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You work for a company that makes vehicle safety systems, such as radar, on-board cameras, and the ever-present back-up beeper. To reduce costs on your most mature product, the back-up beeper, you are considering moving production out of the United States. You are considering Mexico, Philippines, and Singapore. You are interested in road infrastructure, port infrastructure, technological readiness, and wages. 1. Compare the four countries on these dimensions. Include the United States in your analysis as well as a baseline. For wages, use the Bureau of Labor Statistics’ Foreign Labor Statistics website bls.gov/fls. In particular, use the Index of Hourly Compensation Costs for Production Workers http://www.bls.gov/news.release/ichcc.t01.htm (Links to an external site.) . For the other data, use the World Economic Forum’s Global Competitiveness Report      http://gcr.weforum.org/gcr/ (Links to an external site.) The bar chart comparison feature is an efficient way to get the information you need.

2. You are also interested in the overall business climate, which you consider to consist of factors like corruption, accounting standards, and a solid legal system. Use the Opacity Index Operations and Supply Chain Management for the 21st Century 121
to compare the overall level of opacity of each of the four countries: http://www.kurtzmangroup.com/reports/opacity_index_2.pdf  (Links to an external site.)

3. What other factors should be considered?

4. What is your recommendation?

(You also can locate the reports by doing a web search on “opacity index” or/and on “BLS FLS Production Workers: Indexes of hourly compensation costs”)

Global Supply Chain and Service Integration

Chapter 14

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Learning Objectives

Explain the meaning of globalization.

Describe why firms globalize and establish international production facilities. Discuss various strategies for international production.

Evaluate the positives and negatives associated with outsourcing and offshoring.

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American Express—A Global Corporation

American Express, Kellogg’s, Sony.

  • All three have to constantly evaluate the effectiveness of their supply chains: fluctuations in currency exchange rates; changing international laws and tariffs; production and labor costs; and the hiring, training, and retention of high-skill employees.

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Globalization

  • Political, economical, cultural, and naturally occurring events around the world affect each of us.
  • Thanks to advances in efficient production and distribution systems, we get the benefits of using goods manufactured at locations around the world that have been delivered to us in a cost-effective manner.
  • Advances in information and communications technology are now allowing companies to deliver a wide range of services to customers all around the world.

Source: © Image Source/Corbis

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What is Globalization?

  • Globalization: the process by which the experience of everyday life, marked by the diffusion of commodities and ideas, can foster a standardization of cultural expressions around the world
  • The term globalization refers to increasing global connectivity, integration, and interdependence in the economic, social, technological, cultural, political, and ecological spheres.

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Why Globalize?

Many companies pursue global production because:

It offers access to cheaper labor and operations costs from locating production facilities overseas.

Locating facilities in another country allows companies to get access to the knowledge and skills of people in that country.

Certain parts of the world are rich in natural resources.

Globalization allows companies access to new markets.

Facilities at strategic international locations can reduce logistics and distribution costs.

Internationally located facilities take advantage of tax and financial incentives provided by local governments.

International locations may have political and industry-specific reasons behind the choice.

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Three Approaches to Global Integration

Adaptation: boosting revenue and market share by maximizing local presence in a country

Aggregation: achieving economies of scale by creating regional or global operations

Arbitrage: the exploitation of differences among national or regional markets, often by locating separate parts of supply chains in different places

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Brief History of Globalization

  • Globalization has been a long process spanning the last several centuries.
  • Globalization existed during the Mongol Empire, and global integration continued through the expansion of European trade in the sixteenth and seventeenth centuries.
  • Globalization during the period after World War II has been driven by advances in technology, communication, and transportation, all of which have reduced the costs of trade and international production.
  • Globalization has continued to move ahead despite worldwide economic and political instability.

Source: © Image Source/Corbis

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Global Production
and Multinational Corporations

  • Multinational corporation: a corporation or business enterprise that manages production establishments or delivers services in at least two countries
  • Horizontally integrated multinational corporations: corporations that use production establishments located in different countries to produce the same or similar products
  • Vertically integrated multinational corporations: corporations that use production establishments in a certain country or countries to produce products that serve as inputs to their production establishments in one or more other countries
  • Diversified multinational corporations: corporations that use production establishments located in different countries but are neither horizontally nor vertically integrated

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What Production
Functions Are Globalized?

  • Manufacturing
  • Procurement
  • Maintenance and Monitoring
  • Logistics and Distribution Services
  • Customer Service and Support
  • Knowledge-Based Processes
  • Product Development and Innovation

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Classification of International Production Facilities

  • Offshore factory: a factory established to produce specific items at low cost
  • Source factory: a factory whose primary purpose is low-cost production but whose strategic role is broader than that of an offshore factory
  • Server factory: a factory that supplies specific national or regional markets; it typically provides a way to overcome tariff barriers and to reduce taxes, logistics costs, or exposure to foreign exchange fluctuations

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Classification of International Production Facilities (cont’d)

  • Contributor factory: a factory that also serves a specific national or regional market, but whose responsibilities extend to product or process engineering and to the development and choice of suppliers
  • Outpost factory: a factory whose primary role is to collect information
  • Lead factory: a factory that creates new processes, products, and technologies for the entire company

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The World Is Flat

Friedman’s 10 “flatteners” that have contributed to the

development of supply chains and services across

national borders:

Collapse of the Berlin Wall

Rise of the web browser

Workflow software

Open source collaboration

Outsourcing

Off-shoring

Efficient supply chain

In-sourcing

Informing

High-tech personal gadgets

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Some “Flatteners” further defined

  • Insourcing: an operations strategy in which a distribution company performs a variety of services of behalf of another company
  • In-forming: the ability to build and deploy one’s own supply chain for knowledge, information, and entertainment

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Figure 14.5: Drivers
for the “Flattening” of the World

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The Concept of
The Triple Convergence

  • Convergence I. Up until the year 2000, the 10 flatteners were semi-independent from one another. However, around the year 2000, all the flatteners converged with one another.
  • Convergence II. After the emergence of the 10 flatteners, a new platform had to be built in order to do business. Businesses had to begin collaborating horizontally, which meant that companies and people had to start working with other departments or companies as peers in order to add value or to develop product and service innovation.
  • Convergence III. After the fall of the Berlin Wall, countries that had followed a Soviet economic plan—such as China, India, Russia, and the countries of eastern Europe, Latin America, and central Asia—began to open up their economies to the world.

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Outsourcing and Offshoring

  • Outsourcing: turning over all or part of an organizational activity to an outside vendor
  • Traditional outsourcing focuses on achieving higher performance, greater flexibility, and reduced costs.
  • Outsourcing offers the possibility of imposing control on the process, allows the conversion of the fixed costs into variable costs, and creates the opportunity for increased profitability and expanded flexibility.
  • Rapid innovations are probable in technology outsourcing, and so attention should be paid to estimating the needs of the industry at least three years in advance.

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Offshoring

  • Offshoring: transferring production from one country to another with or without outsourcing to a supplier organization

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Figure 14.6: Outsourcing
and Offshoring

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Business Process Out-sourcing

  • Business process oursourcing: the outsourcing routine of financial and accounting operations, such as payroll, accounts payable and receivable, insurance, and property accounting, to another country
  • Commonly off-shored functions include:

manufacturing

information technology

facilities or applications within a firm

other firm services in such areas as finance and accounting, human resources, marketing and sales, and customer support centers.

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Four Broad Types of OffShoring

Traditional outsourcing

Examples: component manufacturing and basic training courses

Peripheral activities

Examples: warehousing, sub-assemblies, customer care services and similar support mechanisms

Critical activities and processes

Examples: secure data back-up and data processing

Strategic problem-solving activities

Examples: new product development, research and development, design management, and total management of information technology

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Outsourcing Goals

Focus on core business strategy.

Reduce control costs while improving functionality.

Improve competitiveness.

Provide better management control.

Improve flexibility.

Free up resources for core functions.

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Outsourcing

  • Outsourcing noncore activities allows firms to focus on the activities that they do best and improve their overall performance.
  • Transferring noncore activities to specialized vendors can help reduce costs and improve the performance of those activities.
  • Important soft criteria include: a good cultural fit, a commitment to continuous improvement, flexibility, and a commitment to developing long-term relationships and trustworthiness.
  • A good contract is essential to outsourcing success because the contract helps to establish a balance of power between the client and the vendor.

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Evaluating Operational Risk

  • Low Risk

Examples: transaction processing, telecollection, and technical support

  • Moderate Risk

Examples: customer service, account management, insurance underwriting, invoice management, and cash-flow forecasting

  • High Risk:

Examples: supply chain coordination, customer data analysis, equity research, yield analysis, and litigation support

  • Highest Risk

Examples: pricing and working capital management

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Evaluating Structural Risk

  • Low Risk

Examples: transaction processing, insurance claims processing, and customer service

  • Moderate Risk

Examples: supply chain coordination and customer data analysis

  • High Risk

Examples: Equity research, litigation support and R&D support

  • Highest Risk

Examples: Pricing and product design

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Discussion Starter

Can we outsource anything?

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Outsourcing Risks

  • The major risk that can arise out of outsourcing is the loss of quality.
  • Outsourcing can be used to save money, but when it degrades critical business attributes such as quality, reliability, integrity, and security, it can become a public relations disaster.

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Outsourcing Risks

  • In supply chain situations, there could be risks such as shipping delays, unavailability of shipping capacity, and customs issues while physically transporting goods.
  • Organizations that are evaluating any kind of outsourcing should question whether vendors have sufficiently robust security practices and whether they can meet the internal security requirements of the parent company.
  • The cultural differences between countries can be perceived as a major limitation, especially in the customer service industry.
  • The time and effort involved in transferring knowledge to the vendor is a cost that is rarely accounted for by IT organizations.
  • Loss of control produces risks that often do not seem to be accounted for when the outsourcing decision is under consideration.

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