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© Ram Mudambi, Temple University, 2007
2
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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Location Strategy and Manufacturing
Serves universal needs Yes No
Flexible manufacturing technology Available Not AvailableMinimum efficient scale High Low
Differences in factor costs Substantial Few
Technological Factors
Product Factors
Fixed costs High Low
Concentrated Decentralized
Trade barriers Few Many
Value-to-weight ratio High Low
Country Factors
Differences in political economy Substantial Few
Favored Manufacturing Strategy
Differences in culture Substantial Few
© Ram Mudambi, Temple University, 2007
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Two Forms of FDIV
alue
cha
in Location 1Stage 1
Location 2Stage 1Horizontal FDI
Location 2Stage 0
BackwardVertical FDI
Location 2Stage 2
ForwardVertical FDI
HOME
HOST
VerticalFDI
© Ram Mudambi, Temple University, 2007
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Dispersed FDIV
alue
cha
in Location 1Stage 1
Location 2Stage 1Horizontal FDI
Location 2Stage 0
BackwardVertical FDI
Location 2Stage 2
ForwardVertical FDI
HOST 2
VerticalFDI
HOST 1HOME
© Ram Mudambi, Temple University, 2007
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Belfast Carburetors and
distributors
Treforest Spark plug insulators
Leamington Foundry production
of engine components
Dagenham Final assembly
Bordeaux Transmissions
Enfield Instruments, fuel and water gauges,
plugs
Basildon Radiators, water pump assembly,
engine components
Genk Body panels, road wheels
Wülfrath Transmission parts, engine components
Saarlouis Final assembly
Cologne Die-cast transaxle casings, gear and
engine components
Valencia Final assembly
© Ram Mudambi, Temple University, 2007
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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.
© Ram Mudambi, Temple University, 2007
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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.
© Ram Mudambi, Temple University, 2007
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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
© Ram Mudambi, Temple University, 2007
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Dell Business StrategyDell Business StrategyBUSINESS MODEL: Traditional PC industry
Assembly ofPCs by PC
Makers (to fillOrders from
Suppliers andKeep
DistributionChannel stocked
Assembly ofPCs by PC
Makers (to fillOrders from
Suppliers andKeep
DistributionChannel stocked
Service and Support activities
provided to PC Maker
(via telephone, fax,Or e-mail) or by
Independent Service providers
Service and Support activities
provided to PC Maker
(via telephone, fax,Or e-mail) or by
Independent Service providers
Manufactureof PC
components by
suppliers
Manufactureof PC
components by
suppliers
Purchases byPC users
Purchases byPC users
Sales andMarketing
Activities ofResellers to
Sell inventoriesOf PCs on hand
Sales andMarketing
Activities ofResellers to
Sell inventoriesOf PCs on hand
Customized assembly of PCs by PC Makers as orders
from PC buyers come in
Customized assembly of PCs by PC Makers as orders
from PC buyers come in
BUSINESS MODEL: Built-to-order/direct sales
VALUE CHAIN INNOVATIONS
Global sourcing
Global sourcing
Regional assembly
Regional assembly
© Ram Mudambi, Temple University, 2007
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Dell Business StrategyDell Business StrategyDell 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.
© Ram Mudambi, Temple University, 2007
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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.
© Ram Mudambi, Temple University, 2007
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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.
© Ram Mudambi, Temple University, 2007
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Global organizational linkages
Global Procurement
Division
PartsSupplier
ContractManufacturer
Negotiations and payment
Productsupply
OversightOversight(EDI)(EDI)
OEMSub-assembly orBranded product
MNCMNC
© Ram Mudambi, Temple University, 2007
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Local market servicingNeed for a local partner
Foreign partner – Technology (R&D knowledgeR&D knowledge)
Domestic partner – Distribution channels (Marketing knowledgeMarketing knowledge)
FINAL MARKETFINAL MARKET
© Ram Mudambi, Temple University, 2007
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Using 3PL’s
UpstreamClient Firm
3PL DownstreamBuyer
Upstreamsystems integration
Downstreamsystems integration
Oversight
Technology People
• Channel density• Channel diversity
© Ram Mudambi, Temple University, 2007
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Using 4PL’s
Upstream client unit
4PL
Externalbuyer
Downstreamclient unit
Outsourcing the internal and external logistics function
© Ram Mudambi, Temple University, 2007
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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