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International Operations Management  After studying this chapter, students should be able to: Describe the nature of international operations management. > Analyze the supply chain management and vertical integration decisions facing international production managers. Identify and discuss the basic location decisions in international production management. Discuss the basic issues in international logistics and materials management. Identify and discuss the basic issues in international service operations. > >

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LECTURE OUTLINE OPENING CASE: Coloring the World  The opening case details the operations management system of Benetton Group SPA, an Italia Italian n clothi clothing ng manuf manufact acture urer. r. Inform Informati ation on techno technolog logy y is a critic critical al part of the operation. Key Points Benetton Group SPA, an Italian clothing chain, began in 1955 as a one-knitter  operation operation.. The company company quickly quickly grew, prompting prompting the company company to build a new factory and setup operations as a full-line apparel marketer. •

The first Benetton retail store opened in 1968, and between the early 1980s and 1993, the company company opened a new store somewhere somewhere in the world everyday. everyday. Today, the compan company y has hundr hundreds eds of stores stores around around the world world,, includ including ing locati location ons s in Central and Eastern Europe, Japan, China, and Egypt. •

Benetton has had a tough time in the U.S., where it faces strong competition from The Gap Gap and The Limited. Limited. In fact, the number number of Benetton outlets has has fallen from its its peak of 1000 in the mid-1980s. mid-1980s. Benetton Benetton is, however, however, enjoying enjoying strong strong success in Europe where it is a leading clothing manufacturer, and even makes cosmetics, toys, eyewear, and watches. •

Benetton Benetton owes its success success to Italian styling and reasonable reasonable prices, prices, and also to its operations operations manageme management nt system. Retail Retail operations operations are decentrali decentralized zed so that store store manage managers rs can respon respond d quickl quickly y to local local prefer preferenc ences es and buyin buying g patte patterns. rns. •

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Design and production are centralized however, so that the company can monitor  manufacturing costs, quality, and related considerations. Information technology is an important part of the Benetton operations management system. Each retail purchase is electronically coded so that managers in Italy can continually monitor which products are selling where. •

Information related to absolute sales levels, sales trends and patterns, and inventory distributions can be tracked for individual stores, for clusters of stores, by country, and on a global basis. This information can then be used to plan and adjust production activity to meet buying trends. Bar codes and scanners facilitate the production process at the Benetton factories, and also the inventory management process. •

Case Questions 1. How is Benetton’s business strategy related to its operations management?  Most students will recognize that Benetton appears to be following a business strategy of differentiation. The company seeks to distinguish its products from those of rival firms on the basis of quality, reasonable prices, and style. Benetton’s operations management system supports the business strategy by emphasizing quality, maintaining control over manufacturing costs, and using information technology to respond quickly to buyer preferences. 2. What factors might affect Benetton’s production location decisions?  Most students will probably suggest the primary factors that appear to be driving Benetton’s location decisions are related to organizational issues. The company has a highly centralized manufacturing operation, yet a very decentralized retail structure. This combination allows the company to respond quickly to customers and fashion trends, yet maintain control over manufacturing costs and quality. The key to making the system work is information technology. Benetton uses information technology to track not only transactions at the retail level, but also the process of manufacturing and shipping its products.  Additional Case Application Benetton’s use of information technology allows it to respond, virtually overnight, to customer preferences. In contrast, most department stores and other types of retail stores must predict what styles consumers will prefer, and buy them well in advance. Students can be asked to compare and contrast the two operations management systems. Issues to consider include the impact on inventory levels, prices, and shipping times.

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CHAPTER SUMMARY Chapter seventeen explores international operations management. The chapter begins with a discussion of the strategic context of international operations management, and its complexities, and then goes on to consider production management and international service operations. I.

THE NATURE OF INTERNATIONAL OPERATIONS MANAGEMENT International operations management is the set of activities used by an international business to transform different kinds of resource inputs (material, •

labor, and so forth) into final goods and services. Show Figure 17.1 here. A properly designed and managed operating system plays a major role in determining product and service quality, and productivity. In addition, operations management plays a role in determining how quickly a firm can respond to changes or new developments in technology, consumer tastes and preferences, pricing levels, competitive threats, and so forth. •

Discuss Bringing the World into Focus: Where’s the factory? This is a warehouse. This Going Global Box describes the operations nightmare at Porsche in 1991. It took the company some 120 hours to build a single car, with parts being obtained from 950 different suppliers. Many parts were defective, causing additional problems, and bins of parts reached to the ceiling in the company’s factory. The company underwent a dramatic reorganization, cutting its number of suppliers by two-thirds. Today, the company can make a car in just 70 hours, and has returned to profitability. This Box fits in well with the discussion of the nature of international operations management, and also with Review Questions 1 and 2. The Strategic Context of International Operations Management International operations management must be closely aligned with a firm’s strategy. In fact, the way in which a firm structures and manages its operations function influences and is influenced by its strategy. A firm’s strategy drives several operations management activities including location, facility design, and how logistics are managed. The text illustrates this concept with an example of Hong Kong’s Roly International Holdings strategy. •

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Complexities of International Operations Management International operations management is a far more complex task than domestic operations management. At the international level, managers must contend with suppliers from different countries, different government regulations wherever the firm does business, a heterogeneous market, disparate transportation facilities and networks, and relatively long distances. Several sets of decisions must be made regarding where and how to produce goods and services. For example, a firm must decide where and how it will obtain necessary resources for the operations management function. Furthermore, the firm must make a number of location-related decisions such as where to build a •

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plant or sales office. In addition, a firm must make decisions regarding transportation choices and inventory levels. II.

PRODUCTION MANAGEMENT International operations management decisions, processes, and issues involving the creation of tangible goods is called production management. International operations management decisions, processes, and issues involving the creation of intangible services is referred to as service operations management. Manufacturing involves the creation of goods by transforming raw materials and component parts in combination with capital, labor and technology. The text focuses on three issues related to this process: international supply chain management; international facilities location; and international logistics. •

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Supply Chain Management and Vertical Integration Supply chain management is the set of processes and steps used by an organization in acquiring the various resources and materials it needs to create its own products and services. Supply chain management is usually seen as a strategic issue because of its implications for product cost, product quality, and internal demands for capital. Vertical integration is the extent to which an organization provides its own • resources or obtains its resources from other sources. The text notes that British Petroleum is a fully integrated firm, while Heineken NV practices relatively little vertical integration. The extent of a firm’s vertical integration will depend on the outcome of the • firm’s make-or-buy decision (whether the company makes necessary inputs itself  •

or buys them from outside suppliers). Show Figure 17. 2 here. The make-or-buy decision can be influenced by the size of the company, the scope of its operations, its technological expertise, and the nature of the product. The text provides several examples of how these factors have influenced make-orbuy decisions for various firms. It is important that firms consider the strategic implications of the make-or-buy • decision. For example, the text notes that firms should balance competitive advantage versus strategic vulnerability when making its decisions. Show Figure •

17.3 here. Firms must also make trade-offs between costs, potential for competitive advantage, and the degree of strategic vulnerability against other factors such as control, risk, investment, and flexibility. Control. A firm that makes an input in-house increases its control over product • quality, delivery schedules, design changes, and cost, as compared to a firm that buys from outside sources. Moreover, the decision to make-or-buy may be influenced by the firm’s ability to write an enforceable contract. The text notes that in countries where laws protecting intellectual property are weak, many firms prefer  to make rather than buy inputs. •

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Discuss Venturing Abroad: Suppliers Friend or Foe This box describes the nature of the relationship between manufacturers and suppliers. The Box notes that Ford views its suppliers as antagonists, while Toyota sees its suppliers as partners. The Box fits in well with the discussion of control. A firm may also be able to develop new business opportunities by making rather  than buying. The text notes, for example, that British Petroleum has capitalized on such an opportunity with its chemical division. Risk. A firm can reduce its risk by buying components from external suppliers • rather than making them in-house because it avoids a potential situation whereby its investment does not earn an adequate rate of return. Investments in Facilities, Technology, and People . Buying from external • suppliers lowers a firm’s level of investment because, since the firm does not have to build a new factory or learn a new technology, a firm can free up capital for other  uses. The text provides an example of how Honda capitalized on this type of  situation. Flexibility. A firm that buys from external suppliers has the flexibility to switch • suppliers as circumstances warrant it. This flexibility is particularly important in situations where technology is rapidly changing or where inflation or exchange-rate costs are a factor. A recent trend in buyer-supplier relationships is a move toward establishing exclusive or semi-exclusive relationships with a few suppliers. This type of strategy allows firms to virtually dictate quality, delivery schedules, and even price. Chrysler, for example, works closely with some of its suppliers to design component systems. •

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Location Decisions A firm that chooses to make rather than buy inputs must consider several sets of factors including country-related issues; product-related issues; government policies; and organizational issues. Country-Related Issues. Resource availability and cost, infrastructure, and country-of-origin marketing effects can all influence the choice of location for an international facility. Classical trade theories and the Hecksher-Ohlin theory suggest that countries that are endowed with large, low-cost factors of production such as labor will attract firms needing that factor of production. Infrastructure will play a role in the choice of locations for production facilities since most facilities require at least some minimal level of infrastructure support such as electricity or water. In addition, location decisions may be affected by consumer perceptions regarding a product’s country-of-origin. The text illustrates this concept with an example involving Timex watches. Product-Related Issues. A product’s value-to-weight ratio, the required production technology, and the importance of customer feedback may also influence location decisions. A product’s value-to-weight ratio affects the fraction of transportation costs in the product’s delivered price. The production technology used to manufacture a particular product can affect production efficiency and hence, impact location decisions. Finally, firms may produce products for which they •

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desire customer feedback close to the point of sale. The text illustrates each concept with examples involving Intel, British Petroleum, and the fashion industry. Government Policies. The location decision is also affected by government policies. In particular, the stability of the political process can affect location decisions because firms tend to prefer relatively stable environments as compared to unstable ones. National trade policies are also a factor in location decisions. The text notes, for example, that several Japanese auto producers established operations in the U.S. to avoid the VERs imposed by the Japanese government. Economic development incentives such as inexpensive land, highway improvements, and discounted utilities often prompt a firm to establish operations in certain locations. Finally, firms may make location decisions on the basis of the existence of foreign trade zones. Organizational Issues A firm’s business strategy may influence location decisions. For  example, a firm that is following a price leadership strategy must locate operations in low-cost areas, while a firm that is emphasizing product quality must locate its facilities in areas that have adequate supplies of skilled labor and managerial talent. The text provides several examples of how the business strategies of various firms influence location decisions. A firm’s organizational structure (see Chapter 13) may also affect location decisions. For example, the text notes that a global area structure decentralizes authority to area managers who are likely to favor local factory sites. In contrast, a firm with a global product structure may locate factories anywhere in the world. Inventory management policies are also affected by plant location decisions. The task involves balancing the costs of maintaining inventory (the costs associated with storage, spoilage and loss, and opportunity costs) against the costs of running out of materials and/or finished goods. The level of inventory that firms must hold is affected by factory location decisions because of the distances and transit times involved in shipping goods. The text illustrates this concept with an example involving Wal-Mart. •

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International Logistics and Materials Management International logistics is the managing of the flow of materials, parts, supplies, and other resources from suppliers to the firm; materials, parts, supplies, and other  resources within and between units of the firm itself; and finished products, services, and goods from the firm to customers. The first two sets of activities are typically called materials management. The • third set of activities is usually called physical distribution, or simply distribution. Distribution issues were discussed in Chapter 16 as they related to the firm’s marketing function. There are three basic differences between domestic and international materials management: first is the greater distance involved in shipping; second is the sheer  number of transport modes that are likely to be involved, and third is the fact that the regulatory context for international materials management is much more complex than that for domestic materials management. •

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In addition, other logistics and materials management issues such as packaging become more complex. The text provides an example of the complexity involved in international logistics and materials management by following a shipment of  electronics equipment from a factory in California to a facility in Saudi Arabia. In addition, a package’s weight may be an important consideration for firms. In fact, some customers require that products meet preset packaging specifications. Finally, logistical considerations may impact factory location decisions. For  example, although production costs may be lower in a particular location, the materials management costs involved may be so high as to make the location unsuitable. In addition, a firm that exports from a domestic location must ensure that competitive levels of service for customers are maintained. •

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INTERNATIONAL SERVICE OPERATIONS An international service business is a firm that transforms resources into an intangible output that creates utility for its customers. The service sector is becoming increasingly important in many countries today, especially developed countries. In the U.S. for example, the relative percentage of service sector jobs has risen steadily throughout this century. Trade in services among most industrialized countries is increasing at a rate that exceeds other forms of international trade. However, agriculture and manufacturing are still dominant in less developed and developing economies since service firms tend to follow the establishment of manufacturing firms. •

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Characteristics of International Services Services are often intangible, are not storable, require customer participation, and are linked with tangible goods. Because services are intangible it may be difficult to assess their value or quality. Because services have a high degree of perishability, capacity planning • becomes a critical task. Capacity planning is deciding how many customers a firm will be able to serve at a given time. Because services such as tourism may require customer participation, many • service providers must customize their product to meet the customer’s needs. Firms may offer product-support services--assistance with operating, maintaining, and/or repairing products for customers. •

The Role of Government in International Services Trade Governments may attempt to protect local professionals and ensure that domestic standards and credentials are upheld by restricting the ability of foreigners to practice certain professions such as law or medicine. Other services may be heavily regulated. The text notes, for example, that the banking industry in the U.S. must follow strict regulations. In the last decade, however, deregulation has occurred in many service • industries such as telecommunications. Not only has this created new opportunities for firms to expand into other markets, but it has also increased international •

competition. Discuss Table 17.1 here.

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Managing Service Operations There are several basic issues involved in the management of international service operations including capacity planning, location planning, facilities design and layout, and operations scheduling. Capacity planning affects the quality of services provided. Location planning is important because most service providers must be close to their customers. Facilities must be designed to ensure the proper look and layout, and operations must be scheduled to best meet the needs of customers. •

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Creating a Global Market for Auto Parts The closing case describes how automobile manufacturers and their suppliers are developing a web-based supply chain management system that will allow both buyers and suppliers to save large sums of money. Key Points Markets have changed over time. Given today's technology, buyers and sellers can conduct exchanges through mail, phone, fax, and so on. However, the basic nature of the exchange continues the same. •

Ford launched an initiative to conduct exchanges with its suppliers over the web. The system, called Auto-Xchange, would have saved Ford money in dealing with its suppliers, but suppliers would still have to deal with each auto company on an individual basis. •

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Suppliers lobbied auto manufacturers for an industry wide site where products and prices could be posted for all interested automobile manufacturers. Many auto manufacturers have agreed to participate in such a site, and the site will eventually become a stand-alone company itself. •

Case Questions 1. Identify and discuss the strategic operations management issues in this case. The development of this web site has enormous strategic implications for  operations management. Supply chain management (or sourcing) will see the greatest effect. Instead of scouring the globe for the most efficient supplier, supply chain management costs will be driven down by having all that information at a single site. Furthermore, competition among suppliers will be intensified, since one supplier's prices will be posted at the same location as the prices of alternative suppliers. On the other hand, a single site will give a supplier visibility to all participating automobile companies.

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2. What are the implications of this form of business-to-business market  mechanism for supply chain management?  This market mechanism should make supply chain management considerably more efficient than it has been. The flow of information between buyers and sellers becomes considerably easier and considerably less expensive. The costs are lowered both for suppliers and buyers, leading to either higher business profits or  lower prices for consumers. 3. Identify other industries in which this same form of exchange might be applicable. Any manufacturing business being supplied by multiple competing firms could probably benefit from this or a similar form of exchange. Students will come up with a variety of suggestions. Many firms in the service industries could also benefit from such systems. 4. Would this approach work for a service industry? If not, why? If so, what would  be the similarities and differences between a manufacturing and service exchange?  This question overlaps somewhat with question 3. The connection between the two questions offers a nice means of expanding the discussion of supply chain management into the service sector. A system similar to the one described in the case could be beneficial to service firms as well. Like manufacturing firms, service firms often have suppliers and buyers. However, the goods provided and sold are often intangible, not storable, and usually require some sort of customer  participation in the process. Therefore supply chain management in services can be challenging and require adaptation from the manufacturing model.

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1. What is international operations management and how is it accomplished?  International operations management refers to the activities used by an international firm to transform resources into goods and services. International operations management is driven by the firm’s strategy, in particular, how resources will be acquired, where facilities will be located, and the efficient movement of materials into, within, and out of the firm. 2. Why is effective operations management important for an international firm?  Effective operations management is important for an international firm because it is linked to both quality and productivity. A firm that has a well-designed and managed operating system should have higher product quality and productivity than a firm with a poorly designed and managed operating system.

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3. How does a firm’s corporate strategy affect its operations management?  A firm’s corporate strategy should direct the planning and implementation of its operations management. For example, in a firm that is following a differentiation strategy, operations managers must be able to create goods or services that are clearly different from those of  rival firms. Similarly, a firm that is following a strategy of cost leadership should emphasize the reduction of cost. 4. How do production management and service operations management differ?  Production management refers to operations management decisions, processes, and issues that involve the creation of tangible goods. Service operations management refers to operations management decisions, processes, and issues that involve the creation of  intangible services. 5. What is supply chain management? What is vertical integration?  Supply chain management refers to the set of processes and steps a firm uses to acquire the necessary resources to create its products. Vertical integration refers to the extent to which a firm either provides its own resources or obtains them from external sources. 6. What factors must a firm consider when addressing the make-or-buy decision?  Firms must consider several issues when addressing the make-or-buy issue. First, if the firm decides to buy rather than make, it must choose between a long-term and a short-term supplier relationship. Second, if the firm decides to make rather than buy, it must choose whether to go-it-alone or go into partnership with another firm. If the firm chooses the latter  case, it must decide how much control it wants to have. In addition, a firm will usually make a trade-off between control, risk, investment in facilities, and flexibility. 7. What basic set of factors must a firm consider when selecting a location for a production facility?  A firm must consider several sets of factors including country-related issues, productrelated issues, government policies, and organizational issues when selecting a location for  a production facility. Country-related issues affect resource availability and cost, infrastructure, and country-of-origin marketing effects. Product-related issues affect the product’s value-to-weight ratio, the required production technology, and the importance of  customer feedback. Government policies are important in terms of the stability of the political process, national trade policies, economic development incentives, and the existence of foreign trade zones. Finally, organizational issues revolve around the firm’s business strategy and its organizational structure. 8. How do materials management and physical distribution differ?  Materials management refers to managing the flow of materials, parts, supplies, and other  resources from suppliers to the firm and materials, parts, supplies, and other resources within and between units of the firm. Physical distribution refers to managing the flow of  finished products, services, and goods from the firm to customers. 9. What basic factors must be addressed when managing international service operations? 

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There are several basic factors that must be addressed when managing international service operations, including the intangibility of services that may make it difficult to assess a service’s value and/or quality, the perishability of services that makes capacity planning a critical task, the fact that because services may require customer participation, services may need to be customized to meet the specific needs of purchasers, and finally, the fact that services may be linked to tangible goods. Questions for Discussion 1. How does international operations management relate to international marketing  (discussed in Chapter 16)?  International operations management refers to the activities involved in transforming inputs into finished products. The process not only includes acquiring the necessary resources to make the products, but it also includes decisions related to where production facilities should be located, and how logistics and materials will be managed. International marketing involves the four Ps of the marketing mix, product, price, promotion, and place. Thus, the areas in which international operations management is most related to international marketing are the distribution process, how products will be shipped from the point-of-production to the point-of-sale, and the packaging process. In addition, the other  components of international operations management will affect decisions related to the marketing mix, and vice versa. 2. How are a firm’s strategy and operations management interrelated?  A firm’s strategy should drive the firm’s operations management process. For example, if a firm is pursuing a strategy of product differentiation, then its operations management should be focused on creating products that are clearly (and valuably) distinguishable from those of rival firms. This type of strategy will probably require the firm to acquire high quality inputs and equipment. Similarly, if the firm is following a cost leadership strategy, its operations management system should emphasize cost control. Input quality at this point would be less important than cost. 3.

What constraints do operations impose on strategic options?  A firm’s strategic options will be constrained by factors related to its operations including how it acquires its resources, where it locates its production, and how it handles its logistics and materials management process. The acquisition of resources involves decisions related to supply chain management, vertical integration and make-or-buy options. Students will probably point out that some firms have very little flexibility in this respect. For example, petroleum companies are limited by the location of oil reserves. Location decisions involve issues related to countries, products, government policies, and the organization itself. Again, students will probably recognize that in some situations, for  example in the case of high trade barriers, a firm’s strategy will be directly impacted by location decisions. Finally, logistics and materials management may constrain a firm’s strategic operations particularly if the firm is dealing with a perishable product or service. 4. How do each of the basic business strategies (differentiation, cost leadership, and  focus) relate to operations management? 

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Each of the basic business strategies is related to operations management in that international operations management must be closely aligned with a firm’s business strategy. As noted in question 2 above, depending on the type of business strategy a firm is pursuing, decisions related to the acquisition of resources, the location of production facilities, and logistics and material management will differ. The key to success in this process is for the selected business strategy to drive the operations management process. 5. In the mid-1990s, Jaguar, the producer of expensive motor cars, threatened to shut  down its British factory and produce its cars in Portugal. If it were cheaper to produce Jaguars in Portugal, would you advise the company to shift its production there? Can you  think of any reason why it shouldn’t make such a move? (P.S.: As it turned out, the British government agreed to provide Jaguar with economic development incentives if it would  modernize its existing factory, and Jaguar kept its British factory open.) Most students will probably suggest that moving production to Portugal would be a disastrous action for Jaguar. People buy Jaguar cars for their image and reputation (if not their mechanical soundness). Part of the image is the idea of driving a British racing car. Certainly, driving a Portuguese made car does not carry this same prestige. 6. What are the basic similarities and differences between production management  and service operations management?  Production management refers to operations management decisions, processes, and issues that involve the creation of tangible goods. Service operations management refers to operations management decisions, processes, and issues that involve the creation of  intangible services. Thus, while production management is concerned with international supply chain management, international facilities location, and international logistics, the primary emphasis in service operations management is on capacity planning, location planning, facilities design and layout, and operations scheduling. 7.

What are the advantages and disadvantages of being vertically integrated? 

Vertical integration is the extent to which a firm either provides its own resources or obtains them from other sources. A primary advantage of being vertically integrated is strategic control. Moreover, scheduling and pricing decisions may be facilitated through vertical integration. However, vertical integration may lock a firm into an obsolete technology or  facility. In addition, since vertically integrated companies have a guaranteed customer for  inputs, there may be a tendency to de-emphasize quality and cost improvements. 8. What are the steps a new manager might follow in selecting a site for a new  factory?  When selecting a site for a new factory, a manager must consider country-related issues, product-related issues, government policies, and organizational issues. Clearly, a manager  must select a location where resources are available at a reasonable cost, where appropriate infrastructure support is available, and where negative country-of-origin perceptions will not exist. In addition, the manager must consider how the site for a new factory will affect and fit with its overall business strategy. 9. Why are services economies? 

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Services are most closely associated with developed, industrialized economies because they usually follow the establishment of manufacturing firms. At the current time, agricultural and manufacturing jobs are still dominant in most less developed and developing countries.

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Essence of the exercise This exercise asks students to assume the role of a marketing manager exporting products to Egypt. Students are required to make a list of all the logistical issues the company faces, and identify websites that are useful in resolving those issues.

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Essence of the exercise This exercise asks students, working in groups of six, to play the role of managers at The Eldora Company (EDC), or its board of directors. EDC, a maker of bicycles, is considering entering the Asian market. The exercise requires students playing the role of EDC managers to summarize the basic issues facing the company regarding potential entry into the Asian market for the board of directors. The board should then discuss and debate whether a new plant should be built in Asia.  Answers to the follow-up questions. There are no specific follow-up questions to this exercise. Rather, each group should summarize its deliberations and report on its final decision to the rest of the class. Other Applications This exercise asks students to consider a number of variables that could affect a company’s decision to locate a new factory in a new country. Both Mercedes-Benz and BMW have recently made decisions to locate operations in the U.S. Students can be asked to compare and contrast the situations of the German auto makers with that of EDC. Issues that should be considered include the reasons for expanding operations to a new location, why a particular  location should be chosen, and any anticipated problems or challenges a firm might face after  the expansion has taken place.