International
Business
Fourth Edition
CHAPTER 16
Global Manufacturing and
Materials Management
16-3
Chapter Focus
Examine:
Where in the world should productive activities be
located?
What should be the long term strategic role of foreign
production sites?
Should the firm own foreign production sites or
outsource those activities to independent vendors?
How should a globally diverse supply chain be managed
and what is the role of the Internet in managing global
logistics?
Should the firm manage global logistics itself or
outsource the management to enterprises that specialize
in this activity?
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16-4
Strategy, Manufacturing, and
Logistics
Production
Focus
Logistics
Performed
internationally
To lower costs of value creation
Add value by better serving customer needs
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16-5
Materials Management
Materials Management: the activity that controls
the transmission of physical materials through the
value chain, from procurement through production and
into distribution.
Logistics: the procurement and and physical
transmission of material through the supply chain,
from suppliers to customers.
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Manufacturing and Materials Management
- Strategic Objectives Lower costs.
Increase product quality.
Total Quality Management.
Increases productivity.
Lowers rework and scrap costs.
Lowers warranty costs.
Accommodate demands for local responsiveness.
Respond quickly to shifts in customer demand.
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Total Quality Management
(TQM)
The leaders: W. Edwards Deming, Joseph Juran,
and A.V. Feigenbaum
“We have learned to live in a world of mistakes and
defective products as if they were necessary to life.
It is time to adopt a new philosophy in America.”
W. Edwards Deming
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The Relationship Between Quality
and Costs
Increases
Productivity
Improves
Performance
Reliability
Figure 16.1
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Lowers
Rework and
Scrap Costs
Lowers
Warranty and
Rework Costs
Lowers
Manufacturing
Costs
16-8
Increases
Profits
Lowers
Service Costs
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16-9
Where to Manufacture
Country
Factors
Technological
Factors
Product
Factors
Locating
Manufacturing
Facilities
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Country Factors
Political economy.
Culture.
Relative factor costs.
Global concentrations of activity.
Skilled labor pools.
Supporting industries.
Formal and informal trade barriers.
Transportation costs.
Rules regarding FDI.
Exchange rate movements.
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Technological Factors
Fixed costs.
Minimum efficient scale.
Flexible manufacturing (Lean Production).
Reduce setup times.
Increase machine utilization.
Improve quality control.
Mass Customization
Low cost
Product
customization
Flexible machine cells.
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A Typical Unit Cost Curve
Minimum
Efficient Scale
Figure 16.2
Volume
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Product Factors and Location Strategies
Two product features affect location
decisions:
Value to weight ratio.
Product serves universal needs.
Two strategies for locating manufacturing
facilities:
Concentration.
Decentralization.
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Product Factors
Value-to-weight ration.
Influences transportation costs.
High value-to-weight.
Electronic components.
Low value-to-weight.
Bulk chemicals.
Does the product serve universal needs?
Industrial products.
Modern consumer products.
Handheld calculators.
Personal computers.
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Manufacturing Location
Factor costs have substantial impact.
Low trade barriers.
Externalities favor certain locations.
Stable exchange rates.
Minimum efficient scale is high and
manufacturing technologies
Product’s value-to-weight ration is high.
Product serves universal needs.
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flexible
Concentration.
available.
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16-16
Manufacturing Location
Factor costs do not have substantial
impact.
High trade barriers.
Location externalities unimportant.
Exchange rate volatility.
Production technology has low fixed costs,
low minimum efficient scale, flexible
manufacturing technology unavailable.
Product has low value-to-weight ratio.
Product does not serve universal needs.
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Decentralization
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Location Strategy and Manufacturing
Favored Manufactured Strategy
Country Factors
Concentrated
Differences in political economy
Substantial
Differences in culture
Substantial
Differences in factor costs
Substantial
Trade barriers
Few
Technological Factors
Fixed costs
High
Minimum efficient scale
High
Flexible manufacturing technology Available
Product Factors
Value-to-weight ration
Serves universal needs
High
Yes
Decentralized
Few
Few
Few
Many
Low
Low
Not Available
Low
No
Table 16.1
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Strategic Role of Foreign Factories
Initially, established where labor costs low.
Later, important centers for design and final
assembly.
Upward migration caused by:
Pressure to improve cost structure.
Dispersed Centers
of Excellence are
Pressure to customize product to
meet customer demand.
consistent with a
Transnational
Increasing abundance of advanced
factors of production.
Strategy
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Make or Buy
Make
Proprietary
Product
Technology
Protection
Lower costs Facilitating
specialized
investments
Buy
Strategic
flexibility
Lower
costs
Improved
scheduling
Offsets
Trade-offs
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Strategic Alliances with Suppliers
Attempting to
reap benefits
of vertical
integration
Building
long-term
relationships
Mutually
beneficial
Pressure from
JIT
CAD
CAM
Trust
May limit strategic flexibility
Risks giving away key technology know-how
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16-21
Coordinating a Global Manufacturing
System
Materials management (includes logistics):
Activities necessary to get materials from
suppliers to manufacturer, to distribution
system, to end user.
Achieve lowest possible cost that
meets customer’s needs.
Power of ‘Just-in-Time’:
Economize on inventory holding costs.
Drawback: no buffer inventory.
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The Role of the Organization
Organizational linkages are more numerous and
complex.
More difficult to control costs.
Functionally separate materials management:
Equal weight with other departments.
Purchasing, production and distribution are one
basic task:
controlling material flow from purchase to
customer.
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Potential Materials Management Linkages
North America
Market A
Europe
Market B
Far East
Market C
Markets
Figure 16.3
Plant 1
Plant 2
Plant 3
Source A
Source B
Source C
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Manufacturing
Locations
Source
Locations
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Traditional Organizational Structure
CEO
Purchasing
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Manufacturing
Marketing
Production
Planning
and Control
Distribution
Finance
Figure 16.4A
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16-25
Organization Structure with Materials
Management as Separate Function
Strategic
manager/CEO
Materials
management
Purchasing
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Manufacturing
Production
planning
and control
Marketing
Finance
Figure 16.4B
Distribution
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16-26
Role of Information Technology and
the Internet
Track component parts to assembly plant.
Optimize production scheduling.
Ability to accelerate (or slow) production.
Electronic data interchange coordinates flow
through into/through manufacturing to
customers.
Suppliers, shippers, and purchasing firms can
communicate with each other without delay.
Flexibility and responsiveness.
Paperwork is decreased.
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