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Marketing 2018 Ferrell/Pride Expert Verified
Global Business Today 6e by Charles W.L. Hill McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 14 Global Production, Outsourcing, and Logistics
Introduction
Strategy, Production, and Logistics Question: How can production and logistics be conducted internationally to lower the costs of value creation add value by better serving customer needs?
Strategy, Production, and Logistics
Strategy, Production, and Logistics
Strategy, Production, and Logistics Question: What management tool is used to increase the reliability of product offerings?
Strategy, Production, and Logistics
production and logistics functions must be able to accommodate demands for local responsiveness production and logistics must be able to respond quickly to shifts in customer demand
Where to Produce Question: Where should production activities be located?
Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Internet Extra: The World Factbook offers very detailed guides on countries and is a great starting place to explore the relative merits of different countries as investment destinations. Create a fictitious product and market. Then go to the site {https://www.cia.gov/cia/publications/factbook/index.html}. Click on the countries you are interested in exploring. Then identify various relevant factors such as government or transportation. Develop a ranking system to help you identify the best location to produce your product.
Country Factors
Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Management Focus: Philips in China Summary This feature describes Philips NV’s operations in China. Philips, the Dutch consumer electronics, lighting, semiconductor, and medical equipment conglomerate, has been operating factories in China since 1985. By the mid 2000s, the company had invested more than $2.5 billion in China and operated 25 factories there. Initially, Philips believed that it would sell a large portion of its output to the local Chinese market. However, the company quickly discovered that the low wages that make China such an attractive production location also meant that the market for its products was smaller than anticipated. Philips’ solution was to export most of its output to the United States and elsewhere. Discussion of the feature can revolve around the following questions: Suggested Discussion Questions 1. What makes China such an attractive production location for Philips? Are there other locations that share the same characteristics? Discussion Points: Several factors make China an attractive production location for Phillips. Perhaps the most important factor is the country’s cheap wages. In addition, the Chinese workforce is well educated, the economy is strong, and many of the company’s suppliers are doing business there. Most students will argue that at least at the moment, China is the only country that offers these particular qualities. While other countries like Mexico and India also have low cost workforces, they do not have the industrial base that is present in China. 2. Philips wants to eventually turn China into a global supply base from which its products will be exported around the world. Consider the advantages and disadvantages of this strategy. Discussion Points: Students should recognize that using China as a global supply base from which to serve the world offers several advantages to Phillips. By having a single production location, the company can capitalize on costs savings that come from economies of scale as well as the low wages in China. However, if economic, political, or other types of problems arise in the country, Phillips could be in serious trouble if it has no alternate locations to fill production gaps. Teaching Tip: Students can explore the company in more depth by going to {http://www.philips.com/global/index.page}. Lecture Note: To extend the discussion of this feature, consider {http://www.businessweek.com/globalbiz/content/sep2007/gb20070910_101622.htm?chan=search}. Video Note: In recent years, many companies have turned to China as a location for low cost production. However, in the light news of various tainted products produced being in China, some managers are questioning that strategy. The iGlobe Probe Sheds Light on Working Conditions in China explores working conditions in China and the potential for production problems.
Technological Factors
1. The level of fixed costs involved
2. The minimum efficient scale of the technology
Technological Factors 3. The flexibility of the technology
Technological Factors
Technological Factors
Technological Factors Question: When does it make sense to concentrate production at a few choice locations?
Product Factors
1. The product's value-to-weight ratio
2. Whether the product serves universal needs
Locating Production Facilities
Concentrating them in the optimal location and serving the world market from there Decentralizing them in various regional or national locations that are close to major markets
Locating Production Facilities
Classroom Performance System Decentralized production will be favored when There are substantial differences in political economy Fixed costs are high The product’s value-to-weight ratio is high Exchange rates are volatile
Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Classroom Performance System Answer: d
Classroom Performance System Firms will prefer concentrated production when Minimum efficient scale is high Location externalities are not important The product does not serve universal needs There are few trade barriers
Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Classroom Performance System Answer: a
The Strategic Role Question: Does the rationale for establishing a foreign production facility change?
The Strategic Role
Outsourcing Production: Question: Should an international business make the component parts to go into their final product or outsource them?
Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Management Focus: Hewlett Packard in Singapore Summary This feature explores the strategic decision making involved in establishing Hewlett Packard’s Singapore plant. The company initially used the plant as a low cost location to manufacture electronic components. Later, entire products were produced in Singapore. Still later, the Singapore plant was involved not only in production but also product design. Today, the plant is an important part of Hewlett Packard’s global network and is responsible for manufacturing and also product development and design. The following questions can provide the basis for the discussion of this feature: Suggested Discussion Questions 1) What factors were important in Hewlett Packard’s initial decision to open a plant in Singapore? How did these factors contribute to the decision to increase responsibilities at the Singapore plant? Discussion Points: Hewlett-Packard initially selected Singapore as a production location because the country offered a lower cost, well-educated workforce that spoke English. In addition, the country was economically stable, and had a good infrastructure. The lower cost, well-educated workforce enabled Hewlett-Packard to reduce its manufacturing and product development costs when the company decided to assign the responsibility for redesigning its handheld calculator to its Singapore facility. The success of this assignment was such that the company has continued to ask the facility to redesign other products. 2) Today, the Singapore plant is considered to be a “lead plant” for Hewlett Packard. How can the company help the plant continue to be a key component in Hewlett Packard’s global network? Discussion Points: Many students will suggest that communication will be central to ensuring that the Singapore facility remains a lead plant for Hewlett-Packard. Already, the company has made the commitment to ensuring the Singapore facility is on the same page as the headquarters location by transferring engineers from Singapore to the United States, and back. Students will probably suggest that continuing to establish cross-border relationships and teams will be important as the company goes forward. Teaching Tip: To further explore Hewlett-Packard’s international operations, go to {http://www.hp.com/}. Lecture Note: To extend the discussion of this feature, consider {http://www.businessweek.com/technology/content/jun2008/tc2008068_225711.htm?chan=search }.
The Advantages of Make
is associated with lower costs facilitates investments in highly specialized assets protects proprietary technology facilitates the scheduling of adjacent processes
The Advantages of Make 1. Lowering Costs
2. Facilitating Specialized Investments
The Advantages of Make 3. Protecting Proprietary Technology
4. Improving Scheduling
Classroom Performance System Which of the following is not one of the key factors that influence the decision of where to produce? Country factors Competitors factors Technological factors Product factors
Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Classroom Performance System Answer: b
The Advantages of Buy
gives the firm greater flexibility helps drive down the firm's cost structure helps the firm to capture orders from international customers
The Advantages of Buy 1. Strategic Flexibility
The Advantages of Buy 2. Lower Costs
3. Offsets
Trade-Offs
Strategic Alliances with Suppliers Question: Can strategic alliances with suppliers give firms the benefits of vertical integration?
Classroom Performance System Buying from independent suppliers offers all of the following advantages except It gives the firm greater flexibility It helps drive down the firm's cost structure It protects proprietary property It helps the firm to capture orders from international customers
Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Classroom Performance System Answer: c
Managing a Global Supply Chain Question: Why is logistics important to the international firm?
The Role of Just-in-Time Inventory Question: How can a just-in-time inventory process help a firm?
The Role of Information Technology and the Internet Question: What is the role of information technology in materials management?
Critical Discussion Question 1. An electronics firm is considering how best to supply the world market for microprocessors used in consumer and industrial electronic products. A manufacturing plant costs approximately $500 million to construct and requires a highly skilled work force. The total value of the world market for this product over the next 10 years is estimated to be between $10 and $15 billion. The tariffs prevailing in this industry are currently low. Should the firm adopt a concentrated or decentralized manufacturing strategy? What kind of location(s) should the firm favor for its plant(s)?
Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Answer: The firm should pursue a concentrated manufacturing because (1) the tariffs prevailing in the industry are low, (2) the cost of building a plant to produce the microprocessors is high, and (3) the product's value-to-weight ratio is high. All of these factors favor a concentrated versus a decentralized manufacturing strategy. In terms of location, the company should consider three factors: country factors, technology factors, and product factors. First, in terms of country factors, the firm should locate its plant in a country that has a highly skilled pool of workers available. That criterion could limit the firm to developed nations. Second, in terms of technology factors, the firm is compelled to limit the number of its manufacturing facilities because of the high cost of constructing a plant. Third, in terms of product factors, the firm can manufacturer its product in a central location due to the relatively high value-weight ratio and the universal appeal of the product.
Critical Discussion Question 2. A chemical firm is considering how best to supply the world market for sulfuric acid. A manufacturing plant costs approximately $20 million to construct and requires a moderately skilled work force. The total value of the world market for this product over the new 10 years is estimated to be between $20 and $30 billion. The tariffs prevailing in this industry are moderate. Should the firm favor concentrated manufacturing or decentralized manufacturing? What kind of location(s) should the firm seek for its plant(s)?
Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Answer: This question is a tougher call than the scenario depicted in Question #1. The firm should probably pursue a limited decentralized manufacturing strategy (meaning that the firm should not set up a plant in every country that it sells to, but should set up plants in several "regions" of the world). This strategy makes sense because (1) The tariffs prevailing in the industry are moderate (rather than low), (2) the cost of constructing a facility is relatively modest ($20 million), and (3) only a moderately skilled work force is needed (which is probably available in many low-cost regions of the world). The firm should select its location based on country factors, technology factors and product factors. In terms of country factors, the firm should find locations where semi-skilled labor is inexpensive. In terms of technology factors, the firm is not constrained by a high fixed costs associated with its product, so technology is not a pervasive issue. Finally, product factors favor the firm locating in several locations throughout the world. The company's product has a low value-weight ratio, making it unattractive to produce the product in a central location and export it across the world.
Critical Discussion Question 3. A firm must decide whether to make a component part in-house or to contract it out to an independent supplier. Manufacturing the part requires a non-recoverable investment in specialized assets. The most efficient suppliers are located in countries with currencies that many foreign exchange analysts expect to appreciate substantially over the next decade. What are the pros and cons of (a) manufacturing the component in-house and (b) outsourcing manufacture to an independent supplier? Which option would you recommend? Why?
Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Answer: Manufacturing in-house would reduce the risk of currency appreciation and rising costs from independent suppliers. Specialized asset investment would make firm dependent on specific suppliers, however, technological know-how would be protected, and improved scheduling would be available. Outsourcing would be beneficial if the product using the component fails in the market because the supplier will bear the cost of the non-recoverable investment, and flexibility in case a better component can be designed or bought would be preserved. Outsourcing would also lower organizational and coordination costs. Based on what we know, manufacturing in-house may be slightly preferred, but other information could tip the decision the other way.
Critical Discussion Question 4. Reread the Management Focus on Philips in China then answer the following questions: a) What are the benefits to Philips of shifting so much of its global production to China? b) What are the risks associated with a heavy concentration of manufacturing assets in China? c) What strategies might Philips adopt to maximize the benefits and mitigate the risks associated with moving so much product?
Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Answer: a) China is an attractive production location for Philips for several reasons. The country has low wage rates, an educated workforce, a strong economy, is a member of the World Trade Organization, and has a stable exchange rate that is pegged to the U.S. dollar. In addition, China’s rapidly expanding industrial base is home to many companies that Philips uses as suppliers. b) Philips reliance on China as a major location for production could be risky if political, economic, or other problems disrupt production and therefore, the company’s ability to supply global markets. c) Some students may suggest that Philips by locating so much production in China has essentially put all of its eggs in one basket and that a strategy that disperses some production to other locations might be better. By hedging its risk, the company could avoid potential disruptions in its supply chain.
Critical Discussion Question 5. Explain how an efficient materials management function can help an international business compete more effectively in the global marketplace.
Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Answer: Given the complexity involved in coordination of material and product flows in a multinational enterprise (purchases, currency exchange, inbound and outbound transportation, production, inventory, communication, expediting, tariffs and duties), a materials management function can help to assure that these flows take place in the most efficient manner possible. A related advantage is that by having a materials management function, a firm may obtain improved information about the costs of different transport alternatives, and choose to reconfigure some of its flows to better take advantage of these costs. By being better able to utilize just in time techniques, the cost of production can be lowered while the quality is increased. The materials management function can also help an international business to develop information technology systems that allow it to better track the flow of goods throughout the firm.
Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Internet Extra: The World Factbook offers very detailed guides on countries and is a great starting place to explore the relative merits of different countries as investment destinations. Create a fictitious product and market. Then go to the site {https://www.cia.gov/cia/publications/factbook/index.html}. Click on the countries you are interested in exploring. Then identify various relevant factors such as government or transportation. Develop a ranking system to help you identify the best location to produce your product. Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Management Focus: Philips in China Summary This feature describes Philips NV’s operations in China. Philips, the Dutch consumer electronics, lighting, semiconductor, and medical equipment conglomerate, has been operating factories in China since 1985. By the mid 2000s, the company had invested more than $2.5 billion in China and operated 25 factories there. Initially, Philips believed that it would sell a large portion of its output to the local Chinese market. However, the company quickly discovered that the low wages that make China such an attractive production location also meant that the market for its products was smaller than anticipated. Philips’ solution was to export most of its output to the United States and elsewhere. Discussion of the feature can revolve around the following questions: Suggested Discussion Questions 1. What makes China such an attractive production location for Philips? Are there other locations that share the same characteristics? Discussion Points: Several factors make China an attractive production location for Phillips. Perhaps the most important factor is the country’s cheap wages. In addition, the Chinese workforce is well educated, the economy is strong, and many of the company’s suppliers are doing business there. Most students will argue that at least at the moment, China is the only country that offers these particular qualities. While other countries like Mexico and India also have low cost workforces, they do not have the industrial base that is present in China. 2. Philips wants to eventually turn China into a global supply base from which its products will be exported around the world. Consider the advantages and disadvantages of this strategy. Discussion Points: Students should recognize that using China as a global supply base from which to serve the world offers several advantages to Phillips. By having a single production location, the company can capitalize on costs savings that come from economies of scale as well as the low wages in China. However, if economic, political, or other types of problems arise in the country, Phillips could be in serious trouble if it has no alternate locations to fill production gaps. Teaching Tip: Students can explore the company in more depth by going to {http://www.philips.com/global/index.page}. Lecture Note: To extend the discussion of this feature, consider {http://www.businessweek.com/globalbiz/content/sep2007/gb20070910_101622.htm?chan=search}. Video Note: In recent years, many companies have turned to China as a location for low cost production. However, in the light news of various tainted products produced being in China, some managers are questioning that strategy. The iGlobe Probe Sheds Light on Working Conditions in China explores working conditions in China and the potential for production problems. Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Classroom Performance System Answer: d Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Classroom Performance System Answer: a Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Management Focus: Hewlett Packard in Singapore Summary This feature explores the strategic decision making involved in establishing Hewlett Packard’s Singapore plant. The company initially used the plant as a low cost location to manufacture electronic components. Later, entire products were produced in Singapore. Still later, the Singapore plant was involved not only in production but also product design. Today, the plant is an important part of Hewlett Packard’s global network and is responsible for manufacturing and also product development and design. The following questions can provide the basis for the discussion of this feature: Suggested Discussion Questions 1) What factors were important in Hewlett Packard’s initial decision to open a plant in Singapore? How did these factors contribute to the decision to increase responsibilities at the Singapore plant? Discussion Points: Hewlett-Packard initially selected Singapore as a production location because the country offered a lower cost, well-educated workforce that spoke English. In addition, the country was economically stable, and had a good infrastructure. The lower cost, well-educated workforce enabled Hewlett-Packard to reduce its manufacturing and product development costs when the company decided to assign the responsibility for redesigning its handheld calculator to its Singapore facility. The success of this assignment was such that the company has continued to ask the facility to redesign other products. 2) Today, the Singapore plant is considered to be a “lead plant” for Hewlett Packard. How can the company help the plant continue to be a key component in Hewlett Packard’s global network? Discussion Points: Many students will suggest that communication will be central to ensuring that the Singapore facility remains a lead plant for Hewlett-Packard. Already, the company has made the commitment to ensuring the Singapore facility is on the same page as the headquarters location by transferring engineers from Singapore to the United States, and back. Students will probably suggest that continuing to establish cross-border relationships and teams will be important as the company goes forward. Teaching Tip: To further explore Hewlett-Packard’s international operations, go to {http://www.hp.com/}. Lecture Note: To extend the discussion of this feature, consider {http://www.businessweek.com/technology/content/jun2008/tc2008068_225711.htm?chan=search }. Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Classroom Performance System Answer: b Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Classroom Performance System Answer: c Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Answer: The firm should pursue a concentrated manufacturing because (1) the tariffs prevailing in the industry are low, (2) the cost of building a plant to produce the microprocessors is high, and (3) the product's value-to-weight ratio is high. All of these factors favor a concentrated versus a decentralized manufacturing strategy. In terms of location, the company should consider three factors: country factors, technology factors, and product factors. First, in terms of country factors, the firm should locate its plant in a country that has a highly skilled pool of workers available. That criterion could limit the firm to developed nations. Second, in terms of technology factors, the firm is compelled to limit the number of its manufacturing facilities because of the high cost of constructing a plant. Third, in terms of product factors, the firm can manufacturer its product in a central location due to the relatively high value-weight ratio and the universal appeal of the product. Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Answer: This question is a tougher call than the scenario depicted in Question #1. The firm should probably pursue a limited decentralized manufacturing strategy (meaning that the firm should not set up a plant in every country that it sells to, but should set up plants in several "regions" of the world). This strategy makes sense because (1) The tariffs prevailing in the industry are moderate (rather than low), (2) the cost of constructing a facility is relatively modest ($20 million), and (3) only a moderately skilled work force is needed (which is probably available in many low-cost regions of the world). The firm should select its location based on country factors, technology factors and product factors. In terms of country factors, the firm should find locations where semi-skilled labor is inexpensive. In terms of technology factors, the firm is not constrained by a high fixed costs associated with its product, so technology is not a pervasive issue. Finally, product factors favor the firm locating in several locations throughout the world. The company's product has a low value-weight ratio, making it unattractive to produce the product in a central location and export it across the world. Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Answer: Manufacturing in-house would reduce the risk of currency appreciation and rising costs from independent suppliers. Specialized asset investment would make firm dependent on specific suppliers, however, technological know-how would be protected, and improved scheduling would be available. Outsourcing would be beneficial if the product using the component fails in the market because the supplier will bear the cost of the non-recoverable investment, and flexibility in case a better component can be designed or bought would be preserved. Outsourcing would also lower organizational and coordination costs. Based on what we know, manufacturing in-house may be slightly preferred, but other information could tip the decision the other way. Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Answer: a) China is an attractive production location for Philips for several reasons. The country has low wage rates, an educated workforce, a strong economy, is a member of the World Trade Organization, and has a stable exchange rate that is pegged to the U.S. dollar. In addition, China’s rapidly expanding industrial base is home to many companies that Philips uses as suppliers. b) Philips reliance on China as a major location for production could be risky if political, economic, or other problems disrupt production and therefore, the company’s ability to supply global markets. c) Some students may suggest that Philips by locating so much production in China has essentially put all of its eggs in one basket and that a strategy that disperses some production to other locations might be better. By hedging its risk, the company could avoid potential disruptions in its supply chain. Multimedia Lecture Support Package to Accompany Basic Marketing Lecture Script 6-* Answer: Given the complexity involved in coordination of material and product flows in a multinational enterprise (purchases, currency exchange, inbound and outbound transportation, production, inventory, communication, expediting, tariffs and duties), a materials management function can help to assure that these flows take place in the most efficient manner possible. A related advantage is that by having a materials management function, a firm may obtain improved information about the costs of different transport alternatives, and choose to reconfigure some of its flows to better take advantage of these costs. By being better able to utilize just in time techniques, the cost of production can be lowered while the quality is increased. The materials management function can also help an international business to develop information technology systems that allow it to better track the flow of goods throughout the firm. Page 2 |