Chapter 14 - Production, Outsourcing & Logistics

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Global Production
Strategy, Production, Logistics
 Value chain activities
– Production, marketing, logistics, R&D, HR, IS
 Production:
– physical goods, as well as services
 Logistics:
– controls physical transmission of materials
through the value chain
 Production and logistics decisions
– Lower costs of value creation
– Add value through better attention to customer
needs
Production and Materials
Management / Logistics

Production activities
– Service and manufacturing
– Conversion of inputs to a product

Materials management activities
– Physical transmission of materials through value
chain:
procurement –> production –> distribution

Logistics activities encompass
– Procurement and physical transmission of material
through the supply chain
suppliers –> customers
Relationship Between
Quality and Costs
Quality …
Increases
Productivity
Improves
Performance
Reliability
Lowers
Rework and
Scrap Costs
Lowers
Warranty
Costs
Lowers
Manufacturing
Costs
Lowers
Service
Costs
Increases
Profits
Quality and Cost Management

TQM:
technique to improve products and services
quality
 Six Sigma: Statistically based cost cutting system
– Reduces defects, boosts productivity, eliminates
waste

ISO 9000
– European Unions standards for quality
– Set by code
– Firm must be certified “ISO 9000” before it may
access the EU marketplace
Which Manufacturing Location?

Country Factors
– Favorable economic, political, cultural conditions

Technological Factors
– Fixed costs relatively low
– Minimum efficient scale
Magnitude of plant output to realize scale-economies
 Market demand level adequacy
– Flexible manufacturing; lean production
– Mass customization
– Flexible machine cells


Product features: value-to-weight ratio, universal needs
Where to Locate?
Concentrate Manufacturing if:
 Costs
of manufacturing are responsive to
country environment (one location best)
 Trade
barriers are low
 Product
serves universal needs
– Minor difference in customer needs
– Minimal consumer preferences
Where to Locate?
Concentrate Manufacturing if:
 Trade
barriers are low
 Exchange
rates among currencies with
impact on your business are stable
 Production
technology
– Has high fixed costs
– Has high minimum efficient scale
– Exists in flexible manufacturing format
When to Decentralize Manufacturing?

Country environment does not affect costs

Trade barriers are high

Production technology
– Has low fixed costs
– Has low minimum efficient scale
– Does not exists in flexible manufacturing format

Product value-to-weight ratio is low

Product does not serve universal needs
– Customer needs different
– Consumer preferences different
Make-or-Buy?

“Make” advantage
– Lower costs in-house?
– Are specialized assets needed?
– Is proprietary technology needed?


Know-how protection issue (Dunning)
“Buy” advantage
– Strategic flexibility needed?
– Lower costs by buying?

In either case “improved scheduling” is important
Other Issues
 Strategic
alliances with suppliers
 Just-in-time inventory system
management
 The role of information technology
 The role of the internet
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