ch 17 u4 book notes int business

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 barriers, political risks, and the like to minimize costs and maximize value added? Single-country strategies may be efficient operationally but often become ineffective strategically. For example, what if the company focused all of its attention on one country for production and that country became politically or economically unstable? Some redundancy is usually the best approach in both global production and supply chain management practices, and such redundancy often demands that a company spreads its production and supply chains across countries. Page 501 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 production to another more favorable location, or is there value to maintaining operations at a given location even if underlying economic conditions change? Value can come from cost inefficiencies. Moving factory locations from one country to another solely due to cost considerations is usually not a strategic move. Successful companies typically evaluate cost considerations along with quality, flexibility, and time issues. At the same time, the cost is one of the most important considerations and serves as the starting point for discussion of making a strategic move from one country to a more advantageous production home. Third, should the firm own foreign production activities, or is it better to outsource those activities to independent vendors? Outsourcing means less control, but it can be cost-efficient. Fourth, how should a globally dispersed supply chain be managed, and what is the role of information technology in the management of global logistics, purchasing (sourcing), and operations? Fifth, similar to issues of production, should the company manage global supply chains itself, or should it outsource the management to enterprises that specialize in this activity? There are myriad options for supply chain management by third parties. Few companies want to manage the full supply chain from raw material to delivering the product to the end-customer. The question, though, is which portion of the supply chain should be managed by third parties, and which portion should be managed by the company itself. In addition, managing supply chains in general and the chains that are global in scope in particular is the key critical aspect of realizing efficiencies in operations: Global supply chains connect global production with global customers. As noted in the opening case, global production and supply chain management are, by design, complex and geographically disjointed, especially in a multinational corporation’s network of global supply chains. Enter blockchain technology to help! Blockchains make it possible for ecosystems of supply chain partners (or any business partners) to share and agree upon key pieces of information. The strategic supply-chain partners can also agree on the information without having to deal with all the complex negotiations and power plays that come with setting the rules before handing over really critical business information. Through blockchains, companies gain a live, real-time digital ledger of all transactions and supply chain movements for all participants in their supply chain network, offsetting issues concerning transparency, trust, ability, and willingness problems that prevented such sharing before. This chapter also includes illustrations of some of the best-operating global supply chain networks in the world. Take a look at each and see what they do that is similar and different, and where they obtain both efficiencies and effectiveness in their supply chains (e.g., P&G in the closing case; Alibaba in the end-of-the-book integrated case related to Chapter 17; and IKEA and Amazon in the Management Focus features in the chapter text). One important aspect of how these companies run their global supply chains is that they constantly think about the total costs of their chains. A total cost focus of a global supply chain ensures that the goal is not necessarily to strive for the lowest cost possible at each stage of the supply chain (each node in the chain), but to instead strive for the lowest total cost to the customer— and, by extension, t he great est val ue—at the end of the pr oduct suppl y chain. Thi s means t hat al l aspects of costincluding integration and coordination of companies in the supply chain—have been incorporated in addition to the cost of raw material, component parts, and assembly worldwide. And these cost issues, as they relate to global logistics and global purchasing—both considered supply chains functions in a company—have been strategically and tactically addressed.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 val ue creatio n activi ties—production and supply chain management—and attempts to clarify how they might be performed internationally to (1) lower the costs of value creation and (2) add value by better serving customer needs. Production is sometimes also referred to as manufacturing or operations when discussed in relation to global supply chains. 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 13, we stated that production is concerned with the creation of a good or service. We used the term production to denote both service and manufacturing activities because either a service or a physical product can be Page 502 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 customer care services to places such as India, where English is widely spoken and labor costs 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 efficiently to better match supply and demand. This involves both coordination and integration of the supply chain functions inside a global company (e.g., purchasing, logistics, 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, increase inventory turnover, and facilitate the appropriate transportation modes being used. Maximizing purchasing operations enhances the order fulfillment and delivery, outsourcing initiatives, and supplier selections. 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 manufacturing 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 assurances 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 upstream and downstream chains, the objectives of reducing costs and increasing quality are not independent of each other. As illustrated in Figure 17.1, the firm that improves 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 product 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. Edwards 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. Deming 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 also recommended that management should create an environment in which employees will not fear reporting problems 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. Deming 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 percent 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. The Six Sigma program is particularly informative in structuring global processes that multinational corporations can follow in quality and productivity initiatives. As such, increasingly companies are adopting Six Sigma programs to try to boost their product quality and productivity. 5 The growth of international standards has also focused greater attention on the importance 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 standard 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 products and processes. 6 Page 504 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 13, demands for local responsiveness arise from national differences in consumer tastes and preferences, infrastructure, distribution channels, and host-government demands. Demands for local responsiveness create pressures to decentralize production activities to the major national or regional markets in which the firm does business or to implement flexible manufacturing 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 important. 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. 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 countries 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 activities (for an example, see the accompanying Management Focus, which looks at the IKEA production in China). In Chapter 13, we referred to the benefits derived from such a strategy 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 influencing foreign direct investment decisions. Externalities include the presence of an appropriately 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 number of supporting industries, such as the manufacturers of semiconductor capital equipment 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 location 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 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 economy, 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 Page 505 Page 506 for performing a manufacturing activity, regulations prohibiting foreign direct investment may eliminate this option. Similarly, consideration of factor costs might suggest 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 the expected future movements in its exchange rate (see Chapters 10 and 11). Adverse changes in exchange rates can quickly alter a country’s attractiveness 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 offshore to lowercost locations in East Asia. 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, technology may make it feasible to perform an activity in multiple locations. Three characteristics of 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 13, 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 location 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. Page 507 Conversely, a relatively low level of fixed costs can make it economical to perform a particular activity in several locations at once. This allows the firm to better accommodate demands 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 manufacturing 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 17.2). 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 efficient scale of production is low relative to global demand, it may be economical to manufacture 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 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 standardized product in large volumes. This view of production efficiency has been challenged by the rise of flexible manufacturing 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 Page 508 machines through better scheduling, and (3) improve quality control at all stages of the manufacturing process. 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 production 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 flexible manufacturing technology, Toyota’s production system, has been credited with making Toyota the most efficient auto company in the world. 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 inventories 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 preferences for product diversity. In response, Ohno looked for ways to make shorter production runs economically. 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 to three minutes. 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 more diverse product range at a lower unit cost than was possible with conventional mass production. 14 Flexible machine cells are another common flexible manufacturing technology. A flexible machine cell is a grouping of various types of machinery, a common materials handler, and a centralized cell controller. 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 bottlenecks. 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 material. 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 90 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 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. 15 Besides improving efficiency and lowering costs, flexible manufacturing technologies enable 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 responsiveness. Most important for international business, flexible manufacturing technologies can help a firm customize products for different national markets. The importance of this advantage 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 satisfy specific consumer tastes and preferences, part of the rationale for a localization strategy (Chapter 13). PRODUCTION FACTORS Several production factors feature prominently into the reasons why production facilities are located and used in a certain way worldwide. They include (1) product features, (2) locating production facilities, and (3) strategic roles for production 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 pressure to produce these products in the optimal location and to serve the world market from there. The opposite 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 inexpensive products that weigh a lot. Accordingly, when they are shipped long distances, transportation 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 consumer 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 As can be seen, the concentration of production makes most sense when Differences among countries in factor costs, political economy, and culture have a substantial impact on the • • • • • • • • • • • • • Page 510 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. 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 differences in factor costs, technological factors, and product factors to point toward concentrated 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 industry. 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 10-fold. 16 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 rationale 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 outside 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. 17 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 factory 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 a strategic input into production planning, process changes, logistics issues, product customization, 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 just like any factory in the global firm’s home country. This also means that source Page 511 Page 512 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 intended 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 minor 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 difference between a contributor factory and a server factory is that a contributor factory has responsibilities 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 position 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. 18 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 many computer science majors every year; (3) there was already a high concentration of information technology companies and workers in Hyderabad; and (4) many of Microsoft’s highly skilled Indian employees, after spending years in the United States, wanted to 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 apparently place little value on long-term incentives and prefer higher current pay. High employee 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.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 workmanship. We have actually lost market share because of this decision.” 20 Another example of efficiency and effectiveness issues is highlighted in the accompanying Management Focus, which looks at Amazon and its world-leading global supply chains.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 strategic 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 operations’ 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 implications (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 example, 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 equipment and reliable alternatives are very scarce. Strategic fit is also important. If the item or part strategically fits within the firm’s current and/or planned core competencies, 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 decision 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 supplier? And if the product is made in-house, what opportunity cost would be incurred as a result (e.g., what product or item was the firm unable to produce because of limited production 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 drivers 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. 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 the sole relevant factor because we have to take into account the costs of quality control measures that have to be instituted, raw materials that have to be purchased far away from home, foreign 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 elements that we should be evaluating when we are determining whether the correct decision is to make or to buy? To facilitate your understanding of the make-or-buy decision, we have captured the dynamics of this choice in two graphics that illustrate either operationally favoring a make decision or operationally favoring a buy decision (see Figures 17.3 and 17.4). As shown in the figures, the core elements in both cases are cost and production capacity. However, the other elements differ for each of the decisions and influence the choice differently. This means that we need to evaluate each decision 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 best one—the one that is the best strategic fit with the least opportunity cost. The elements that favor a make decision—beyond the core elements of cost and production capacity— include quality control, proprietary technology, having control, excess capacity, limited suppliers, assurance of continual supply, and industry drivers (see Figure 17.3). 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 17.3. 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 cannot or should not be shared with outsourcing parties, then the decision has to be to 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 international barriers, follow the production of your firm’s products to wherever you see fit to locate your production lines. 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 benefit 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 makeor-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 elements that are not necessarily factors in the make decision (see Figure 17.4). 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 17.4. 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 suppliers 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. 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 functions need to be developed in concert with global production. They are logistics, purchasing (sourcing), and the company’s distribution strategy (i.e., marketing channels). The latter—distribution strategy—is addressed in Chapter 18, 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 the 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 functions 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 inventory of raw material, component parts, and products used in manufacturing. The core activities 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 facility 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 customs agencies to store products and provide a location where customization can be facilitated. When warehousing shifted from passive storage of products to strategic assortments and processing, the term distribution center became more widely used to capture this strategic and dynamic aspect of not only storing, but adding 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 strategically in the global marketplace, considering the aggregate total labor and transportation cost of moving products from plants or suppliers through the distribution center and then delivering them to customers. Global inventory management can be viewed as the decision-making process regarding the raw materials, workin-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. 21 These companies have 32 percent of their inventory in raw materials, 18 percent of their inventory in work-in-process, and 50 percent of their inventory in finished goods. 22 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 26, 14, and 60 percent in raw materials, work-in-process, and finished vehicles, respectively. Another example is Sinopec (www.sinopec.com), a petroleum firm and the largest firm in China. Sinopec has 21 percent of its total assets in inventory, with a mix of 37, 43, and 20 percent in raw materials and component parts, work-in-process, and finished goods, respectively. Note that Sinopec maintains a much higher percentage of its inventories 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 formulate 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 different types: primary, secondary, and transit. Primary packaging holds the product itself. These are the packages brought home from the store, usual ly a retai l er, by the e nd-consumer. Secondary packaging (sometimes called case-lot packaging) is designed to contain several primary 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 Page 518 suppliers, manufacturers, distribution centers, retailers, and any other intermediaries in the global supply chain. Regardless of where the product is in the global supply chain, the packaging is intended to achieve a set of multilayered functions. These can be grouped into (1) perform, (2) protect, and (3) inform. 23 Perform refers to (1) the ability of the product in the package to handle being 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 providing 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 transporting raw materials from their suppliers to the production facilities, work-in-process, and finished goods inventories between plants and distribution centers, and finished goods from distribution centers to customers. The primary drivers of transportation rates and the resulting aggregate cost are distance, transport mode (ocean, air, or land), size of the 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. The ocean is the least expensive 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 because there is a substantial charge for defying gravity. Transportation rates are heavily influenced 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, the 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 information 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 iscritically 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 percent in lost profits. 24 Overall, manufacturers spend about 9 to 14 percent of their sales revenue 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 we defined it earlier in this chapter, purchasing represents the part of the supply chain that involves worldwide buying of raw material, component parts, and products used in the manufacturing of the company’s products and services. The core activities performed in purchasing include the 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. 25 Level I is simply companies engaging in domestic purchasing activities only. Often, these companies stay close to their home base in their domestic 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 purchasing 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. At the level III stage, companies begin to recognize that a well-formulated and well-executed worldwide international purchasing strategy can be very effective in elevating the firm’s competitive edge in the marketplace. 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 locations worldwide. With level IV, we are now dealing with a sophisticated form of worldwide 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, Page 519 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. 26 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 purchasing 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 their company). The next decision, in both internal and external purchasing, is to figure out “where to purchase” (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 internal 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 The potential for reducing costs through more efficient supply chain management is enormous. 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 revenues 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. 27 In a saturated market, it would be much easier to reduce materials costs by 3 percent than to increase sales revenues by 30 percent. Thus, managing global supply chains is one of the strategically most important areas for a global company. Four main areas are of concern in managing 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. ROLE OF JUST-IN-TIME INVENTORY Pioneered by Japanese firms during 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-intime (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 inventory 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 inventory, freeing capital for other uses and/or lowering the total capital requirements of the enterprise. 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 inventory 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 warehoused. 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 defective 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 inventory. 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 r el i ed on global ly dispersed suppl i ers and t i ghtl y man aged “j ust-in- t i me” suppl y chai ns wit hout a buff er stock of inventory. A less pronounced but similar situation occurred again in April 2003, when the outbreak of the pneumonialike severe acute respiratory syndrome (SARS) 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. 28 There are ways of reducing the risks associated with a global supply chain that operates using 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 different countries. While this may not help in the case of an event with global ramifications—such as September 11, 2001, in the United States, or the Tōhoku earthquake and tsunami on March 11, 2011, in Japan—it does help manage country-specific supply disruptions, which are more common. Strategically, all global companies need to build in some degree of redundancy in supply chains by having multiple options for suppliers. ROLE OF INFORMATION TECHNOLOGY Web and cloud-based information systems play a crucial role in modern global supply chains. For example, by tracking component 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 components are expected to arrive. By locating component parts in Page 521 Page 522 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 manufacturing plant. Firms now typically use some form of a 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). Collaborative planning, forecasting, and replenishment (CPFR) was developed to fill the inter-organizational connections that ERP cannot fill. Vendor management of inventory (VMI) allows 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 transmitted 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 applications 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 dispersed 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 associated 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. Having at least some form of a supply chain information system to coordinate the flow of materials into manufacturing, through manufacturing, and out to customers is paramount to be part of the global supply chain networks that exist today. Now, enter blockchain technology as an additional layer in the systems! As we saw in the opening case, blockchains make it possible for ecosystems of supply chain partners (or any business partners) to share and agree upon key pieces of information. Importantly, the partners can agree on the information without having to deal with all the complex negotiations and power plays that come with setting the rules before handing over really critical business information. Blockchains synchronize all data and transactions across the global network. Through blockchains, companies gain a live, real-time digital ledger of all transactions and supply chain movements for all participants in their supply chain network. However, the added coordination-value that companies can achieve via blockchain technology has at least, for now, short-term concerns as well. For example, fitting blockchain technology into existing systems around the globe is difficult, costly, and not as efficient as possible to reap the short-term, immediate advantages that blockchain technology offers companies. That said, coordination in global supply chains and networks is critically important for a well-functioning system. COORDINATION IN GLOBAL SUPPLY CHAINS Consider how to turn an aircraft, and think in terms of coordination and leverage points. Traditionally, aircraft were typically 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 rudder seem very small. However, leverage allows the coordinated effort ofthe ailerons and the rudder to turn the aircraft. In other words, putting the right combination of a little leverage in 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 operational collaboration of key global supply chain activities. Shared decision making—such as joint consideration of replenishment, inventory holding costs, collaborative planning, costs of different processes, the frequency of orders, batch size, and product development—creates a more integrated, coherent, efficient, and effective 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 companies, 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. 29 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. Page 523 This includes multi-unit coordination across global supply chain functions. Quality refers to integrating a system so it achieves zero defects throughout global supply chains. Finally, life-cycle support refers to integrating the activities of reverse logistics, recycling, after-market service, product recall, and product disposal across global supply chain functions. INTERORGANIZATIONAL RELATIONSHIPS Interorganizational relationships 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 in relationships and 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 17.5 focuses on the upstream (or inbound) supply chain relationships, and Figure 17.6 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 emphasis 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 scenarios 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 products 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/outbound 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. 30 First, however, some basics on value are appropriate. The 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 (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 percent 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 relative 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).