Lecture 08
Global Manufacturing and Logistics
© Ram Mudambi, Temple University, 2007
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Outline
Distance still matters
Location issues in global manufacturing
Vertical vs. horizontal FDI
Global materials management
Value chain innovation
Make or buy?
Outsourcing logistics
© Ram Mudambi, Temple University, 2007
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Cf: Ghemawat
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Location Strategy and Manufacturing
Favored Manufacturing Strategy
Country Factors
Concentrated
Decentralized
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 ratio
High
Serves universal needs
Yes
© Ram Mudambi, Temple University, 2007
Few
Few
Few
Many
Low
Low
Not Available
Low
No
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Two Forms of FDI
HOME
Backward
Vertical FDI
Location 1
Stage 1
Horizontal FDI
HOST
Location 2
Stage 0
Location 2
Stage 1
Vertical
FDI
Forward
Vertical FDI
© Ram Mudambi, Temple University, 2007
Location 2
Stage 2
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Dispersed FDI
HOME
HOST 2
HOST 1
Backward
Vertical FDI
Location 1
Stage 1
Horizontal FDI
Location 2
Stage 0
Location 2
Stage 1
Vertical
FDI
Forward
Vertical FDI
© Ram Mudambi, Temple University, 2007
Location 2
Stage 2
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Belfast
Carburetors and
distributors
Enfield
Basildon
Instruments, fuel
and water gauges,
plugs
Radiators, water
pump assembly,
engine components
Treforest
Genk
Spark plug
insulators
Body panels,
road wheels
Leamington
Wülfrath
Foundry production
of engine
components
Transmission
parts, engine
components
Dagenham
Cologne
Die-cast transaxle
casings, gear and
engine components
Final assembly
Bordeaux
Transmissions
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Valencia
Saarlouis
Final assembly
Final assembly
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Coordinating a Global
Manufacturing System
Materials management and logistics:
Global sourcing
• 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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Global sourcing
The process of identifying, evaluating,
negotiating and configuring supply across
multiple locations to reduce costs,
maximize performance and mitigate risks.
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Material costs -- price, setup, tooling, transaction and
other costs related to the actual product or service
Transportation costs -- transportation, fuel surcharges
and other fees included in a freight rate
Inventory carrying costs -- warehousing, handling,
taxes, insurance, depreciation, shrinkage, obsolescence,
and other costs associated with maintaining inventories,
including the cost of money or opportunity costs
Cross-border taxes and tariffs -- often referred to as
landed costs, i.e., the sum of duties, insurance and other
fees for door-to-door delivery
Supply and operational performance -- the cost of
noncompliance or underperformance; can offset any
price gains attained by shifting to an offshore source
Supply and operational risks -- including geopolitical
factors or natural disasters and disease; tariff and policy
changes; and instability caused by war and/or terrorism,
all of which may disrupt supply lines
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Dell Business Strategy
BUSINESS
BUSINESSMODEL:
MODEL:Built-to-order/direct
Traditional PC industry
sales
Manufacture
of PC
components
by
suppliers
Assembly of
Customized
PCs by PC
assembly
Makers (to fill
of PCs by
Orders from
PC Makers
Suppliers and
as orders
Keep
from
Distribution
PC buyers come in
Channel stocked
Sales and
Marketing
Activities of
Resellers to
Sell inventories
Of PCs on hand
Service and Support
activities
provided to
PC Maker
(via telephone, fax,
Or e-mail) or by
Independent
Service providers
Purchases by
PC users
VALUE CHAIN INNOVATIONS
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Dell Business Strategy
Dell believes that the direct model provides it with
several distinct competitive advantages.
Eliminates wholesale/retail channel.
Avoids the higher inventory costs.
Reduces high risk of outdated technology.
Maintenance and monitoring of customer
database, helping to shape future product offerings.
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Make or Buy
Advantages of Make:
Lower costs.
Facilitating specialized investments.
Proprietary product production technology
protection.
Improved scheduling.
Advantages of Buy:
Strategic flexibility.
Lower costs.
Offsets.
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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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Global organizational linkages
MNC
Parts
Supplier
Negotiations
and payment
Global
Procurement
Division
Oversight
(EDI)
Product
supply
Contract
Manufacturer
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OEM
Sub-assembly or
Branded product
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Local market servicing
Need for a local partner
Foreign partner – Technology
(R&D knowledge)
Domestic partner – Distribution channels
(Marketing knowledge)
FINAL MARKET
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Using 3PL’s
Oversight
Upstream
Client Firm
3PL
Upstream
systems integration
Technology
• Channel density
• Channel diversity
Downstream
Buyer
Downstream
systems integration
People
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Using 4PL’s
Outsourcing the internal and external logistics function
Upstream
client unit
Downstream
client unit
External
buyer
4PL
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Takeaways
Manufacturing and logistics decisions are
intimately intertwined with all aspects of
the FDI decision
Regional strategy will often be a crucial
factor
Superior manufacturing and logistics can
support value chain innovation
The make or buy decision encompasses
both manufacturing and logistics
© Ram Mudambi, Temple University, 2007
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