Functional Areas of

International Business
 Unit V

14-1
Global Production, Outsourcing,
and Logistics

14-2
 Introduction

 In today’s global economy, firms must decide

where to locate productive activities
what the long-term strategic role of foreign production
sites should be
whether to own foreign production activities or
outsource those activities
how to manage a globally dispersed supply chain and
what the role of Internet-based information technology
should be in the management of global logistics
whether to manage global logistics or outsource

14-3
 Introduction

Question: How can production and logistics be

conducted internationally to lower the costs of value
creation add value by better serving customer needs?

 Production refers to activities involved in creating a

product
 Logistics refers to the procurement and physical
transmission of material through the supply chain from
suppliers to customers
 The total quality management (TQM), aims to reduce
defects, boost productivity, eliminate waste, and cut
costs throughout a company

14-4
 Global production and Manufacturing
Production and operations management is the function that concerns with the transformation of
material resource inputs into outputs of goods (finished goods) and services. It is normally
associated with manufacturing; but it might equally involve other components of the function
such as transportation, warehousing and logistics.

 Global production and Manufacturing is basically concerns with where to produce. While
choosing the location of production, the IB managers should consider country factors,
technological factors and product factors.

 Country Factors: They include the influence of factor costs, political economy, and national
culture on production costs, allowing with the presence of location externalities.

 Technological Factors: They include the fixed costs of setting up production facilities, the
minimum efficient scale of production, and the availability of flexible manufacturing
technologies that allow for mass customization.

 Product Factors: They consist of the value-to-weight ratio of the product and whether product
serves universal needs.

14-5
 Outsourcing : Make-or-Buy Decisions

Question: Should an international business make the

component parts to go into their final product or
outsource them?

 Make-or-buy decisions (decisions about whether to

perform a certain value creation activity in-house or
outsource it to another firm) are important to a firm’s
manufacturing strategy

14-6
 Outsourcing is basically a ‘make or buy’ decision. International businesses frequently face ‘make-
or- buy’ decisions. It is the decision about whether they should perform a certain value creation
activity themselves or simply outsource it to another entity, particularly independent suppliers in
foreign countries. Such decisions are an important aspect of the strategy of many firms.

 In sports shoe industry, the ‘make-or-buy’ decisions have been taken to an extreme with such
companies as Nike and Reebok; these companies are not involved in manufacturing; all their
production has been outsourced, mainly to manufacturers of low-wage countries. One such case
is Vietnam where Nike was once criticised over operating ‘sweat-shops’ which symbolise the
factories where labourers’ sweat is exploited. The benefits and risks of the ‘make-or-buy’
decisions, or outsourcing, are discussed here under.

14-7
 Benefits of Outsourcing/ Global Sourcing

 Cost efficiency: Cost efficiency Is the traditional rationale for sourcing abroad. The firm takes advantage of
the large wage gap between advanced economies and emerging markets.

 Higher-tech products: Outsourcing is a good way to get product-components based on better technologies.
It improves the IB firm’s production quality.

 Better product quality: A firm can get better qualify components by sourcing it from foreign independent
suppliers as they are specialised in the given product quality. It helps the firm improve the final products and
competitive position in the global markets.

 Better delivery service: A firm can get delivery of components on the time and place it wants. It is so as the
foreign independent suppliers maintain good timetable for delivery of ordered components so that they can
make delivery efficiently.

14-8
 Risks (Challenges) of Outsourcing/ Global Sourcing
 High Cost : Sourcing from other countries may often be more complex and costly than expected. Establishing
an outsourcing facility can be surprisingly expensive, due to the need to upgrade poor Infrastructure or locate it
in a large city to attract sufficient skilled labour.

 Environmental factors: Environmental challenges Include currency fluctuations, tariffs and other trade
barriers, high energy and transportation costs, adverse macroeconomic events, and labour strikes.

 Weak legal environment: Many popular locations for global sourcing (for example, China, India, and Russia)
have weak Intellectual property laws and poor enforcement, which can erode key strategic assets. Inadequate
legal systems, red tape, complicated tax systems, and complex business regulations complicate local operations
in many countries.

 Inadequate or low-skilled workers: Some foreign suppliers may be staffed by employees who lack appropriate
knowledge about the tasks with which they are charged. Other suppliers suffer rapid turnover of skilled
employees. In 2009, customer complaints about the quality of service led Delta Airlines to move its corporate
call centers from India back to the United States.

 Overreliance on suppliers: Unreliable suppliers may put earlier work aside when they gain a more important
client. Suppliers occasionally encounter financial difficulties or are acquired by other firms with different
priorities and procedures.

14-9
 Risk of (Creating competitors): As the IB firm shares its intellectual property and business- process
knowledge with foreign suppliers, it also runs the risk of creating future rivals. Schwinn, long the
leader in the global bicycle industry, transferred much of its production and core expertise to lower-
cost foreign suppliers, which acquired sufficient knowledge to become competitors, eventually forcing
Schwinn into bankruptcy (from which it later recovered).

 Erosion of morale and commitment: Global sourcing can leave home-country employees caught in the
middle between their employer and their employer’s clients. So, their morale may be down.

14-10
 Managing a Global Supply Chain

 Logistics Is an important dimension of the supply chain management that we discuss later In
this Section. Logistics is that part of the supply chain process that plans, implements, and controls
the efficient, effective flow and storage of goods, services and related information from the point of
origin to the point of consumption, to meet customers’ needs.

 In other words, logistics covers all the activities that move materials to a production facility like
factory, through the production process, and out through a distribution system to the end user.

 Logistics physically moves goods through the supply chain. It incorporates information,
transportation, inventory, warehousing, materials handling, and similar activities associated
with the delivery of raw materials, parts, components, and finished products. IB managers try to
reduce moving and storage costs by using just-in-time (JIT) inventory systems.

14-11
 The logistics function

 The logistics function is complicated in an international business because of the following:

 Wide Geographic Distance
 Time
 Exchange rates
 Customs and trade barriers
 Multiple legal environments
 Costly nature of distribution infrastructure

14-12