Global Manufacturing and Material Management

Global Supply Chain Management &
Outsourced Manufacturing

Chapter 3
Global Manufacturing &
Materials management

chapter3 1

Learning Objectives
After reading this chapter ,you will understand
following:
1. A Firm as value chain
2. The role of strategy
3. Profiting from Globalization
4. Strategic Choice
5. Strategic Alliance
6. Manufacturing & Materials management in global
business .
7. Locating Manufacturing facilities
8. Make or buy decisions.
9. Coordinating Global Manufacturing system
2

The Value Chain

To analyze the specific activities through which
firms can create a competitive advantage, it is
useful to model the firm as a chain of value-
creating activities.

Michael Porter identified a set of interrelated
generic activities common to a wide range of firms.
The resulting model is known as the value chain
and is depicted below:

3

The Value Chain

Primary Value Chain Activities

Inbound Outbound Marketing
> Operations > > > Service
Logistics Logistics & Sales

The goal of these activities is to create value that
exceeds the cost of providing the product or service,
thus generating a profit margin.
4

The Value Chain
Inbound logistics include the receiving, warehousing,
and inventory control of input materials.
Operations are the value-creating activities that transform
the inputs into the final product.
Outbound logistics are the activities required to get the
finished product to the customer, including warehousing,
order fulfillment, etc.
Marketing & Sales are those activities associated with
getting buyers to purchase the product, including channel
selection, advertising, pricing, etc.
Service activities are those that maintain and enhance the
product's value including customer support, repair services,
etc.

5

The Value Chain
Any or all of these primary activities may be vital in
developing a competitive advantage. For example, logistics
activities are critical for a provider of distribution services,
and service activities may be the key focus for a firm
offering on-site maintenance contracts for office equipment.
These five categories are generic and portrayed here in a
general manner. Each generic activity includes specific
activities that vary by industry.

Support Activities
The primary value chain activities described above are
facilitated by support activities. Porter identified four
generic categories of support activities, the details of which
are industry-specific.
6

The Value Chain
Procurement - the function of purchasing the raw
materials and other inputs used in the value-creating
activities.
Technology Development - includes research and
development, process automation, and other technology
development used to support the value-chain activities.
Human Resource Management - the activities associated
with recruiting, development, and compensation of
employees.
Firm Infrastructure - includes activities such as finance,
legal, quality management, etc.
Support activities often are viewed as "overhead", but
some firms successfully have used them to develop a
competitive advantage, for example, to develop a cost
advantage through innovative management of information
7
systems.

The Value Chain
Value Chain Analysis

In order to better understand the activities leading to a
competitive advantage, one can begin with the generic value
chain and then identify the relevant firm-specific activities.
Process flows can be mapped, and these flows used to
isolate the individual value-creating activities.

Once the discrete activities are defined, linkages between
activities should be identified. A linkage exists if the
performance or cost of one activity affects that of another.
Competitive advantage may be obtained by optimizing and
coordinating linked activities.

8

The Value Chain

The value chain also is useful in outsourcing decisions.
Understanding the linkages between activities can lead to
more optimal make-or-buy decisions that can result in either
a cost advantage or a differentiation advantage.

The Value System
The firm's value chain links to the value chains of
upstream suppliers and downstream buyers. The result is a
larger stream of activities known as the value system. The
development of a competitive advantage depends not only
on the firm-specific value chain, but also on the value
system of which the firm is a part.

9

The Value Chain

The value chain also is useful in outsourcing decisions.
Understanding the linkages between activities can lead to
more optimal make-or-buy decisions that can result in either
a cost advantage or a differentiation advantage.

The Value System
The firm's value chain links to the value chains of
upstream suppliers and downstream buyers. The result is a
larger stream of activities known as the value system. The
development of a competitive advantage depends not only
on the firm-specific value chain, but also on the value
system of which the firm is a part.

10

The role of Strategy
Globalization involves decision making on
following lines
•Deciding whether to go global
•Deciding which market to enter
•Deciding how to enter market
•Learning to handle difference
•Adjusting the management process
•Selecting a managerial approach
•Deciding organization structure

11

Deciding which market to enter:
This depend on
1.Volume of foreign sales
2.Number of countries to market
3.The types of countries to enter
Most companies start small when they go abroad.
Some prefer to stay small ,viewing foreign sales as
small part of there business.
Other companies have bigger plan,seeing foreign
sales as equal or even more important than local
business
12


The type of countries to enter depends on the type of
product,geographical factors,income & population,
Political climate & other related factors.
The goal is to determine potential of each country.
It goes without saying that the countries which
assures long run return on investment must be
selected for entering the market.
International business generally make political risk
assessment before entering into any foreign market.

13

Indicators of market potential
• Demographic Characteristics
1. Size of population & rate of growth
2. Degree of urbanization
3. Population density
4. Age structure
• Geographic Characteristics
1. Physical size of the country
2. Topological Characteristics
3.

14

• Economic factors
1. GNP per capita
2. Income distribution
3. Rate of growth of GNP
4. Rate of investment to GNP
• Technological factors
1. Level of technology skills
2. Existing production technology
3. Education levels
4. Existing consumption technology Cont..
15


• Economic factors
1. GNP per capita
2. Income distribution
3. Rate of growth of GNP
4. Rate of investment to GNP
• Technological factors
1. Level of technology skills
2. Existing production technology
3. Education levels
4.
16


• Socio –cultural factors
1. Dominant values
2. Life style patterns
3. Ethic groups
4. Linguistics fragmentation
• National goals & plans
1. Industry priorities
2. Infrastructure investment plans

17

Strategic Choice
There are four basic strategies are used by firms to
enter and compete in the international
Environment.
They are:
1. International Strategy
2. Multi domestic Strategy
3. Global Strategy
4. Transnational Strategy
The appropriateness of each strategy varies with the
extent of pressures for cost reduction and total
responsiveness
18

Strategic Choice
High

Transnational
Global Strategy Strategy
Cost pressures

International Multi domestic
Strategy Strategy

Low

Low Pressure for local responsiveness High 19

Types of Strategic Actions
Needs of the Environment
Dynamic Static
External
What business How to compete
Strategic Focus

to do in a given
market

Capability Managing
Development Efficiency

Internal

20

Cooperative Strategy

Cooperative strategy is a strategy in which firms
work together
to achieve a shared objective
Cooperating with other firms is a strategy that
creates value for a customer
exceeds the cost of constructing customer value in
other ways
establishes a favorable position relative to
competition

21

Strategic Alliance

A strategic alliance is a cooperative strategy in
which
firms combine some of their resources and
capabilities
to create a competitive advantage
A strategic alliance involves
exchange and sharing of resources and capabilities
co-development or distribution of goods or services

22

Strategic Alliance

Firm A Firm B
Resources Resources
Capabilities Capabilities
Core Competencies Core Competencies
Combined
Resources
Capabilities
Core Competencies

Mutual interests in designing, manufacturing,
or distributing goods or services
23

Types of Cooperative Strategies
Joint venture: two or more firms create an
independent company by combining parts of their
assets
Equity strategic alliance: partners who own
different percentages of equity in a new venture
Nonequity strategic alliances: contractual
agreements given to a company to supply,
produce, or distribute a firm’s goods or services
without equity sharing

24

Reasons for Strategic Alliances
by Market Type
Market Reason

Slow Cycle • Gain access to a restricted market
• Establish a franchise in a new market
• Maintain market stability (e.g., establishing
standards)

25

by Market Type
Market Reason

Fast Cycle • Speed up development of new goods or
service
• Speed up new market entry
• Maintain market leadership
• Form an industry technology standard
• Share risky R&D expenses
• Overcome uncertainty

26

by Market Type
Market Reason

Standard Cycle • Gain market power (reduce industry
overcapacity)
• Gain access to complementary
resources
• Establish economies of scale
• Overcome trade barriers
• Meet competitive challenges from other
competitors
• Pool resources for very large capital
projects
• Learn new business techniques

27

Approaches for Managing
Cooperative Strategies
cost minimization
formal contracts specify how the cooperative strategy
is to be monitored and how partner behavior is to be
controlled
opportunity maximization
maximize partnership’s value-creation opportunities
partners take advantage of unexpected opportunities
to learn from each other and to explore additional
marketplace possibilities
fewer formal, limiting, contracts
28

Manufacturing & Materials Management
in global business

Production is the process by which raw materials and
other inputs are converted into finished goods.
Manufacturing refers to the process of producing
tangible goods only.
Nature of production can be better understood if we
view the manufacturing function fro three angles
•Production as a System
•Production as an organizational function
•Decision making in production

29

in global business

A system is understood as a whole which can not
be taken apart.There systems are classified into
three types.
•Production System
•Conversion subsystem
•Control Subsystem
Production system receives inputs in the form of
1) Capital.
2) Utilities.
3) Personnel.
4)Information Cont..
30

in global business

Inputs of a Production System
•External
Legal, Economic, Social, Technological

•Market
Competition, Customer Desires, Product Info.

•Primary Resources
Materials, Personnel, Capital, Utilities
Cont..
31

in global business

Conversion Subsystem

•Physical (Manufacturing)
•Vocational Services (Transportation)
•Exchange Services (Retailing)
•Storage Services (Warehousing)
•Other Private Services (Insurance)
•Government Services (Federal)

32

in global business

1. Production System:
A system whose function is to convert a set of
inputs into a set of desired outputs
2. Conversion Sub-System:
A Sub-System of larger production system where
inputs are converted into outputs
3.Control Subsystem:
A subsystem of a larger production system where
a portion of the output is monitored for feedback
signals
33

Production System Model

Inputs
Inputs Conversion
Conversion Outputs
Outputs
Subsystem
Subsystem

Environment
Physical
Lavational service Goods or
Market Storage service services
Business service
Primary Government service
Resources

Control Subsystem
34

Where to Manufacture?
Country Factors
Technology Factors
Customization and Cost Efficiency
Product Factors
Locating Manufacturing Facilities
Making Global Sourcing Decision
Logistics Management in MNCs
Global Supply Chain Management
Transfer of Knowledge from Home Country to the Host
Country
Parent Subsidiary Relationship
New Product Development
Unleashing Innovation in Subsidiaries.
35

Locating Manufacturing
Facilities
Reducing costs and improving quality are the two inter
dependent objectives of operations management. R&D
initiatives help derive competitive advantage a they make
companies better equipped to respond faster to changes in
market demands.
Three factors determine location of a factory: country,
technology and product. Country factors include political
stability, the FDI policy and the lobbying power of domestic
industrialists and economic stability which is determined by
factors like exchange rate. Land and labor costs of a country
are crucial in deciding the location of manufacturing facility.

36

Facilities
Technological developments also impact vocational
decisions. The higher the level of investment required, the
stronger the case for centralized manufacturing. Moreover,
economies of scale might require companies to concentrate
manufacturing in a few locations. But some companies like
Levi's have proved that customization and cost efficiency
can go together.
Companies are often confronted with 'make or buy'
questions. Global sourcing has been put to use effectively by
many MNC's. The major advantages of sourcing
components are that financial and operational risks can be
reduced and fixed costs of investments in people, plant and
machinery can be avoided.
37

Facilities
The risk of dependence on the supplier can be mitigated
either by vertical integration or by holding equity in the
supplier's firms.
There are three types of integration. Backward integration
is said to occur when the firm produces its own raw material
and component parts. In forward integration, a raw material
manufacturer may produce finished goods.
Horizontal integration occurs when a firm acquires its
competitor to expand capacity or to gain market share.
Global Logistics and Supply Chain Management (SCM) are
emerging as strategic tools to help companies focus on core
competencies and achieve cost efficiency.

38

Facilities
Logistics management involves managing the flow of
goods from the supplier to manufacturing facilities across
the world and then distributing the finished goods to the
consumer.
SCM is a wider concept that integrates the activity of
demand forecasting and inventory management with other
functions of logistics management. Forecasting of demand is
often difficult because of the bull-whip effect which is the
distortion of demand information due to certain reasons.
Companies have recognized the importance of the R&D
function. However, most companies still do not empower
the subsidiaries to innovate. While companies like Nestle
justify the centralization of R&D,
39

‘Make or Buy’ decision

The ‘make or buy’ decision is one of the most critical
supply chain, strategic decisions. The supply management
organization has a key role in this decision.
The decision is important for a number of reasons. It
determines and defines an organization’s core competencies.
It determines what level of investment the business should
make internally as well as with suppliers.
The ‘make or buy’ decision involves financial and
capability issues as companies ask: ‘Do we have the
expertise to manufacture a quality product and deliver it at a
competitive cost?’

40


Since some industrial tasks cannot be effectively
accomplished in- house because of lack of equipment,
trained personnel, or material, the answer to the question is
often ‘no.’ So, non-core products and services are contracted
to outside suppliers.
High Tech Companies
Let us look at a high-tech company’s ‘make or buy’
decision-making. Following the rule, ‘can’t be all things to
all customers,’ high tech companies focus their internal
resources on some core technology while depending on
strategically outsourced innovations to complement their
efforts.]

41


In general, high tech companies such as Intel and
Microsoft competitively position themselves based on their
core knowledge competencies so that internal development
(‘make’ decision) provides the most competitive advantage.
In areas away from chip design and software development,
they may outsource, license, or purchase required
competencies.

‘Make or Buy' Due Diligence
If a company sources a product or service, then it can
work with existing suppliers or find new suppliers. As much
as possible, companies don’t want surprises or variability.
They want consistency.
42


They want to work with known people, known
relationships, and known processes. It’s pretty simple; life
and business work better when we work with known. Again,
think variability. We don’t want unknown variability,
unknown risk, unknown people, unknown processes, or
unknown suppliers.
The solution is to encourage supply-partnering
relationships. Customers and suppliers must trust each other
to share key process information, technologies,
cost/delivery/quality targets, and even investments. This
frankly isn’t easy. It requires trust that a nondisclosure
agreement can’t enforce.

43


The ‘make’ decision also isn’t easy for a supplier. The
supplier may even pass on the opportunity to provide the
product or service.
The products may not be worthwhile to manufacture. The
products may be low volume or ‘one of a kind’ that may
require new production equipment or provide insufficient
margins.
Is the customer willing to pay for the added supplier
investment? Many questions - few easy answers. The ‘make
or buy’ decision usually comes down to optimizing many
factors

44


Alternate Sourcing Options
Also, the ‘make or buy’ decision involves a ‘risk/reward’
or ‘cost/benefit’ analysis. For example, low value products
are usually commodity and non-strategic items.
As well, there are multiple suppliers who can produce this
commodity so the risk of losing a commodity source or
finding competitive bidders is relatively low.
If the supplier provides a high value, innovative product
or process technology, the company may partner with a
supplier or bring the product in-house.
What does a company do if a new or existent supplier
can’t produce the product to the customer’s requirements?

45


The customer has several options. It can find a new
supplier or it can work with an existing supplier. The
customer may even improve the supplier’s capabilities.
How? The customer can provide technical assistance,
machines, incentives, or even pay the cost of improving the
supplier’s capabilities.
And, there is the ‘risk-reward’ decision of switching
suppliers. This isn’t negligible. The risk or cost of an
unknown supplier may be too high. When should a company
change a supplier? The change should occur when the cost,
pain or risk of keeping the supplier exceed the cost of
finding a new supplier.

46

Make-or-Buy Decisions
Reasons for Making
1. Maintain core competence
2. Lower production cost
3. Unsuitable suppliers
4. Assure adequate supply (quantity or delivery)
5. Utilize surplus labor or facilities
6. Obtain desired quality
7. Remove supplier collusion
8. Obtain unique item that would entail a prohibitive
commitment for a supplier
9. Protect personnel from a layoff
10. Protect proprietary design or quality
11. Increase or maintain size of company
47
Table 11.4

Make-or-Buy Decisions
Reasons for Buying
1. Frees management to deal with its primary
business
2. Lower acquisition cost
3. Preserve supplier commitment
4. Obtain technical or management ability
5. Inadequate capacity
6. Reduce inventory costs
7. Ensure alternative sources
8. Inadequate managerial or technical resources
9. Reciprocity
10. Item is protected by a patent or trade secret
48
Table 11.4

Just in time Inventory system

Just In Time (JIT) is an inventory strategy implemented
to improve the return on investment of a business by
reducing in-process inventory and its associated costs. The
process is driven by a series of signals, or Kanban (看板
Kanban?), that tell production processes when to make the
next part. Kanban are usually 'tickets' but can be simple
visual signals, such as the presence or absence of a part on a
shelf. When implemented correctly, JIT can lead to dramatic
improvements in a manufacturing organization's return on
investment, quality, and efficiency.
New stock is ordered when stock drops to the re-order
level. This saves warehouse space and costs. However, one
drawback of the JIT system is that the re-order level is
determined by historical demand.
49

Just in time Inventory system
If demand rises above the historical average demand, the
firm will deplete inventory faster than usual and cause
customer service issues. To meet a 95% service rate a firm
must carry about 3 standard deviations of demand in safety
stock. Forecasted shifts in demand should be planned for
around the Kanban until trends can be established to reset
the appropriate Kanban level. Others[1] have suggested that
recycling Kanban faster can also help flex the system by as
much as 10-30%. In recent years manufacturers have touted
a trailing 13 week average as a better predictor than most
forecasters could provide.]
A related term is Kaizen which is an approach to
productivity improvement literally meaning "continuous
improvement" of process.
50


End Of

Chapter 3

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