Deck 15: Global Production, Outsourcing, and Logistics

Question 1

What are the implications of upgraded skills for strategic decisions about where a company should locate value creation activities?

Answer 1

Not answer

Question 2

What technological factors influence the location of production?

Answer 2

The main technological factors to be considered when deciding on the location of production are:
1) Costs should be fixed : In some industries, like the semiconductor industry, the fixed costs of setting up a production unit are very high. They can be in excess of $5 billion in the case of the semi-conductor industry. Here servicing the entire market from a single location, or at that most a couple of locations is an evident choice.
2) Efficient Scale should be minimum : Conventional wisdom dictates that with economies of scale the per unit cost declines with the increase in numbers. This is due to the amortization of the fixed cost over a larger number of units as well as the specialization of the employee tasks. However there comes a limit beyond which there are hardly any gains. This level when the economies are no longer available is called the minimum efficient scale.
3) Manufacturing and Mass Customization should not be rigid : The flexible manufacturing technology or lean manufacturing tends to overturn the theory of economies of scale. The deficiencies of the theory of economies of scale are that it believes in mass standardization and long production runs. These are not always practicable due to the demands of the market. Hence, the evolution of this technology.
Therefore, this approach permits the firm to manufacture a greater variety of products at a unit cost that was earlier associated only with mass manufacturing.

Question 3

The Rise of the Indian Automobile Industry
India is well on its way to becoming a small car manufacturing hub for some of the world's largest automobile companies. Between 2004 and 2011, automobile exports from India jumped from 50,000 to 450,000 per year. Despite a global economic slowdown, exports are predicted to increase, reaching 720,000 vehicles a year by 2016. The leading Indian exporter is the Korean company Hyundai, which committed early to the Indian market. Hyundai began production in India in 1998, when consumers were only purchasing 300,000 cars a year, despite the country's population of almost 1 billion people (in 2011, more than 3 million cars were sold in India). Hyundai invested in a plant in the southern city of Chennai with the capacity to turn out 100,000 cheap small cars a year. It had to train most of the workers from scratch, often giving them two years of on-the-job training before hiring them full-time. Soon, Hyundai's early investments were paying off as India's emerging middle class snapped up its cars. Still, the company had excess capacity, so it turned its attention to exports.
By 2004, Hyundai was the country's largest automobile exporter, shipping 70,000 cars a year overseas. Things have only improved for Hyundai since then. By 2008, Hyundai was making 500,000 cars a year in India and exporting more than a third of them. Its smallest cars, the i10, are now produced only in India and are shipped mainly to Europe. In 2005, Hyundai decided to invest around a billion dollars in a second Chennai plant. The plant, which opened in 2010, boosted its Indian output to 650,000 vehicles. Some 250,000 were exported in 2010, making Hyundai the largest exporter of manufactured goods in India. In addition to Europe, Hyundai is now considering selling its Indian-made cars in the United States.
Hyundai's success has not gone unnoticed. Among other automakers, Suzuki and Nissan have also been investing aggressively in Indian factories. Suzuki exported about 50,000 cars from India in 2007 and increased that to around 200,000 in 2010. Nissan also has big plans for India. It has invested some $1.1 billion in a new factory close to Hyundai's in Chennai. Completed in 2010, the factory has the capacity to make some 400,000 cars a year, about half of which will be exported. Ford, BMW, GM, and Toyota are also building, or planning to build, cars in India. A notable local competitor, Tata Motors, launched a lowcost "people's car," priced at $2,500, for the Indian market in 2009.
For all of these companies, India has several attractions. For one thing, the rapidly developing country has a potentially large domestic market. Also, labor costs are low compared with many other nations. Nissan, for example, notes that wage rates in India will be one-tenth of those in its Japanese factories. As Hyundai has shown, productivity is high and Indian workers can produce quality automobiles. Hyundai's executives claim that its Indian cars are of comparable quality to those produced in Korea. Nissan's goal is to use the same highly efficient flexible manufacturing processes in India as it uses in Japan. Nissan plans to send Indian workers to its Japanese factories for training on manufacturing processes and quality control.
India produces a large number of engineers every year, providing the professional skill base for designing cars and managing complex manufacturing facilities. Nissan intends to draw on this talent to design a low-cost small car to compete with Tata's "people's car." According to Nissan executives, the great advantage of Indian's engineers is that they are less likely to have the preconceptions of automobile engineers in developed nations, are more likely to "think outside of the box" and thus may be better equipped to handle the challenges of designing an ultra-low-cost small car.
Establishing manufacturing facilities in India does have problems, however. Nissan executives note that basic infrastructure is still lacking-roads are poor and often clogged with everything from taxis and motorbikes to bullocks and carts-making the Japanese practice of just-in-time delivery hard to implement. It is also proving challenging to find local parts suppliers that can attain the same high-quality standards as those Nissan is used to elsewhere in the world. Nissan's strategy has been to work with promising local companies, helping them to raise their standards. For example, under the guidance of teams of engineers from Nissan, the Indian parts supplier Capro, which makes body panels, has built a new factory near Nissan's Chennai facility, using the latest Japanese equipment. Workers there have also been trained in the Japanese practice of kaizen, or continuous process improvement.
Observers see the potential for Chennai to develop into the Detroit of India, with a cluster of automobile companies and parts suppliers working in the region producing high-quality, low-cost small cars that will not only sell well in the rapidly expanding Indian market, but could also sell well worldwide.
What are the attractions of India as a base for producing automobiles both for domestic sale and for export to other nations?

Answer 3

A country like India has all the factor endowments for a successful automobile operation.
The reasons are as following:
1) A large and upward mobile middle class. Hence, an expanding domestic market.
2) It is well situated between the Far East, Europe, Middle East and Africa to have a logistical advantage in those markets.
3) It has a large pool of well-educated automobile engineers.
4) It has a low cost work-force that can easily be trained.
5) It has a network of ancillary companies to support the automobile manufacture.
6) It has a FDI friendly policy for this sector.
These factors make India a good place for locating an automobile manufacturing unit. Most Japanese manufacturers and some US and European manufacturers have already set up their operations in India.

Question 4

The Rise of the Indian Automobile Industry
India is well on its way to becoming a small car manufacturing hub for some of the world's largest automobile companies. Between 2004 and 2011, automobile exports from India jumped from 50,000 to 450,000 per year. Despite a global economic slowdown, exports are predicted to increase, reaching 720,000 vehicles a year by 2016. The leading Indian exporter is the Korean company Hyundai, which committed early to the Indian market. Hyundai began production in India in 1998, when consumers were only purchasing 300,000 cars a year, despite the country's population of almost 1 billion people (in 2011, more than 3 million cars were sold in India). Hyundai invested in a plant in the southern city of Chennai with the capacity to turn out 100,000 cheap small cars a year. It had to train most of the workers from scratch, often giving them two years of on-the-job training before hiring them full-time. Soon, Hyundai's early investments were paying off as India's emerging middle class snapped up its cars. Still, the company had excess capacity, so it turned its attention to exports.
By 2004, Hyundai was the country's largest automobile exporter, shipping 70,000 cars a year overseas. Things have only improved for Hyundai since then. By 2008, Hyundai was making 500,000 cars a year in India and exporting more than a third of them. Its smallest cars, the i10, are now produced only in India and are shipped mainly to Europe. In 2005, Hyundai decided to invest around a billion dollars in a second Chennai plant. The plant, which opened in 2010, boosted its Indian output to 650,000 vehicles. Some 250,000 were exported in 2010, making Hyundai the largest exporter of manufactured goods in India. In addition to Europe, Hyundai is now considering selling its Indian-made cars in the United States.
Hyundai's success has not gone unnoticed. Among other automakers, Suzuki and Nissan have also been investing aggressively in Indian factories. Suzuki exported about 50,000 cars from India in 2007 and increased that to around 200,000 in 2010. Nissan also has big plans for India. It has invested some $1.1 billion in a new factory close to Hyundai's in Chennai. Completed in 2010, the factory has the capacity to make some 400,000 cars a year, about half of which will be exported. Ford, BMW, GM, and Toyota are also building, or planning to build, cars in India. A notable local competitor, Tata Motors, launched a lowcost "people's car," priced at $2,500, for the Indian market in 2009.
For all of these companies, India has several attractions. For one thing, the rapidly developing country has a potentially large domestic market. Also, labor costs are low compared with many other nations. Nissan, for example, notes that wage rates in India will be one-tenth of those in its Japanese factories. As Hyundai has shown, productivity is high and Indian workers can produce quality automobiles. Hyundai's executives claim that its Indian cars are of comparable quality to those produced in Korea. Nissan's goal is to use the same highly efficient flexible manufacturing processes in India as it uses in Japan. Nissan plans to send Indian workers to its Japanese factories for training on manufacturing processes and quality control.
India produces a large number of engineers every year, providing the professional skill base for designing cars and managing complex manufacturing facilities. Nissan intends to draw on this talent to design a low-cost small car to compete with Tata's "people's car." According to Nissan executives, the great advantage of Indian's engineers is that they are less likely to have the preconceptions of automobile engineers in developed nations, are more likely to "think outside of the box" and thus may be better equipped to handle the challenges of designing an ultra-low-cost small car.
Establishing manufacturing facilities in India does have problems, however. Nissan executives note that basic infrastructure is still lacking-roads are poor and often clogged with everything from taxis and motorbikes to bullocks and carts-making the Japanese practice of just-in-time delivery hard to implement. It is also proving challenging to find local parts suppliers that can attain the same high-quality standards as those Nissan is used to elsewhere in the world. Nissan's strategy has been to work with promising local companies, helping them to raise their standards. For example, under the guidance of teams of engineers from Nissan, the Indian parts supplier Capro, which makes body panels, has built a new factory near Nissan's Chennai facility, using the latest Japanese equipment. Workers there have also been trained in the Japanese practice of kaizen, or continuous process improvement.
Observers see the potential for Chennai to develop into the Detroit of India, with a cluster of automobile companies and parts suppliers working in the region producing high-quality, low-cost small cars that will not only sell well in the rapidly expanding Indian market, but could also sell well worldwide.
What are the drawbacks of basing manufacturing in a country such as India? What other locations might be attractive?

Question 5

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. Should the firm adopt a concentrated or decentralized manufacturing strategy? What kind of location(s) should the firm favor for its plant(s)?

Question 6

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?

Question 7

What are the benefits and risks associated with just-in-time inventory systems for an international business?

Question 8

Under what circumstances might it make sense to outsource production to a foreign entity?

Question 9

Describe the advantages of making all or part of a product in-house.

Question 10

How do product factors influence the location of production?

Question 11

Global Production, Outsourcing, and Logistics
Use the globalEDGE Resource Desk (http://globaledge.msu.edu/Reference-Desk) to complete the following exercises:
You work for a company whose manufacturing operations require a highly skilled labor force. Some executives have recently decided to open a production plant in Europe to serve that market, because the high cost of transporting the products from your U.S. plant are making your company's products less attractive for consumers. Using the Chartbook of International Labor Comparisons, compare the attractiveness of producing in the Czech Republic, Hungary, and Poland based both on labor market indicators and on competitiveness indicators for manufacturing. Prepare an executive summary recommending where your company should produce.

Question 12

The Rise of the Indian Automobile Industry
India is well on its way to becoming a small car manufacturing hub for some of the world's largest automobile companies. Between 2004 and 2011, automobile exports from India jumped from 50,000 to 450,000 per year. Despite a global economic slowdown, exports are predicted to increase, reaching 720,000 vehicles a year by 2016. The leading Indian exporter is the Korean company Hyundai, which committed early to the Indian market. Hyundai began production in India in 1998, when consumers were only purchasing 300,000 cars a year, despite the country's population of almost 1 billion people (in 2011, more than 3 million cars were sold in India). Hyundai invested in a plant in the southern city of Chennai with the capacity to turn out 100,000 cheap small cars a year. It had to train most of the workers from scratch, often giving them two years of on-the-job training before hiring them full-time. Soon, Hyundai's early investments were paying off as India's emerging middle class snapped up its cars. Still, the company had excess capacity, so it turned its attention to exports.
By 2004, Hyundai was the country's largest automobile exporter, shipping 70,000 cars a year overseas. Things have only improved for Hyundai since then. By 2008, Hyundai was making 500,000 cars a year in India and exporting more than a third of them. Its smallest cars, the i10, are now produced only in India and are shipped mainly to Europe. In 2005, Hyundai decided to invest around a billion dollars in a second Chennai plant. The plant, which opened in 2010, boosted its Indian output to 650,000 vehicles. Some 250,000 were exported in 2010, making Hyundai the largest exporter of manufactured goods in India. In addition to Europe, Hyundai is now considering selling its Indian-made cars in the United States.
Hyundai's success has not gone unnoticed. Among other automakers, Suzuki and Nissan have also been investing aggressively in Indian factories. Suzuki exported about 50,000 cars from India in 2007 and increased that to around 200,000 in 2010. Nissan also has big plans for India. It has invested some $1.1 billion in a new factory close to Hyundai's in Chennai. Completed in 2010, the factory has the capacity to make some 400,000 cars a year, about half of which will be exported. Ford, BMW, GM, and Toyota are also building, or planning to build, cars in India. A notable local competitor, Tata Motors, launched a lowcost "people's car," priced at $2,500, for the Indian market in 2009.
For all of these companies, India has several attractions. For one thing, the rapidly developing country has a potentially large domestic market. Also, labor costs are low compared with many other nations. Nissan, for example, notes that wage rates in India will be one-tenth of those in its Japanese factories. As Hyundai has shown, productivity is high and Indian workers can produce quality automobiles. Hyundai's executives claim that its Indian cars are of comparable quality to those produced in Korea. Nissan's goal is to use the same highly efficient flexible manufacturing processes in India as it uses in Japan. Nissan plans to send Indian workers to its Japanese factories for training on manufacturing processes and quality control.
India produces a large number of engineers every year, providing the professional skill base for designing cars and managing complex manufacturing facilities. Nissan intends to draw on this talent to design a low-cost small car to compete with Tata's "people's car." According to Nissan executives, the great advantage of Indian's engineers is that they are less likely to have the preconceptions of automobile engineers in developed nations, are more likely to "think outside of the box" and thus may be better equipped to handle the challenges of designing an ultra-low-cost small car.
Establishing manufacturing facilities in India does have problems, however. Nissan executives note that basic infrastructure is still lacking-roads are poor and often clogged with everything from taxis and motorbikes to bullocks and carts-making the Japanese practice of just-in-time delivery hard to implement. It is also proving challenging to find local parts suppliers that can attain the same high-quality standards as those Nissan is used to elsewhere in the world. Nissan's strategy has been to work with promising local companies, helping them to raise their standards. For example, under the guidance of teams of engineers from Nissan, the Indian parts supplier Capro, which makes body panels, has built a new factory near Nissan's Chennai facility, using the latest Japanese equipment. Workers there have also been trained in the Japanese practice of kaizen, or continuous process improvement.
Observers see the potential for Chennai to develop into the Detroit of India, with a cluster of automobile companies and parts suppliers working in the region producing high-quality, low-cost small cars that will not only sell well in the rapidly expanding Indian market, but could also sell well worldwide.
If Hyundai, Nissan, their suppliers, and other automobile enterprises continue to make investments in the Chennai region of India, how might this region evolve over time? What does this suggest about manufacturing location strategy?

Question 13

What are the main strategic objectives of production and logistics?

Question 14

Reread the Management Focus on Philips in China, then answer the following questions:
a. What are the benefits to Philips of shifting so much of its global production to China?
b. What are the risks associated with a heavy concentration of manufacturing assets in China?
c. What strategies might Philips adopt to maximize the benefits and mitigate the risks associated with moving so much production capacity offshore?

Question 15

Through what mechanisms might a foreign production site upgrade its skills over time?

Question 16

Why might an international business want to enter into a strategic alliance with key suppliers?

Question 17

Outline the main country factors that influence the location of production.

Question 18

What are the possible hidden costs of locating production in a foreign nation?

Question 19

The Rise of the Indian Automobile Industry
India is well on its way to becoming a small car manufacturing hub for some of the world's largest automobile companies. Between 2004 and 2011, automobile exports from India jumped from 50,000 to 450,000 per year. Despite a global economic slowdown, exports are predicted to increase, reaching 720,000 vehicles a year by 2016. The leading Indian exporter is the Korean company Hyundai, which committed early to the Indian market. Hyundai began production in India in 1998, when consumers were only purchasing 300,000 cars a year, despite the country's population of almost 1 billion people (in 2011, more than 3 million cars were sold in India). Hyundai invested in a plant in the southern city of Chennai with the capacity to turn out 100,000 cheap small cars a year. It had to train most of the workers from scratch, often giving them two years of on-the-job training before hiring them full-time. Soon, Hyundai's early investments were paying off as India's emerging middle class snapped up its cars. Still, the company had excess capacity, so it turned its attention to exports.
By 2004, Hyundai was the country's largest automobile exporter, shipping 70,000 cars a year overseas. Things have only improved for Hyundai since then. By 2008, Hyundai was making 500,000 cars a year in India and exporting more than a third of them. Its smallest cars, the i10, are now produced only in India and are shipped mainly to Europe. In 2005, Hyundai decided to invest around a billion dollars in a second Chennai plant. The plant, which opened in 2010, boosted its Indian output to 650,000 vehicles. Some 250,000 were exported in 2010, making Hyundai the largest exporter of manufactured goods in India. In addition to Europe, Hyundai is now considering selling its Indian-made cars in the United States.
Hyundai's success has not gone unnoticed. Among other automakers, Suzuki and Nissan have also been investing aggressively in Indian factories. Suzuki exported about 50,000 cars from India in 2007 and increased that to around 200,000 in 2010. Nissan also has big plans for India. It has invested some $1.1 billion in a new factory close to Hyundai's in Chennai. Completed in 2010, the factory has the capacity to make some 400,000 cars a year, about half of which will be exported. Ford, BMW, GM, and Toyota are also building, or planning to build, cars in India. A notable local competitor, Tata Motors, launched a lowcost "people's car," priced at $2,500, for the Indian market in 2009.
For all of these companies, India has several attractions. For one thing, the rapidly developing country has a potentially large domestic market. Also, labor costs are low compared with many other nations. Nissan, for example, notes that wage rates in India will be one-tenth of those in its Japanese factories. As Hyundai has shown, productivity is high and Indian workers can produce quality automobiles. Hyundai's executives claim that its Indian cars are of comparable quality to those produced in Korea. Nissan's goal is to use the same highly efficient flexible manufacturing processes in India as it uses in Japan. Nissan plans to send Indian workers to its Japanese factories for training on manufacturing processes and quality control.
India produces a large number of engineers every year, providing the professional skill base for designing cars and managing complex manufacturing facilities. Nissan intends to draw on this talent to design a low-cost small car to compete with Tata's "people's car." According to Nissan executives, the great advantage of Indian's engineers is that they are less likely to have the preconceptions of automobile engineers in developed nations, are more likely to "think outside of the box" and thus may be better equipped to handle the challenges of designing an ultra-low-cost small car.
Establishing manufacturing facilities in India does have problems, however. Nissan executives note that basic infrastructure is still lacking-roads are poor and often clogged with everything from taxis and motorbikes to bullocks and carts-making the Japanese practice of just-in-time delivery hard to implement. It is also proving challenging to find local parts suppliers that can attain the same high-quality standards as those Nissan is used to elsewhere in the world. Nissan's strategy has been to work with promising local companies, helping them to raise their standards. For example, under the guidance of teams of engineers from Nissan, the Indian parts supplier Capro, which makes body panels, has built a new factory near Nissan's Chennai facility, using the latest Japanese equipment. Workers there have also been trained in the Japanese practice of kaizen, or continuous process improvement.
Observers see the potential for Chennai to develop into the Detroit of India, with a cluster of automobile companies and parts suppliers working in the region producing high-quality, low-cost small cars that will not only sell well in the rapidly expanding Indian market, but could also sell well worldwide.
Both Hyundai and Nissan made their investments in the southern Indian city of Chennai. What is the advantage to be had by investing in the same region as rivals?

Question 20

Explain how an efficient logistics function can help an international business compete more effectively in the global marketplace.

Question 21

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. Should the firm favor concentrated manufacturing or decentralized manufacturing? What kind of location(s) should the firm seek for its plant(s)?

Question 22

How has the emergence of the World Wide Web transformed the management of globally dispersed supply chains?

Question 23

What might be lost in the long run if a company outsources production to a foreign entity?

Question 24

Global Production, Outsourcing, and Logistics
Use the globalEDGE Resource Desk (http://globaledge.msu.edu/Reference-Desk) to complete the following exercises:
The International Association of Outsourcing Professionals (IAOP) ranks the world's best 100 global outsourcing service providers. What are the criteria used to rank companies? Identify the 10 best companies. What are the key strengths for each company? Do you notice any trends in the information you have gathered?

Question 25

How does improved product reliability reduce costs?