that it gives
the firm greater flexibility, it can help drive down the firm's cost structure, and it may help
the firm to capture orders from international customers.
Strategic Flexibility: The great advantage of buying component parts from independent
suppliers is that the firm can maintain its flexibility, switching orders between suppliers as
circumstances dictate. Adapting to changing exchange rates or demand location.
Lower Costs: Although Outsourcing may lower the firm's cost structure. Vertical
integration into the manufacture of component parts increases an organization's scope,
and the resulting increase in organizational complexity can raise a firm's cost structure.
Offsets: Another reason for outsourcing some manufacturing to independent suppliers
based 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 Boeing
to push some subcontracting work toward Indian manufacturers.

13. 4. Coordinating a global manufacturing system
Materials management, which encompasses logistics, embraces the activities
necessary to get materials to a manufacturing facility, through the manufacturing
process, and out through a distribution system to the end user.
The twin objectives of materials management are to achieve this at the lowest possible
cost and in a way that best serves customer needs, thereby lowering the costs of value
creation and helping the firm establish a competitive advantage through superior
customer service. Materials management is a major undertaking in a firm with a
globally dispersed manufacturing system and global markets and logistics end up
becoming the center of such a company.
One of the side effects of a global supply chain lies in complexity wich represents a risk
increase and may be potentially damaging to the company in case of unexpected
difficutlies or management mistakes.

14. 5. Global supply chain disasters
Foxmeyer’s 1996 Distribution Disaster: New order management and warehouse
automation systems lead to inability to ship product and failure to achieve expected
savings; bankruptcy and sale of the company follow
The WebVan Story: $25 million automated warehouses just make no sense given the
market; company goes from billions in market gap to gone in just months in 2001
Adidas 1996 Warehouse Meltdown: Not well known story, adidas can’t get a first and
then second warehouse system and also its DC automation to work. Inability to ship
leads to market share losses that persist for a long time
Toys R Us.com Christmas 1999: On-line retail division can’t make Christmas delivery
commitments to thousands; infamous “We’re sorry” emails on Dec. 23; eventually,
Amazon takes over fulfillment
Nike’s 2001 Planning System Perplexity: New planning system causes inventory and
order woes, blamed for $100 revenue miss as stock loses 20%
Aris Isotoner’s Sourcing Calamity in 1994: Then a division of Sara Lee, Isotoner
decides to shut successful Manila glove/slipper plant to chase even lower costs
elsewhere; costs rise, quality plummets, revenue cut by 50%; soon sold to Totes Inc.