Session 6

Overview of Global Production Networks

• Global Production Networks (GPNs)

• Definition: A complex system of interconnected activities that span across international borders involving the simultaneous production and distribution of goods to meet global market demand. GPNs encompass not only the physical movement of goods but also the networks of communication, information exchange, and supply chain management that facilitate trade.

• Origin: Developed as an evolution alongside traditional supply chains, the concept of GPNs emphasizes the flexibility and adaptability necessary to respond to shifting market demands and technological changes. GPNs reflect the dynamic nature of global trade, influenced by factors such as political relations, economic policies, and technological advancements.

Key Developments and Trends

• Trade and Transport

• The rise of diversified transportation options, including ships and air freight, has created new opportunities for global trade, transforming oceans into 'highways' for international commerce. These innovations allow for more rapid and cost-effective movement of goods across regions.

• Importance of Location Selection: In the context of GPNs, strategic location selection is critical. Supply chain conferences, such as the upcoming event in Florida, emphasize discussions around optimal geographical positioning, focusing on minimizing costs, optimizing logistics, and enhancing market access.

Location Models in GPNs

• Model Types: Options for Corporate Location

• Global Model

  • Benefits:

  • Utilizes advantages of minimal trade barriers and cost-effective transport solutions.

  • Efficiency gains from economies of scale achieved by consolidating production facilities.

  • Products can be tailored to specific markets (e.g., producing French goods in France, German goods in Germany) to meet local consumer expectations.

  • Risks:

  • High vulnerability if operations experience disruptions stemming from natural disasters, political instability, or logistical challenges. This over-reliance on a single region can negatively impact supply continuity.

• Regional Model (Option B)

  • Focus: Emphasizes diversification of manufacturing locations to manage and mitigate risks associated with supply chain disruptions.

  • Setup: Maintains multiple plants strategically placed across various geographic regions (e.g., establishing three plants in North America and three in China).

  • Advantages:

  • Provides redundancy against disruptions, allowing for seamless operational continuity and increased resilience to unforeseen challenges.

Financial Considerations

• Trade-Off Between Risk and Return

  • Option A (Global Model): Generally regarded as riskier. This model’s reliance on a singular geography means higher potential returns; however, it is also susceptible to significant disruptions that can lead to substantial financial losses.

  • Option B (Regional Model): Tends to offer more stability. This setup is typically more favorable when securing financing since banks show a preference for applicants that demonstrate a diversified risk profile. Financial institutions often require operations to be 'bankable', meaning they need to have manageable risks to approve loans and funding.

Real-World Examples of GPNs

• Nutella Production

  • Employs global sourcing of key ingredients, with production plants established close to market demands, enabling efficient distribution strategies and shorter lead times.

• Colgate Toothpaste

  • Raw materials are sourced from regions such as China for production in India, designed to cater to markets across the globe including the U.S., Africa, and Europe, showcasing the interconnected nature of GPNs.

• Technology Manufacturing

  • For brands like Dell, components are sourced globally, with final assembly strategically located closer to major markets (e.g., Ireland), improving delivery times and reducing logistical costs.

Logistics and Production Strategies

• Logistics Flow Model

  • This model is critical for determining optimal location choices; it incorporates simulation tools to analyze production flows effectively, ensuring that supply chains are efficient and responsive to market needs.

Case Study: INEOS Cracker Project

• Decision Factors in Location

  • INEOS chose Antwerp as the location for their cracker project, primarily due to its proximity to essential water sources necessary for chemical production.

  • Other considerations included the importance of securing local permits and having access to resources, which were all factored into the overall decision-making process regarding the project’s location.

Conclusion

• Strategic Decisions in GPN Construction

  • Balancing both emotional and rational insights plays a crucial role in the process of selecting locations for production within GPNs.

  • Companies must carefully consider the financial implications associated with different location strategies, as these decisions can lead to significant influences on corporate growth trajectories and overall competitiveness in the global market.