Global Production, Outsourcing and Logistics
1. Production denotes both service and manufacturing activities.
2. The activity that controls the transmission of physical materials through the value chain,
from procurement through production and into distribution is known as logistics.
3. Efficient supply chain management reduces the amount of inventory in the system and
decreases the inventory turnover.
4. The firm that improves quality control will also reduce its costs of value creation.
5. A firm can lower costs by dispersing production to locations around the globe where each
activity can be performed most efficiently.
6. The principle tool that most managers now use to increase the reliability of their product
offering is TQM.
7. TQM is a direct descendent of the Six Sigma philosophy of quality improvement.
8. A statistically based philosophy that aims to reduce defects, boost productivity, eliminate
waste and cut costs throughout a company is known as ISO 9000.
9. European Union firms must comply with ISO 9000 standards in their manufacturing
processes and products before they will be given access to the European Union market.
10. Country factors, technological factors and product factors, all influence the decision of
where to produce.
11. When a currency depreciates, a low-cost location can be turned into a high-cost location.
12. The level of output at which most plant-level scale economies are exhausted is referred to as
the minimum efficient scale of output.
13. As a plant output expands, unit costs decrease.
14. The smaller 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.
15. Producing greater product variety from a factory implies longer production runs.
16. Lean production is another term for flexible manufacturing technology.
17. Economies of scale allow a firm to produce a wider variety of end products at a unit cost
that at one time could only be achieved through the mass production of a standardized output.
18. Mass customization describes the ability of companies to use flexible manufacturing
technology to reconcile low cost and product customization.
19. A grouping of various types of machinery, a common materials handler and a centralized
cell controller is a flexible machine cell.
20. Flexible manufacturing technologies can help a firm improve efficiency, lower costs and
customize products to small markets.
21. A product's value-to-weight ratio affects the firm's transportation costs.
22. Because of the low value-to weight ratio of many pharmaceutical and electronics products,
there is great pressure to produce these products in the optimal location and serve the world
from there.
23. Concentrating production at an optimal location is more attractive when a product serves
universal needs.
24. Concentration of production makes most sense when trade barriers are high.
25. Decentralization of production is appropriate when the product serves universal needs.
26. There is a trend toward viewing foreign factories as simply being low-cost manufacturing
facilities.
27. The make-or-buy decision involves deciding whether a firm should make or buy the
component parts that go into the final product.
28. Historically, most outsourcing decisions have involved the manufacture of service
products.
29. Outsourcing decisions pose plenty of problems for international businesses but even more
problems for purely domestic businesses.
30. A firm that has integrated horizontally is making all or part of a product in-house.
31. When one firm invests in specialized assets to supply another, mutual dependency is
created.
32. When substantial investments in specialized assets are required to manufacture a
component, the firm will prefer to contract it out to a supplier.
33. The greatest advantage of buying component parts from independent suppliers is that the
firm can maintain its strategic flexibility.
34. When political risk is high, sourcing products from independent suppliers can be
advantageous.
35. Incentive problems that occur with independent suppliers do not arise with internal
suppliers.
36. Strategic alliances build trust between the firm and its suppliers.
37. Strategic alliances can effectively limit a firm's strategic flexibility.
38. A CAD/CAM system allows the firm 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.
39. Under a JIT system, products are briefly warehoused before entering the manufacturing
process.
40. Firms use EDI to coordinate the flow of materials into manufacturing, through
manufacturing and out to customers.
Multiple Choice Questions
41. _____ is the activity that controls the transportation of physical materials through the value
chain, from procurement through production and into distribution.
A. Outsourcing
B. Production
C. Logistics
D. Distribution
42. _____ is a management philosophy according to which mistakes, defects and poor-quality
materials are not acceptable and should be eliminated.
A. Scientific management
B. Total quality management
C. ISO 9000
D. Lean manufacturing
43. The Six Sigma methodology
A. Is a direct descendant of the total quality management philosophy
B. Is a direct descendant of benchmarking
C. Was adopted first by British companies and then Japanese companies during the 1980s
D. Was developed by Deming, Juran and Feigenbaum
44. Saving time by not producing poor-quality products that cannot be sold, lowering rework
costs, lowering scrap costs and lowering warranty costs are the intended results of
A. Total feature management
B. Reengineering
C. Logistics
D. Total quality management
45. Before a firm is allowed access to the European marketplace, the European Union requires
that the quality of the firm's manufacturing processes and products be certified under a quality
standard known as
A. Total quality management
B. Reengineering
C. Quality management system
D. ISO 9000
46. The modern successor to TQM is
A. Corporate Quality Commitment
B. ISO 9000
C. Quality Process Realized
D. Six Sigma
47. The statistically based philosophy that aims to reduce defects, boost productivity, eliminate
waste and cut costs throughout a company is known as
A. ISO 9000
B. TQM
C. Six Sigma
D. Deming's Law
48. Which of the following statements about Six Sigma is ?
A. It is a statistically based philosophy
B. It is easily possible for a company to achieve Six Sigma perfection
C. At six sigma, a production process will have 66 defects per million units
D. At six sigma, a production process would be 100 percent accurate
49. Factors that help a firm decide where to locate its manufacturing facilities can be best
grouped under three broad headings. These are
A. Political factors, social factors and legal factors
B. Country factors, technological factors and product factors
C. Product factors, service factors and labor factors
D. Language factors, cultural factors and transportation factors
50. The creation of a global web of value creation activities is the result of
A. Location economies
B. Diseconomies of scale
C. Shortage of skilled labor
D. Informal trade barriers
51. Identify the incorrect statement pertaining to exchange rate movements.
A. Adverse changes in exchange rates can quickly alter a country's attractiveness as a
manufacturing base
B. Currency appreciation can transform a low-cost location into a high-cost location
C. Currency appreciation can cause firms to move their manufacturing offshore to lower-cost
locations
D. A low-cost location can be transformed into a high-cost location because of currency
depreciation
52. Being too dependent on one location is particularly risky because of
A. Floating exchange rates
B. Fixed exchange rates
C. Lack of movement in currencies
D. Static exchange rates
53. According to the concept of economies of scale,
A. As plant output reduces, unit costs decrease
B. As plant output expands, unit costs increase
C. As plant output reduces, unit costs remain static
D. As plant output expands, unit costs decrease
54. Identify an advantage of a low minimum efficient scale.
A. Allows the firm to accommodate demands for local responsiveness
B. Discounts currency risk by manufacturing all products in one location
C. Helps keep overheads low at the expense of fixed costs
D. Helps a firm to standardize its products for all markets
55. A company that wants to reduce set-up time for complex equipment, increase the utilization
of individual machines through better scheduling and improve quality control at all stages of the
manufacturing process should adopt
A. Standardization
B. Diseconomies of scale
C. Flexible machine technology
D. Minimum efficient scale
56. The term _____ has been coined to describe the ability of companies to use flexible
manufacturing technology to reconcile the goals of low cost and product customization.
A. Assembly-line-like customization
B. Economies of customization
C. Mass customization
D. Standardized customization
57. Flexible manufacturing technology is also known as
A. Mass customization
B. Lean production
C. Flexible machine cells
D. Minimum efficient scale
58. According to the concept of economies of scale what is the best way to achieve high
efficiency and low unit costs?
A. Customizing products for each individual market
B. Mass producing standardized outputs
C. Concentrating on production of small volumes of products
D. Increasing the product variety dramatically
59. This allows 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.
A. Kaizen
B. Six Sigma
C. Lean production
D. TQM
60. _____ challenged the notion that the way to increase efficiency and drive down unit costs is
to limit product variety and produce a standardized product in large volumes.
A. Bartlett and Ghoshal's theory of a transnational company
B. Minimum efficient scale
C. Economies of scale
D. Flexible manufacturing technology
61. A _____ is a grouping of various types of machinery, a common materials handler and a
centralized cell controller.
A. Flexible machine cell
B. Mass customization policy
C. Lean production system
D. Minimum efficient scale cluster
62. All of the following are the major efficiency benefits of flexible manufacturing
technologies except
A. It enables companies to customize products to the demands of small consumer groups
B. It helps a company achieve mass customization, which increases its customer
responsiveness
C. It requires firms to establish manufacturing facilities in each major market to provide
products that satisfy specific consumer tastes and preferences
D. It improves capacity utilization and reductions in work in progress and waste
63. When a company's product has a low value-to-weight ratio, the company should
A. Should have a centralized manufacturing location
B. Produce the product in multiple locations close to major markets
C. Ignore transportation costs
D. Produce the product in one optimal location and serve the world from there
64. Which of the following statements about products with high value-to-weight ratios is ?
A. They are relatively inexpensive and weigh a lot
B. They are expensive and do not weigh very much
C. Transportation costs usually account for a large percentage of their total costs
D. They must be produced in multiple locations close to major markets
65. Which of the following is a characteristic of manufacturing technology that should be
considered by a firm contemplating international production?
A. Trade barriers
B. Value-to-weight ratio
C. Level of fixed costs
D. Exchange rates
66. A company might consider decentralizing when
A. A product's value-to-weight ratio is high
B. The product serves universal needs
C. Trade barriers are low
D. Volatility in important exchange rates is expected
67. The concentration of production makes most sense when
A. Volatility in important exchange rates is expected
B. The product's value-to-weight ratio is high
C. Location externalities are not important
D. Trade barriers are high
68. The concentration of production is favored when all of the following factors are high
except
A. Fixed costs
B. Minimum efficient scale
C. Value-to-weight ratio
D. Trade barriers
69. Decisions a firm must make about whether to perform a certain value creation activity
themselves or outsource it to another entity are best known as
A. Outsource potential decisions
B. In-house potential decisions
C. Make-or-buy decisions
D. Integration decisions
70. Which of the following is not an argument that supports making a product in-house?
A. Vertical integration may be associated with higher costs
B. Vertical integration may protect proprietary product technology
C. Vertical integration may facilitate investment in highly specialized assets
D. Vertical integration may ease the scheduling of adjacent processes
71. A _____ is an asset whose value is contingent upon a particular relationship persisting.
A. Specialized asset
B. Common asset
C. Complementary asset
D. Supplementary asset
72. A firm will prefer to make the component internally rather than contract it out to a supplier,
because of all of the following reasons except
A. It needs to maintain control over its proprietary technology
B. Substantial investments in specialized assets are required to manufacture a component
C. The firm completely trusts the independent supplier to play fair
D. It runs the risk that suppliers will expropriate the technology for their own use
73. How can firms attain tight coordination between different stages in the production process?
A. By using information technology
B. By lowering the costs of value creation
C. By implementing ISO 9000
D. By minimum efficient scale of output
74. Which of the following is not a reason to outsource production?
A. It can give the firm greater flexibility
B. It can make planning, coordination and scheduling of adjacent processes easier
C. It can help drive down the firm's cost structure
D. It may help the firm capture orders from international customers
75. An advantage of buying component parts or even an entire product, from independent
suppliers is that
A. The firm can maintain its flexibility of switching orders between suppliers as circumstances
dictate
B. It can make planning, coordination and scheduling of adjacent processes easier for the firm
C. It reduces the risk for the firm that suppliers will expropriate the technology for their own
use
D. The firm is able to maintain firm control over its proprietary technology
76. Vertical integration may raise a firm's cost structure for all of the following reasons except
A. The greater the number of subunits in an organization, the more problems coordinating and
controlling those units
B. The firm that vertically integrates into component part manufacturing may find that because
its internal suppliers have an active customer, they lack the motivation to be more efficient
C. Vertically integrated firms have to determine appropriate prices for goods transferred to
subunits within the firm
D. It makes planning, coordination and scheduling of adjacent processes more difficult, as
compared to buying from independent suppliers, particularly with just-in-time inventory
systems
77. The major costs saving associated with JIT comes from
A. Speeding up inventory turnover
B. Having materials arrive at a manufacturing plant before they are needed
C. Avoiding production slowdowns by ensuring inventory is stockpiled
D. Using warehouse space to maintain on-hand inventory
78. Just-in-time inventory systems
A. Can help firms improve product quality
B. Are fast becoming obsolete
C. Require that parts be warehoused
D. Give firms a buffer stock of inventory
79. Which of the following is a drawback associated with a JIT system?
A. There are high transportation costs involved
B. It leaves a firm without a buffer stock of inventory
C. It leaves a firm with scrap costs associated with defective products
D. It increases the warranty costs
80. With _____, suppliers, shippers and the purchasing firm can communicate with each other
with no time delay.
A. A CAD system
B. A JIT system
C. A CAM system
D. An EDI system
Essay Questions
81. What are the five interrelated issues confronting a firm as trade barriers fall and global
markets develop?
As trade barriers fall and global markets develop, firm face five interrelated issues. First, where
in the world should production activities be located? Second, what should be the long-term
strategic role of foreign production sites? Third, should the firm own foreign production
activities or is it better to outsource those activities to private vendors? Fourth, how should a
globally dispersed supply chain be managed and what is the role of internet-based information
technology in the management of global logistics? Finally, should the firm manage global
logistics itself or should it outsource the management to enterprises that specialize in this
activity?
82. What is logistics? Discuss the relationship between production and logistics.
Logistics is the activity that controls the transmission of physical materials through the value
chain, from procurement through production and into distribution. Production and logistics are
closely linked since a firm's ability to perform its production activities efficiently depends on a
timely supply of high-quality material inputs, for which logistics is responsible.
83. Discuss the strategic objectives of the production and logistics functions of an international
firm.
The production and logistics functions of an international firm have a number of important
strategic objectives. A primary objective is to lower costs. Dispersing production activities to
various locations around the globe where each activity can be performed most efficiently can
lower costs. Costs can also be lowered by managing the global supply chain to better match
supply and demand. A second strategic objective is to increase product quality by eliminating
defective products by both the supply chain and the manufacturing process. A third objective
involves meeting demands for local responsiveness. Finally, production and logistics must be
able to respond to shifts in customer demand.
84. What is the principle tool used by most managers to increase the reliability of their product
offering?
The principle tool used by most managers to increase the reliability of their product offering is
the Six Sigma quality improvement methodology. Six Sigma is the successor of the total quality
management philosophy that aims to reduce defects, boost productivity, eliminate waste and
cut costs throughout a company.
85. What does Six Sigma refer to?
Six Sigma is the modern successor to TQM. It is a statistically based philosophy that aims to
reduce defects, boost productivity, eliminate waste and cut costs throughout a company. Six
Sigma is the principle tool used by most managers to increase the reliability of their product
offering. At Six Sigma, a production process would be 99.99966 percent accurate, creating just
3.4 defects per million units.
86. Who was W. Edward Deming? What is his contribution to business?
Deming was a key contributor to the development of the total quality management (TQM)
technique. Deming identified a number of steps that should be part of any TQM program. He
argued that management should embrace the philosophy that mistakes, defects and poor quality
materials are not acceptable and should be eliminated. He suggested that the quality of
supervision should be improved by allowing more time for supervisors to work with
employees, that management should create an environment in which employees will not fear
reporting problems or recommending improvements and that some notion of quality should be
included in work standards to promote the production of defect-free output. Deming also
argued that it is management's responsibility to train workers in new skills to keep pace with
changes in the workplace. According to Deming, achieving better quality requires the
commitment of everyone in the company.
87. Describe the European Union's efforts to raise product quality. In your opinion, does the
effort represent a trade barrier?
Before a firm can gain access to the European Union marketplace, the firm must meet certain
quality standards. Specifically, the European Union requires that the quality of a firm's
manufacturing processes and products be certified under a quality standard known as ISO 9000.
The ISO 9000 certification process has proven to be bureaucratic and costly for firms. At the
same time, however, the standards have focused management attention on the need to improve
the quality of products and processes.
88. What are the three main factors that affect the decision of where to locate production?
The decision of where to locate production is determined by three main factors. Country
factors: Include a country's economic, political and cultural conditions and their effect on the
production of the firm's product. Technological factors: The type of technology a firm uses to
perform specific manufacturing activities can be pivotal in location decisions. Product factors:
Specifically, a product's value-to-weight ratio and whether the product serves universal needs
will affect where a firm locates its production activities.
89. Discuss the effect of country factors on the decision of where to locate production?
All other things being equal, a firm should locate its manufacturing activities in countries where
the political, economic and cultural conditions are conducive to the performance of those
activities. Other country specific factors that play a role in location decisions include formal
and informal trade barriers and rules and regulations regarding foreign direct investment,
expected movements in currency exchange rates and also the quality of the local labor pool.
90. What is meant by minimum efficient scale? Discuss the implications of minimum efficient
scale.
Minimum efficient scale of output refers to the level of output at which most plant-level scale
economies are exhausted. This is the level of output a plant must operate to realize all major
plant level scale economies. The concept suggests that 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.
91. How does the type of technology a firm uses affect its decision of where to locate
production?
The type of technology a firm uses to perform specific manufacturing activities can be pivotal
in location decisions. The three primary factors that drive location decisions in terms of
technology are a manufacturing activity's level of fixed costs, its minimum efficient scale and
its flexibility. When the fixed costs of setting up a manufacturing operation are high, a firm
must serve the world market from a single location or from a few locations. In contrast, when
fixed costs are low, a firm can scatter its manufacturing activities throughout the world to better
accommodate local markets. The larger the minimum efficient scale of a plant, the greater is the
argument for centralized production at a single location. Finally, when flexible manufacturing
technologies are available, a firm can manufacture products customized to various national
markets at a single factory at the optimal location.
92. What is mass customization?
The term mass customization has been coined to describe the ability of companies to use
flexible manufacturing technology to describe 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. Mass customization implies that a firm may be able to
customize its product range to suit the needs of different customer groups without bearing a cost
penalty. Research suggests that the adoption of flexible manufacturing technologies may
increase efficiency and lower unit costs relative to what can be achieved by the mass production
of a standardized output.
93. How do flexible machine cells work? What is the advantage of incorporating this type of
technology into a strategy?
Flexible machine cells are a common flexible manufacturing technology. A flexible machine
cell is a grouping of various types of machinery, a common materials handler and a centralized
cell controller (computer). Each cell normally contains four to six machines capable of
performing various operations. The typical cell is dedicated to the production of a family of
parts or products. The settings on machines are computer controlled. This allows each cell to
switch quickly between the production of different parts or products.
94. Explain how the concept of production efficiency has changed with the rise of flexible
manufacturing technologies.
Flexible technology, also known as lean production, covers a range of manufacturing
technologies designed to reduce setup times for complex equipment, increase the utilization of
individual machines through better scheduling and improve quality control at all stages of the
manufacturing process. A firm that adopts flexible manufacturing technologies can increase
efficiency and lower unit costs relative to what can be achieved by the mass production of a
standardized output, while at the same time allowing the firm to customize its product offering
to a much greater extent than was once thought possible. In fact, flexible manufacturing
technologies allow companies to produce a wider variety of products at a unit cost that at one
time could only be achieved through the mass production of a standardized output.
95. How do product factors affect the decision of where to locate production? Suppose your
firm produces refined sugar. Where should your firm locate production?
There are two product factors that affect the decision of where to locate production. First, a
product's value-to-weight ratio must be considered because of its effect on transportation costs.
Students should recognize that sugar has a low value-to-weight ratio, therefore, other things
being equal, there will be pressure to make these products in multiple locations close to major
markets to reduce transportation costs.
96. When does concentration of production make sense?
There are several situations when concentrating production facilities in a centralized location
and serving the world from there makes sense. Concentration of production makes sense when
the product serves universal needs, the product's value-to-weight ratio is high, trade barriers are
low, important exchange rates are expected to remain stable, externalities from the
concentration of like enterprises favor certain locations, differences between countries in factor
costs, political economy and culture have a substantial impact on the costs of manufacturing in
various countries and when the production technology has high fixed costs and high minimum
efficient scale relative to global demand or flexibility manufacturing technology exists.
97. Explain how the role of foreign factories evolves over time.
The strategic role of foreign factories can evolve over time. Initially, many foreign factories are
established where labor costs are low and at that time, their strategic role is to produce labor
intensive products at as low a cost as possible. Over time, the strategic role of the factories may
evolve to one in which the factories become important centers for the design and assembly of
products for the global marketplace. This change may take place as factories upgrade their
capabilities as the factories respond to pressure to improve their cost structures and/or
customize a product to the demands of consumers in a particular nation. In addition, as the local
factors of production improve, it is easier for the factories to take on a greater strategic role.
98. Why should a firm consider vertical integration as opposed to simply outsourcing the
component parts that go into its final product? What are the advantages of making a product
in-house?
The question of whether a firm should vertically integrate or outsource, the make versus buy
decision, can be a difficult decision. A firm that chooses to make a product in-house can benefit
from lower costs that may be achieved if the firm is the most efficient producer of that product
in the industry, will facilitate specialized investments, will protect proprietary technology and
and ease the scheduling of adjacent processes.
99. Explain why a firm might adopt the just-in-time system. Why might a firm choose a
different inventory system?
The JIT system was developed by Japanese firms in the 1950s and 1960s. Today, most
manufacturing firms have adopted the system in some way. The basic philosophy behind
just-in-time (JIT) manufacturing is to economize on inventory holding costs by having
materials arrive at a manufacturing plant "just in time" to enter the product process. This results
in potential cost savings and quality improvements. In addition, JIT systems can lead to quality
improvements. A firm might consider a different type of inventory system in some cases
because the disadvantage of a JIT system is that it leaves a firm without a buffer stock of
inventory. As a result, a labor dispute at a supplier's plant or a disruption in the transportation
system could leave a manufacturer without adequate component parts.
100. Discuss the role of information technology and the Internet in materials management.
Web-based information systems play a crucial role in modern material management. Firms
increasingly use EDI to coordinate the flow of materials into manufacturing, through
manufacturing and out to customers. EDI systems require computer links between a firm, it
suppliers, its shippers and sometimes its customers. These electronic links are then used to
place orders with suppliers, to register parts leaving a supplier, to track them as they travel
toward a manufacturing plant and to register their arrival. Suppliers typically use an EDI link to
send invoices to the purchasing firm. The EDI system enables suppliers, shippers and the
purchasing firm to communicate with each other with no time delay, which increases the
flexibility and responsiveness of the whole supply system. The EDI system also eliminates
much of the paperwork between suppliers, shippers and the purchasing firm.