Chapter 19

Global Operations and Supply Chain Management

McGraw-Hill/IrwinInternational Business, 11/e Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

chapter nineteen

19-3

Learning Objectives

• Understand the concept of supply chain management

• Recognize the relationship between design and supply chain management

• Describe the five global sourcing arrangements

• Appreciate the importance of added costs of global sourcing

• Understand the increasing role of electronic purchasing for global sourcing

• Understand the just-in-time (JIT) production system and potential problems with its implementation

19-4

Chapter Objectives

Understand synchronous manufacturing and customization

Comprehend the concept of Six Sigma systems and their application

Explain the potential of global standardization of production processes and procedures, and identify impediments to standardization efforts

Know the two general classes of activities in manufacturing systems, productive and supportive, that must be performed in all manufacturing systems

19-5

Supply Chain Management

• Process of coordinating and integrating the flow of materials, information, finances, and services within and among companies in the value chain from suppliers to the ultimate consumer

19-6

Lower Costs/Improved Products

• Desired results may be obtained through– Improvement within existing operations– Opening new operations– finding outside sources for inputs

• Outsourcing– Hiring others to perform some of the noncore activities

and decision making in a company’s value chain, rather than having the company and its employees continue to perform those activities

– Combination of above

19-7

Global Supply Chain Management

• Involves total systems approach to managing flow of– Materials

– Information

– Finances

– Services

19-8

Supply Chain Network: A Hypothetical Example of an American Laptop Computer

Company

19-9

Design of Products and Services

• Design has fundamental relationship with type of inputs required

• Important consideration is extent to which products and services will be standardized or adapted

• Over-the-Wall approach is traditional approach– Sequential steps

• Alternative approach is cross-functional participation– May involve customers

19-10

Outsourcing

• Increasingly common option– Relocating some or all of a business’s activities or processes

outside of the company• Focus on core competencies• Leverage skills of other companies• Reduce costs• Improve flexibility and speed of response• Enhance quality

– Can outsource in same country or another country• Offshoring: a foreign location

– Choices increased by• Global access to vendors• Falling costs of interactions• Improved information technology and communication

19-11

Global Sourcing

• Considerations– Costs– Control– Expertise – Distance– Languages– Laws and regulations

• Begin simple– Then move to complex

19-12

Global Sourcing

• The Lure of Global Sourcing– Suppliers with improved competitiveness

• Cost• Quality• Timeliness

– Suppliers in less developed countries with low-cost labor

• Attractive for labor-intensive products with low skill requirements

19-13

Global Sourcing Arrangements

• Arrangement that provide a firm with foreign products– Wholly owned subsidiary

– Overseas joint venture

– In-bond plant contractor

– Overseas independent contractor

– Independent overseas manufacturer

19-14

Use of ElectronicPurchasing for Global Sourcing

• Growth of electronic procurement exchanges– Identify potential suppliers or customers

– Facilitate efficient and dynamic interactions among prospective buyers and suppliers

– Recognize strategic function of purchasing

19-15

Global Electronic Procurement

• Electronic Exchange Options– Catalog purchases– Permits buyers and suppliers to interact through a

standard bid/quote system– Facilitates obtaining letters of credit, contracting for

logistics and distribution, and monitoring daily

• Benefits– Cut costs and invoice and ordering errors– Improve productivity and internal purchasing processes– Reduce trading cycle time, paper– Compare bids

19-16

Global Sourcing

• Problems

– Unanticipated added costs• Currency fluctuations• Transportation cost increases

– E-procurement exposes business systems to wide range of potential security issues

19-17

Added Costs

• International freight, insurance and packing• Import duties• Customhouse broker’s fees• Transit or pipeline inventory• Cost of letter of credit• International travel and communication costs• Company import specialists• Reworking of products out of specification

19-18

Advanced Production Techniques

• Systems to improve competitiveness– Just-in-time supply chains (JIT)

– Highly synchronized manufacturing systems

– Mass customization

– Six Sigma

19-19

Japan’s Use of JIT

• Requirements to operate without inventory– Components defect-free– Components delivered to each point at specified

time – Sellers maintain inventory of finished products– Process time reduced– Manufacturers simplified product lines– Suppliers cooperate– Designers, managers, purchasing people and

marketers work as a team

19-20

Total Quality Management

• System in which organization is managed so that it excels on all dimensions of product and service that are important to the customer

• TQM uses Quality Circles– Small work groups meet to discuss ways to

improve functional areas and product quality

19-21

Problems with JIT in U.S.

• Failure to realize JIT is a total system, includes TQM

• Cultural differences in U.S. workers– Highly specialized work– No company loyalty

• Failure to train and integrate suppliers

• JIT restricted to operations that produce same parts repeatedly

• If one operation stops, entire production line stops

• Achieving a balanced system difficult: production capacities differ among machines

• No allowances for contingencies

• Much trial and error are required to put system into effect

19-22

Advanced Production Techniques

• Synchronous Manufacturing– Manufacturing system with unbalanced

operations that emphasizes total system performance

• Mass Customization– Flexible manufacturing system to produce

customized products and services

• Six Sigma– Business management process for reducing

defects and eliminating variation

19-23

Logistics

• Movement of materials– Must interface with sourcing ,

manufacturing, design, engineering and marketing

– Packaging and transportation requirements can greatly increase logistics costs

– Many companies outsource logistics

19-24

Standards for Global Operations

• Standards– Documented agreements on technical

specifications or other precise criteria used consistently as guidelines, rules, or definitions of the characteristics of a product, process, or service

• ISO 9000 (International Organization for Standards) most used in Europe, for quality

• ISO 9001 most comprehensive standard

19-25

Impediments to Standardization

• Economic Forces– Wide range of market sizes– Cost of production– Backward vertical Integration

• Arrangement in which facilities are established to manufacture inputs used in the production of firm’s final products

19-26

Impediments to Standardization

• Cultural Forces

– Developing countries may lack skilled workers

– Resources directed to professional vs. technical education

– Use of specialized machines favored

– Absenteeism

19-27

Impediments to Standardization

• Political Forces

– Country needs new jobs

– Government insists on most modern equipment

19-28

Some Design Solutions

• Hybrid Design– Hybrid capital-intensive mixed with labor

intensive processes when abundant unskilled labor

• Intermediate Technology– Production methods between capital- and

labor-intensive methods

19-29

Local Manufacturing System

• Commonly scaled-down version of that found in the parent company

• Horizontal/Vertical integration– Vertical more traditional – Horizontal less prevalent in foreign

subsidiaries

19-30

Design of the Manufacturing System

• Manufacturing system:– Functionally related group of activities for

creating value

– Factors involved in efficient operation• Plant location• Plant layout• Materials handling• Human element

19-31

Design of the Manufacturing System

• Plant location– Affects both production and distribution costs– Needs labor, raw materials, water and power– Must locate in export processing zones

• Plant layout– Arrangement of machinery, personnel and service facilities

• Materials Handling– Careful planning can save production costs– Poor handling leads to excessive inventory, idle machinery,

late deliveries and damaged goods

• Human element– Effectiveness depends on people– People are affected by the system

19-32

Operation of the Manufacturing System

• Manufacturing system has two classes of activities– Productive activities– Supportive activities

19-33

Operation of the Manufacturing System

Obstacles to Meeting Manufacturing Standards– Low output– Inferior quality– Excessive manufacturing costs

19-34

Obstacles to Meeting Manufacturing Standards

• Low Output– Supplier problems, absenteeism– Poor coordination of production scheduling– Culture differences,attitudes, educational levels, planning

• Inferior Product Quality– Good quality is relative– Lack of maintenance and operating skills

• Excessive Manufacturing Costs– Low output– Budget problems– Overoptimistic sales forecast– Supply problems, supplier, water/power– Overstocked inventory– Resistance to lay off workers

19-35

Supportive Activities

• Quality control

• Inventory control

• Purchasing– Must consider costs– Develop suppliers– Know import procedures and key

government officials– Monitor foreign exchange

19-36

Supportive Activities

• Maintenance– Goal to ensure acceptable level of production– Two alternatives

• Preventive• Breakdown

• Technical Function– Provides operations with manufacturing

specifications– Checks quality of inputs and finished products– Influential in selecting sources of supply