Role of Just In Time Inventory

Chapter 15 in the textbook will be covered for this week’s assignment. The topic ROLE OF JUST IN TIME INVENTORY should be reviewed to post this assignment. The assignment should be substantive and demonstrate insight gained from the course material. The assignment is to be no less than 600 words, be in APA format, must reference material from the textbook and academic journals. You will need at least three journal references and the textbook. Start your research with the textbook chapter 15 as attached, so it always grounds your topic. It is very important that textbook research is done to always ground your post, no exemptions whatsoever. The selected topic is outline in page 22 of the attached. Below is the text reference that is to be included along with 3 other peer reviewed journals (MUST)

Hill, C., & Hult, G. (2011). Global business today. McGraw Hill Education.

APANo Plagiarismmcgraw hill connect

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Global Production and
Supply Chain Management

Apple: The Best Supply Chains in the World?

o p e n i n g c a s e

F
or six straight years

,

Apple has been recognized as having the best worldwide supply chains in the
“Gartner Global Supply Chain Top 25” ranking. Numerous accolades have also been made about
Apple’s supply chain strategy, operations, and results. For example, Apple’s supply chains “best

demonstrate leadership in applying demand-driven principles to drive business results.” “Apple dominates
because it consistently brings both operational and innovation excellence to bear in some of the most
competitive markets in the world.” Basically, Apple gets a lot of credit in the supply chain profession for
being able to ramp up volumes both in hardware and software while also innovatively helping to redefine
the consumer electronics market (e.g., iPhone, iPod, iPad, Mac).

Apple is the world’s second largest information technology company by revenue after Samsung and the
third largest mobile phone producer after Samsung and Nokia. In Interbrand’s “Best Global Brands” report,
Apple is now also the most valuable brand in the world. It overtook Coca-Cola for the number one position
after Coca-Cola’s 13-year run at the top. Apple has an estimated brand value of more than $98 billion. “Few
brands have enabled so many people to do so much so easily, which is why Apple has legions of adoring fans.”
These “fans” or customers have downloaded apps for Apple’s electronic gadgets more than 50 billion times.

The company’s general supply chain model follows the path of most large multinational corporation’s
supply chains. They do research and development to cultivate new technologies and/or to acquire
intellectual property needed for future products. They test the product concepts via marketing research,
product testing, and total cost analysis. After that, Apple typically does a pre-launch of new products,
where global production, sourcing commitments, inventory management, and so on are evaluated. The
product launch involves doing demand forecasts, resolving potential backlogs, and ensuring that the
products are in the hands of its customers in as fast cycle time as possible. After the launch, monitoring
starts with periodic reviews of inventory, demand, life cycle status, and component cost forecasts.

A number of factors make Apple’s global supply chains world leading. First, early on, Apple took steps
to manage the total value created in its global supply chains by managing its suppliers and all other
providers within the chains. Predetermined expectations of suppliers, exclusivity in supplier arrangements,

–continued

420 Part Six International Business Functions

and volume guarantees ensured a supply chain infrastructure that could support Apple’s
aggressive market leadership. Apple’s relationship building with its network partners is
also a strength that has helped with increased scaling of production and resulted in
improved quality in the manufacturing processes. Plus, and not to be underestimated,
Apple has amassed lots of cash! The available cash funds have partially been used to
place high volume orders, which strengthen supplier relationships, and in other ways
maintain global supply chain leadership.

Using its supply chain infrastructure, Apple has managed to solve most of the
challenges it has faced. For example, while the global economic downturn in 2008
presented problems for virtually all companies, Apple came through it in great shape. At
the time, Steve Jobs said, “We’re armed with the strongest product line in our history,
the most talented employees and the best customers in our industry . . . Apple just
reported one of the best quarters in its history.” Other challenges that Apple is facing
include obtaining enough quality components for its consumer electronics, potential for
supply chain disruptions (natural and people created), dependence on third-party
logistics providers, and inventory management issues. In each case, so far, Apple has
strategically solved major issues to the satisfaction of the marketplace (the company
consistently ranks at the top in “customer satisfaction” in the American Customer
Satisfaction Index).

However, everything is not all rosy or positive about Apple. The company’s reputation
has taken a few hits recently. For example, Apple was found guilty by a U.S. court of
conspiring with publishers to set the price of e-books that were bought using iTunes.
The ongoing feud with Samsung regarding various patents keeps lingering year-by-
year, and worldwide customers are almost fanatically taking sides for or against Apple.
There have also been allegations about the treatment of employees at Foxconn in
China (one of the Apple suppliers). Plus, there was a U.S. Senate hearing that
investigated Apple’s “highly questionable” tax minimization strategies. Now, on the
more positive side, Apple has a portfolio of potential blockbuster products, welcomed
upgrades, and innovative services in the making that are sure to remind its fans why
they favor Apple products.

The challenges attached to these new offerings are sure to test Apple’s leadership in both
brand value and best global supply chains. To some degree, the future challenges are clear.
To stay at the top of its industry, Apple has to succeed in slowing Samsung’s momentum and
capturing the booming Chinese mobile phone market. As always with Apple, as set in our
expectations over the years by Steve Jobs’ “one more thing” announcements, Tim Cook and
the new Apple leadership team must keep communicating to the market that their vision,
innovations, and leadership can drive the idea that Apple’s best days are ahead. As one way
to do this, Apple is on a hiring binge in Asia, adding hundreds of engineers and supply chain
managers to its staff in Shangai and Taipei as it seeks to increase the speed at which it
introduces new products. Plus, with Tim Cook as the CEO, Apple has a global production and
supply chain management expert at the helm who constantly scrutinizes Apple’s supply
chains, production operations, and fair labor practices. •
Sources: D. Hofman, “The Gartner Supply Chain Top 25,” 2013, www.gartner.com/technology/supply-chain/top25.jsp,
accessed April 13, 2014; “Interbrand’s Best Global Brands 2013,” www.interbrand.com/en/best-global-brands/2013/
Best-Global-Brands-2013.aspx, accessed April 13, 2014; “Apple Is the World’s Most Valuable Brand at $98 Billion,” The
Huffington Post, September 30, 2013; “Apple Reports Fourth Quarter Results,” Apple Press Info, October 21, 2008; E. Doe,
“Apple Goes on Hiring Binge in Asia to Speed Product Releases,” The Wall Street Journal, March 3, 2014; American
Customer Satisfaction Index, http://theacsi.org; and “Fixing Apple’s Supply Chains,” The New York Times, April 2, 2012.

,

Chapter Fifteen Global Production and Supply Chain Management 421

Introduction
As trade barriers fall and global markets develop, many
firms increasingly confront a set of interrelated issues. First,
where in the world should production activities be located?
Should they be concentrated in a single country, or should
they be dispersed around the globe, matching the type of
activity with country differences in factor costs, tariff barri-
ers, political risks, and the like to minimize costs and maxi-
mize value added? Second, what should be the long-term
strategic role of foreign production sites? Should the firm
abandon a foreign site if factor costs change, moving pro-
duction to another more favorable location, or is there
value to maintaining an operation at a given location even if
underlying economic conditions change? Third, should the
firm own foreign production activities, or is it better to out-
source those activities to independent vendors? Fourth,
how should a globally dispersed supply chain be managed,
and what is the role of Internet-based information technol-
ogy in the management of global logistics and sourcing?
Fifth, should the firm manage global supply chains itself, or
should it outsource the management to enterprises that
specialize in this activity?

The example of Apple’s global supply chains discussed in
the opening case touches on some of these issues. Like many modern products, different
components for Apple’s consumer electronics are manufactured in different locations to
produce a low-cost product. In choosing which company should make which components,
Apple was guided by the need to keep the cost of the component parts low so that it could
price aggressively and gain market share from its global rivals, Samsung and Nokia. How-
ever, as the case demonstrates, Apple may have miscalculated in some areas and the compa-
ny’s reputation has taken a few recent hits. As the Apple example illustrates, companies also
need to be very careful when deciding to outsource production to foreign suppliers, and
they need to think about the total costs of their supply chains, not just basic differentials in
production cost.

Strategy, Production, and Supply Chain
Management
Chapter 12 introduced the concept of the value chain and discussed a number of value
creation activities, including production, marketing, logistics, R&D, human resources, and
information systems. This chapter focuses on two of these activities—production and
supply chain management—and attempts to clarify how they might be performed interna-
tionally to (1) lower the costs of value creation and (2) add value by better serving customer
needs. We also discuss the contributions of information technology to these activities, which
has become particularly important in a globally integrated world. The remaining chapters in
this text look at other value creation activities in the international context (marketing, R&D,
and human resource management).

In Chapter 12, we defined production as “the activities involved in creating a product.” We
used the term production to denote both service and manufacturing activities, because either
a service or a physical product can be produced. Although in this chapter we focus more on
the production of physical goods, we should not forget that the term can also be applied to
services. This has become more evident in recent years, with the continued pattern among
U.S. firms to outsource the “production” of certain service activities to developing nations
where labor costs are lower (e.g., the trend among many U.S. companies to outsource cus-
tomer care services to places such as India, where English is widely spoken and labor costs

LO 15-1
Explain why global production and
supply chain management decisions
are of central importance to many
global companies.

Production
Activities involved in creating a product.

Supply Chain Management
The integration and coordination of
logistics, purchasing, operations, and
market channels activities from raw
material to the end-customer.

Which Career Would You
Choose in Global Supply Chain
Management?
With increased outsourcing and overseas production sites and
customers, supply chain management is a growing field. The
Council of Supply Chain Management Professionals (CSCMP), a
professional association with more than 8,500 members world-
wide, says the industry offers a promising outlook. What’s more,
potential employers are everywhere—manufacturers and dis-
tributors; government agencies; consulting firms; the transport
industry; universities and colleges; service firms such as banks,
hospitals, and hotels; and third-party logistics providers. The
basic career options in global supply chains include its main
functions of logistics, purchasing (sourcing), production and
operations management, and marketing channels. Which func-
tional area would you choose if you decided to get a job in
supply chain management and why? For more information
about the organization and careers in this field, visit the CSCMP
website at www.cscmp.org and its careers site, www.careers-
insupplychain.org.

422 Part Six International Business Functions

are much lower). Supply chain management is the integration and coordination of logistics,
purchasing, operations, and market channel activities from raw material to the end-
customer. Production and supply chain management are closely linked because a firm’s
ability to perform its production activities efficiently depends on a timely supply of high-
quality material and information inputs, for which purchasing and logistics are critical
functions. Purchasing represents the part of the supply chain that involves worldwide buying
of raw material, component parts, and products used in manufacturing of the company’s
products and services. Logistics is the part of the supply chain that plans, implements, and
controls the effective flows and inventory of raw material, component parts, and products
used in manufacturing.

The production and supply chain management functions (purchasing, logistics) of an
international firm have a number of important strategic objectives.1 One is to ensure
that the total cost of moving from raw materials to finished goods is as low as possible
for the value provided to the end-customer. Dispersing production activities to various
locations around the globe where each activity can be performed most efficiently can
lower the total costs. Costs can also be cut by managing the global supply chain effi-
ciently so as to better match supply and demand. This involves both coordination and
integration of the supply chain functions inside a global company (e.g., purchasing, logis-
tics, production and operations management) and across the independent organizations
(e.g., suppliers) involved in the chain. For example, efficient logistics practices reduce
the amount of inventory in the system, increases inventory turnover, and facilitates the
appropriate transportation modes being used. Maximizing purchasing operations
enhance the order fulfillment and delivery, outsourcing initiatives, and supplier selec-
tions. Efficient operations ensure that the right location of production is made,
establishes which production priorities should be stressed, and facilitates a high-quality
outcome of the supply chain.

Another strategic objective shared by production and supply chain management is to
increase product (or service) quality by establishing process-based quality standards, and
eliminating defective raw material, component parts, and products from the manufactur-
ing process and the supply chain.2 In this context, quality means reliability, implying that
ultimately the finished product has no defects and performs well. These quality assur-
ances should be embedded in both the upstream and downstream portions of the global
supply chain. The upstream supply chain includes all of the organizations (e.g., suppliers)
and resources that are involved in the portion of the supply chain from raw materials to
the production facility (this is sometimes also called the inbound supply chain). The
downstream supply chain includes all of the organizations (e.g., wholesaler, retailer) that
are involved in the portion of the supply chain from the production facility to the end-
customer (this is also sometimes called the outbound supply chain). Through the up-
stream and downstream chains, the objectives of reducing costs and increasing quality
are not independent of each other. As illustrated in Figure 15.1, the firm that improves

Purchasing
The part of the supply chain that includes
the worldwide buying of raw material,
component parts, and products used in
manufacturing of the company’s products
and services.

Logistics
The part of the supply chain that plans,
implements, and controls the effective
flows and inventory of raw material,
component parts, and products used in
manufacturing.

Upstream Supply Chain
The portion of the supply chain from raw
materials to the production facility.

Downstream Supply Chain
The portion of the supply chain from the
production facility to the end-customer.

Outsourcing

The Global Production and Supply Chain Management chapter tackles
a number of issues related to production, make-or-buy decisions,
sourcing, and logistics. Outsourcing is one of the most commonly dis-
cussed topics in news media and on the Internet related to production
and supply chains. In effect, the word outsourcing sometimes even
creates “us against them” mentality (i.e., should the company out-
source production or other activities to entities outside its country bor-
ders, or should it use only domestic operations?). Often, the answer is

more of a political issue than a strategic resource issue. To stay com-
petitive, companies typically opt for the best value to infuse in their
supply chains. The “Outsourcing” section on globalEDGE ensures that
you have an updated set of data and knowledge on outsourcing (http://
globaledge.msu.edu/global-resources/outsourcing). For example, did
you know that there is an International Association of Outsourcing Pro-
fessionals? Do you know what it does, its goals, and how many mem-
bers it has worldwide?

Chapter Fifteen Global Production and Supply Chain Management 423

its quality control will also reduce its costs of value creation. Improved quality control
reduces costs by:

• Increasing productivity because time is not wasted producing poor-quality products that
cannot be sold, leading to a direct reduction in unit costs.

• Lowering rework and scrap costs associated with defective products.
• Reducing the warranty costs and time associated with fixing defective products.

The effect is to lower the total costs of value creation by reducing both production and
after-sales service costs. This creates an increased overall reliability in global production
and supply chain management.

The principal tool that most managers now use to increase the reliability of their prod-
uct offering is the Six Sigma quality improvement methodology. Six Sigma is a direct
descendant of the total quality management (TQM) philosophy that was widely
adopted, first by Japanese companies and then American companies, during the 1980s and
early 1990s.3 The TQM philosophy was developed by a number of American consultants
such as W. Edward Deming, Joseph Juran, and A. V. Feigenbaum.4 Deming identified a
number of steps that should be part of any TQM program. He argued that management
should embrace the philosophy that mistakes, defects, and poor-quality materials are not
acceptable and should be eliminated. He suggested that the quality of supervision should
be improved by allowing more time for supervisors to work with employees and by
providing them with the tools they need to do the job. Deming recommended that man-
agement should create an environment in which employees will not fear reporting prob-
lems or recommending improvements. He believed that work standards should not only
be defined as numbers or quotas, but also include some notion of quality to promote the
production of defect-free output. He argued that management has the responsibility to
train employees in new skills to keep pace with changes in the workplace. In addition,
he! believed that achieving better quality requires the commitment of everyone in the
company.

Six Sigma, the modern successor to TQM, is a statistically based philosophy that aims
to reduce defects, boost productivity, eliminate waste, and cut costs throughout a company.
Six Sigma programs have been adopted by several major corporations, such as Motorola,
General Electric, and Honeywell. Sigma comes from the Greek letter that statisticians use
to represent a standard deviation from a mean; the higher the number of “sigmas,” the
smaller the number of errors. At six sigmas, a production process would be 99.99966 per-
cent accurate, creating just 3.4 defects per million units. While it is almost impossible for
a company to achieve such perfection, Six Sigma quality is a goal to strive toward. Increas-
ingly, companies are adopting Six Sigma programs to try to boost their product quality
and productivity.5

Total Quality
Management (TQM)
Management philosophy that takes as its
central focus the need to improve the
quality of a company’s products and
services.

Six Sigma
Statistically based methodology for
improving product quality.

15.1 FIGURE
The Relationship between
Quality and Costs
Source: From “What Does Product Quality Really
Mean?” by David A. Gandin, MIT Sloan
Management Review, Fall 1984. Copyright
©1984 by Massachusetts Institute of
Technology. All rights reserved. Distributed by
Tribune Media Services. Reprinted with
permission.

Improves
Performance
Reliability

Lowers
Rework and
Scrap Costs

Lowers
Manufacturing
Costs

Increases
Pro!ts

Increases
Productivity

Lowers
Warranty
Costs

Lowers
Service Costs

424 Part Six International Business Functions

The growth of international standards has also focused greater attention on the impor-
tance of product quality. In Europe, for example, the European Union requires that the
quality of a firm’s manufacturing processes and products be certified under a quality stan-
dard known as ISO 9000 before the firm is allowed access to the EU marketplace. Although
the ISO 9000 certification process has proved to be somewhat bureaucratic and costly for
many firms, it does focus management attention on the need to improve the quality of prod-
ucts and processes.6

In addition to lowering costs and improving quality, two other objectives have particular
importance in international businesses. First, production and supply chain functions must
be able to accommodate demands for local responsiveness. As we saw in Chapter 12, de-
mands for local responsiveness arise from national differences in consumer tastes and pref-
erences, infrastructure, distribution channels, and host-government demands. Demands for
local responsiveness create pressures to decentralize production activities to the major na-
tional or regional markets in which the firm does business or to implement flexible manu-
facturing processes that enable the firm to customize the product coming out of a factory
according to the market in which it is to be sold.

Second, production and supply chain management must be able to respond quickly to
shifts in customer demand. In recent years, time-based competition has grown more impor-
tant.7 When consumer demand is prone to large and unpredictable shifts, the firm that can
adapt most quickly to these shifts will gain an advantage.8 As we shall see, both production
and supply chain management play critical roles here.

Where to Produce
An essential decision facing an international firm is where to locate its production activi-
ties to best minimize costs and improve product quality. For the firm contemplating inter-
national production, a number of factors must be considered. These factors can be
grouped under three broad headings: country factors, technological factors, and produc-
tion factors.9

COUNTRY FACTORS We reviewed country-specific factors in some detail earlier
in the book. Political and economic systems, culture, and relative factor costs differ from
country to country. In Chapter 6, we saw that due to differences in factor costs, some coun-
tries have a comparative advantage for producing certain products. In Chapters 2, 3, and 4
we saw how differences in political and economic systems—and national culture—influence
the benefits, costs, and risks of doing business in a country. Other things being equal, a firm
should locate its various manufacturing activities where the economic, political, and cultural
conditions—including relative factor costs—are conducive to the performance of those ac-
tivities (for an example, see the accompanying Management Focus, which looks at the Philips
investment in China). In Chapter 12, we referred to the benefits derived from such a strat-
egy as location economies. We argued that one result of the strategy is the creation of a
global web of value creation activities.

Also important in some industries is the presence of global concentrations of activities
at certain locations. In Chapter 8, we discussed the role of location externalities in influ-
encing foreign direct investment decisions. Externalities include the presence of an appro-
priately skilled labor pool and supporting industries.10 Such externalities can play an
important role in deciding where to locate production activities. For example, because of a
cluster of semiconductor manufacturing plants in Taiwan, a pool of labor with experience
in the semiconductor business has developed. In addition, the plants have attracted a num-
ber of supporting industries, such as the manufacturers of semiconductor capital equip-
ment and silicon, which have established facilities in Taiwan to be near their customers.
This implies that there are real benefits to locating in Taiwan, as opposed to another loca-
tion that lacks such externalities. Other things being equal, the externalities make Taiwan
an attractive location for semiconductor manufacturing facilities. The same process is now
under way in two Indian cities, Hyderabad and Bangalore, where both Western and Indian
information technology companies have established operations. For example, locals refer

ISO 9000
Certification process that requires certain
quality standards must be met.

LO 15-2
Explain how country differences,
production technology, and
production factors all affect the
choice of where to locate production
activities.

test PREP
Use LearnSmart to help retain what
you have learned. Access your
instructor’s Connect course to check
out LearnSmart or go to
learnsmartadvantage.com for help.

Chapter Fifteen Global Production and Supply Chain Management 425

to a section of Hyderabad as “Cyberabad,” where Microsoft, IBM, Infosys, and Qualcomm
(among others) have major facilities.

Of course, other things are not equal. Differences in relative factor costs, political econ-
omy, culture, and location externalities are important, but other factors also loom large.
Formal and informal trade barriers obviously influence location decisions (see Chapter 7), as
do transportation costs and rules and regulations regarding foreign direct investment (see
Chapter 8). For example, although relative factor costs may make a country look attractive
as a location for performing a manufacturing activity, regulations prohibiting foreign direct
investment may eliminate this option. Similarly, a consideration of factor costs might sug-
gest that a firm should source production of a certain component from a particular country,
but trade barriers could make this uneconomical.

Another important country factor is expected future movements in its exchange rate (see
Chapters 10 and 11). Adverse changes in exchange rates can quickly alter a country’s attrac-
tiveness as a manufacturing base. Currency appreciation can transform a low-cost location
into a high-cost location. Many Japanese corporations had to grapple with this problem
during the 1990s and early 2000s. The relatively low value of the yen on foreign exchange
markets between 1950 and 1980 helped strengthen Japan’s position as a low-cost location
for manufacturing. More recently, however, the yen’s steady appreciation against the dollar
increased the dollar cost of products exported from Japan, making Japan less attractive as a
manufacturing location. In response, many Japanese firms moved their manufacturing off-
shore to lower-cost locations in East Asia.

Philips in China

The Dutch consumer electronics, lighting, semiconductor, and medical
equipment conglomerate Philips Electronics NV has been operating
factories in China since 1985, when the country first opened its mar-
kets to foreign investors. When Philips initially entered China, it had
dreams of Chinese consumers snapping up its products by the millions.
However, the company soon found out that the reason it liked China—
low wage rates—also meant that few Chinese workers could afford to
buy its products. So Philips hit on a new strategy: Keep the factories in
China, but export most of the goods to developed nations.

The initial attractions of China to Philips included low wage rates,
an educated workforce, a robust Chinese economy, a stable exchange
rate that is linked to the U.S. dollar through a managed float, a rapidly
expanding industrial base that includes many other Western and
Chinese companies that Philips uses as suppliers, and easier access to
world markets given China’s entry into the WTO in 2001. By the early
2000s, Philips employed some 30,000 people in China either directly or
indirectly at joint ventures. Philips exported nearly two-thirds of the
$7!billion in products that its Chinese factories were producing. At this
point, 25 percent of everything that Philips made worldwide came from
China.

As time passed, Philips started to give its Chinese factories a greater
role in product development. In the TV business, for example, basic de-
velopment used to occur in Holland but was moved to Singapore in the
early 1990s. In the early 2000s, Philips transferred TV development
work to a new R&D center in Suzhou near Shanghai. Similarly, basic
product development work on LCD screens for cell phones was shifted
to Shanghai. In 2011, in a testament to just how important China had
become to Philips, the company moved the global headquarters of its
domestic appliances business from Amsterdam to Shanghai. By this

point, China was far more than just
an export base. Demand in China
had accelerated rapidly, and the
country was now the second-
largest market for Philips.

Some worry that Philips and
companies pursuing a similar
strategy might be overdoing it. Too
much dependence on China could
be dangerous if political, eco-
nomic, or other problems disrupt
production and the company’s
ability to supply global markets.
Some observers believe that it
might be better if the manufactur-
ing facilities of companies were
more geographically diverse as a
hedge against problems in China.
These fears have taken on added
importance recently as labor costs have accelerated in China due to
labor shortages. According to estimates, labor costs have been growing
by 20 percent per year since the 2000s. On the other hand, there is a
silver lining to this cloud: Chinese consumption of many of the products
that Philips makes there is now rising rapidly.

Sources: B. Einhorn, “Philips’ Expanding Asia Connections,” BusinessWeek Online,
November 27, 2003; K. Leggett and P. Wonacott, “The World’s Factory: A Surge in Exports
from China Jolts the Global Industry,” The Wall Street Journal, October 10, 2002, p.A1;
J.!Blau, “Philips Tears Down Eindhoven R&D Fence,” Research Technology Management
50, no. 6 (2007), pp. 9–11; L.Baijia, “Philips Elevates China’s Market Status,” China Daily,
May 26, 2011; and information on Philips NV website, www.philips.com/shared/assets/
Downloadablefile/Investor/2011_05_26_Frans_van_Houten_Morgan_Stanley .

management FOCUS

Employees work at a Philips
stand during a trade show in
Shanghai, China.

426 Part Six International Business Functions

TECHNOLOGICAL FACTORS The type of technology a firm uses to perform
specific manufacturing activities can be pivotal in location decisions. For example, because
of technological constraints, in some cases it is necessary to perform certain manufacturing
activities in only one location and serve the world market from there. In other cases, the
technology may make it feasible to perform an activity in multiple locations. Three charac-
teristics of a manufacturing technology are of interest here: the level of fixed costs, the
minimum efficient scale, and the flexibility of the technology.

Fixed Costs As noted in Chapter 12, in some cases the fixed costs of setting up a
production plant are so high that a firm must serve the world market from a single loca-
tion or from very few locations. For example, it now costs up to $5 billion to set up a
state-of-the-art plant to manufacture semiconductor chips. Given this, other things being
equal, serving the world market from a single plant sited at a single (optimal) location can
make sense.

Conversely, a relatively low level of fixed costs can make it economical to perform a par-
ticular activity in several locations at once. This allows the firm to better accommodate de-
mands for local responsiveness. Manufacturing in multiple locations may also help the firm
avoid becoming too dependent on one location. Being too dependent on one location is
particularly risky in a world of floating exchange rates. Many firms disperse their manufac-
turing plants to different locations as a “real hedge” against potentially adverse moves in
currencies.

Minimum Efficient Scale The concept of economies of scale tells us that as plant
output expands, unit costs decrease. The reasons include the greater utilization of capital
equipment and the productivity gains that come with specialization of employees within the
plant.11 However, beyond a certain level of output, few additional scale economies are
available. Thus, the “unit cost curve” declines with output until a certain output level is
reached, at which point further increases in output realize little reduction in unit costs. The
level of output at which most plant-level scale economies are exhausted is referred to as the
minimum efficient scale of output. This is the scale of output a plant must operate to
realize all major plant-level scale economies (see Figure 15.2).

The implications of this concept are as follows: The larger the minimum efficient scale of
a plant relative to total global demand, the greater the argument for centralizing production
in a single location or a limited number of locations. Alternatively, when the minimum effi-
cient scale of production is low relative to global demand, it may be economical to manufac-
ture a product at several locations. For example, the minimum efficient scale for a plant to
manufacture personal computers is about 250,000 units a year, while the total global demand

Minimum Efficient Scale
The level of output at which most plant-
level scale economies are exhausted.

15.2 FIGURE
Typical Unit Cost Curve

Volume

U
ni

t
C

os
ts

Minimum
Ef!cient Scale

Chapter Fifteen Global Production and Supply Chain Management 427

exceeds 35 million units a year. The low level of minimum efficient scale in relation to total
global demand makes it economically feasible for companies such as Dell and Lenovo to
assemble PCs in multiple locations.

As in the case of low fixed costs, the advantages of a low minimum efficient scale include
allowing the firm to accommodate demands for local responsiveness or to hedge against
currency risk by manufacturing the same product in several locations.

Flexible Manufacturing and Mass Customization Central to the concept of
economies of scale is the idea that the best way to achieve high efficiency, and hence low
unit costs, is through the mass production of a standardized output. The trade-off implicit
in this idea is between unit costs and product variety. Producing greater product variety
from a factory implies shorter production runs, which in turn implies an inability to realize
economies of scale. That is, wide product variety makes it difficult for a company to increase
its production efficiency and thus reduce its unit costs. According to this logic, the way to
increase efficiency and drive down unit costs is to limit product variety and produce a stan-
dardized product in large volumes.

This view of production efficiency has been challenged by the rise of flexible manufactur-
ing technologies. The term flexible manufacturing technology—or lean production, as
it is often called—covers a range of manufacturing technologies designed to (1) reduce setup
times for complex equipment, (2) increase the utilization of individual machines through
better scheduling, and (3) improve quality control at all stages of the manufacturing pro-
cess.12 Flexible manufacturing technologies allow the company to produce a wider variety of
end products at a unit cost that at one time could be achieved only through the mass pro-
duction of a standardized output. Research suggests the adoption of flexible manufacturing
technologies may actually increase efficiency and lower unit costs relative to what can be
achieved by the mass production of a standardized output while enabling the company to
customize its product offering to a much greater extent than was once thought possible.
The term mass customization has been coined to describe the ability of companies to
use flexible manufacturing technology to reconcile two goals that were once thought to be
incompatible—low cost and product customization.13 Flexible manufacturing technologies
vary in their sophistication and complexity.

One of the most famous examples of a flexible manufacturing technology, Toyota’s pro-
duction system, has been credited with making Toyota the most efficient auto company in
the world. (Despite Toyota’s recent problems with sudden uncontrolled acceleration, the
company continues to be an efficient producer of high-quality automobiles, according to
J.D. Power, which produces an annual quality survey. Toyota’s Lexus models continue to top
J.D. Power’s quality rankings.14) Toyota’s flexible manufacturing system was developed by
one of the company’s engineers, Taiichi Ohno. After working at Toyota for five years and
visiting Ford’s U.S. plants, Ohno became convinced that the mass production philosophy for
making cars was flawed. He saw numerous problems with mass production.

First, long production runs created massive inventories that had to be stored in large
warehouses. This was expensive, both because of the cost of warehousing and because inven-
tories tied up capital in unproductive uses. Second, if the initial machine settings were
wrong, long production runs resulted in the production of a large number of defects (i.e.,
waste). Third, the mass production system was unable to accommodate consumer prefer-
ences for product diversity.

In response, Ohno looked for ways to make shorter production runs economical. He
developed a number of techniques designed to reduce setup times for production equipment
(a major source of fixed costs). By using a system of levers and pulleys, he reduced the time
required to change dies on stamping equipment from a full day in 1950 to three minutes by
1971. This made small production runs economical, which allowed Toyota to respond better
to consumer demands for product diversity. Small production runs also eliminated the need
to hold large inventories, thereby reducing warehousing costs. Plus, small product runs and
the lack of inventory meant that defective parts were produced only in small numbers and
entered the assembly process immediately. This reduced waste and helped trace defects back
to their source to fix the problem. In sum, these innovations enabled Toyota to produce a

Flexible Manufacturing
Technology
Manufacturing technology designed to
improve job scheduling, reduce setup
time, and improve quality control.

Lean Production
See flexible manufacturing technology.

Mass Customization
The production of a variety of end
products at a unit cost that could once be
achieved only through mass production
of a standardized output.

428 Part Six International Business Functions

more diverse product range at a lower unit cost than was possible with conventional mass
production.15

Flexible machine cells are another common flexible manufacturing technology. A flexi-
ble machine cell is a grouping of various types of machinery, a common materials handler,
and a centralized cell controller (computer). Each cell normally contains four to six machines
capable of performing a variety of operations. The typical cell is dedicated to the production
of a family of parts or products. The settings on machines are computer controlled, which
allows each cell to switch quickly between the production of different parts or products.

Improved capacity utilization and reductions in work in progress (i.e., stockpiles of partly
finished products) and in waste are major efficiency benefits of flexible machine cells.
Improved capacity utilization arises from the reduction in setup times and from the computer-
controlled coordination of production flow between machines, which eliminates bottle-
necks. The tight coordination between machines also reduces work-in-progress inventory.
Reductions in waste are due to the ability of computer-controlled machinery to identify
ways to transform inputs into outputs while producing a minimum of unusable waste mate-
rial. While freestanding machines might be in use 50 percent of the time, the same machines
when grouped into a cell can be used more than 80 percent of the time and produce the
same end product with half the waste. This increases efficiency and results in lower costs.

The effects of installing flexible manufacturing technology on a company’s cost structure
can be dramatic. The Ford Motor Company has been introducing flexible manufacturing
technologies into its automotive plants around the world. These new technologies should
allow Ford to produce multiple models from the same line and to switch production from
one model to another much more quickly than in the past, allowing Ford to take $2 billion
out of its cost structure.16

Besides improving efficiency and lowering costs, flexible manufacturing technologies en-
able companies to customize products to the demands of small consumer groups—at a cost
that at one time could be achieved only by mass-producing a standardized output. Thus, the
technologies help a company achieve mass customization, which increases its customer re-
sponsiveness. Most important for international business, flexible manufacturing technologies
can help a firm customize products for different national markets. The importance of this ad-
vantage cannot be overstated. When flexible manufacturing technologies are available, a firm
can manufacture products customized to various national markets at a single factory sited at
the optimal location. And it can do this without absorbing a significant cost penalty. Thus,

firms no longer need to establish manufacturing facilities
in each major national market to provide products that sat-
isfy specific consumer tastes and preferences, part of the
rationale for a localization strategy (Chapter 12).

PRODUCTION FACTORS Several production
factors feature prominently into the reasons why produc-
tion facilities are located and used in a certain way world-
wide. They include (1) product features, (2) locating
production facilities, and (3) strategic roles for produc-
tion facilities.

Product Features Two product features affect
location decisions. The first is the product’s value-to-
weight ratio because of its influence on transportation
costs. Many electronic components and pharmaceuticals
have high value-to-weight ratios; they are expensive and
they do not weigh very much. Thus, even if they are
shipped halfway around the world, their transportation
costs account for a very small percentage of total costs.
Given this, other things being equal, there is great pres-
sure to produce these products in the optimal location
and to serve the world market from there. The opposite

Flexible Machine Cells
Flexible manufacturing technology in
which a grouping of various machine
types, a common materials handler, and
a centralized cell controller produce a
family of products.

Should Nestlé Continue to
Invest Heavily in Turkey?
According to Nestlé Turkey’s CEO, Hans Ulrich Mayer, Turkey has
been a great place to invest. “Turkey has been the recipient of
several Nestlé investments many times greater than we invest in
other markets,” reported Mayer. Nestlé has invested about
500!million U.S. dollars in Turkey over the last four years, and
following its successful breakfast cereal investment in 2011, the
company intends to go on investing because of the strong Turkish
economy compared to other European economies. Nestlé prod-
ucts sold in Turkey, ranging from pet food to chocolates, are
manufactured in Turkey and also exported to North Africa and
the Middle East. Given the political situation in Turkey, should
Nestlé continue to establish increased production (i.e., expand
its production facility) in delivering to North Africa and the Middle
East, or should it establish production elsewhere?

Source: Invest in Turkey, www.spotblue.co.uk/turkey-property-news/11577/
nestle-goes-on-investing-in-turkey/.

Chapter Fifteen Global Production and Supply Chain Management 429

holds for products with low value-to-weight ratios. Refined sugar, certain bulk chemicals,
paint, and petroleum products all have low value-to-weight ratios; they are relatively inex-
pensive products that weigh a lot. Accordingly, when they are shipped long distances, trans-
portation costs account for a large percentage of total costs. Thus, other things being equal,
there is great pressure to make these products in multiple locations close to major markets
to reduce transportation costs.

The other product feature that can influence location decisions is whether the product
serves universal needs, needs that are the same all over the world. Examples include many
industrial products (e.g., industrial electronics, steel, bulk chemicals) and modern con-
sumer products (e.g., Apple’s iPhone or iPad, Amazon’s Kindle, Lenovo’s ThinkPad,
Sony’s Cyber-shot camera, Microsoft’s Xbox). Because there are few national differences
in consumer taste and preference for such products, the need for local responsiveness is
reduced. This increases the attractiveness of concentrating production at an optimal
location.

Locating Production Facilities There are two basic strategies for locating pro-
duction facilities: (1) concentrating them in a centralized location and serving the world
market from there or (2) decentralizing them in various regional or national locations that
are close to major markets. The appropriate strategic choice is determined by the various
country-specific, technological, and product factors discussed in this section and summa-
rized in Table 15.1.

As can be seen, concentration of production makes most sense when:

• Differences among countries in factor costs, political economy, and culture have a
substantial impact on the costs of manufacturing in various countries.

• Trade barriers are low.
• Externalities arising from the concentration of like enterprises favor certain locations.
• Important exchange rates are expected to remain relatively stable.
• The production technology has high fixed costs and high minimum efficient scale

relative to global demand or flexible manufacturing technology exists.
• The product’s value-to-weight ratio is high.
• The product serves universal needs.

LO 15-3
Recognize how the role of foreign
subsidiaries in production can be
enhanced over time as they
accumulate knowledge.

15.1 TABLE
Location Strategy and
Production

Concentrated Production
Favored

Decentralized Production
Favored

Country Factors

Differences in political economy Substantial Few

Differences in culture Substantial Few

Differences in factor costs Substantial Few

Trade barriers Few Substantial

Location externalities Important in industry Not important in industry

Exchange rates Stable Volatile

Technological Factors

Fixed costs High Low

Minimum efficient scale High Low

Flexible manufacturing technology Available Not available

Product Factors

Value-to-weight ratio High Low

Serves universal needs Yes No

430 Part Six International Business Functions

Alternatively, decentralization of production is appropriate when:

• Differences among countries in factor costs, political economy, and culture do not have
a substantial impact on the costs of manufacturing in various countries.

• Trade barriers are high.
• Location externalities are not important.
• Volatility in important exchange rates is expected.
• The production technology has low fixed costs and low minimum efficient scale, and

flexible manufacturing technology is not available.
• The product’s value-to-weight ratio is low.
• The product does not serve universal needs (i.e., significant differences in consumer

tastes and preferences exist among nations).

In practice, location decisions are seldom clear-cut. For example, it is not unusual for dif-
ferences in factor costs, technological factors, and product factors to point toward concen-
trated production, while a combination of trade barriers and volatile exchange rates points
toward decentralized production. This seems to be the case in the world automobile indus-
try. Although the availability of flexible manufacturing and cars’ relatively high value-to-
weight ratios suggest concentrated manufacturing, the combination of formal and informal
trade barriers and the uncertainties of the world’s current floating exchange rate regime (see
Chapter 10) have inhibited firms’ ability to pursue this strategy. For these reasons, several
automobile companies have established “top-to-bottom” manufacturing operations in three
major regional markets: Asia, North America, and western Europe.

Strategic Roles for Production Facilities The growth of global production
among multinational companies has been tremendous over the past two decades, outdoing
the growth of home country production by more than tenfold.17 In essence, since the early
1990s, multinationals have opted to set up production facilities outside their home country
10 times for every 1 time they have opted to create such facilities at home. There is a clear
strategic rational for this; multinationals are trying to capture the gains associated with a
dispersed global production system. This trend is expected to continue going forward. Thus,
managers need to be ready to make the decision to open up a new production facility out-
side of their home base and decide where to locate the facility.

When making these decisions, managers need to think about the strategic role assigned
to a foreign factory. A major consideration here is the importance of global learning—the
idea that valuable knowledge does not reside just in a firm’s domestic operations; it may also
be found in its foreign subsidiaries. Foreign factories that upgrade their capabilities over
time are creating valuable knowledge that might benefit the whole corporation. Foreign
factories can have one of a number of strategic roles or designations, including (1) offshore
factory, (2) source factory, (3) server factory, (4) contributor factory, (5) outpost factory, and
(6) lead factory.18

An offshore factory is one that is developed and set up mainly for producing component
parts or finished goods at a lower cost than producing them at home or in any other market.
At an offshore factory, investments in technology and managerial resources should ideally
be kept to a minimum to achieve greater cost efficiencies. Basically, the best offshore factory
should involve minimal everything—from engineering to development to engaging with
suppliers to negotiating prices to any form of strategic decisions being made at that facility.
In reality, we expect at least some strategic decisions to include input from the offshore fac-
tory personnel.

The primary purpose of a source factory is also to drive down costs in the global supply
chain. The main difference between a source factory and an offshore factory is the strategic
role of the factory, which is more significant for a source factory than for an offshore factory.
Managers of a source factory have more of a say in certain decisions, such as purchasing raw
materials and component parts used in the production at the source factory. They also have
strategic input into production planning, process changes, logistics issues, product custom-
ization, and implementation of newer designs when needed. Centrally, a source factory is at
the top of the standards in the global supply chain, and these factories are used and treated

Global Learning
The flow of skills and product offerings
from foreign subsidiary to home country
and from foreign subsidiary to foreign
subsidiary.

Offshore Factory
A factory that is developed and set up
mainly for producing component parts or
finished goods at a lower cost than
producing them at home or in any other
market.

Source Factory
A factory whose primary purpose is also
to drive down costs in the global supply
chain.

Chapter Fifteen Global Production and Supply Chain Management 431

just like any factory in the global firm’s home country. This also means that source factories
should be located where production costs are low, where infrastructure is well developed,
and where it is relatively easy to find a knowledgeable and skilled workforce to make the
products.

A server factory is linked into the global supply chain for a global firm to supply specific
country or regional markets around the globe. This type of factory—often with the same
standards as the top factories in the global firm’s system—is set up to overcome intangible
and tangible barriers in the global marketplace. For example, a server factory may be in-
tended to overcome tariff barriers, reduce taxes, and reinvest money made in the region.
Another obvious reason for a server factory is to reduce or eliminate costly global supply
chain operations that would be needed if the factory were located much farther away from
the end customers. Managers at a server factory typically have more authority to make mi-
nor customizations to please their customers, but they still do not have much more input
than managers in an offshore factory relative to the home country factories of the same
global firm.

A contributor factory also serves a specific country or world region. The main differ-
ence between a contributor factory and a server factory is that a contributor factory has re-
sponsibilities for product and process engineering and development. This type of factory
also has much more of a choice in terms of which suppliers to use for raw materials and
component parts. In fact, a contributor factory often competes with the global firm’s home
factories for testing new ideas and products. A contributor factory has its own infrastructure
when it comes to development, engineering, and production. This means that a contributor
factory is very much stand-alone in terms of what it can do and how it contributes to the
global firm’s supply chain efforts.

An outpost factory can be viewed as an intelligence-gathering unit. This means that an
outpost factory is often placed near a competitor’s headquarters or main operations, near the
most demanding customers, or near key suppliers of unique and critically important parts.
An outpost factory also has a function to fill in production; it often operates as a server and/
or offshore factory as well. The outpost factory can be very much connected to the idea of
selecting countries for operations based on the countries’ strategic importance rather than
on the production logic of a location. Maintaining and potentially even enhancing the posi-
tion of the global firm in strategic countries is sometimes viewed as a practical factor. For
example, the fact that Nokia has its headquarters in Finland may result in another mobile
phone manufacturer locating some operations in Finland, even though the country market
is rather small (about 5.5 million people).

A lead factory is intended to create new processes, products, and technologies that
can be used throughout the global firm in all parts of the world. This is where cutting-
edge production should take place, or at least be tested for implementation in other parts
of the firm’s production network. Given the lead factory’s prominent role in setting a
high bar for how the global firm wants to provide products to customers, we also expect
that it will be located in an area where highly skilled employees can be found (or where
they want to locate). A lead factory scenario also implies that managers and employees at
the site have a direct connection to and say in which suppliers to use, what designs to
implement, and other issues that are of critical importance to the core competencies of
the global firm.

THE HIDDEN COSTS OF FOREIGN LOCATIONS There may be some
“hidden costs” to basing production in a foreign location. Numerous anecdotes suggest that
high employee turnover, shoddy workmanship, poor product quality, and low productivity
are significant issues in some outsourcing locations.19

Microsoft, for example, established a major facility in Hyderabad, India, for four very
good reasons: (1) The wage rate of software programmers in India is one-third of that in
the United States. (2) India has an excellent higher education system that graduates a lot
of computer science majors every year. (3) There was already a high concentration of in-
formation technology companies and workers in Hyderabad. (4) Many of Microsoft’s
highly skilled Indian employees, after spending years in the United States, wanted to

Server Factory
A factory linked into the global supply
chain for a global firm to supply specific
country or regional markets around the
globe.

Contributor Factory
A factory that serves a specific country or
world region.

Outpost Factory
A factory that can be viewed as an
intelligence-gathering unit.

Lead Factory
A factory that is intended to create new
processes, products, and technologies
that can be used throughout the global
firm in all parts of the world.

432 Part Six International Business Functions

return home, and Microsoft saw the Hyderabad facility as a way of holding on to this
valuable human capital.

However, the company found that the turnover rate among its Indian employees is higher
than in the United States. Demand for software programmers in India is high, and many
employees are prone to switch jobs to get better pay. Although Microsoft has tried to limit
turnover by offering good benefits and long-term incentive pay, such as stock grants to high
performers who stay with the company, many of the Indians who were hired locally appar-
ently place little value on long-term incentives and prefer higher current pay. High em-
ployee turnover, of course, has a negative impact on productivity. One Microsoft manager in
India noted that 40 percent of his core team had left within the past 12 months, making it
very difficult to stay on track with development projects.20

Microsoft is not alone in experiencing this problem. The manager of an electronics
company that outsourced the manufacture of wireless headsets to China noted that after
four years of frustrations with late deliveries and poor quality, his company decided to
move production back to the United States. In his words: “On the face of it, labor costs
seemed so much lower in China that the decision to move production there was a very
easy one. In retrospect, I wish we had looked much closer at productivity and workman-
ship. We have actually lost market share because of this decision.”21 Another example
of this phenomenon is given in the next Management Focus, which looks at the deci-
sion by General Electric to move some production from China back to the United
States. The lesson here is that it is important to look beyond pay rates and make judg-
ments about employee productivity before deciding whether to outsource activities to
foreign locations.

GE Moves Manufacturing from China
to the United States

For decades, General Electric has been at the forefront of the move to
shift production offshore from high-cost locations inside the United
States to cheaper locations, such as China. But there are now some
signs that the relentless flow of production offshore may be slowing
down and, in some cases, starting to reverse. There are several rea-
sons for this. Wage rates in China and some other developing nations
have been rising fast, closing the differential between costs in the
United States and overseas. In dollar terms, wage rates in China
were some five times higher in 2012 than they were in 2000, and
they are still rising fast. Labor productivity has also increased sig-
nificantly in the United States, further closing the gap in labor costs.
Meanwhile, high oil prices have raised the cost of shipping products
across oceans, while the abundance of cheap natural gas in the United
States is helping to lower production costs. If this were not enough,
there are signs that there are benefits to having product design and
manufacturing co-located, and in some cases, this is driving a shift in
production back to the United States.

A case in point is GE’s GeoSpring water heater. This was originally
designed in the United States and manufactured in China. The finished
product was then shipped back across the ocean for sale in the United
States. In 2010, given the macro trends in labor productivity and en-
ergy prices, GE decided to see what would happen if it brought some of
its appliance products back to the United States. The GeoSpring was
one of its first attempts at this. GE established a team of engineers and

production workers at its appliance plant in Louisville, Kentucky, to see
what they could do with the GeoSpring. The team quickly concluded
that the GeoSpring was not easy to manufacture due to poor design.
They redesigned the product for ease of assembly, eliminating one out
of every five parts and cutting material costs by 25 percent. As a result,
GE cut the time required to assemble the product from 10 hours in
China to 2 hours in Louisville.

The end result: Material costs went down, labor requirement went
down, and product quality went up. Indeed, the cost savings were so
big that GE was able to reduce the price of the GeoSpring 20 percent
below that of the Chinese-manufactured product and still maintain a
decent profit margin. Time to market also improved greatly. It used to
take five weeks to get a GeoSpring from China into a U.S. retail store—
now GE can do that in a matter of days, which improves inventory
management.

Having learned from experiences like this, GE is now planning to
ramp up production of other appliance products at Louisville. It has
recently doubled the workforce there to 3,700, and has also hired
500 new designers and engineers to redesign many of its products
for ease of manufacture. A few years ago, less than half of the reve-
nues of the appliance business came from products made in the
United States. By mid-decade, GE plans to have 75 percent of the
revenue of the appliance business to come from American-made
products.

Sources: Charles Fishman, “The Insourcing Boom,” The Atlantic, December 2012; and
J. R. Immelt, “Sparking an American Manufacturing Renewal,” Harvard Business Review,
March!2012.

management FOCUS
test PREP
Use LearnSmart to help retain what
you have learned. Access your
instructor’s Connect course to check
out LearnSmart or go to
learnsmartadvantage.com for help.

Chapter Fifteen Global Production and Supply Chain Management 433

Make-or-Buy Decisions
The make-or-buy decision for a global firm is the strategic decision concerning whether
to produce an item in-house (“make”) or purchase it from an outside supplier (“buy”).
Make-or-buy decisions are made at both the strategic and operational levels, with the stra-
tegic level being focused on the long term and the operational level being more focused on
the short term. In some ways, the make-or-buy decision is also the starting point for opera-
tions’ influence on global supply chains. That is, someone in the chain—within one firm—
has to take the lead in deciding whether the global firm should make the product in-house
or buy it from an external supplier. If the decision is to make it in-house, there are certain
implications for that firm’s global supply chains (e.g., where to purchase raw materials and
component parts). If the decision is to buy the product, that decision also has certain impli-
cations (e.g., quality control and competitive priorities management).

A number of things are involved in determining which decision is the correct one for a
particular global firm in a particular situation. At a broad level, issues of product success,
specialized knowledge, and strategic fit can lead to the make (produce) decision. For exam-
ple, if the item or part is critical to the success of the product, including perceptions among
primary stakeholders, such a scenario skews the decision in favor of make. Another reason
for a make decision is that the item or part requires specialized design or production skills
and/or that equipment and reliable alternatives are very scarce. Strategic fit is also impor-
tant. If the item or part strategically fits within the firm’s current and/or planned core com-
petencies, then it should be a make decision for the global firm.

However, these are strategic decisions at a general level. In reality, the make-or-buy deci-
sion is often based largely on two critical factors: cost and production capacity. Cost issues
include such things as acquiring raw materials, component parts, and any other inputs into
the process, along with the costs of finishing the product. The production capacity is really
presented as an opportunity cost. That is, does the firm have
the capacity to produce the product at a cost that is at least
no higher than the cost of buying it from an external sup-
plier? And, if the product is made in-house, what opportu-
nity cost would be incurred as a result (e.g., what product or
item was the firm unable to produce because of limited pro-
duction capacity)? Unfortunately, many, and perhaps most,
global companies think that cost and production capacity
are the only factors playing into the make-or-buy decision.
This is simply not true!

Cost and production capacity are just the two main driv-
ers behind make-or-buy choices made by global companies
when they engage in global supply chains. The decision of
whether to buy or make a product is a much more complex
and research-intensive process than the typical global firm
may expect, though. For example, how many times have we
heard, “Let’s move our production to China because we can
get the same quality for a dime-on-the-dollar cost, and that
will free up production capacity that we can use to focus on
other products”? Of course, dime-on-the-dollar cost is not
relevant because we have to take into account the costs of
quality control measures that have to be instituted, raw ma-
terials that have to be purchased far away from home, for-
eign entry requirements, multiple-party contracts,
management responsibilities for the outsourced production
operations, and so on. Ultimately, we are unlikely to end up
with a dime-on-the-dollar cost, but where do we end up and
how do we get there? In other words, what are the core ele-
ments that we should be evaluating when we are determin-
ing whether the correct decision is to make or to buy?

LO 15-4
Identify the factors that influence a
firm’s decision of whether to source
supplies from within the company or
from foreign suppliers.

Make-or-Buy Decision
The strategic decision concerning
whether to produce an item in-house
(“make”) or purchase it from an outside
supplier (“buy”).

Do You Expect a Trend in
Bringing Jobs Back from
Overseas?
The United States may be on the verge of bringing back manu-
facturing jobs from China. Outsourcing manufacturing to China
is not as cheap as it used to be. Many companies, especially in
the auto and furniture industries, moved plants overseas once
China opened its doors to free trade and foreign investment in
the last few decades. Labor was cheaper for American compa-
nies—less than $1 per hour by some estimates at the time.
Today, labor costs in China have risen dramatically, and shipping
and fuel costs have skyrocketed. As China’s economy has
expanded and as China has built new factories all across the
country, the demand for workers has risen. As a result, wages
are up as new companies compete to hire the best workers.
Experts note the fears that U.S. manufacturing is in decline are
overstated and that the United States is still a manufacturing
giant. However, both China and the United States each account
for about 20 percent global manufacturing value added. The U.S.
share of about 20 percent of global manufacturing value added
“has declined only slightly over the past three decades,” accord-
ing to the Boston Consulting Group. With these estimates in
mind, do you expect more and more outsourced jobs to be
“insourced” in the future?

Source: http://rockcenter.msnbc.msn.com/_news/2012.

434 Part Six International Business Functions

To facilitate the make-or-buy decision, we have captured the dynamics of this choice in
two figures that center on either operationally favoring a make decision or operationally
favoring a buy decision (Figures 15.3 and 15.4). As shown, the core elements in both cases
are cost and production capacity. However, the other elements differ for each of the deci-
sions and influence the choice differently. This means that we need to evaluate each deci-
sion separately, not jointly. In fact, through this process, we may end up thinking that both
a make decision and a buy decision would be acceptable and strategically logical for our
firm. Keep in mind that this simply means that we have a choice; if both choices seem
positive for your firm, choose the one that is the best strategic fit with the least opportunity
cost structure.

The elements that favor a make decision—beyond the core elements of cost and produc-
tion capacity—include quality control, proprietary technology, having control, excess capac-
ity, limited suppliers, assurance of continual supply, and industry drivers (see Figure 15.3).
So, the starting point is lower (or at least no greater) cost than what we can expect when we
outsource the production to an external party in another country (or another external party
in general). The limitation is that we must have excess production capacity or capacity that
is best used by our firm for making the product in-house.

After the cost and production capacity decisions have been explored and made (really,
after the cost and production hurdles have been overcome), the next set of decisions follows
logically from the path in Figure 15.3. For example, if quality control is important to the
global firm, cannot be relied on fully if the part is outsourced, and is at the center of the
strategic core that customers expect from the firm, then the quality control issue favors a
make decision. If there is proprietary technology involved in making the product that can-
not or should not be shared with outsourcing parties, then the decision has to be make.

The idea that limited suppliers may influence the make-or-buy choice in the direction of
the make selection is important as well. Specifically, it could be that some suppliers do not
want to work with certain companies in certain parts of the world. It could also be that a
supplier cannot, because of various restrictions on production or location or because of in-
ternational barriers, follow the production of your firm’s products to wherever you see fit to
locate your production lines.

15.3 FIGURE
Operationally Favoring a Make
Decision

Cost HavingControl

Quality
Control

Proprietary
Technology

Excess
Capacity

Limited
Suppliers

Industry
Drivers

Assurance
of

Continual
Supply

Production
Capacity

Chapter Fifteen Global Production and Supply Chain Management 435

Naturally, if the firm has excess capacity that otherwise would not be productively used,
the decision should favor a make choice to allow that excess capacity to be used for the ben-
efit of the firm in the global marketplace. Some companies also simply want to have control
over certain elements of their production processes. This affects the make-or-buy decision
in favor of the make choice.

A make decision is also favored if there is any chance that supply cannot be guaranteed
if the firm moves its production overseas. And, finally, the industry globalization drivers
may dictate that a make decision should be the choice for various trust and commitment
reasons involving your industry and the marketplace that you engage with in order to find
success.

Now, some of these elements that favor make can probably influence a buy decision as
well. Naturally, if one of the make elements is not in favor of the make decision (e.g., if there
is no excess capacity), this would suggest that the global firm should think more seriously
about a buy decision. However, again, the buy decision also involves a number of other ele-
ments that are not necessarily factors in the make decision (see Figure 15.4). As with the
make decision, after the cost and production capacity decisions have been considered and
made, the next set of decisions for the buy choice follow logically from the path in Figure
15.4. For example, if the global firm has minimal restrictions on which firms or companies
it can source raw materials and component parts from, then a buy decision is more likely
because outsourcing production also increases the likelihood that other and/or more suppli-
ers in those parts of the world will be used.

Another good reason to choose a buy scenario is if the firm lacks the needed expertise to
make a product or component part and the supplier or outsourced production choice has
that expertise. Supplier competencies can affect the decision in favor of a buy choice as well,
especially if those competencies reside closer to the production facility that you buy from
than the ones that will be available if you make the product. Small volumes would also be a
reason favoring a buy decision; cost efficiencies can seldom be achieved when only small
volumes are produced.

Inventory planning is also of critical importance. Even if your firm can make the product
equally well in terms of quality and expectations set, perhaps a better choice is to buy simply

15.4 FIGURE
Operationally Favoring a Buy
Decision

Cost InventoryPlanning

Multisource
Policy

Lack of
Expertise

Small
Volumes

Supplier
Compe-
tencies

Nonessential
Item

Brand
Preference

Production
Capacity

436 Part Six International Business Functions

in order to strategically manage inventory (which is a cost center in the global supply chain).
In certain cases, even brand preference is a reason to go with a buy decision; for example,
many computer users favor Intel microchips in their computers, so many of the large com-
puter manufacturers opt to buy chips from Intel instead of making them in-house for that
reason (this was more true in the 1990s and 2000s than it is now, but it is still a factor). And,
of course, if the item to be made is a so-called nonessential item that has little effect on the
firm’s core competencies and what the customers expect in terms of uniqueness, this is a fac-
tor in favor of a buy decision.

Global Supply Chain Functions
To this point in the chapter, we have emphasized global production, a component of the
operations management of a supply chain. Issues such as where to produce, the strategic
role of a foreign production site, and the make-or-buy decisions are the core aspects of
global production. In addition to global production, three additional supply chain func-
tions need to be developed in concert with global production. They are logistics, purchas-
ing (sourcing), and the company’s distribution strategy (i.e., marketing channels). The
latter—distribution strategy—is addressed in Chapter 16, where we discuss marketing and
R&D. Here we address logistics and purchasing. From earlier in this chapter, we know
that production and supply chain management are closely linked because a firm’s ability to
perform its production activities depends on information inputs and a timely supply of
high-quality material (raw material, component parts, and even finished products that are
used in the manufacturing of new products). Logistics and purchasing are critical func-
tions in ensuring that materials are ordered and delivered and that an appropriate level of
inventory is managed.

GLOBAL LOGISTICS From earlier in this chapter we know that logistics is the
part of the supply chain that plans, implements, and controls the effective flows and inven-
tory of raw material, component parts, and products used in manufacturing. The core ac-
tivities performed in logistics are (1) global distribution center management, (2) inventory
management, (3) packaging and materials handling, (4) transportation, and (5) reverse

logistics. Each of these core logistics is described in the
next paragraphs.

A global distribution center (or warehouse) is a facil-
ity that positions and allows customization of products for
delivery to worldwide wholesalers or retailers or directly
to consumers anywhere in the world. Distribution centers
(DCs) are used by manufacturers, importers, exporters,
wholesalers, retailers, transportation companies, and cus-
toms agencies to store products and provide a location
where customization can be facilitated. When warehous-
ing shifted from passive storage of products to strategic
assortments and processing, the term distribution center be-
came more widely used to capture this strategic and dy-
namic aspect of not only storing, but ofadding value to
products that are being warehoused or staged. A DC is at
the center of the global supply chain, specifically the order-
processing part of the order-fulfillment process. DCs are
the foundation of a global supply network because they
allow either a single location or satellite warehouses to
store quantities and assortments of products and allow for
value-added customization. They should be located strate-
gically in the global marketplace, considering the aggre-
gate total labor and transportation cost of moving
products from plants or suppliers through the distribution
center and then delivering them to customers.

LO 15-5
Understand the functions of logistics
and purchasing (sourcing) within
global supply chains.

Global Distribution Center
A facility that positions and allows
customization of products for delivery to
worldwide wholesalers or retailers, or
directly to consumers anywhere in the
world; also called a global distribution
warehouse.

How Much Relationship Building
Do You Really Want to Do?
Like manufacturers, professional service firms have also been
learning how to better manage their delivery on a global basis.
For example, some global services firms are dealing with other
global firms in a new way, using one supplier for all their ser-
vice-related needs around the world. The traditional approach
involved the development of market-specific relationships, so
the same multinational client would have a number of individual
service relationships, one in each major market for each com-
pany division. Under a global account management approach,
one relationship has a global span—and one contract. Such
supply chain practices allow for more effective relationship
management, a better sense of what the client needs, more
product extension opportunities, and better pricing and econo-
mies. But global account management also takes time, energy,
and resources. How many “global accounts” do you think would
be ideal for a global company? What is the minimum and maxi-
mum number of global account relationships a large multina-
tional corporation should have (e.g., Microsoft)?

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Chapter Fifteen Global Production and Supply Chain Management 437

Global inventory management can be viewed as the decision-making process regarding
the raw materials, work-in-process (component parts), and finished goods inventory for a
multinational corporation. The decisions include how much inventory to hold, in what form
to hold it, and where to locate it in the supply chain. Examining the largest 20,910 global
companies with headquarters in 105 countries, we find that these companies, on average
across all industries, carry 14.41 percent of their total assets in some form of inventory.22
These companies have 32.30 percent of their inventory in raw materials, 17.94 percent of
their inventory in work-in-process, and 49.76 percent of their inventory in finished goods.23
At the company level, Toyota (www.toyota.com) from Japan, one of the largest automobile
firms in the world, has 8.71 percent of its total assets in inventory, with a mix of 25.87, 13.62,
and 60.50 percent in raw materials, work-in-process, and finished vehicles, respectively. An-
other example is Sinopec (www.sinopec.com), a petroleum firm and the largest firm in
China. Sinopec has 21.46 percent of its total assets in inventory, with a mix of 36.58, 42.50,
and 20.92 percent in raw materials and component parts, work-in-process, and finished
goods, respectively. Note that Sinopec maintains a much higher percentage of its invento-
ries in work-in-process and a much lower percentage in finished goods than Toyota does.
This suggests that petroleum firms want more flexibility in deciding exactly how to formu-
late the finished product. The company’s global inventory strategy must effectively trade off
the service and economic benefits of making products in large quantities and positioning
them near customers against the risk of having too much stock or the wrong items.

Packaging comes in all shapes, sizes, forms, and uses. It can be divided into three differ-
ent types: primary, secondary, and transit. Primary packaging holds the product itself. These
are the packages brought home from the store, usually a retailer, by the end-consumer. Sec-
ondary packaging (sometimes called case-lot packaging) is designed to contain several pri-
mary packages. Bulk buying or warehouse store customers may take secondary packages
home (e.g., from Sam’s Club), but this is not the typical mode for retailers. Retailers can also
use secondary packaging as an aid when stocking shelves in the store. Transit packaging
comes into use when a number of primary and secondary packages are assembled on a pallet
or unit load for transportation. Unit-load packaging—through palletizing, shrink-wrapping,
or containerization—is the outer packaging envelope that allows for easier handling or
product transfer among international suppliers, manufacturers, distribution centers, retail-
ers, and any other intermediaries in the global supply chain.

Regardless of where the product is in the global supply chain, packaging is intended to
achieve a set of multilayered functions. These can be grouped into (1) perform, (2) protect,
and (3) inform.24 Perform refers to (1) the ability of the product in the package to handle be-
ing transported between nodes in the global supply chain, (2) the ability of the product to be
stored for typical lengths of time for a particular product category, and (3) the package pro-
viding the convenience expected by both the supply chain partners and the end-customers.
Protect refers to the package’s ability to (1) contain the products properly, (2) preserve the
products to maintain their freshness or newness, and (3) provide the necessary security and
safety to ensure that the products reach their end destination in their intended shape. Inform
refers to the package’s inclusion of (1) logical and sufficient instructions for the use of the
products inside the package, including specific requirements to satisfy local regulations,
(2)!a statement of a compelling product guarantee, and (3) information about service for the
product if and when it is needed.

Transportation refers to the movement of raw material, component parts, and finished
goods throughout the global supply chain. It typically represents the largest percentage of
any logistics budget and an even greater percentage for global companies because of the
distances involved. Global supply chains are directly or indirectly responsible for transport-
ing raw materials from their suppliers to the production facilities, work-in-process and fin-
ished goods inventories between plants and distribution centers, and finished goods from
distribution centers to customers. The primary drivers of transportation rates and the re-
sulting aggregate cost are distance, transport mode (ocean, air, or land), size of load, load
characteristics, and oil prices. As would be expected, longer distances require more fuel and
more time from vehicle operators, so transport rates increase with distance. Transport mode
influences rates because of the different technologies involved. Ocean is the least expensive

Global Inventory
Management
The decision-making process regarding
the raw materials, work-in-process
(component parts), and finished goods
inventory for a multinational corporation.

Packaging
The container that holds the product
itself. It can be divided into primary,
secondary, and transit packaging.

Transportation
the movement of inventory through the
supply chain.

438 Part Six International Business Functions

because of the size of the vehicles used and the low friction of water. Land is the next least
expensive, with rail being less expensive than motor carriers. Air is the most expensive be-
cause there is a substantial charge for defying gravity. Transportation rates are heavily in-
fluenced by economies of scale, so larger shipments are typically relatively less expensive
than smaller shipments. The characteristics of the shipment also influence transportation
rates through such factors as product density, value, perishability, potential for damage, and
other such factors. Finally, oil prices have a major impact on transportation rates because
anywhere from 10 to 40 percent of most carrier costs, depending on the mode, are related
to fuel.

Reverse logistics is the process of planning, implementing, and controlling the efficient,
cost-effective flow of raw materials, in-process inventory, finished goods, and related infor-
mation from the point of consumption to the point of origin for the purpose of recapturing
value or proper disposal. The ultimate goal is to optimize the after-market activity or make
it more efficient, thus saving money and environmental resources. Reverse logistics is criti-
cally important in global supply chains. For example, product returns cost manufacturers
and retailers more than $100 billion per year in the United States, or an average of 3.8 per-
cent in lost profits.25 Overall, manufacturers spend about 9 to 14 percent of their sales rev-
enue on returns. Even more staggering, each year, consumers in America return more than
the GDP of two-thirds of the nations in the world. Just these sample numbers suggest that
reverse logistics is an incredibly important part of the global supply chain.

GLOBAL PURCHASING As defined in the introduction to this chapter, purchas-
ing represents the part of the supply chain that involves worldwide buying of raw material,
component parts, and products used in manufacturing of the company’s products and ser-
vices. The core activities performed in purchasing include development of an appropriate
strategy for global purchasing and selecting the type of purchasing strategy best suited for
the company.

There are five strategic levels—from domestic to international to global—that can be
undertaken by a global company.26 Level I is simply companies engaging in domestic pur-
chasing activities only. Often, these companies stay close to their home base in their do-
mestic market when purchasing raw materials, component parts, and the like for their
operations (e.g., a Michigan firm purchasing raw materials, such as cherries, from another
Michigan firm). Levels II and III are both considered “international purchasing,” but of
various degrees and forms. Companies that are at level II engage in international purchas-
ing activities only as needed. This means that their approach to international purchasing is
often reactive and uncoordinated among the buying locations within the firm and/or across
the various units that make up the firm, such as strategic business units and functional
units. Companies at level III engage in international purchasing activities as part of the
firm’s overall supply chain management strategy. As such, at the level III stage, companies
begin to recognize that a well-formulated and well-executed worldwide international pur-
chasing strategy can be very effective in elevating the firm’s competitive edge in the mar-
ketplace. Levels IV and V both involve “global purchasing” to various degrees. Level IV
refers to global purchasing activities that are integrated across worldwide locations. This
involves integration and coordination of purchasing strategies across the firm’s buying lo-
cations worldwide. With level IV, we are now dealing with a sophisticated form of world-
wide purchasing. Level V involves engaging in global purchasing activities that are
integrated across worldwide locations and functional groups. Broadly, this means that the
firm integrates and coordinates the purchasing of common items, purchasing processes,
and supplier selection efforts globally, for example.

Beyond the domestic, international, and global purchasing strategies in levels I through
V, purchasing includes a number of basic choices that companies make in deciding how to
engage with markets.27 The starting point is a choice of internal purchasing versus external
purchasing—in other words, “how to purchase.” We find that roughly 35 percent of the pur-
chasing in global companies today is internal (i.e., from sources within their own company),
with 65 percent being classified as external (i.e., from sources outside of their company). The
next decision, in both internal and external purchasing, is to figure out “where to purchase”

Reverse Logistics
The process of moving inventory from the
point of consumption to the point of
origin in supply chains for the purpose of
recapturing value or proper disposal.

Chapter Fifteen Global Production and Supply Chain Management 439

(domestically or globally). This takes us ultimately to the “types of purchasing” (where and
how) and the four choices for purchasing strategy: domestic internal purchasing, global in-
ternal purchasing, domestic external purchasing, and global external purchasing.

The types of purchasing activities and strategies just discussed come with a set of generic
options for the “international arena.” But we all know that outsourcing and offshoring, along
with many by-products and other similar yet quite different options, exist in the purchasing
world today. At this stage of the text, we feel it is important to go over the outsourcing-
related terms and options that companies have, especially the following terms that are often
confusing to understand, develop strategy around, and implement: outsourcing, insourcing,
offshoring, offshore outsourcing, nearshoring, and co-sourcing (see Table 15.2).

Managing a Global Supply Chain
The potential for reducing costs through more efficient supply chain management is enor-
mous. For the typical manufacturing enterprise, material costs account for between 50 and
70 percent of revenues, depending on the industry. Even a small reduction in these costs can
have a substantial impact on profitability. According to one estimate, for a firm with reve-
nues of $1 million, a return on investment rate of 5 percent, and materials costs that are
50!percent of sales revenues, a $15,000 increase in total profits could be achieved either by
increasing sales revenues 30 percent or by reducing materials costs by 3 percent.28 In a satu-
rated market, it would be much easier to reduce materials costs by 3 percent than to increase
sales revenues by 30 percent. As such, managing global supply chains is one of the strategi-
cally most important areas for a global company. Four main areas are of concern in manag-
ing a global supply chain, including the role of just-in-time inventory, the role of information
technology, coordination in global supply chains, and interorganizational relationships in
global supply chains.

LO 15-6
Describe what is required to efficiently
manage a global supply chain.

15.2 TABLE
Outsourcing Terms and Options

Outsourcing A multinational corporation buys products or services from one of its suppliers
that produces them somewhere else, whether domestically or globally. In that
sense, it also refers to external purchasing in relation to purchasing strategy.

Insourcing A multinational corporation decides to stop outsourcing products or services
and instead starts to produce them internally; insourcing is the opposite of
outsourcing. Thus it refers to internal purchasing in the context of purchasing
strategy.

Offshoring A multinational corporation buys products or services from one of its suppliers
that produces them somewhere globally (outside the MNCs home country).
Offshoring is thus a form of global external purchasing in terms of purchasing
strategy.

Offshore outsourcing A multinational corporation buying products or services from one of its
suppliers in a country other than the one in which the product is manufactured
or the service is developed. This again is a form of global external purchasing in
terms of purchasing strategy.

Nearshoring A multinational corporation transfers business or information technology
processes to suppliers in a nearby country, often one that shares a border with
the firm’s own country. While nearshoring is not a purchasing activity per se, it
involves facilitating global external purchasing.

Co-sourcing A multinational corporation uses both its own employees from inside the firm
and an external supplier to perform certain tasks, often in concert with each
other. This applies to all four forms of purchasing strategy. It implies that the
relationship between the firm and its supplier is rather strategic in nature—
often, this involves the top suppliers in a particular product or component
category.

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440 Part Six International Business Functions

ROLE OF JUST-IN-TIME INVENTORY Pioneered by Japanese firms dur-
ing that country’s remarkable economic transformation during the 1960s and 1970s, just-in-
time inventory systems now play a major role in most manufacturing firms. The basic
philosophy behind just-in-time (JIT) inventory systems is to economize on inventory
holding costs by having materials arrive at a manufacturing plant just in time to enter the
production process and not before. The major cost savings comes from speeding up inven-
tory turnover. This reduces inventory holding costs, such as warehousing and storage costs.
It means the company can reduce the amount of working capital it needs to finance inven-
tory, freeing capital for other uses and/or lowering the total capital requirements of the en-
terprise. Other things being equal, this will boost the company’s profitability as measured by
return on capital invested. It also means the company is less likely to have excess unsold in-
ventory that it has to write off against earnings or price low to sell.

In addition to the cost benefits, JIT systems can also help firms improve product quality.
Under a JIT system, parts enter the manufacturing process immediately; they are not ware-
housed. This allows defective inputs to be spotted right away. The problem can then be
traced to the supply source and fixed before more defective parts are produced. Under a
more traditional system, warehousing parts for weeks before they are used allows many de-
fective parts to be produced before a problem is recognized.

The drawback of a JIT system is that it leaves a firm without a buffer stock of inven-
tory. Although buffer stocks are expensive to store, they can help a firm respond quickly to
increases in demand and tide a firm over shortages brought about by disruption among
suppliers. Such a disruption occurred after the September 11, 2001, attacks on the World
Trade Center and Pentagon, when the subsequent shutdown of international air travel
and shipping left many firms that relied upon globally dispersed suppliers and tightly
managed “just-in-time” supply chains without a buffer stock of inventory. A less pro-
nounced but similar situation occurred again in April 2003, when the outbreak of the
pneumonia-like SARS (severe acute respiratory syndrome) virus in China resulted in the
temporary shutdown of several plants operated by foreign companies and disrupted their
global supply chains. Similarly, in late 2004, record imports into the United States left
several major West Coast shipping ports clogged with too many ships from Asia that could
not be unloaded fast enough, which disrupted the finely tuned supply chains of several
major U.S. enterprises.29

There are ways of reducing the risks associated with a global supply chain that operates
on just-in-time principles. To reduce the risks associated with depending on one supplier for
an important input, some firms source these inputs from several suppliers located in differ-
ent countries. While this does not help in the case of an event with global ramifications,
such as September 11, 2001, it does help manage country-specific supply disruptions, which
are more common. Strategically, all global companies need to build in some degree of re-
dundancy in supply chains by having multiple options for suppliers.

ROLE OF INFORMATION TECHNOLOGY Web and cloud-based infor-
mation systems play a crucial role in modern materials management. By tracking compo-
nent parts as they make their way across the globe toward an assembly plant, information
systems enable a firm to optimize its production scheduling according to when compo-
nents are expected to arrive. By locating component parts in the supply chain precisely,
good information systems allow the firm to accelerate production when needed by pulling
key components out of the regular supply chain and having them flown to the manufac-
turing plant.

Firms now typically use some form of supply chain information system to coordinate the
flow of materials into manufacturing, through manufacturing, and out to customers. There
are a variety of options for global supply chains. Electronic data interchange (EDI) refers to
the electronic interchange of data between two or more companies. Enterprise resource
planning (ERP) is a wide-ranging business planning and control system that includes
supply chain-related subsystems (e.g., materials requirements planning, or MRP). Collabora-
tive planning, forecasting, and replenishment (CPFR) was developed to fill the interorgani-
zational connections that ERP cannot fill. Vendor management of inventory (VMI) allows

Just in Time (JIT)
Inventory logistics system designed to
deliver parts to a production process as
they are needed, not before.

Chapter Fifteen Global Production and Supply Chain Management 441

for a holistic overview of the supply chain with a single point of control for all inventory
management. A warehouse management system (WMS) often operates in concert with ERP
systems; for example, an ERP system defines material requirements, and these are transmit-
ted to a distribution center for a WMS.

Before the emergence of the Internet as a major communication medium, firms and their
suppliers normally had to purchase expensive proprietary software solutions to implement
EDI systems. The ubiquity of the Internet and the availability of web and cloud-based ap-
plications have made most of these proprietary solutions obsolete. Less expensive systems
that are much easier to install and manage now dominate the market for global supply chain
management software. These systems have transformed the management of globally dis-
persed supply chains, allowing even small firms to achieve a much better balance between
supply and demand, thereby reducing the inventory in their systems and reaping the associ-
ated economic benefits. Importantly, with most firms now using these systems, those that do
not will find themselves at a competitive disadvantage. This has implications for small and
medium-sized companies that may not always have the resources to implement the most
sophisticated supply chain information systems.

COORDINATION IN GLOBAL SUPPLY CHAINS Consider how to turn
an aircraft, and think in terms of coordination and leverage points. That is, aircraft are typi-
cally steered using an integrated system of ailerons on the wings and the rudder at the tail of
the aircraft. In comparison to the aircraft, the ailerons and the rudder seem very small.
However, leverage allows the coordinated effort of the ailerons and the rudder to turn the
aircraft. In other words, putting the right combination of a little leverage on the right places
together with a coordinated effort leads to incredible maneuvering ability for the plane.
Global supply chains are the same. Integration and coordination are critically important.
Global supply chain coordination refers to shared decision-making opportunities and op-
erational collaboration of key global supply chain activities.

Shared decision making—such as joint consideration of replenishment, inventory hold-
ing costs, collaborative planning, costs of different processes, frequency of orders, batch
size, and product development—creates a more integrated, coherent, efficient, and effec-
tive global supply chain. This includes shared decision making by supply chain members
both inside an organization (e.g., logistics, purchasing, operations, and marketing channels
employees) and across organizations (e.g., raw materials producers, transportation compa-
nies, manufacturers, wholesalers, retailers). Shared decision making is not joint decision
making; it is decision making involving joint considerations. Shared decision making helps
in resolving potential conflicts among global supply chain members and fosters a culture of
coordination and integration. In most supply chains, certain parties are more influential,
and shared decision making, at a minimum, should include the critically important chain
members.

To achieve operational integration and collaboration within a global supply chain, six
operational objectives should be addressed: responsiveness, variance reduction, inventory
reduction, shipment consolidation, quality, and life-cycle support.30 Responsiveness refers to a
global firm’s ability to satisfy customers’ requirements across global supply chain functions
in a timely manner. Variance reduction refers to integrating a control system across global
supply chain functions to eliminate global supply chain disruptions. Inventory reduction refers
to integrating an inventory system, controlling asset commitment, and turning velocity
across global supply chain functions. Shipment consolidation refers to using various programs
to combine small shipments and provide timely, consolidated movement. This includes mul-
tiunit coordination across global supply chain functions. Quality refers to integrating a sys-
tem so that it achieves zero defects throughout global supply chains. Finally, life-cycle support
refers to integrating the activities of reverse logistics, recycling, after-market service, prod-
uct recall, and product disposal across global supply chain functions.

INTERORGANIZATIONAL RELATIONSHIPS Interorganizational rela-
tionships have been studied and talked about in various contexts for decades. The two keys
are trust and commitment. If we always had 100 percent trust within relationships and

Global Supply Chain
Coordination
The shared decision-making opportunities
and operational collaboration of key global
supply chain activities.

442 Part Six International Business Functions

100!percent commitment to them, most global supply chains would ultimately be efficient
and effective. But we don’t! However, by looking at the building blocks for global supply
chains, we would also assume that not all relationships are equally valuable and that they
should not be treated as if they were. Two examples centered on upstream/inbound and
downstream/outbound supply chain activities can effectively be used to illustrate this
point. Figure 15.5 focuses on the upstream (or inbound) supply chain relationships, and
Figure 15.6 focuses on the downstream (or outbound) supply chain relationships.

For the upstream/inbound portion of the global supply chain, the three logical scenarios
of interacting organizations are labeled as vendors, suppliers, and partners. Each scenario is
based on the degree of coordination, integration, and transactional versus relationship em-
phasis that the firm should adopt in partnering with other entities in the global supply chain.
For instance, a firm uses vendors to obtain raw materials and component parts through a
transactional relationship that can change easily. A given firm may use suppliers to obtain
raw materials and parts and maintain a relationship with those suppliers based on experience
and performance. Another firm may engage with partners to obtain raw materials and parts,
maintaining a relationship based on trust and commitment.

For the downstream/outbound portion of the global supply chain, the three logical sce-
narios of interacting organizations are labeled as buyers, customers, and clients. As with the
upstream/inbound examples, each downstream/outbound scenario is based on the degree of
coordination, integration, and transactional versus relationship focus that the firm should
adopt in partnering with other entities in the global supply chain. One firm may sell prod-
ucts and parts to buyers through a transactional relationship that can change easily. Another
firm may sell products and parts to customers and maintain a relationship that is based on
experience and performance. Yet another firm may sell products and parts to clients and
maintain a relationship that is based on trust and commitment.

Having reviewed the three scenarios for the upstream/inbound and downstream/out-
bound portions of the global supply chain, let’s look at the emphasis a global company
should place on the relationships with each entity: the benefits to be expected, favorable
points of distinction, and resonating focus in the relationship.31 First, however, some
basics on value are appropriate. Value between nodes and actors in global supply chains is
a function of the cost (money and nonmoney resources) given up in return for the quality

15.5 FIGURE
Upstream/Inbound
Relationships Vendor

Low Coordination
Low Integration
Transactional Focus

High Coordination
High Integration

Relationship Focus

Supplier Partner

15.6 FIGURE
Downstream/Outbound
Relationships Buyer

Low Coordination
Low Integration
Transactional Focus
High Coordination
High Integration
Relationship Focus

Customer Client

Chapter Fifteen Global Production and Supply Chain Management 443

(products, services, information, trust, and commitment) received. Basically, greater value
is achieved if the quality is greater while the cost remains the same or is reduced, or when
the cost is reduced and the quality remains constant.

A global company should allocate 20 percent of its efforts to the vendor category, 30!per-
cent to the supplier category, and 50 percent to the partner category in the upstream/
inbound portion of the global supply chain. Likewise, a global company should allocate
20! percent of its efforts to the buyer category, 30 percent to the customer category, and
50!percent to the client category in the downstream/outbound portion of the chain. In the
vendor (upstream) and buyer (downstream) portions of the supply chain, the benefits that
can be expected include those typical of a transactional exchange (costs equal to quality for
the goods bought, but not necessarily the best goods in the marketplace). In the supplier
(upstream) and customer (downstream) stages, the expectation is that the firm will receive
all the favorable points that the raw materials, component parts, and/or products have rela-
tive to the next best alternative in the global marketplace. This takes into account the ideas
that the costs are equal to quality for the goods bought and that the goods are among the
best goods in the marketplace. Finally, in the partner (upstream) and client (downstream)
portions of the supply chain, the benefits that the firm can expect to receive include the one
or two points of difference for the raw materials, component parts, and/or products whose
improvements will deliver the greatest value to the customer for the foreseeable future
(quality greater than cost).

production, p. 421
supply chain management, p. 421
purchasing, p. 422
logistics, p. 422
upstream supply chain, p. 422
downstream supply chain, p. 422
total quality management (TQM), p. 423
Six Sigma, p. 423
ISO 9000, p. 424
minimum efficient scale, p. 426

flexible manufacturing technology, p. 427
lean production, p. 427
mass customization, p. 427
flexible machine cells, p. 428
global learning, p. 430
offshore factory, p. 430
source factory, p. 430
server factory, p. 431
contributor factory, p. 431
outpost factory, p. 431

lead factory, p. 431
make-or-buy decision, p. 433
global distribution center, p. 436
global inventory management, p. 437
packaging, p. 437
transportation, p. 437
reverse logistics, p. 438
just in time (JIT), p. 440
global supply chain coordination, p. 441

Key Terms

Summary

This chapter explained how global production and supply
chain management can improve the competitive position
of an international business by lowering the total costs of
value creation and by performing value creation activities
in such ways that customer service is enhanced and value
added is maximized. We looked closely at five issues cen-
tral to global production and supply chain management:
where to produce, the strategic role of foreign production
sites, what to make and what to buy, global supply chain
functions, and managing a global supply chain. The chap-
ter made the following points:

1. The choice of an optimal production location must
consider country factors, technological factors, and
production factors.

2. Country factors include the influence of factor costs,
political economy, and national culture on production
costs, along with the presence of location
externalities.

3. Technological factors 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.

4. Production factors include product features, locating
production facilities, and strategic roles for
production facilities.

5. Location strategies either concentrate or decentralize
manufacturing. The choice should be made in light of

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444 Part Six International Business Functions

country, technological, and production factors. All
location decisions involve trade-offs.

6. Foreign factories can improve their capabilities over
time, and this can be of immense strategic benefit to
the firm. Managers need to view foreign factories as
potential centers of excellence and encourage and
foster attempts by local managers to upgrade factory
capabilities.

7. An essential issue in many international businesses is
determining which component parts should be
manufactured in-house and which should be
outsourced to independent suppliers. Both making
and buying component parts are primarily based on
cost considerations and production capacity
constraints, but each decision (make or buy) is also
influenced by several different factors.

8. The core global supply chain functions are logistics,
purchasing (sourcing), production (and operations
management), and marketing channels.

9. Logistics is the part of the supply chain that plans,
implements, and controls the effective flows and
inventory of raw material, component parts, and
products used in manufacturing. The core activities
performed in logistics are to manage global distribution
centers, inventory management, packaging and
materials handling, transportation, and reverse logistics.

10. Purchasing represents the part of the supply chain
that involves worldwide buying of raw material,
component parts, and products used in manufacturing
of the company’s products and services. The core
activities performed in purchasing include

development of an appropriate strategy for global
purchasing and selecting the type of purchasing
strategy best suited for the company.

11. Managing a supply chain involves orchestrating
effective just-in-time inventory systems, using
information technology, coordination among
functions and entities in the chain, and developing
interorganizational relationships.

12. Just-in-time systems generate major cost savings by
reducing warehousing and inventory holding costs
and by reducing the need to write off excess
inventory. In addition, JIT systems help the firm spot
defective parts and remove them from the
manufacturing process quickly, thereby improving
product quality.

13. Information technology, particularly Internet-based
electronic data interchange, plays a major role in
materials management. EDI facilitates the tracking of
inputs, allows the firm to optimize its production
schedule, lets the firm and its suppliers communicate
in real time, and eliminates the flow of paperwork
between a firm and its suppliers.

14. Global supply chain coordination refers to shared
decision-making opportunities and operational
collaboration of key global supply chain activities.

15. The depth and involvement in interorganizational
relationships in global supply chains should be based
on the degree of coordination, integration, and
transactional versus relationship emphasis that the
firm should adopt in partnering with other entities in
the global supply chain.

Critical Thinking and Discussion Questions

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 about $500 million to
construct and requires a highly skilled workforce. The
total value of the world market for this product over
the next 10 years is estimated to be between $10 billion
and $15 billion. The tariffs prevailing in this industry
are currently low. What kind of location(s) should the
firm favor for its plant(s)?

2. A chemical firm is considering how best to supply the
world market for sulfuric acid. A manufacturing plant
costs about $20 million to construct and requires a
moderately skilled workforce. The total value of the
world market for this product over the next 10 years is
estimated to be between $20 billion and $30 billion.
The tariffs prevailing in this industry are moderate.
What kind of location(s) should the firm seek for its
plant(s)?

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 nonrecoverable
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 manufacturing to an independent
supplier? Which option would you recommend? Why?

4. Reread the Management Focus on Philips in China
and 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?

5. Explain how the global supply chain functions of
(a)!logistics and (b) purchasing can be used to
strategically leverage the global supply chains for a
manufacturing company producing mobile phones.

6. What type of interorganizational relationship should a
global company consider in the (a) inbound portion of

its supply chains if the goal is to buy commodity-
oriented component parts for its own production and
(b) outbound portion of its supply chains if the goal is
to establish a strong partnership in reaching
end-customers?

Use the globalEDGE website (globaledge.msu.edu) to
complete the following exercises:

1. The globalization of production makes many people
aware of the differences in manufacturing costs
worldwide. The U.S. Department of Labor’s Bureau of
International Labor Affairs publishes the Chartbook of
International Labor Comparisons. Locate the latest edition
of this report, and identify the hourly compensation
costs for manufacturing workers in China, Brazil,
Mexico, Turkey, Germany, and the United States.

2. The World Bank’s Logistics Performance Index (LPI)
assesses the trade logistics environment and
performance of countries. Locate the most recent LPI
ranking. What components for each country are
examined to construct the index? Identify the top 10
logistics performers. Prepare an executive summary
highlighting the key findings from the LPI. How are
these findings helpful for companies trying to build a
competitive supply chain network?

Research Task http://globalEDGE.msu.edu

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David Beckham, Freja Beha, Beyoncé, Gisele Bündchen, Georgia May Jag-
ger, Miranda Kerr, Madonna, Vanessa Paradis, Katy Perry, Lana Del Rey,
Rihanna, Anja Rubik, and so many more. Yes, it sounds like a list of celebri-
ties and they are! These celebrities represent just a partial list of really
well-known people around the world who have worked with H&M (do you
recognize all of them?). But, let’s move on from the “name dropping” to
Hennes & Mauritz, or H&M as it is more commonly known. H&M is a Swed-
ish multinational retail-clothing giant known for its fashion clothing for
women, men, teenagers, and children. H&M has effectively used superstar
celebrities like David Beckham, Beyoncé, and Gisele Bündchen for years to
carry their advertising message worldwide. Behind the scenes, H&M’s
global supply chains are equally well orchestrated and are as high pow-
ered as its advertising campaigns.

H&M Hennes & Mauritz AB is now the full name of the company (it
started simply as “Hennes” in 1947 in a small Swedish town called
Västerås). The idea for the company emerged when, in 1946, Erling Pers-
son, the company’s founder, came up with the idea of offering fashionable
clothing at relatively low prices while he was on a business trip to the
United States. At that time, Erling Persson decided to focus on women’s
clothing only, and “Hennes,” which means “her” or “hers” in Swedish, was
started. A couple of decades later, in 1968, Hennes acquired the building
and inventory of hunting equipment retailer Mauritz Widforss. A supply of
men’s clothing was also a part of the inventory. This resulted in menswear
being included in the company’s collection—and gave birth to Hennes &
Maurits (H&M). H&M now has some 3,200 stores in 54 countries and ap-
proximately 116,000 employees. It is the second largest clothing retailer in

the world after Spain-based Inditex (parent company of ZARA) and ahead
of U.S.-based GAP Inc.

H&M Hennes & Mauritz AB comprises six different brands, although the
H&M brand is the most recognizable worldwide. The other brands are COS,
Monki, Weekday, Cheap Monday, and & Other Stories. H&M designs sus-
tainable fashion for all people at relatively modest prices and sells its prod-
ucts in 54 countries and online in an additional 10 markets. COS explores
the concept of style over fashion and sells its products in stores and online
in 38 countries. Monki is promoted as a fashion experience and is offered

H&M: The Retail-Clothing Giant

Chapter Fifteen Global Production and Supply Chain Management 445

Pedestrians walk past a H&M store in Singapore.

446 Part Six International Business Functions

in 30 markets in stores and online. Weekday is a jeans-focused fashion
destination with sales in 25 markets. Cheap Monday combines “influences
from street fashion and subculture with a catwalk vibe” and is offered in
some 20 markets. The last brand, called “& Other Stories,” was launched
in 2013 and focuses on personal expression and styling, with availability in
17 markets. The collection of these brands, driven by the H&M collection
and its footprint in 64 countries, presents a unique global supply chain
challenge for the company.

The collections of clothing are created by a team of 160 in-house de-
signers and 100 pattern makers. The design and pattern team is large and
diverse, representing different age groups and nationalities. H&M Hennes
& Mauritz AB’s (H&M from now on) design process is about “striking the
right balance between fashion, quality and the best price . . . and it always
involves sustainability awareness.” H&M does not own its own factories
but instead works with around 900 independent suppliers to implement
the team’s designs into reality. These independent suppliers are mostly
located in Europe and Asia. They manufacture all of H&M’s products, and
they also generally source fabrics and other components needed to create
the fashion statements we have come to know from the H&M brands.
Some 80 people in the H&M organization are dedicated to constantly audit
the working conditions at the factories of suppliers, including safety and
quality testing and ensuring that chemicals requirements are met.

Within the global supply chain infrastructure, one key aspect of H&M is
the ordering of each product. Specifically, ordering each product at the
optimal moment is an important part of H&M achieving the right balance
among price, cycle time, and quality. To realize the effectiveness needed to
ultimately sell fashion-oriented clothing at affordable prices, H&M works
closely with long-term partners and invests significant resources into the
sustainability of the work needed in its supply chains. In these areas, H&M
strives to promote lasting improvements in working conditions and envi-
ronmental impact throughout the footprint that it makes worldwide.

Through its 900 suppliers, the company is connected to some 1,900 facto-
ries and about 1.6 million workers.

Sources: H&M website, http://hm.com, accessed April 12, 2014; L. Siegle, “Is H&M
The New Home of Ethical Fashion?” The Observer, April 7, 2012; G. Petro, “The
Future of Fashion Retailing—The H&M Approach,” Forbes, November 5, 2012; K.
Stock, “H&M’s New Store Blitz Moves Faster Than Its Digital Expansion,”
Bloomberg Businessweek, March 17, 2014; and M. Kerppola, R. Moody, L. Zheng,
and A. Liu, “H&M’s Global Supply Chain Management Sustainability: Factories and
Fast Fashion,” GlobaLens, a division of the William Davidson Institute at the
University of Michigan, February 8, 2014.

CASE DISCUSSION QUESTIONS
1. Does it surprise you that the second largest clothing retailer is only

selling in stores in 54 countries plus an additional 10 countries
online? Why do you think it is not covering more of the world’s
countries?

2. H&M does not own any of the factories that produce its clothes.
Instead, it relies on some 1,900 factories and 900 suppliers to create
what its team designed. These factories and suppliers are mostly in
Europe and Asia. How can H&M ensure that its customers receive the
quality expected in the clothing?

3. H&M stresses sustainability in its promotional campaigns. How can it
ensure that the working conditions are appropriate for the 1.6 million
people that serve in its supplier network? Is it even H&M’s role to
ensure that the working conditions and environmental impact are
great in every market it engages in?

4. If you worked for H&M, what would you suggest that it focus on to
become even larger than it is now? Should it have its own factories?
Should it expand to more than the 64 countries (54 with stores and
10!online) that it is in now? Should it control more of the global supply
chains?

Endnotes

Note: Elements of the sections on Strategic Roles for Production Facili-
ties; Make-or-Buy Decisions; Global Supply Chain Functions; Coordi-
nation in Global Supply Chains; and Interorganizational Relationships
are drawn from Tomas Hult, David Closs, and David Frayer (2014),
Global Supply Chain Management, New York: McGraw Hill.

1. T. Hult, D. Closs, and D. Frayer, Global Supply Chain Manage-
ment: Leveraging Processes, Measurements, and Tools for Strategic
Corporate Advantage (New York: McGraw-Hill Professional,
2014).

2. D. A. Garvin, “What Does Product Quality Really Mean,”
Sloan Management Review 26 (Fall 1984), pp. 25–44.

3. See the articles published in the special issue of the Academy
of Management Review on Total Quality Management 19, no. 3
(1994). The following article provides a good overview of
many of the issues involved from an academic perspective:
J.! W. Dean and D. E. Bowen, “Management Theory and
Total Quality,” Academy of Management Review 19 (1994),
pp.!392–418. Also see T. C. Powell, “Total Quality Manage-
ment as Competitive Advantage,” Strategic Management Jour-
nal 16 (1995), pp. 15–37; and S. B. Han et al., “The Impact of

ISO 9000 on TQM and Business Performance,” Journal of
Business and Economic Studies 13, no. 2 (2007), pp. 1–25.

4. For general background information, see “How to Build
Quality,” The Economist, September 23, 1989, pp. 91–92; A.
Gabor, The Man Who Discovered Quality (New York: Penguin,
1990); P. B. Crosby, Quality Is Free (New York: Mentor, 1980);
and M. Elliot et al., “A Quality World, a Quality Life,” Indus-
trial Engineer, January 2003, pp. 26–33.

5. G. T. Lucier and S. Seshadri, “GE Takes Six Sigma beyond
the Bottom Line,” Strategic Finance, May 2001, pp. 40–46;
and U. D. Kumar et al., “On the Optimal Selection of
Process Alternatives in a Six Sigma Implementation,” Inter-
national Journal of Production Economics 111, no. 2 (2008),
pp. 456–70.

6. M. Saunders, “U.S. Firms Doing Business in Europe Have
Options in Registering for ISO 9000 Quality Standards,”
Business America, June 14, 1993, p. 7; and Han et al., “The
Impact of ISO 9000.”

7. G. Stalk and T. M. Hout, Competing against Time (New York:
Free Press, 1990).

Chapter Fifteen Global Production and Supply Chain Management 447

8. N. Tokatli, “Global Sourcing: Insights from the Global Cloth-
ing Industry—The Case of Zara, a Fast Fashion Retailer,”
Journal of Economic Geography 8, no. 1 (2008), pp. 21–39.

9. Diana Farrell, “Beyond Offshoring,” Harvard Business Review,
December 2004, pp. 1–8; and M. A. Cohen and H. L. Lee,
“Resource Deployment Analysis of Global Manufacturing
and Distribution Networks,” Journal of Manufacturing and
Operations Management 2 (1989), pp. 81–104.

10. P. Krugman, “Increasing Returns and Economic Geography,”
Journal of Political Economy 99, no. 3 (1991), pp. 483–99; J. M.
Shaver and F. Flyer, “Agglomeration Economies, Firm Het-
erogeneity, and Foreign Direct Investment in the United
States,” Strategic Management Journal 21 (2000), pp. 1175–93;
and R. E. Baldwin and T. Okubo, “Heterogeneous Firms,
Agglomeration Economies, and Economic Geography,” Jour-
nal of Economic Geography 6, no. 3 (2006), pp. 323–50.

11. For a review of the technical arguments, see D. A. Hay and D.
J. Morris, Industrial Economics: Theory and Evidence (Oxford,
UK: Oxford University Press, 1979). See also C. W. L. Hill
and G. R. Jones, Strategic Management: An Integrated Approach
(Boston: Houghton Mifflin, 2004).

12. See P. Nemetz and L. Fry, “Flexible Manufacturing Organi-
zations: Implications for Strategy Formulation,” Academy of
Management Review 13 (1988), pp. 627–38; N. Greenwood,
Implementing Flexible Manufacturing Systems (New York:
Halstead Press, 1986); J. P. Womack, D. T. Jones, and D.
Roos, The Machine That Changed the World (New York: Raw-
son Associates, 1990); and R. Parthasarthy and S. P. Seith,
“The Impact of Flexible Automation on Business Strategy
and Organizational Structure,” Academy of Management
Review 17 (1992), pp. 86–111.

13. B. J. Pine, Mass Customization: The New Frontier in Business
Competition (Boston: Harvard Business School Press, 1993);
S. Kotha, “Mass Customization: Implementing the Emerging
Paradigm for Competitive Advantage,” Strategic Management
Journal 16 (1995), pp. 21–42; J. H. Gilmore and B. J. Pine II,
“The Four Faces of Mass Customization,” Harvard Business
Review, January–February 1997, pp. 91–101; and M. Zerenler
and D. Ozilhan, “Mass Customization Manufacturing: The
Drivers and Concepts,” Journal of American Academy of Busi-
ness 12, no. 1 (2007), pp. 230–62.

14. “Toyota Motor Corporation Captures Ten Segment Awards,”
J. D. Power press release, March 19, 2009, http://business-
center.jdpower.com/news/pressrelease.aspx?ID52009043.

15. M. A. Cusumano, The Japanese Automobile Industry
(Cambridge, MA: Harvard University Press, 1989); T. Ohno,

Toyota Production System (Cambridge, MA: Productivity Press,
1990); and Womack, Jones, and Roos, The Machine That
Changed the World.

16. P. Waurzyniak, “Ford’s Flexible Push,” Manufacturing Engi-
neering, September 2003, pp. 47–50.

17. Hult, Closs, and Frayer, Global Supply Chain Management.

18. F. Kasra, “Making the Most of Foreign Factories,” in World
View, ed. J. E. Garten (Boston: Harvard Business School
Press, 2000).

19. “The Boomerang Effect,” The Economist, April 21, 2012; and
Charles Fishman, “The Insourcing Boom,” The Atlantic,
December 2012.

20. This anecdote was told to the author by a Microsoft manager
while the author was visiting Microsoft facilities in Hyderabad,
India.

21. Interview by author. The manager was a former executive
MBA student of the author.

22. Hult, Closs, and Frayer, Global Supply Chain Management.

23. Ibid.

24. D. A. Beeton, Technology Roadmapping in the Packaging Sector
(Cambridge, UK: Institute for Manufacturing, University of
Cambridge, 2004).

25. J. A. Peterson and V. Kumar, “Can Product Returns Make
You Money?” MIT Sloan Management Review 51, no. 3 (2013),
pp. 85–89.

26. Hult, Closs, and Frayer, Global Supply Chain Management; R.
J. Trent and R. M. Monczka, “Achieving Excellence in Global
Sourcing,” MIT Sloan Management Review 47, no. 1 (2005),
pp. 24–32.

27. M. Kotabe and K. Helsen, Global Marketing Management
(Hoboken, NJ: John Wiley & Sons, 2010).

28. H. F. Busch, “Integrated Materials Management,” IJPD &
MM 18 (1990), pp. 28–39.

29. T. Aeppel, “Manufacturers Cope with the Costs of Strained
Global Supply Lines,” The Wall Street Journal, December 8,
2004, p. A1.

30. D. J. Bowersox, D. J. Closs, M. B. Cooper, and J. C. Bowersox,
Supply Chain Logistics Management (New York: McGraw-Hill
Companies, 2012).

31. J. C. Anderson, J. A. Narus, and W. van Rossum (2006), “Cus-
tomer Value Propositions in Business Markets,” Harvard
Business Review, March, pp. 1–10.