Fourth Edition

InternationalBusiness

CHAPTER 16

Global Manufacturing and Materials Management

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Chapter Focus

Examine:Where in the world should productive activities be located?What should be the long term strategic role of foreign production sites?Should the firm own foreign production sites or outsource those activities to independent vendors?How should a globally diverse supply chain be managed and what is the role of the Internet in managing global logistics?Should the firm manage global logistics itself or outsource the management to enterprises that specialize in this activity?

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Strategy, Manufacturing, and Logistics

Focus

Production

LogisticsPerformed

internationally

To lower costs of value creation

Add value by better serving customer needs

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Materials Management

Materials Management: the activity that controls the transmission of physical materials through the value chain, from procurement through production and into distribution.

Logistics: the procurement and and physical transmission of material through the supply chain, from suppliers to customers.

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Manufacturing and Materials Management - Strategic

Objectives -

Lower costs.

Increase product quality.Total Quality Management.

Increases productivity.Lowers rework and scrap costs.Lowers warranty costs.

Accommodate demands for local responsiveness.

Respond quickly to shifts in customer demand.

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Total Quality Management(TQM)

The leaders: W. Edwards Deming, Joseph Juran, and A.V. Feigenbaum

“We have learned to live in a world of mistakes and defective products as if they were necessary to life. It is time to adopt a new philosophy in America.”

W. Edwards Deming

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The Relationship Between Quality and Costs

Figure 16.1

LowersRework andScrap Costs

Increases Productivity

LowersWarranty andRework Costs

Improves Performance

Reliability

LowersService Costs

LowersManufacturing

CostsIncreases

Profits

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Where to Manufacture

CountryFactors

TechnologicalFactors

ProductFactors

LocatingManufacturing

Facilities

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Country Factors

Political economy.Culture.Relative factor costs.Global concentrations of activity.

Skilled labor pools.Supporting industries.

Formal and informal trade barriers.Transportation costs.Rules regarding FDI.Exchange rate movements.

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Technological Factors

Fixed costs.Minimum efficient scale.Flexible manufacturing (Lean Production).

Reduce setup times.Increase machine utilization.Improve quality control.

Flexible machine cells.

Productcustomization

Mass Customization

Low cost

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A Typical Unit Cost Curve

Figure 16.2

Un

it C

ost

s

Volume

Minimum Efficient Scale

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Product Factors and Location Strategies

Two product features affect location decisions:

Value to weight ratio.Product serves universal needs.

Two strategies for locating manufacturing facilities:

Concentration.Decentralization.

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Product Factors

Value-to-weight ration.Influences transportation costs.

High value-to-weight.Electronic components.

Low value-to-weight.Bulk chemicals.

Does the product serve universal needs?Industrial products.Modern consumer products.

Handheld calculators.Personal computers.

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Manufacturing Location

Factor costs have substantial impact.Low trade barriers.Externalities favor certain locations.Stable exchange rates.Minimum efficient scale is high and flexible manufacturing technologies available.Product’s value-to-weight ration is high.Product serves universal needs.

Concentration.

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Manufacturing Location

Factor costs do not have substantial impact.High trade barriers.Location externalities unimportant.Exchange rate volatility.Production technology has low fixed costs, low minimum efficient scale, flexible manufacturing technology unavailable.Product has low value-to-weight ratio.Product does not serve universal needs.

Decentralization

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Location Strategy and Manufacturing

Technological Factors

Flexible manufacturing technology Available Not Available

Minimum efficient scale High LowFixed costs High Low

Product Factors

Serves universal needs Yes NoValue-to-weight ration High Low

Country Factors

Differences in factor costs Substantial Few

Substantial Few

Trade barriers Few Many

Differences in political economyDifferences in culture Substantial Few

Concentrated Decentralized

Favored Manufactured Strategy

Table 16.1

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Strategic Role of Foreign Factories

Initially, established where labor costs low.Later, important centers for design and final assembly.Upward migration caused by:

Pressure to improve cost structure.Pressure to customize product to meet customer demand.Increasing abundance of advanced factors of production.

Dispersed Centers of Excellence are consistent with a Transnational Strategy

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Make or Buy

Make

Lower costs

ProprietaryProduct

TechnologyProtection

Facilitatingspecialized investments

Improved scheduling

Buy

Strategic flexibility

Lower costs

Offsets

Trade-offs

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Strategic Alliances with Suppliers

Attempting toreap benefits

of verticalintegration

Building long-term

relationships

Mutuallybeneficial

Pressure fromJIT

CADCAM

Trust

May limit strategic flexibilityRisks giving away key technology know-how

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Coordinating a Global Manufacturing System

Materials management (includes logistics):Activities necessary to get materials from suppliers to manufacturer, to distribution system, to end user.Achieve lowest possible cost that meets customer’s needs.

Power of ‘Just-in-Time’:Economize on inventory holding costs.Drawback: no buffer inventory.

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The Role of the Organization

Organizational linkages are more numerous and complex.

More difficult to control costs.

Functionally separate materials management:

Equal weight with other departments.Purchasing, production and distribution are one basic task:

controlling material flow from purchase to customer.

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Potential Materials Management Linkages

Plant 1

Market A

Source A Source B

Plant 2

Market B

Source C

Plant 3

Market C Markets

Manufacturing Locations

Source Locations

Far EastEuropeNorth America

Figure 16.3

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Traditional Organizational Structure

CEO

DistributionProduction Planning

and Control

Purchasing Manufacturing Marketing Finance

Figure 16.4A

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Organization Structure with Materials Management as Separate Function

Strategicmanager/CEO

Productionplanning

and controlPurchasing

Materials management

Manufacturing Marketing Finance

Distribution

Figure 16.4B

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Role of Information Technology and the Internet

Track component parts to assembly plant.Optimize production scheduling.

Ability to accelerate (or slow) production.

Electronic data interchange coordinates flow through into/through manufacturing to customers.

Suppliers, shippers, and purchasing firms can communicate with each other without delay.

Flexibility and responsiveness.

Paperwork is decreased.