CHAPTER 09

GLOBAL PRODUCTION AND

SUPPLY CHAIN MANAGEMENT
ENT 3378: Global Business Management

Dhanuka Perera
Department of
Entreprenuership
077 917 5075
dhanukaprr@[Link]
 Learning Outcomes
• LO-1 Explain why global production and supply chain management decisions are of central
importance to many global companies.

• LO-2 Explain how country differences, production technology, and production factors all affect
the choice of where to locate production activities.

• LO-3 Recognize how the role of foreign subsidiaries in production can be enhanced over time as
they accumulate knowledge.

• LO-4 Identify the factors that influence a firm’s decision of whether to source supplies from
within the company or from foreign suppliers.

• LO-5 Understand the functions of logistics and purchasing (sourcing) within global supply chains.

• LO-6 Describe what is required to efficiently manage a global supply chain.

CONTENT

• Global Supply Chain

• Production

• Supply Chain Management

• Strategy, Production, and Supply Chain Management

• Where to Produce
CONTENT

• Make or Buy Decision

• Global Supply Chain

• Global Supply Chain Functions

• Managing a Global Supply Chain

Global Supply Chain
Global Supply Chain

• Redundancy

• Long-term strategic role

• Cost

• Favourable Location

• Economic Conditions

• Owning or Sourcing

• Lowest Total Cost

Strategy, Production, and
Supply Chain Management

1. Production

2. Supply Chain Management

Production

• Manufacturing and Service Activities

Supply Chain Management
• Supply chain management is the integration and coordination of logistics,
purchasing, operations, and market channel activities from raw material
to the end-customer.

• Purchasing - worldwide buying of raw material, component parts, and

products used in manufacturing of the company’s products and services.

• Logistics - plans, implements, and controls the effective flows and

inventory of raw material, component parts, and products used in
manufacturing.
Strategic Objectives of
Production and Supply Chain
Management
1. To ensure that the total cost of moving from raw materials to finished
goods is as low as possible for the value provided to the end-customer

• (Dispersing production activities managing the global supply chain efficiently

(inside and across)

2. To increase product (or service) quality by establishing process-based

quality standards and eliminating defective raw material, component parts, and
products from the manufacturing process and the supply chain.

(Upstream and Downstream Reliability)

Cost Reduction & Quality

• 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.
 The relationship between quality
and costs.

Source: David A. Garvin, “What Does Product Quality Really Mean?” MIT Sloan Management Review, Fall 1984, pp.
Total Quality Management
(TQM)
• mistakes, defects, and poor-quality materials are not acceptable
• quality of supervision should be improved

• create an environment in which employees will not fear reporting

problems or recommending improvements.

• train employees in new skills to keep pace with changes in the workplace

• Not just the quotas, but also an output that is free of defects
Six Sigma

• Statistically based philosophy that aims to reduce

defects, boost productivity, eliminate waste, and cut
costs throughout a company.
• Greek letter that statisticians use to represent a standard
deviation

• At six sigmas, a production process would be 99.99966 percent

accurate, creating just 3.4 defects per million units.
International Standards

• ISO 9000: the European Union requires that the quality

of a firm’s manufacturing processes and products be
certified under ISO 9000 before being allowed in the EU
Market
Strategic Objectives of Production and
Supply Chain Management cont..

3. Respond to Local Responsiveness

Arising due to national differences in consumer tastes and preferences,

infrastructure, distribution channels, host government.

4. Respond Quickly to changes in Demand

When consumer demand is prone to large and unpredictable shifts, the

firm that can adapt most quickly to these shifts will gain an advantage
Where to Produce?
Where to Produce?

[Link] factors

[Link] factors

[Link] factors
1. COUNTRY FACTORS
• Political and economic systems, Culture, Relative factor costs

• Comparative Advantages

• Location Economies

• Other things being equal, a firm should locate its various

manufacturing activities where the economic, political, and
cultural conditions— including relative factor costs—are
conducive to the performance of those activities
Case Extract : IKEA Production
in China
• …The Sweden-based home furnishing giant opened its first
wholly owned manufacturing facility in China on August 28, 2013.
In a local move, the factory supports the rapid expansion in Asia
and, especially, in China (the facility is located in Nantong,
Jiangsu province). As the largest sourcing country for IKEA, China
accounts for more than 20 percent of its global procurement, with
about 300 local Chinese suppliers. The factory is also not far from
IKEA’s two biggest warehouses that are located in Shanghai.
• Location Externalities:
• Appropriately skilled labour pool and supporting
industries

• Eg: Because of a cluster of semiconductor manufacturing

plants in Taiwan, a pool of labour with experience in the
semiconductor business has developed.

• Formal and informal trade barriers

• Transportation Costs

• Expected future movements in its exchange rate

2. TECHNOLOGICAL FACTORS

• The type of technology a firm uses to perform specific

manufacturing activities can be pivotal in location decisions.

• Because of technological constraints, in some cases it is

necessary to perform certain manufacturing activities in only one
location and serve the world market from there.

• Three characteristics of a manufacturing technology:

• the level of fixed costs

• the minimum efficient scale

Fixed Costs

• The fixed costs associated with setting up a

production plant.
• in some cases the fixed costs of setting up a
production plant are so high that a firm must serve
the world market from a single location or from very
few locations.
Minimum Efficient Scale

• The concept of economies of scale tells us that

as plant output expands, unit costs decrease.
• However, beyond a certain level of output, few
additional scale economies are available.

• The level of output at which most plant-level scale

economies are exhausted is referred to as the minimum
efficient scale of output.
Typical unit cost curve
• The larger the minimum efficient scale of a plant
relative to total global demand, the greater the
argument for centralizing production in a single location
or a limited number of locations.

• Alternatively, when the minimum efficient scale of

production is low relative to global demand, it may be
economical to manufacture a product at several
locations.
Flexible Manufacturing and Mass
Customization

• The best way to achieve high efficiency is through mass

production of a standardized output.
• Trade-off between unit cost and product variety

• Greater variety means shorter production runs and lower gains

from Economies of Scale

• According to this logic, the way to increase efficiency and drive

down unit costs is to limit product variety and produce a
standardized product in large volumes.
Flexible Manufacturing
Technology / Lean Production
[Link] setup times for complex equipment

[Link] the utilization of individual machines through

better scheduling, and

[Link] quality control at all stages of the

manufacturing process.
Mass Customization

• The ability of companies to use flexible manufacturing

technology to reconcile two goals that were once
thought to be incompatible: low cost and product
customization.
3. PRODUCTION FACTORS

• Several production factors feature prominently into the reasons

why production facilities are located and used in a certain way
worldwide.

a) Product Features

b) Locating Production Facilities

c) Strategic Roles for Production Facilities.

a. Product Features

• Value-to-weight ratio

E.g.: Electronic Components – can be produced at optimal

locations.

• whether the product serves universal needs

• responsiveness is reduced.
b. Locating Production Facilities

1. Concentrating them in a centralized location and

serving the world market from there

or

2. Decentralizing them in various regional or national

locations that are close to major markets.
Activity
Centralization vs Decentralization

[Link]
Concentration is appropriate
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 favour 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.

Decentralization 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).
c. Strategic Roles for Production
Facilities
Foreign factories can have one of a number of strategic roles or
designations, including

i. Offshore Factory

ii. Source Factory

iii. Server Factory

iv. Contributor Factory

v. Outpost Factory

vi. Lead Factory

i. Offshore Factory
• An offshore factory is one 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

• Basically, the best off- shore factory 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.
ii. Source Factory

• The primary purpose of a source factory is also to drive

down costs in the global supply chain.

• The strategic role of a Source factory is significant

• More involved in decisions such as purchasing

iii. Server Factory
• A server factory is linked into the global supply chain for a global firm
to supply specific country or regional markets around the globe.

• Set up to overcome intangible and tangible barriers in the global

marketplace
• E.g.: to overcome tariff barriers, reduce taxes, and reinvest money made in
the region.

• Managers at a server factory typically have more authority (a bit

more than offshore, but less than home country)
iv. Contributor Factory

• A contributor factory also serves a specific country or

world region.

• A contributor factory has responsibilities for product and

process engineering and development.

• More of a choice in terms of which suppliers to use

v. Outpost Factory
• An outpost factory can be viewed as an intelligence-gathering unit.

• often placed near

• a competitor’s headquarters or main operations
• Key Customers
• Key Suppliers

• Maintaining and potentially even en- hancing the position of the global
firm in strategic countries is sometimes viewed as a practical factor.
iv. Lead Factory

• A lead factory is intended to create new processes,

products, and technologies that can be used throughout
the global firm in all parts of the world.

• Where cutting-edge production takes place

• located in an area where highly skilled employees can

be found
Make-or-Buy Decisions
Make-or-Buy Decisions

• The strategic decision concerning whether to

produce an item in-house (“make”) or purchase it
from an outside supplier (“buy”).

• Taken at Strategic Level and Operational Level

• Often the starting point of the Global Supply Chain

Critical Determining Factors

1. Cost of Production

• Acquiring raw materials, component parts, and any

other inputs into the process, along with the costs
of finishing the product.
Critical Determining Factors

2. Production Capacity
• Presented as an Opportunity Cost.

• Does the firm have the capacity to produce the

product at a cost that is at least no higher than the
cost of buying it from an external supplier?
“Let’s move our production to China because we can get the same
quality for a dime- on-the-dollar cost, and that will free up
production capacity that we can use to focus on other products”?
Other Factors?
Other Factors
1. Raw materials that have to be purchased far away from home

2. Foreign entry requirements

3. Multiple-party contracts

4. Management responsibilities for the outsourced production

operations
Any Other Factors?
Operationally Favouring A Make Decision.
Operationally Favouring A Buy Decision.
Interpretation?
Global Supply Chain
Global Supply Chain Functions
1. Logistics

2. Purchasing (Sourcing)

3. Distribution (Marketing Channels)

• Logistics and purchasing are critical functions in ensuring that materials are
ordered and delivered and that an appropriate level of inventory is managed.
1. Global Logistics

• logistics is 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.

a) Global distribution Centre Management

b) Inventory management

c) Packaging and materials handling

d) Transportation
a. Global Distribution Centre

• A global distribution centre (or warehouse) is a facility that

positions and allows customization of products for delivery to
worldwide wholesalers or retailers or directly to consumers
anywhere in the world.

• Used by manufacturers, importers, exporters, wholesalers,

retailers, transportation companies, and customs agencies to
• store products

• provide a location where customization can be facilitated.

Global Distribution Centre cont

• Played an important role when companies shifted from

Passive Storage to strategic assortments and processing
for Adding Value to products being stored.

• Used for Order Processing and Order Fulfilment

• Should be located strategically in the global

marketplace
b. Global Inventory
Management
• The decision-making process regarding the raw
materials, work-in-process (component parts), and
finished goods inventory

• The decisions include how much inventory to hold, in

what form to hold it, and where to locate it in the supply
chain.
At the company level, Toyota from Japan, one of the largest
automobile firms in the world, has 8.71% of its total assets in
inventory, with a mix of 26% 14% and 60% in raw materials,
work-in-process, and finished vehicles, respectively.

Another example is Sinopec ([Link]), a petroleum

firm and the largest firm in China. Sinopec has 21 percent of
its total assets in inventory, with a mix of 37, 43, and 20
percent in raw materials and component parts, work-in-
process, and finished goods, respectively.
c. Packaging

• It can be divided into three different types: primary,

secondary, and transit.
• Primary Packaging

• Secondary Packaging

• Transit Packaging
Functions of Packaging

1. Perform

2. Protect

3. Infrom
Perform
(1) The ability of the product in the package to handle
being transported between nodes in the global supply
chain

(2) The ability of the product to be stored for typical

lengths of time for a particular product category

(3) The package providing the convenience expected by

both the supply chain partners and the end-customers.
Protect
(1)Contain the products properly

(2)Preserve the products to maintain their freshness or

newness, and

(3)Provide the necessary security and safety to ensure

that the products reach their end destination in their
intended shape.
Inform

(1)logical and sufficient instructions for the use of the

products inside the package, including specific
requirements to satisfy local regulations

(2)A statement of a compelling product guarantee

(3)Information about service for the product if and when

it is needed.
d. Transportation

• Refers to the movement of raw material, component parts, and

finished goods throughout the global supply chain.

• Typically represents a larger part of the cost

• Distance

• Mode

• Load Size

• Load Characteristics

• Oil Prices
e. Reverse logistics

• The 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.
• (For example, product returns cost manufacturers and retailers more
than $100 billion per year in the United States, or an average of 3.8
percent in lost profits.)
2. Global Purchasing

• Purchasing represents the part of the supply chain that

involves worldwide buying of raw material, component
parts, and products used in manufacturing of the
company’s products and services.

• The core activities performed in purchasing include

development of an appropriate strategy for global
purchasing and selecting the type of purchasing
strategy best suited for the company.
Global Purchasing cont..

• Five strategic levels

• Level I is simply companies engaging in domestic
purchasing activities only
• Level II & III concerned with International Purchasing.
Varies in degree.
• Levels IV and V concerned with Global Purchasing. Varies
in degree.
Where to Purchase?
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.
Insourcing

• A multinational corporation decides to stop outsourcing

products or services and instead starts to produce them
internally;

• insourcing is the opposite of outsourcing. Thus it refers

to internal purchasing in the context of 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.
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.
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.
Managing a Global
Supply Chain
Upstream/Inbound
Relationships.
Downstream/outbound
Relationships
Discussion and Q&A