Lecture 05

GLOBAL PRODUCTION, OUTSOURCING & LOGISTICS Learning Objectives: • What is production management and optimal production location? • How much production should be performed inhouse and how much should be outsourced? • How best should companies coordinate globally dispersed supply chain?

Logistics (Supply Chain Management & Materials Management)

• SCM is the process of coordination of materials, information and funds from the initial raw materials supplier to the ultimate buyer/consumer

• Logistics (MM) – part of SCM process that plans, implements and controls the flow and storage of goods/services from the point of origin to the point of consumption (in order to meet customers’ requirements) • Logistics (MM) only part of SCM as it deals with transport and storage • SCM extends beyond, to cover management of suppliers and customer relations

Production Management Strategic Objectives • Lower costs: - disperse manufacturing activities to efficient global locations • Increase productivity - using Total Quality Management • Accommodate demands for local responsiveness - decentralise production • Respond quickly to shifts in customer demand time-based competition extremely important

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Relationship between Quality and Costs • Increased quality leads to: - increased productivity - lower rework and scrap costs - lower warranty and rework costs • Results: - lower manufacturing costs - lower service costs => increased profits through lowering costs

Kaizen • Customer orientation

• Kamban

• TQC

• Quality improvement

• QC cycles

• JIT

• Suggestion system

• Zero defects

• Automation

• Small-group activities

• Discipline in the workplace

• Co-operative labour-management relations

• TPM

• Productivity improvement • New product development

Perception of job functions Japanese companies Top mgt Middle mgt Supervisors Workers

Innovatio n

Kaizen Maintenance

Western companies Top mgt Middle mgt Supervisors Workers Source: Imai

Innovation Maintenance

Case Study: Li & Fung • What is the basic business of Li & Fung? • Why firms such as The Limited do not handle these activities by themselves?

The top 100 non-financial TNCs, ranked by foreign assets 8 22 29 32 42 56 62 71 72 77 79 80 81 84 89 96

Toyota Motor Sony Honda Motor Nissan Motor Mitsui & Company Hitachi Matsushita El. Industrial Canon Sumitomo Nissho Iwai Japan Tobacco Itochu Bridgestone Fujitsu Marubeni Mitsubishi Motors

Motor vehicles Electrical and Electronic equipment Motor vehicles Motor vehicles Wholeshale trade Electrical and Electronic equipment Electrical and Electronic Electrical and Electronic equipment Wholeshale trade Wholeshale trade Tobacco Wholeshale trade Rubber/tyres Electrical and Electronic equipment Wholeshale trade Wholeshale trade

Where to produce? The theory of international plant location suggests the following variables: • Country factors • Technological factors • Product factors • The unexpected

Country factors • political economy • culture • relative cost factors => influence the benefits/costs/risks balance Besides, - formal and informal trade barriers - rules and regulations regarding FDI movements of exchange rates - timing [see article on Singapore]

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Technological factors • Manufacturing technology may lead to producing in one or in multiple locations, depending upon: - its level of fixed costs minimum efficient scale (MES) - flexible manufacturing (lean production) a) reduces setup costs increases machine utilisation improves quality control

mass customisation cells [see article on Ford]

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=> - flexible machine

Manufacturing location • Single or few locations when: - substantial fixed costs - high MES - flexible manufacturing technologies available • Multiple locations (if it meets local demands!): low fixed costs - low MES unavailable flexible technologies Trade barriers and transportation costs remain serious impediments! So does the need for product customisation! (see the case of automobiles)

Product factors and location strategies • Two product features affect location decision: value to weight ratio - whether the product serves universal needs • Two basic strategies: - concentrating in a centralised location and serving the world market from there decentralising them in various regional or national locations close to major markets when opposite conditions exist

Centralised location • Factor costs have substantial impact • Low trade barriers • Externalities favour certain locations (skilled labour pools, supporting industries) • Stable exchange rates • High fixed costs, high MES relative to global demand • Flexible manufacturing technology available • Product’s value-to-weigh ratio is high • Product serves universal needs

Decentralised location • Factor costs do not have substantial impact • High barriers to trade • Location externalities not important • Exchange rates volatile • Low fixed costs, low MES • Flexible manufacturing technology unavailable • Products’ value-to-weigh is low • Significant differences in consumer tastes and preferences exist between countries

Location Strategy: An application • An electronics firm is considering how best to supply the world market for microprocessors used in consumer and industrial electronic products. A manufacturing plant costs approximately $500 million to construct and requires highly skilled work force. The total value of the world market over the next ten years for this product is estimated to be in the $10 to 15 billion range. The tariffs prevailing in this industry are currently low. Should the firm favour concentrated manufacturing or decentralised manufacturing? What kind of locations should the firm choose for its plant (s)?

Location Strategy: An application • A chemical firm is considering how best to supply the world market for sulfuric acid. A manufacturing plant costs approximately $20 million to construct and requires a moderately skilled workforce. The total value of the world market over the next ten years for this product is estimated to be in the $20 to 30 billion range. The tariffs prevailing in this industry are moderate. Should the firm favour concentrated manufacturing or decentralised manufacturing? What kind of locations should the firm choose for its plant (s)?

Strategic role of foreign factories • Initially, established where labour costs were low • Subsequently, important centres for design and final assembly [ex: HP in Singapore] Why? - pressure to improve costs - pressure to customise product - upgraded national factors of production => from low-cost manufacturing facilities to dispersed centres of excellence (consistent with global learning argument!)

Make or Buy Decisions • Should a firm make or buy the component parts that go into their final product? • Intra-firm sourcing (i.e. the ‘make’ option or vertical integration): - very significant in the US (30% of total exports, 40% of total imports); in Europe and Japan (30% of total imports and exports) • Inter-firm sourcing (i.e. the ‘buy’ option from independent suppliers/ reliance upon market forces): also significant by today’s standards

Advantages of making own components • Lower costs if most efficient producer • Facilitates investment in specialised assets • Protects proprietary product technology • Improves scheduling (esp. when just-in-time system adopted)

Advantages of buy versus make • Strategic flexibility in sourcing components from optimal location (political factors permitting) • Lower costs, by avoiding bureaucratic inefficiencies incentives among internal suppliers pricing decisions

- lack of - transfer

• Increased sales abroad (offsets) • Strategic alliances with suppliers give benefits of vertical integration without the associated organisational problems

Case Study: Outsourcing in Japan • Why are the Taiwanese electronics companies positive about business prospects in Japan? • Why are their Japanese counterparts reluctant to outsource to Taiwan? • What alternatives do they prefer and why?

New developments in international outsourcing • Outsourcing services [see articles on India] - why does India presents great outsourcing opportunity in IT-enabled services? why do independent centres encounter wider problems? - what can Indian government do to encourage this trend? - what are the prospects of India in this respect? - what opportunities does India offers to the banking sector?

Make or Buy: An Application • A firm has to decide whether to make a component part in-house or to contract out manufacturing to an independent supplier. Manufacturing the part requires a non-recoverable investment in specialised assets. The most efficient suppliers are located in countries with currencies that many foreign exchange analysts expect to appreciate substantially over the next decade. What are the pros and the cons of: (a) manufacturing the component in-house; (b) out-sourcing manufacture to an independent supplier? Which option would you recommend and why?

The role of Information Technology • To track component parts across the globe to an assembly plant and optimise and adjust production scheduling when necessary • Electronic data interchange (EDI) - used to coordinate flow of materials between a firm’s suppliers, shippers and customers communicate without time delay minimising paperwork significant competitive advantage [see article in The Economist on management and IT, April 9th, 2005]

Case Study: Competitive Advantage at Dell • What are the consequences for Dells cost structure and profitability of replacing inventories with information? • Do you think that Dell’s model can be imitated by other PC manufacturers and manufacturers in other industries? • What factors might make it difficult for other firms to adopt Dell’s model? • What are the potential risks associated with Dell’s supply chain strategy?

Selected readings for seminar 6: • T. G. Andrews et al “Information tracking” in The changing face of Multinationals in Southeast Asia (London: Routledge, 2003) • P. M. Swamidass and M. Kotabe “Component sourcing strategies of multinationals: an empirical study of European and Japanese multinationals”, Journal of International Business Studies 24, no 1, 1993 • M. Kotabe and J. Y. Murray “Determinants of intrafirm sourcing and market performance”, International Business Journal, vol. 5, no. 2, 1994