Chapter Sixteen

Global Production,
Outsourcing, and Logistics
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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

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 16 - 4

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?

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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
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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

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 16 - 7

Relationship Between
Quality and Costs

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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

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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

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 16 - 10

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

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 16 - 11

Where to Produce

• For the firm contemplating international production a

number of factors must be considered
- Country factors
- Technological factors
- Product factors

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Country Factors

• Optimum economic, political, and cultural conditions

• Externalities
- Skilled labor pools
- Supporting industries
• Formal and informal trade barriers
• Exchange rate

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Technological Factors

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

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 16 - 14

Typical Unit Cost Curve

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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

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 16 - 16

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

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 16 - 17

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

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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

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 16 - 19

Location Strategy and

Production

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 16 - 20

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

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 16 - 21

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

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 16 - 22

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

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 16 - 23

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

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 16 - 24

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

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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

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 16 - 26

Looking Ahead to Chapter 17

• Global Marketing and R & D

- The Globalization of Markets and Brands
- Market Segmentation
- Product Attributes
- Distribution Strategy
- Communication Strategy
- Pricing Strategy
- Configuring the Marketing Mix
- New-Product Development

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