Global Production Outsourcing and Logistics 16 2 Introduction

Global Production, Outsourcing, and Logistics

16 - 2 Introduction • In a globalized world, managing supply chains is shockingly difficult - How should a globally dispersed supply chain be managed? - To what extent should we own our factories rather than outsourcing? - Should the firm manage global logistics itself, or should it outsource the management? - Where should production be done? - What strategic role should foreign production sites play? Mc. Graw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

16 - 3 Strategy, Production, and Logistics • Production is the activities involved in creating a product - especially direct physical work - but includes 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 produce depends on timely, high quality inputs Mc. Graw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

16 - 4 Strategy, Production, and Logistics • Technology and location economies are reducing the direct cost of production • So supply chain management, logistics and other service work have become more important Mc. Graw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

16 - 5 The demands on supply chains are amazingly complex • In addition to low cost and high quality and reliability, two other objectives have particular importance - Production and logistic functions must accommodate demands for responsiveness - Production and logistics must be able to respond quickly to shifts in customer demand Mc. Graw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

16 - 6 Make or Buy Decisions • Should a firm make or buy component parts? • Advantages of making: - Can become most efficient producer (control your destiny) Can make own specialized long-term investments Protect proprietary product technology Improved scheduling • But – the more people you employ and the more facilities you operate, the more likely you will become bureaucratic - You wind up doing things you’re not very good at Mc. Graw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

16 - 7 • Advantages of buying components - Flexibility in sourcing – can switch suppliers - Can cut cost structure quickly - Long-term alliances with suppliers give benefits of vertical integration with less of the associated problems Mc. Graw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

16 - 8 • The key challenge: Understand manage the total cost of sourcing, including: - inventory costs - costs of inspections and defects - effect of a supplier’s work on the final performance of the product - all transportation costs - importing costs including • tariffs • difficulties of working with customs - time required to process orders - supplier ability to work with your technological system (Drake, pp. 44 -45) Mc. Graw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

16 - 9 Strategic Role of Foreign Factories • Often initially established where labor costs low • Later, important centers for design and final assembly • Upward migration caused by improvement in local capabilities and by pressures to: - Improve cost structure - Customize product to meet customer demand - An increasing abundance of advanced factors of production Mc. Graw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

16 - 10 Role of Information Technology and the Internet • Firms today 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 Mc. Graw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

16 - 11 Mc. Graw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

16 - 12 A Production, Outsourcing, and Logistics Case • When introducing the X-Box gaming console, Microsoft had to decide if it should manufacture the console or outsource manufacturing - Microsoft primarily creates software and lacked the manufacturing capabilities to make the X-Box Mc. Graw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.

16 - 13 • Microsoft decided to outsource production to Flextronics for four reasons - Flextronics’ industrial park strategy would allow good control of the supply chain • Flextronics takes care of the subcontractors - Flextronics had a global presence - Flextronics’ Web-based information systems would share information well with Microsoft - Microsoft trusted Flextronics Mc. Graw-Hill/Irwin International Business, 6/e, 7/e Portions © 2007, 2009 The Mc. Graw-Hill Companies, Inc. , All Rights Reserved.