CH 17 Global Production and Supply Chain Management

Decentralization of production is appropriate when

- Differences among countries in factor costs, political economy, and culture do not have a substantial impact on the costs of manufacturing in various countries. - Trade barriers are high. - Location externalities are not important.∙ Volatility in important exchange rates is expected. - The production technology has low fixed costs and low minimum efficient scale, and flexible manufacturing technology is not available. - The product's value-to-weight ratio is low. - The product does not serve universal needs (i.e., significant differences in consumer tastes and preferences exist among nations)."

Concentration of production makes most sense when

- Differences among countries in factor costs, political economy, and culture have a substantial impact on the costs of manufacturing in various countries. - Trade barriers are low - Externalities arising from the concentration of like enterprises favor certain locations. - Important exchange rates are expected to remain relatively stable. - The production technology has high fixed costs and high minimum efficient scale relative to global demand or flexible manufacturing technology exists. - The product's value-to-weight ratio is high. - The product serves universal needs"

Foreign factories have a number of strategic roles or designations, including

1)offshore factory, (2) source factory, (3) server factory, (4) contributor factory, (5)out-post factory, and (6) lead factory.

Global distribution center

A facility that positions and allows customization of products for delivery to worldwide wholesalers or retailers, or directly to consumers anywhere in the world; also called a global distribution warehouse. When warehousing shifted from passive storage of products to strategic assortments and processing, the term distribution center became more widely used to capture this strategic and dynamic aspect of not only storing, but adding value to products that are being warehoused or staged. A DC is at the center of the global supply chain; specifically, the order-processing part of the order-fulfillment process. DCs are the foundation of a global supply network because they allow either a single location or satellite warehouses to store quantities and assortments of products and allow for value-added customization.

offshore outsourcing

A multinational corporation buys products or services from one of its suppliers in a country other than the one in which the product is manufactured or the service is developed. This again is a form of global external purchasing in terms of purchasing strategy.

Insourcing

A multinational corporation buys products or services from one of its suppliers that produces them somewhere else, whether domestically or globally. In that sense, it also refers to external purchasing in relation to purchasing strategy

Outsourcing

A multinational corporation buys products or services from one of its suppliers that produces them somewhere else, whether domestically or globally. In that sense, it also refers to external purchasing in relation to purchasing strategy

Offshoring

A multinational corporation buys products or services from one of its suppliers that produces them somewhere globally (outside the MNCs home country). Offshoring is thus a form of global external purchasing in terms of purchasing strategy

Nearshoring

A multinational corporation transfers business or information technology processes to suppliers in a nearby country, often one that shares a border with the firm's own country. While nearshoring is not a purchasing activity per se, it involves facilitating global external purchasing.

Co-sourcing

A multinational corporation uses both its own employees from inside the firm and an external supplier to perform certain tasks, often in concert with each other. This applies to all four forms of purchasing strategy. It implies that the relationship between the firm and its supplier is rather strategic in nature—often, this involves the top suppliers in a particular product or component category

mass customization

Ability of a company to use flexible manufacturing technology to reconcile 2 goals that were once thought to be incompatible: low cost and product customization

Production

Also referred to as manufacturing or operations when discussed in relation to global operations. It is concerned with the creation of a good or service.

Different supply chain information system to coordinate the flow of materials into manufacturing, through manufacturing, and out to customers. There are a variety of options for global supply chains

Electronic data interchange (EDI) refers to the electronic interchange of data between two or more companies. Enterprise resource planning (ERP) is a wide-ranging business planning and control system that includes supply chain-related subsystems (e.g., materials requirements planning, or MRP). Collaborative planning, forecasting, and replenishment (CPFR) was developed to fill the inter-organizational connections that ERP cannot fill. Vendor management of inventory (VMI) allows for a holistic overview of the supply chain with a single point of control for all inventory management. A warehouse management system (WMS) often operates in concert with ERP systems; for example, an ERP system defines material requirements, and these are transmitted to a distribution center for a WMS

flexible machine cells

Flexible manufacturing technology in which a grouping of various machine types, a common materials handler, and a centralized cell controller produce a family of products (part of flexible manufacturing)

packaging

It can be divided into three different types: primary, secondary, and transit. Primary packaging holds the product itself. These are the packages brought home from the store, usually a retailer, by the end-consumer. Secondary packaging (sometimes called case-lot packaging) is designed to con-tain several primary packages. Bulk buying or warehouse store customers may take secondary packages home (e.g., from Sam's Club), but this is not the typical mode for retailers. Retailers can also use secondary packaging as an aid when stocking shelves in the store. Transit packaging comes into use when a number of primary and secondary packages are assembled on a pallet or unit load for transportation. Unit-load packaging—through palletizing, shrink-wrapping, or containerization—is the outer packaging envelope that allows for easier handling or product transfer among international suppliers, manufacturers, distribution centers, retailers, and any other intermediaries in the global supply chain.

Server factory

Linked into the global supply chain for a global firm to supply specific country or regional markets around the globe. This type of factory—often with the same stan-dards as the top factories in the global firm's system—is set up to overcome intangible and tangible barriers in the global marketplace. For example, a server factory may be intended to overcome tariff barriers, reduce taxes, and reinvest money made in the region. Another obvi-ous reason for a server factory is to reduce or eliminate costly global supply chain operations that would be needed if the factory were located much farther away from the end customers. Managers at a server factory typically have more authority to make minor customizations to please their customers, but they still do not have much more input than managers in an off-shore factory relative to the home country factories of the same global firm

transportation

Refers to the movement of raw material, component parts, and finished goods throughout the global supply chain. It typically represents the largest percentage of any logistics budget and an even greater percentage for global companies because of the distances involved

Purchasing

Represents the part of the supply chain that involves worldwide buying of raw material, component parts and products used in the manufacturing of the company's products and services

To achieve operational integration and collaboration within a global supply chain, six operational objectives should be addressed: responsiveness, variance reduction, inventory reduction, shipment consolidation, quality, and life-cycle support.

Responsiveness refers to a global firm's ability to satisfy customers' requirements across global supply chain functions in a timely manner. Variance reduction refers to integrating a control system across global supply chain functions to eliminate global supply chain disruptions. Inventory reduction refers to integrating an inventory system, controlling asset commitment, and turning velocity across global supply chain functions. Shipment consolidation refers to using various programs to combine small shipments and provide timely, consolidated movement. This includes multi-unit coordination across global supply chain functions. Quality refers to integrating a system so it achieves zero defects throughout global supply chains. Finally, life-cycle support refers to integrating the activities of reverse logistics, recycling, after-market service, product recall, and product disposal across global supply chain functions.

ISO 9000

Set of international standards on quality management and quality assurance, critical to international business. In Europe, EU requires that the quality of a firms manufacturing process and products be qualified under this quality standard

Six Sigma

Successor to TQM. Statistically based philosophy that aims to reduce defects, boost productivity, eliminate waste, and cut costs through a company. (Would equal 3.4 defects per million units)

Global Inventory Management

The decision-making process regarding the raw materials, work-in-process (component parts), and finished goods inventory for a multinational corporation.

Supply Chain Management

The integration and coordination of logistics, purchasing, operations, and market channels activities from raw material to the end-customer

Just-in-time

To economize on inventory holding costs by having materials arrive at a manufacturing plant just in time to enter the production process and not before

Total Quality Management (TQM)

a comprehensive approach - led by top management and supported throughout the organization - dedicated to continuous quality improvement, training, and customer satisfaction

make or buy decision

a decision concerning whether an item should be produced internally or purchased from an outside supplier. Largely based on 2 factors: cost and production capacity

Outpost Factory

a factory that can be viewed as an intelligence-gathering unit. often placed near a competitor's headquarters or main operations, near the most demanding customers, or near key suppliers of unique and critically important parts. An outpost factory also has a function to fill in production; it often operates as a server and/or offshore factory as well. The outpost factory can be very much connected to the idea of selecting countries for operations based on the countries' strategic importance rather than on the production logic of a location. Maintaining and potentially even enhancing the position of the global firm in strategic countries is sometimes viewed as a practical factor.

Offshore Factory

a factory that is developed and set up mainly for producing component parts or finished goods at a lower cost than producing them at home or in any other market. Investments in technology and managerial resources should ideally be kept to a minimum to achieve greater cost-efficiencies. Basically, the best __________ should involve minimal everything—from engineering to development to engaging with suppliers to negotiating prices to any form of strategic decisions being made at that facility. In reality, we expect at least some strategic decisions to include input from the personnel.

Lead Factory

a factory that is intended to create new processes, products, and technologies that can be used throughout the global firm in all parts of the world. often placed near a competitor's headquarters or main operations, near the most demanding customers, or near key suppliers of unique and critically important parts. An outpost factory also has a function to fill in production; it often operates as a server and/or offshore factory as well. The outpost factory can be very much connected to the idea of selecting countries for operations based on the countries' strategic importance rather than on the production logic of a location. Maintaining and potentially even enhancing the position of the global firm in strategic countries is sometimes viewed as a practical factor.

Contributor Factory

a factory that serves a specific country or world region. The main differ-ence between a contributor factory and a server factory is that a contributor factory has responsibilities for product and process engineering and development. This type of factory also has much more of a choice in terms of which suppliers to use for raw materials and component parts. In fact, a contributor factory often competes with the global firm's home factories for testing new ideas and products. A contributor factory has its own infrastruc-ture when it comes to development, engineering, and production. This means that a con-tributor factory is very much stand-alone in terms of what it can do and how it contributes to the global firm's supply chain efforts.

Flexible manufacturing (lean production)

covers a range of manufacturing technologies designed to (1) reduce setup times for complex equipment, (2) increase the utilization of individual machines through better scheduling, and (3) improve quality control at all stages of the manufacturing process.12 Flexible manufacturing technologies allow the 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.

Upstream Supply Chain

includes all of the organizations (e.g., suppliers) and resources that are involved in the portion of the supply chain from raw materials to the production facility (this is sometimes also called the inbound supply chain)

downstream supply chain

includes all of the organizations (e.g., wholesaler, retailer) that are involved in the portion of the supply chain from the production facility to the end-customer (this is also sometimes called the outbound supply chain)

source factory

primary purpose is also to drive down costs in the global supply chain. The main difference between a source factory and an offshore factory is the strategic role of the factory, which is more significant for a source factory than for an offshore factory. Managers of a source factory have more of a say in certain decisions, such as purchasing raw materials and component parts used in the production at the source factory. They also have a strategic input into production planning, process changes, logistics issues, product customization, and implementation of newer designs when needed. Centrally, a source factory is at the top of the standards in the global supply chain, and these factories are used and treated just like any factory in the global firm's home country. This also means that source factories should be located where production costs are low, where infrastructure is well developed, and where it is relatively easy to find a knowledgeable and skilled workforce to make the products

reverse logistics

process of planning, implementing, and controlling the efficient, cost-effective flow of raw materials, in-process inventory, finished goods, and related. information from the point of consumption to the point of origin for the purpose of recapturing value or proper disposal. The ultimate goal is to optimize the after-market activity or make it more efficient, thus saving money and environmental resources. (helps reduce cost for returns)

Elements that favor a make decision (beyond just cost and production capacity)

quality control, proprietary technology, having control, excess capacity, limited suppliers, assurance of continual supply, and industry drivers (see Figure 17.3). So, the starting point is lower (or at least no greater) cost than what we can expect when we outsource the production to an external party in another country (or another external party in general). The limitation is that we must have excess production capacity or capacity that is best used by our firm for making the product in-house

Global learning

the idea that valuable knowledge does not reside just in a firm's domestic operations, it may also be found in its foreign subsidiaries

minimum efficient scale

the level of output at which most plant-level scale economies are exhausted

Logistics

the part of the supply chain that plans, implements, and controls the effective flows and inventory of raw material, component parts, and products used in manufacturing

Global Supply Chain Coordination

the shared decision-making opportunities and operational collaboration of key global supply chain activities. Shared decision making—such as joint consideration of replenishment, inventory holding costs, collaborative planning, costs of different processes, the frequency of orders, batch size, and product development—creates a more integrated, coherent, efficient, and effective global supply chain