Global Production, Outsourcing, and Logistics

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Introduction

• In a globalized world, managing supply chains is shockingly difficult

- How should a globally dispersed supply chain be managed?

- To what extent should we own our factories rather than outsourcing?

- Should the firm manage global logistics itself, or should it outsource the management?

- Where should production be done?- What strategic role should foreign production sites play?

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Strategy, Production, and Logistics

• Production is the activities involved in creating a product

- especially direct physical work- but includes both service and manufacturing activities

• Logistics is the activity that controls the transmission of physical materials through the value chain

• Production and logistics are closely linked since a firm’s ability to produce depends on timely, high quality inputs

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Strategy, Production, and Logistics

• Technology and location economies are reducing the direct cost of production

• So supply chain management, logistics and other service work have become more important

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The demands on supply chains are amazingly complex

• In addition to low cost and high quality and reliability, two other objectives have particular importance

- Production and logistic functions must accommodate demands for responsiveness

- Production and logistics must be able to respond quickly to shifts in customer demand

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Make or Buy Decisions

• Should a firm make or buy component parts? • Advantages of making:

- Can become most efficient producer (control your destiny)

- Can make own specialized long-term investments- Protect proprietary product technology- Improved scheduling

• But – the more people you employ and the more facilities you operate, the more likely you will become bureaucratic

- You wind up doing things you’re not very good at

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• Advantages of buying components- Flexibility in sourcing – can switch suppliers- Can cut cost structure quickly

- Long-term alliances with suppliers give benefits of vertical integration with less of the associated problems

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• The key challenge: Understand and manage the total cost of sourcing, including:

- inventory costs- costs of inspections and defects- effect of a supplier’s work on the final performance of the product- all transportation costs - importing costs including

• tariffs• difficulties of working with customs

- time required to process orders - supplier ability to work with your technological system (Drake, pp. 44-45)

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Strategic Role of Foreign Factories

• Often initially established where labor costs low• Later, important centers for design and final assembly• Upward migration caused by improvement in local

capabilities and by pressures to:- Improve cost structure- Customize product to meet customer demand- An increasing abundance of advanced factors of

production

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Role of Information Technology and the Internet

• Firms today use electronic data interchange (EDI) to coordinate the flow of materials into manufacturing, through manufacturing, and out to customers

• EDI systems require computer links between a firm, its suppliers, and its shippers; 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- To register their arrival

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A Production, Outsourcing, and Logistics Case

• When introducing the X-Box gaming console, Microsoft had to decide if it should manufacture the console or outsource manufacturing

- Microsoft primarily creates software and lacked the manufacturing capabilities to make the X-Box

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• Microsoft decided to outsource production to Flextronics for four reasons

- Flextronics’ industrial park strategy would allow good control of the supply chain

• Flextronics takes care of the subcontractors

- Flextronics had a global presence- Flextronics’ Web-based information systems would

share information well with Microsoft- Microsoft trusted Flextronics