Chapter 18

Global Manufacturing and Supply Chain Management





!          Describe different dimensions of global manufacturing strategy.

!          Examine the elements of global supply chain management.

!          Show how quality affects the global supply chain.

!          Illustrate how supplier networks function.

!          Explain how inventory management is a key dimension of the global supply chain.

!          Present different alternatives for transporting products from suppliers to customers along the supply chain.



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 18 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 18.1, Figures 18.1-3]

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 U.S.

Teaching Tip: Review the PowerPoint slides for Chapter 18 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.



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

(i) compatibility, (ii) configuration, (iii) coordination and (iv) control. Virtual manufacturing describes the situation in which a firm subcontracts the manufacturing process to another company, i.e., the firm chooses to outsource.

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. Offshore manufacturing refers to manufacturing activities that occur beyond the borders of a firm’s home country.

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).

Rationalization represents the specialization of production by product or process in different parts of the world in order to take advantage of varying costs of labor, capital and raw materials.

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.



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. 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.



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 describes 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 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 strategy 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). Firms pursue global sourcing strategies in order to reduce costs, improve quality, increase their exposure to worldwide technology, strengthen the reliability of supply, improve the supply delivery process, 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) arm’s length purchases from independent suppliers and (iii) Japanese keiretsu relationships with suppliers.

A.                Make or Buy Decision

Outsourcing refers to those production activities that occur outside of the firm, i.e., the use of external (foreign) suppliers to provide materials, components, services, or finished goods. 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.

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 18.9]

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.



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.



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.



What Supplier-Relations Approach Yields the Best Results?

A utilitarian view of ethical conduct argues the worth of actions or practices is determined by their consequences, i.e., an action or practice is “right” if it leads to the best possible balance of good and bad consequences for all the affected parties. Even though it is in a firm’s self-interest to keep costs as low as possible, by treating its suppliers fairly it upholds its ethical obligations to them and its actions result in a positive utilitarian outcome. On the other hand, if a firm requires a supplier to enter into a contractual agreement but then tears up the contract and forces the supplier to renegotiate, it is acting in its own short-term self-interest at the expense of the supplier. Given the negative impact on suppliers, such actions do not result in a positive utilitarian outcome. As firms continue to outsource and deal with suppliers from different countries and cultures, the issue of supplier relations and productivity outcomes will be carefully scrutinized.



To Be Global, an MNE Must Establish Strong Supply Chain Links

In their efforts to serve worldwide markets, MNEs are discovering that to take advantage of market imperfections and drive costs down, they need greater control over global manufacturing operations. Improvements in communications technology will continue to facilitate the flow of information, and firms will continue to gain critical flexibility in establishing relationships and to improve quality, delivery time and their responsiveness to customer needs. A major decision any firm must make is whether it wants to be in the manufacturing business or to outsource its manufacturing activities. Whichever path they choose, MNEs will have to develop strong global supply chain management systems in order to compete effectively in today’s dynamic global business environment.




Teaching Tip: Visit for additional information and links relating to the topics presented in Chapter 18. Be sure to refer your students to the on-line study guide, as well as the Internet exercises for Chapter 18.



CLOSING CASE: DENSO Corporation and Global Suppliers Relations [See Maps 18.2-3, Figure 18.10]


1.         How has DENSO’s relationship with Toyota affected its international strategy?

DENSO’s relationship with Toyota has affected its international strategy in several ways. On the one hand, it has limited DENSO’s strategic flexibility because its operations have been so closely linked to Toyota’s requirements. As a result, DENSO has developed an overdependence on the automobile industry as a customer base. On the other hand, DENSO’s association with Toyota has facilitated its becoming a viable international competitor as the result of its supplying Toyota’s various foreign operations. Subsequently, DENSO’s international experience helped the firm gain access to other major automobile manufacturers.


2.                  What types of quality programs has DENSO adopted, and how do you think they will affect DENSO’s future as a global supplier?

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 it 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 Japan.


3.                  Why does it make a difference whether DENSO uses kanban or MRP?

The two systems represent very different approaches to production management in an environment that heavily relies on the just-in-time delivery of products or subassemblies. Under kanban, the supplier is truly at the mercy of the customer, who does not give much advance notice of needing parts. Further, because kanban links the operations of the customer and the supplier so closely, working with a variety of customers can become extremely difficult for a single supplier. Under material requirements planning (MRP), a computerized information system that addresses complex inventory situations, the supplier has more lead time and can better adjust its schedules so as to optimize operations. Also, under MRP a supplier can better mange its deliveries to multiple customers, which is a matter of great interest to DENSO as the company tries to move away from its overdependence on Toyota.


4.                  DENSO faces what challenges as it diversifies its customers and product lines?

DENSO faces two major challenges. The less difficult one to achieve is its goal of diversifying its customer base within the automobile industry. Its ISO 9001 and QS9000 certifications will continue to open doors for DENSO; its quality track record should also help the firm strengthen its competitive position. The more difficult goal for DENSO to achieve is the diversification of its product lines and thus a reduced dependence on the automobile industry for revenue growth. Although it makes products for both the telecommunications and environmental systems markets, in 2002 nonautomotive products generated only 6.3 percent of DENSO’s revenues. To significantly increase that number, DENSO must intensify its R&D efforts with respect to products that lie both within and outside of the automobile industry.


5.                  What do you notice in the layout of the Takatana plant that demonstrates DENSO’s commitment to its employees?

The “green belt” DENSO has created around the plant is particularly appealing and suggests a concern for employees that goes well beyond productivity and cost containment. In addition, DENSO’s flexible and highly automated production facilities and its on-site education facilities enhance working conditions and assure workers of on-the job training.

Additional Exercises: Global Manufacturing and Supply Chain Management


Exercise 18.1. 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 18.2. 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 18.3. 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?