Chapter 18

By Craig Gomez,2014-06-16 23:38
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Chapter 18 ...





To describe different dimensions of global manufacturing strategy

     To examine the elements of global supply chain management

     To show how quality affects the global supply chain

     To illustrate how supplier networks function

     To explain how inventory management is a key dimension of the global supply chain

     To present different alternatives for transporting products along the supply chain

    from suppliers to customers

Chapter Overview

Important objectives shared by the global manufacturing and supply chain functions are

    to simultaneously lower costs and increase quality by eliminating defects from both

    processes. Chapter Seventeen examines supply chain networks to see how firms can

    manage the various links most effectively. The chapter begins by discussing global

    manufacturing strategy. It then moves on to explore supply chain management issues,

    quality standards and supplier networks. The chapter concludes with a discussion of

    inventory management and the development of effective transportation networks.

Chapter Outline

OPENING CASE: Samsonite’s Global Supply Chain

     [See Map 17.1, Figures 17.13]

    This case describes how Samsonite, a U.S.-based corporation that manufactures and

    distributes both hardside and softside luggage, developed its global manufacturing and

    distribution systems. Samsonite began its operations in 1910 in Denver, Colorado, but it

    took many years to become a global firm after moving first through decentralized and

    then centralized supply-chain structures. By the end of the 1960s, Samsonite was

    manufacturing luggage in the Netherlands, Belgium, Spain, Mexico, and Japan; it was

    also marketing luggage worldwide through a variety of distributors. During the 1990s,

    Samsonite expanded throughout Eastern Europe and established several joint-venture

    operations in China and other parts of Asia as well. As Samsonite expanded throughout

    the world, it entered into subcontract arrangements in Asia and Eastern Europe for

    outsourced parts and finished goods in order to supplement its own production. By 2002,

    Samsonite’s European operations alone had grown to six company-owned production

    facilities and one joint-venture facility, plus a series of subsidiaries, joint ventures, retail


    franchises, distributors and agents set up to service the European market. R&D is done

    both in Europe and the United States.

    Teaching Tip: Review the PowerPoint slides for Chapter Seventeen and select those you find most useful for enhancing your lecture and class discussion. For

    additional visual summaries of key chapter points, also review the figures in the text.


    The supply chain function encompasses the sourcing and coordination of materials, information and funds from the initial raw material supplier to the final customer. It

    concerns the management of the value-added process from the supplier’s supplier to

    the customer’s customer. Suppliers can be part of the manufacturer’s organizational

    structure, as in the case of a vertically integrated organization, or they can be

    independent organizations. An important part of the supply chain function is

    logistics (aka materials management), which encompasses the planning,

    implementation and control of the efficient and effective flow and storage of

    products and information from the point of origin to the final customer. Because the

    supply chain is quite broad, the coordination of the network actually occurs through

    interactions within the network. The greater the geographic spread of the firm, the

    more difficult it becomes to manage the supply chain effectively.


    The success of a global manufacturing strategy depends on four key factors: (i)

    compatibility, (ii) configuration, (iii) coordination and (iv) control.

    A. Manufacturing Compatibility

    Compatibility refers to the degree of consistency between a firm’s foreign

    direct investment decisions and its competitive strategy. Cost-minimization and

    the drive for globalization force MNEs to pursue economies of scale in

    manufacturing, often by producing at low labor-cost sites. Other key variables

    include dependability, quality, flexibility and innovation.

    B. Manufacturing Configuration

    MNEs consider three basic configurations en route to developing their global

    manufacturing strategies. They are:

     centralized manufacturing in a single country

     (a global export approach)

     regionalized manufacturing in the specific regions served

     (a regionalized marketing and manufacturing approach)

     local manufacturing in each country market served

     (a multidomestic marketing and manufacturing approach).

    C. Coordination and Control

    Coordination represents the linking or integrating of participants all along the

    global supply chain into a unified system. Control embraces systems, such as

    organizational structure and performance measurement, which are designed to

    help ensure strategies are implemented, monitored and revised, when





    Global supply chain management concerns the sourcing and coordination of materials, information and funds from the initial raw material supplier to the final

    customer. A comprehensive supply chain strategy should include the following 10


     customer service requirements

     plant and distribution center network design

     inventory management

     outsourcing and third-party logistics relationships

     key customer and supplier relationships

     business processes

     information systems

     organizational design and training requirements

     performance metrics

     performance goals.

    The key to making a global information system work effectively is information.

    Electronic data interchange (EDI) refers to the electronic movement of money and information via computers and telecommunications equipment in a way that

    effectively links suppliers, customers and third-party intermediaries, and ultimately

    enhances customer value. Enterprise resource planning (ERP) refers to the use of

    software to link information flows from different parts of a business and from

    different parts of the world. E-commerce refers to the use of the Internet to link suppliers with firms and firms with customers. An intranet can be used to help

    automate and speed up internal processes in a company. The extranet refers to

    using the Internet to link a company with external constituencies. Finally, the

    Private Technology Exchange (PTX) refers to an online collaboration model that brings manufacturers, distributors, resellers and customers together to execute trade

    transactions and to share information regarding demand, production, availability, etc.

    While many networks can in fact be managed via the Internet, others (especially

    those in developing countries) cannot because of the lack of available, leading-edge



    Quality refers to meeting or exceeding the expectations of the customer. More

    specifically, it incorporates conformance to specifications, value enhancement,

    fitness for use, after-sales support and psychological impressions (image).

    Acceptable quality level (AQL) is a premise that allows for a tolerable (negotiable) level of defects that can be corrected through repair and service warranties. Zero

    defects describe the refusal to tolerate defects of any kind.

    A. Total Quality Management

    Total quality management (TQM) stresses three principles: (i) customer

    satisfaction, (ii) employee involvement and (iii) continuous improvements at

    every level of the organization. The goal of TQM is to eliminate all defects. It

    focuses on benchmarking world-class standards, product and service design,

    process design and purchasing practices. Kaizen represents the Japanese process


    of continuous improvement, which requires identifying problems and enlisting

    employees at all levels of the organization to help eliminate the problems. Six

    Sigma is a highly focused quality-control system designed to scrutinize a firm’s

    entire production system and eliminate defects, slash product cycle time and cut

    costs across the board.

    B. Quality Standards

    The three different levels (types) of quality standards are: (i) a general level, (ii)

    an industry specific level and (iii) a company level. The general level includes

    International Organization for Standardization (ISO) ISO 9000:2000

    certification, i.e., a set of five universal standards initially designed to harmonize

    technical standards within the EU that is now accepted worldwide; it is applied

    uniformly to companies in any industry and of any size in order to promote

    quality at every level of an organization. Rather than judging the quality of a

    product, ISO 9000:2000 evaluates the management of the manufacturing process

    according to standards in 20 domains, from purchasing to design to training.

    Industry-specific standards and company-specific standards represent the

    quality-related requirements expected of suppliers.


    Sourcing is the path a firm pursues in obtaining materials, components and final

    products either from within or outside of the organization and from both domestic

    and foreign locations. Global sourcing represents the first step in the process of

    global materials management (logistics) (see Figures 17.7, 17.8). Firms pursue

    global sourcing strategies in order to reduce costs, improve quality, increase their

    exposure to worldwide technology, improve the delivery-of-supplies process,

    strengthen the reliability of supply, gain access to strategic materials, establish a

    presence in a foreign market, satisfy offset requirements and/or react to competitors’

    offshore sourcing practices. The three major configurations that have emerged for

    global sourcing are: (i) vertical integration (ii) outsourcing through industrial

    clusters, and (iii) other outsourcing.

    A. Make or Buy Decision

    In determining whether to make or buy, MNEs should focus on making those

    parts and performing those processes critical to a product and in which they

    have a distinctive advantage. Other things can potentially be outsourced.

POINT: Yes, firms should outsource innovation in order to effectively position

    themselves in the highly competitive high tech and electronics industries. Suppliers

    capabilities continue to grow, making them important sources of innovation that can be

    incorporated into final products. Outsourcing R&D can result in tremendous cost savings

    and can greatly speed the R&D process.

    COUNTERPOINT: Companies that outsource any R&D risk losing control of core technologies. Outsourcing turns intellectual property into a commodity rather than a


source of sustainable competitive advantage. Outsourcing R&D risks losing important

    technology to current competitors, and also presents the possibility of having suppliers

    and other partners turn into future competitors. A company without R&D is merely a

    marketing front that has little identifiable intrinsic value. Outsourcing of manufacturing

    is potentially harmful to competitiveness, but the outsourcing of innovation could be

    disastrous to a company’s future fortunes.

    B. Supplier Relations

    When an MNE decides to outsource rather than integrate vertically, it must

    determine the nature and extent of its involvement with suppliers.

    C. Purchasing Function [See Figure 17.9]

    Global progression in the purchasing function includes four phases:

     Domestic purchasing only

     Foreign buying based on need

     Foreign buying as a part of procurement strategy

     Integration of global procurement strategy

    The last phase is reached when a firm realizes the benefits from the integration

    and coordination of purchasing on a global basis. At this point, the MNE may

    once again be faced with the centralization vs. decentralization dilemma. Global

    sourcing options include:

     assigning domestic buyers international purchasing duties

     using foreign subsidiaries or business agents

     establishing international purchasing offices

     assigning the responsibility for global sourcing to a specific business unit or


     integrating and coordinating sourcing on a worldwide basis.

    E-sourcing, i.e., the use of the Internet in the purchasing process is rapidly

    growing in popularity.


    Whether a firm decides to source from inside or outside the company or from

    domestic or foreign suppliers, it needs to manage the flow and storage of inventory.

    However, the distance, time, and uncertainty associated with foreign environments

    will surely complicate the inventory management process.

    A. Just-in-Time Systems

    A just-in-time (JIT) manufacturing system reduces inventory costs by having

    raw materials and components delivered just as they are needed in the

    production process. JIT typically implies sole sourcing for specific parts in order

    to get the supplier to commit to the stringent delivery and quality requirements

    inherent in the system. A company’s inventory management strategy determines

    the desired frequency and size of shipments and whether JIT will be used.

    B. Foreign Trade Zones

    Foreign trade zones (FTZs) are government-designated areas in which goods

    can be stored, inspected and/or manufactured without being subject to formal


    customs procedures until they actually enter the country. A general-purpose

    zone is usually established near a port of entry, such as a seaport, an airport, or a

    border crossing. A subzone is under the same administrative domain but is

    usually physically separate from a general-purpose zone. FTZs often serve as a

    site to store inputs until they are needed at a particular production site. Exports

    for which FTZs are used fall into one of the following categories:

     Foreign goods transshipped through U.S. zones to third countries

     Foreign goods processed in U.S. zones and then transshipped abroad

     Foreign goods processed or assembled in U.S. zones with some domestic

    materials and parts, then reexported

     Goods produced wholly of foreign content in U.S. zones and then exported

     Domestic goods moved into a U.S. zone to achieve export status prior to

    their actual exportation


    The international transportation of goods is extremely complicated with respect to

    documentation, choice of carrier (air, land, ocean) and the decision to outsource the

    function to a third-party intermediary or to establish internal transportation

    capabilities. The key is to link manufacturers and suppliers on one end and

    manufacturers and final customers on the other. Third-party intermediaries are a

    critical factor in transportation networks. They can provide a host of services,

    including packing, storing and shipping.

Because of low manufacturing wages and investments in capital equipment, China will

    continue to be able to manufacture higher level products with better quality. China will

    also be important as a location for outsourcing to third-party suppliers and will become

    increasingly important as a base for all low cost manufacturing. Two factors will temper

    the growing importance of China in global supply chains. One is the quality of Chinese

    products. Although improving, Chinese manufacturing has still not reached the high

    quality levels typically required by Japanese firms. The second factor is the future of the

    Chinese currencythe yuan. If this currency is allowed to float against the dollar and

    subsequently appreciates significantly, the cost advantages of Chinese manufacturers will

    be harder to sustain.

Denso is a Japanese auto parts supplier and is the third-largest auto supplier in the world.

    It is a major supplier to Toyota, but also supplies parts to all other auto manufacturers in

    Japan. In order to increase revenues, Denso is making a big push to diversify by


increasing sales to non-Japanese firms such as DaimlerChrysler. Denso serves the U.S.

    market through plants in the U.S. and in Mexico. China is becoming increasing

    important as its car market begins to grow rapidly. China is also becoming a source of

    increased competition as Chinese auto parts makers grow.


    1. What is driving DENSO’s globalization efforts, and what do you see as the major

    challenges confronting the company?

    Changes in automobile manufacturing locations and demand are influencing

    DENSO’s globalization efforts. Growth has been stronger for the industry outside of

    Japan, forcing DENSO to diversify geographically in order to grow. Anticipated

    growth in countries like China and India will present major challenges to DENSO in

    the future, as it tries to expand operations to meet demands for high quality and low

    cost across the globe.

    2. What challenges will DENSO face in maintaining its commitment to quality in the


    To satisfy Toyota’s rigid quality standards, DENSO has had to adopt TQM and

    strive for zero defects. In addition, by complying with both ISO 9001 and QS9000,

    DENSO qualifies as a supplier for auto manufacturers throughout Asia, Europe and

    North America. Although kanban is thought to be on the decline, it is still widely

    used, and mastery of the process gives DENSO an advantage with firms that rely on

    that system. However, kanban shifts production and inventory management burdens

    to suppliers and makes it more difficult for suppliers to manage their production

    schedules. Nonetheless, given its expertise and certification, DENSO is well

    positioned to compete as a global supplier to the automobile industry. In fact,

    DENSO currently supplies parts to all companies manufacturing automobiles in


    3. From the standpoint of inventory management, why is it going to be difficult for

    DENSO to supply companies other than Toyota?

    Toyota still uses the kanban inventory control system, while DENSO’s other major

    customers have abandoned kanban and now use more highly fluctuating demand

    models. This requires DENSO to work within multiple systems and greatly

    increases the complexity of balancing the inflow of supplies to production volumes

    and customer needs.



    Teaching Tip: Visit for additional information and links relating to the topics presented in Chapter Seventeen. Be sure to refer your

    students to the online study guide, as well as the Internet exercises for Chapter


    _________________________ HAPTER TERMINOLOGY: supply chain, p. 602 quality, p. 608

    Clogistics, p. 602 zero defects, p. 609 materials management, p. 602 acceptable quality level, p. 609 compatibility, p. 604 total quality management (TQM), coordination, p. 605 p. 609 control, p. 605 six sigma, p. 610 electronic data interchange (EDI), International Organization for

     p. 607 Standardization (ISO), p. 610 enterprise resource planning (ERP), sourcing, p. 611

     p.607 vertical integration, p. 614 e-commerce, p. 607 outsourcing, p. 614 extranet, p. 608 just-in-time, p. 618 intranet, p. 608 foreign trade zones (FTZs), p. 620 private technology exchange (PTX),

     p. 608


ADDITIONAL EXERCISES: Global Manufacturing and Supply Chain


Exercise 17.1. The total cost concept is a major concern in global manufacturing and

    supply chain management. Strategic reorder points and economic order quantities

    must be determined. The tradeoffs between (i) customer service and cost

    minimization and (ii) control and flexibility must be considered. Contractual linkages

    with the participants in the system must be negotiated and honored. Ask students to

    discuss the challenges a firm faces in establishing its global manufacturing and

    supply chain network given the dynamics of today’s competitive environment. Use

    examples of firms in different types of industries as a basis for the discussion.

Exercise 17.2. A firm is considering whether to make a component in house or to

    outsource it to an independent foreign supplier. Manufacturing the part in house will

    require an investment in specialized assets; quality control and the protection of

    intellectual property rights are major concerns. The most efficient and reliable

    suppliers are located in countries whose currencies many foreign exchange analysts

    expect will appreciate in the next decade; likewise, wage rates in those countries are

    expected to rise. Ask students to discuss the pros and cons of manufacturing the


component in house as opposed to outsourcing it. Should the firm consider foreign

    direct investment as one of its options? Explain.

    Exercise 17.3. The value-to-weight ratio is very important with respect to manufacturing site location decisions because of its influence on transportation costs.

    Other things being equal, products with a high value-to-weight ratio are good

    candidates for exporting, while those with low value-to-weight ratios should be

    manufactured in multiple locations close to major markets to minimize transportation

    costs. For example, many electronic components have high value-to-weight ratios

    although they are expensive, they are very small and weigh very little. Even when

    shipped halfway around the world, transportation accounts for a very small

    percentage of the total delivered cost. Given that, ask students to consider why low

    value but heavy products such as petroleum and refined sugar are shipped such great

    distances. Why are products such as automobiles, which are bulky and can be so

    easily damaged, also shipped great distances, rather than being manufactured locally?

    Exercise 17.4. Have students assume the role of top management at a major global electronics company that is developing a wireless device capable of on-demand

    music and video downloads from anywhere on the globe. What criteria should the

    company use to make a decision on where to manufacture the device and whether to

    outsource the manufacturing or control it internally?

    Exercise 17.5. India and China are both very large emerging markets that are becoming increasingly important in many MNEs global supply chains. What are the

    advantages and disadvantages of sourcing from China as opposed to India? What

    types of products or services are best suited for sourcing from India versus China?


    Exercise 17.6. Have half the class assume the role of a large MNE and half the class assume the role of a small potential supplier. What are the major concerns of the

    MNE as it evaluates the smaller firm as a potential supplier? What concerns does the

    small firm have as it attempts to develop a relationship with the MNE? Break

    students up into small groups to discuss the issues.


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