Chapter 17
Global Production,
Outsourcing, and
Logistics
Ever hear of
“General Average”?
The Budget and Economic Outlook: Fiscal Years 2013 to 2023
The Economic Outlook for 2013
CBO expects that economic activity will expand slowly this year, with real GDP growing by just 1.4
percent. That slow growth reflects a combination of ongoing improvement in underlying economic factors
and fiscal tightening that has already begun or is scheduled to occur—including the expiration of a 2
percentage-point cut in the Social Security payroll tax, an increase in tax rates on income above certain
thresholds, and scheduled automatic reductions in federal spending. That subdued economic growth will
limit businesses’ need to hire additional workers, thereby causing the unemployment rate to stay near 8
percent this year, CBO projects. The rate of inflation and interest rates are projected to remain low.
The Economic Outlook for 2014 to 2018
After the economy adjusts this year to the fiscal tightening inherent in current law, underlying economic
factors will lead to more rapid growth, 3.4 percent in 2014 and an average of 3.6 percent a year from
2015 through 2018. In particular, CBO expects that the effects of the housing and financial crisis will
continue to fade and that an upswing in housing construction (though from a very low level), rising real
estate and stock prices, and increasing availability of credit will help to spur a virtuous cycle of faster
growth in employment, income, consumer spending, and business investment over the next few years.
Nevertheless, under current law, CBO expects the unemployment rate to remain high—above 7½
percent through 2014—before falling to 5½ percent at the end of 2017. The rate of inflation is projected
to rise slowly after this year: CBO estimates that the annual increase in the price index for personal
consumption expenditures will reach about 2 percent in 2015. The interest rate on 3 month Treasury
bills—which has hovered near zero for the past several years—is expected to climb to 4 percent by the
end of 2017, and the rate on 10-year Treasury notes is projected to rise from 2.1 percent in 2013 to 5.2
percent in 2017.
SOURCE: http://www.cbo.gov/publication/43907
Outsourcing – What can we do?
Outsourcing – Video (7 min)
Outsourcing Challenges & Responses
What would you do?
Please answer this question (discussion):
What recommendation would you give to the
U.S. President regarding outsourcing and
the U.S. response?
- incentives?
- restrictions?
Lower Costs & Add Value
Objectives of International Business are to:
Lower costs
Produce in most efficient locations
Efficiently manage the global supply chain to
better match supply and demand
Add value
Eliminate defective products from the supply
chain and the manufacturing process
Improved quality will also reduce costs
Both objectives are interrelated
Low Asian Labor Costs
Low Asian Labor Costs
Will Outsourcing be replaced by bringing production
back to the U.S.?
MIT profs say world employment will be impacted greatly by
automation – robots FILM
Questions:
1. How relevant will labor costs be in the age of robots?
2. Who stands to lose most by the wonders of automation?
Points to consider:
1. Labor costs will become less meaningful
2. Countries with low consumption (% of GDP) and high
investment led production (% of GDP) will hurt most
3. Innovative and entrepreneurial countries will lead
Quality Focus
Six Sigma
Reduce defects, boost productivity, eliminate waste,
and cut costs throughout a company
3.4 defects per million units
Total Quality Management (TQM)
Goal of improving product quality
Mistakes, defects and poor materials are unacceptable
Employees do NOT fear reporting problems
ISO 9000
European Union -firms must meet the standards
before they are allowed access to the European
marketplace
Quality Standards – 3 Levels
1. General level
Deming Award [for demonstrated excellence in
quality]
Malcolm Baldrige National Quality Award [for
demonstrated quality strategies and achievements]
2. Industry-specific level
“Certifications” or “ABC approved products”
3. Company level
Companies set supplier standards
Where to Go?
You are an electronics manufacturer located in City of
Industry. For more than two decades, your company has
designed, manufactured and supplied electronic
components and finished goods. You have excellent
quality.
- Become more price competitive (domestic market)
- Expand sales abroad.
If you were to offshore manufacture – what should
you consider when deciding where to go?
Three Factors to Consider (know for exam)
Country
Factors
Technological
Factors
Product
Factors
Country Factors
• Skilled Labor availability
• Trade Barriers Formal and
informal
• Exchange Rate - volatility
expectations
• Transportation costs
• FDI regulations
Where To Produce?
Country
Factors
Technological
Factors
Product
Factors
Technological Factors
• Level of fixed costs
Mfg plant set up costs
• Flexibility of the technology
- Equipment set-up time
reductions
- Scheduling efficiency - Increase
machine utilization
- Quality Control improvements
Where To Produce?
Country
Factors
Technological
Factors
Product
Factors
Product Factors
• Value-to-weight ratio
- Impacts the shipping mode
- High value – ship any way
(e.g., jewelry, computer chips)
• Type of need served
- Standardize products (low cost)
- Adapte products (localized)
Produce in How Many Locations?
Concentrate production
High fixed costs
High minimum efficient
scale of production
Available flexible
manufacturing
technologies
High value-to-weight
ratio
Standardized products
Multiple Locations
Low fixed costs
Low minimum efficient
scale of production
No available flexible
manufacturing
technologies
Low value-to-weight
ratio
Adapted products
Where to Go?
You are an electronics manufacturer located in City of
Industry. For more than two decades, your company
has designed, manufactured and supplied electronic
components and finished goods. You have excellent
quality.
- Become more price competitive (domestic market)
- Expand sales abroad.
You have decided to offshore to Mexico
WHY??
Handout - Complete while watching the FILM (12 min)
Outsourcing From China – Tips
Outsourcing From China - Tips (7 min)
Outsourcing Tips
Key Takeaways while watching:
1. Laws and bureaucracy
2. Contracts and handshakes
3. Reliability and quality control
4. Guanxi
5. The benefits
Chindia – China & India
Considerations
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
Transfer pricing
Infrastructure
Tax compliance
Accounting requirements
Incentives for businesses
State owned enterprise competition
Strength of private sector
Due diligence
Control of foreign investments
Corporate governance
Labor contract law
Bankruptcy laws