International BusinessGlobal supply management

Professor: Marc Arza marc@futura.cat

1. International business, supply chain & logistics

Exporting is not enough. Globalization has taken international business from exporting (centralizing all activities in the home market and selling abroad) to managing a global supply chain where every step of the supply chain is taken abroad to the place offering a more advantageous context.

Defining the supply chain: “The coordination of materials, infomation and funds from the initial raw material supplier to the ultimate costumer. (...) It is the management of the value-added process from the supplier's supplier to the costumer's costumer”. From International Business by John D. Daniels

Globalization has, therefore, put logistics at the center of international business management. Logistics can be defined as “that part of the supply chain process that plans, implements, and controls the efficient, effective flow and storage of goods,services and related information from the point of origin to the point of consumption in order to meet the costumer requirements”. From the US Council of Logistics Management.

1. International business, supply chain & logistics

A global supply chain strategy requires that each step of the value-added process is taken to the place where it is going to be more efficient (which does not only mean better priced). Finances, design, production, stockage, accounting and costumer service are just a few of the most important steps of any supply chain. Finances may come from a country with low interest rates and a stable exchange rate while design may be centered in a high cost but creative city as Barcelona or Stockholm and production be moved to Vietnam while costumer service goes to Morocco.

Until today the production side of the global supply chain is probably the most developped and may be used as a reference for the overall process. Wether to manufacture or source from a third party and where to manufacture are two of the basic decisions involved with the supply chain management of production activities in international business.

1. International business, supply chain & logistics

2. Where to manufacture

An essential decision facing an international firm is where to locate its manufacturing activities to achieve the twin goals of minimizing costs and improving product quality. For the firm contemplating international production, a number of factors must be considered. These factors can be grouped under three broad headings: country factors, technological factors, and product factors.

2. Where to manufacture

Country factors: Political economy, culture, and relative factor costs differ from country to country. Other things being equal, a firm should locate its various manufacturing activities where the economic, political, and cultural conditions, including relative factor costs, are conducive to the performance of those activities

Other country factors that impinge on location decisions include formal and informal trade barriers and rules and regulations regarding foreign direct investment . For example, although relative factor costs may make a country look attractive as a location for performing a manufacturing activity, regulations prohibiting foreign direct investment may eliminate this option. Similarly, a consideration of factor costs might suggest that a firm should source production of a certain component from a particular country, but trade barriers could make this uneconomical.

Another country factor is expected future movements in its exchange rate Currency appreciation can transform a lowcost location into a high - cost location.

2. Where to manufacture

Technological factors: Three characteristics of a manufacturing technology are of interest here: the level of its fixed costs, its minimum efficient scale, and its flexibility.

Fixed costs: In some cases the fixed costs of setting up a manufacturing plant are so high that a firm must serve the world market from a single location or from a very few locations. But a relatively low level of fixed costs can make it economical to perform a particular activity in several locations at once.

Minimum efficient cost: The larger the minimum efficient scale of a plant, the greater the argument for centralizing production in a single location or a limited number of locations. Alternatively, when the minimum efficient scale of production is relatively low, it may be economical to manufacture a product at several locations.

Flexible manufacturing technologies: A range of manufacturing technologies that are designed to (a) reduce setup times for complex equipment, (b) increase utilization of individual machines through better scheduling, and (c) improve quality control at all stages of the manufacturing process. Flexible manufacturing technologies allow a company to produce a wider variety of end products at a unit cost that at one time could be achieved only through the mass production of a standardized output.

2. Where to manufacture

Two product features affect location decisions. The first is the product's value-to-weight ratio because of its influence on transportation costs. Many electronic components and pharmaceuticals have high value-to-weight ratios; they are expensive and they do not weigh very much. Thus, even if they are shipped halfway around the world, their transportation costs account for a very small percentage of total costs. Given this, other things being equal, there is great pressure to manufacture these products in the optimal location and to serve the world market from there. The opposite holds for products with low value-to-weight ratios.. Thus, other things being equal, there is great pressure to manufacture these products in multiple locations close to major markets to reduce transportation costs. The other product feature that can influence location decisions is whether the product serves universal needs, needs that are the same all over the world. Since there are few national differences in consumer taste and preference for such products, the need for local responsiveness is reduced. This increases the attractiveness of concentrating manufacturing at an optimal location.

2. Where to manufacture

3. Make or buy

International businesses frequently face sourcing decisions, decisions about whether they should make or buy the component parts that go into their final product. Should the firm vertically integrate to manufacture its own component parts or should it outsource them, or buy them from independent suppliers? Make-or-buy decisions are important factors of many firms' manufacturing strategies.

Make-or-buy decisions pose plenty of problems for purely domestic businesses but even more problems for international businesses. These decisions in the international arena are complicated by the volatility of countries' political economies, exchange rate movements, changes in relative factor costs, and the like.

3. Make or buy

The arguments that support making component parts in-house--vertical integration--are fourfold.

Lower Costs: It may pay a firm to continue manufacturing a product or component part in-house if the firm is more efficient at that production activity than any other enterprise. Facilitating Specialized Investments: When one firm must invest in specialized assets to supply another, mutual dependency is created. In such circumstances, each party fears the other will abuse the relationship by seeking more favorable terms. When substantial investments in specialized assets are required to manufacture a component, the firm will prefer to make the component internally rather than contract it out to a supplier.Proprietary Product Technology Protection: Proprietary product technology is technology unique to a firm. If it enables the firm to produce a product containing superior features, proprietary technology can give the firm a competitive advantage. The firm would not want this technology to fall into the hands of competitors.Improved Scheduling: The weakest argument for vertical integration is that production cost savings result from it because it makes planning, coordination, and scheduling of adjacent processes easier. This is particularly important in firms with just-in-time inventory systems. However, ownership is not the issue here. A company may achieve tight scheduling with its globally dispersed parts suppliers without vertical integration.

3. Make or buy

The advantages of buying component parts from independent suppliers are that it gives the firm greater flexibility, it can help drive down the firm's cost structure, and it may help the firm to capture orders from international customers.

Strategic Flexibility: The great advantage of buying component parts from independent suppliers is that the firm can maintain its flexibility, switching orders between suppliers as circumstances dictate. Adapting to changing exchange rates or demand location.

Lower Costs: Although Outsourcing may lower the firm's cost structure. Vertical integration into the manufacture of component parts increases an organization's scope, and the resulting increase in organizational complexity can raise a firm's cost structure.

Offsets: Another reason for outsourcing some manufacturing to independent suppliers based in other countries is that it may help the firm capture more orders from that country. The practice of offsets is common in the commercial aerospace industry. For example, before Air India places a large order with Boeing, the Indian government might ask Boeing to push some subcontracting work toward Indian manufacturers.

4. Coordinating a global manufacturing system

Materials management, which encompasses logistics, embraces the activities necessary to get materials to a manufacturing facility, through the manufacturing process, and out through a distribution system to the end user.

The twin objectives of materials management are to achieve this at the lowest possible cost and in a way that best serves customer needs, thereby lowering the costs of value creation and helping the firm establish a competitive advantage through superior customer service. Materials management is a major undertaking in a firm with a globally dispersed manufacturing system and global markets and logistics end up becoming the center of such a company.

One of the side effects of a global supply chain lies in complexity wich represents a risk increase and may be potentially damaging to the company in case of unexpected difficutlies or management mistakes.

5. Global supply chain disasters

Foxmeyer’s 1996 Distribution Disaster: New order management and warehouse automation systems lead to inability to ship product and failure to achieve expected savings; bankruptcy and sale of the company followThe WebVan Story: $25 million automated warehouses just make no sense given the market; company goes from billions in market gap to gone in just months in 2001Adidas 1996 Warehouse Meltdown: Not well known story, adidas can’t get a first and then second warehouse system and also its DC automation to work. Inability to ship leads to market share losses that persist for a long timeToys R Us.com Christmas 1999: On-line retail division can’t make Christmas delivery commitments to thousands; infamous “We’re sorry” emails on Dec. 23; eventually, Amazon takes over fulfillmentNike’s 2001 Planning System Perplexity: New planning system causes inventory and order woes, blamed for $100 revenue miss as stock loses 20%Aris Isotoner’s Sourcing Calamity in 1994: Then a division of Sara Lee, Isotoner decides to shut successful Manila glove/slipper plant to chase even lower costs elsewhere; costs rise, quality plummets, revenue cut by 50%; soon sold to Totes Inc.