© ram mudambi, temple university, 2007 1 lecture 08 global manufacturing and logistics

© Ram Mudambi, Temple University, 2007

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Lecture 08Global Manufacturing and Logistics


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Outline

Distance still matters Location issues in global manufacturing Vertical vs. horizontal FDI Global materials management Value chain innovation Make or buy? Outsourcing logistics


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Cf: Ghemawat


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Location Strategy and Manufacturing

Serves universal needs Yes No

Flexible manufacturing technology Available Not AvailableMinimum efficient scale High Low

Differences in factor costs Substantial Few

Technological Factors

Product Factors

Fixed costs High Low

Concentrated Decentralized

Trade barriers Few Many

Value-to-weight ratio High Low

Country Factors

Differences in political economy Substantial Few

Favored Manufacturing Strategy

Differences in culture Substantial Few


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Two Forms of FDIV

alue

cha

in Location 1Stage 1

Location 2Stage 1Horizontal FDI

Location 2Stage 0

BackwardVertical FDI

Location 2Stage 2

ForwardVertical FDI

HOME

HOST

VerticalFDI


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Dispersed FDIV

alue

cha

in Location 1Stage 1

Location 2Stage 1Horizontal FDI

Location 2Stage 0

BackwardVertical FDI

Location 2Stage 2

ForwardVertical FDI

HOST 2

VerticalFDI

HOST 1HOME


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Belfast Carburetors and

distributors

Treforest Spark plug insulators

Leamington Foundry production

of engine components

Dagenham Final assembly

Bordeaux Transmissions

Enfield Instruments, fuel and water gauges,

plugs

Basildon Radiators, water pump assembly,

engine components

Genk Body panels, road wheels

Wülfrath Transmission parts, engine components

Saarlouis Final assembly

Cologne Die-cast transaxle casings, gear and

engine components

Valencia Final assembly


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Coordinating a Global Manufacturing System

Materials management and logistics: Global sourcing

• Achieve lowest possible cost that meets customer’s needs.

Power of ‘Just-in-Time’: Economize on inventory

holding costs. Drawback: no buffer inventory.


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Global sourcing The process of identifying, evaluating,

negotiating and configuring supply across multiple locations to reduce costs, maximize performance and mitigate risks.


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Material costs -- price, setup, tooling, transaction and other costs related to the actual product or service

Transportation costs -- transportation, fuel surcharges and other fees included in a freight rate

Inventory carrying costs -- warehousing, handling, taxes, insurance, depreciation, shrinkage, obsolescence, and other costs associated with maintaining inventories, including the cost of money or opportunity costs

Cross-border taxes and tariffs -- often referred to as landed costs, i.e., the sum of duties, insurance and other fees for door-to-door delivery

Supply and operational performance -- the cost of noncompliance or underperformance; can offset any price gains attained by shifting to an offshore source

Supply and operational risks -- including geopolitical factors or natural disasters and disease; tariff and policy changes; and instability caused by war and/or terrorism, all of which may disrupt supply lines


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Dell Business StrategyDell Business StrategyBUSINESS MODEL: Traditional PC industry

Assembly ofPCs by PC

Makers (to fillOrders from

Suppliers andKeep

DistributionChannel stocked

Assembly ofPCs by PC

Makers (to fillOrders from

Suppliers andKeep

DistributionChannel stocked

Service and Support activities

provided to PC Maker

(via telephone, fax,Or e-mail) or by

Independent Service providers

Service and Support activities

provided to PC Maker

(via telephone, fax,Or e-mail) or by

Independent Service providers

Manufactureof PC

components by

suppliers

Manufactureof PC

components by

suppliers

Purchases byPC users

Purchases byPC users

Sales andMarketing

Activities ofResellers to

Sell inventoriesOf PCs on hand

Sales andMarketing

Activities ofResellers to

Sell inventoriesOf PCs on hand

Customized assembly of PCs by PC Makers as orders

from PC buyers come in

Customized assembly of PCs by PC Makers as orders

from PC buyers come in

BUSINESS MODEL: Built-to-order/direct sales

VALUE CHAIN INNOVATIONS

Global sourcing

Global sourcing

Regional assembly

Regional assembly


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Dell Business StrategyDell Business StrategyDell believes that the direct model provides it with several distinct competitive advantages.

Eliminates wholesale/retail channel.

Avoids the higher inventory costs.

Reduces high risk of outdated technology.

Maintenance and monitoring of customer database, helping to shape future product offerings.


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Make or Buy Advantages of Make:

Lower costs. Facilitating specialized investments. Proprietary product production technology

protection. Improved scheduling.

Advantages of Buy: Strategic flexibility. Lower costs. Offsets.


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The Role of the Organization Organizational linkages are more numerous

and complex. More difficult to control costs.

Functionally separate materials management: Equal weight with other departments. Purchasing, production and

distribution are one basic task:• controlling material flow from

purchase to customer.


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Global organizational linkages

Global Procurement

Division

PartsSupplier

ContractManufacturer

Negotiations and payment

Productsupply

OversightOversight(EDI)(EDI)

OEMSub-assembly orBranded product

MNCMNC


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Local market servicingNeed for a local partner

Foreign partner – Technology (R&D knowledgeR&D knowledge)

Domestic partner – Distribution channels (Marketing knowledgeMarketing knowledge)

FINAL MARKETFINAL MARKET


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Using 3PL’s

UpstreamClient Firm

3PL DownstreamBuyer

Upstreamsystems integration

Downstreamsystems integration

Oversight

Technology People

• Channel density• Channel diversity


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Using 4PL’s

Upstream client unit

4PL

Externalbuyer

Downstreamclient unit

Outsourcing the internal and external logistics function


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Takeaways Manufacturing and logistics decisions are

intimately intertwined with all aspects of the FDI decision

Regional strategy will often be a crucial factor

Superior manufacturing and logistics can support value chain innovation

The make or buy decision encompasses both manufacturing and logistics

© ram mudambi, temple university, 2007 1 lecture 08 global manufacturing and logistics

Documents

material costs

landed costs

higher inventory costs

service transportation

global manufacturingvertical

buffer inventory

global sourcingthe process

door delivery supply