Production Strategy

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Chapter 10

Production strategy

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Integration by resource –based MNEs •

MNEs need to organize organize their production management so that they can minimize operating costs through the use of logistics and inventory control. •

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Backward integration: the ownership of equity assets used earlier in the production cycle, cycle, such as an auto firm that acquires a steel company. Forward integration: the purchase of assets or facilities that move the company closer to the customer such as a computer manufacturer that acquires a retail chain, which specializes in computer products. Horizontal integration: the purchase of firms in the same line of business such as a computer chip firm, which acquires a competitor competitor..

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GLOBAL SOURCING

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GLOBAL SOURCING •

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Global sourcing is the procurement of products or services from suppliers or company-owned subsidiaries located abroad for consumption in the home country or a third country.

Also called global procurement or global purchasing, global sourcing amounts to importing -- an inbound flow. It is an entry strategy that involves a contractual relationship between the buyer (the focal firm) and a foreign supplier. It involves subcontracting the performance of specific manufacturing or services tasks to the firm's own subsidiaries or independent suppliers. Global sourcing is classified as a low-control strategy to the extent that the firm is buying from independent suppliers through contractual agreements, as opposed to buying from its own subsidiaries.

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DRIVERS OF GLOBAL SOURCING •

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Technological advances, including instant Internet connectivity and broadband availability Declining communication and transportation costs Widespread access to vast information including growing connectivity between suppliers and the customers that they serve; and Entrepreneurship and rapid economic transformation in emerging markets.

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DECISION 1: OUTSOURCE OR NOT?

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Managers must decide between internalization and externalization -- whether each value-adding activity should be conducted in-house or by an independent supplier. This is known as the ‘make or buy’ decision: “Should we make a product or conduct a particular value-chain activity ourselves, or should we source it from an outside contractor?” Firms usually internalize those value-chain activities they consider a part of their core competence, or which involve the use of proprietary knowledge and trade secrets that they want to control.

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DECISION 2: WHERE IN THE WORLD SHOULD VALUE-ADDING ACTIVITIES BE LOCATED?

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Configuration of value-adding activity: The pattern or geographic arrangement of locations where the firm carries out value-chain activities.

Instead of concentrating value-adding activities in the home country, many firms configure these activities across the world to save money, reduce delivery time, access factors of production, and extract maximal advantages relative to competitors. This helps explain the migration of traditional industries from Europe, Japan, and the U.S. to emerging markets in Asia, Latin America, and Eastern Europe.

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 AN EXAMPLE OF WORLDWIDE CONFIGURATION OF VALUE CHAIN The German automaker BMW employs 70,000 factory personnel at 23 sites in 13 countries to manufacture its vehicles. Workers at the Munich plant build the BMW 3 Series and supply engines and key body components to other BMW factories abroad. In the U.S., BMW has a plant in South Carolina, which makes over 500 vehicles daily for the world market. In Northeast China, BMW makes cars in a joint venture with Brilliance China Automotive Holdings Ltd. In India, BMW has a manufacturing presence to serve the needs of the rapidly growing South Asia market. BMW must configure sourcing at the best locations worldwide, in order to minimize costs (e.g., by producing in China), access skilled personnel (by producing in Germany), remain close to key markets (by producing in China, India and the U.S.).

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GENERATION OF GOODS AND SERVICES

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KEY ISSUES TO RESEARCH, DEVELOPMENT AND INNOVATION •

Key issues related to R&D/Innovation and organizing production: •

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How far should products, services and the processes that create them should be standardized across all locations, as opposed to customizing these to suit local markets? Where should firms locate different innovation-related activities?

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GLOBAL R&D: MARKETS AND HIERARCHIES •

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Blue-sky’ (basic) R&D centres tend to link to Universities or government research institutes to tap into expertise around the world. Technical design and development centres focus on near-market R&D. Applied technical development and customization departments will focus on incremental improvements to production processes or minor adaptations to products to suit local markets. ‘

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SPEED-TO-MARKET •

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One of the major manufacturing challenges facing MNEs is the speed with which they develop and get new products to market. By carefully designing the product and getting it out the door fast, the company can dramatically increase profitability. •

“Early delivery of their products”

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IMPORTANCE OF SERVICE •

Developing a strong service orientation: •

Many products have a service element associated with them.

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Determining the product/service balance.

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Providing the right amount of service.

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Figure 10.3

Product- and service-dominated businesses

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INTERNATIONAL LOGISTICS

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GLOBAL SUPPLY CHAIN MANAGEMENT CAPABILITIES GREATLY ENHANCE GLOBAL SOURCING •

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Global supply chain refers to the firm’s integrated network of sourcing, production, and distribution, organized on a world scale, and located in countries where competitive advantage can be maximized. Sourcing from numerous suppliers scattered around the world would be neither economical nor feasible without an efficient supply-chain system.

Boeing’s 787 Dreamliner jet provides a striking example of  how global supply-chain management is making global sourcing feasible and, at the same time, contributing to firm competitiveness.

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INTERNATIONAL LOGISTICS •

International logistics: The designing and managing of a system to control the flow of materials and products throughout the firm. •

Transportation 

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for example: ocean shipping and air shipping

Choice criteria of transportation 

time, predictability, cost, and non-economic factors

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Packaging

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Storage.

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DIFFERENT KINDS OF GLOBAL PRODUCTION SYSTEMS

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DIFFERENT KINDS OF GLOBAL PRODUCTION SYSTEMS •

Companies tend to focus on the functions and innovation activities where they have the major advantage. •

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They often outsource activities or parts of the value chain where they add less value. The “boundaries” of the firm: What activities are internalized and what are externalized or left to other firms to provide on a contract basis.

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Figure 10.4

Global production systems: where is the value added?

Source: Adapted from UNCTAD, World Investment Report 2002