Chapter Seventeen
Global Manufacturing and Supply Chain Management
Objectives
• 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 17.1–3]
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.
I. INTRODUCTION
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.
II. GLOBAL MANUFACTURING STRATEGIES
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 appropriate.
III. INFORMATION TECHNOLOGY AND GLOBAL SUPPLY CHAIN MANAGEMENT
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 elements:
• 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 technology.
IV. QUALITY
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.
V. SUPPLIER NETWORKS
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-COUNTERPOINT: Should Firms Outsource Innovation?
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 units
• 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.
VI. INVENTORY MANAGEMENT
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
VII. TRANSPORTATION NETWORKS
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.
LOOKING TO THE FUTURE:
The Role of China in the Supply Chain
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 currency—the 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.
CLOSING CASE: DENSO Corporation and Global Suppliers Relations
[See Maps 17.2–3]
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.
QUESTIONS
1. What is driving DENSO’s globalization efforts, and what do you see as the major challenges confronting the company?