Complexity and Coffee Supply Chain_Guido Nassimbeni_L1_part one - Notes on International Manufacturing and Sourcing (Lecture Summary)

The Two Fundamental Choices: Make vs Buy and Onshore vs Offshore

  • Two existential choices for every company (across industries):

    • What to produce internally vs what to procure from external sources

    • Make vs Buy (insourcing vs outsourcing)

    • Where to produce (location decision): Onshoring vs Offshoring

  • Framing language:

    • Insourcing = making outputs in the company’s own units

    • Outsourcing = acquiring outputs from external suppliers

    • Onshoring = producing within the domestic context

    • Offshoring = locating production abroad

  • Result: a 2×2 decision framework (the international chessboard)

    • Quadrants depend on the combination of Make/Buy and Onshore/Offshore

    • The quadrants illustrate different governance and cost structures across borders

  • Practical takeaway: these two choices interact; cost, capability, and strategic goals shape where and how you produce

The International Chessboard: The 2×2 Matrix and Its Quadrants

  • Quadrant definitions (abstracted):

    • Q1: Insourcing + Onshoring — production internalized in domestic factories

    • Q2: Outsourcing + Onshoring — production outsourced to domestic suppliers

    • Q3: Insourcing + Offshoring — production internalized but located abroad (foreign-owned factories)

    • Q4: Outsourcing + Offshoring — production outsourced to foreign suppliers

  • Core idea: firms can mix and match where they keep critical capabilities and where they buy from others, with location choices evolving over time

  • Important note: the geographic and cost landscape can change, prompting shifts between quadrants (example: GEOX/JEOX case below)

Example: GEOX and JEOX — A Tale of Flexibility Across Locations

  • GEOX (Italian brand) initially outsourced production entirely to local suppliers in the Montebelluna district; they focused on product development, marketing, quality control, and logistics

  • 1997–2010: GEOX opened two wholly owned factories (Romania and Slovakia) to internalize production in low-cost locations (greenfield in Romania; acquisition in Slovakia)

  • Later: GEOX sought sourcing opportunities in China, Brazil, and other Eastern European countries; began purchasing more from external suppliers abroad

  • Consequence: GEOX closed its Romania and Slovakia factories when cost advantages of those locations faded compared to external suppliers (China, Brazil, etc.)

  • Fourth move: Serbia offered incentives (e.g., 9,000 euros per new job and tax relief) to host a factory; GEOX opened a factory in Serbia

  • Key message from the example:

    • Same country can host multiple configurations (in-house abroad, or outsourced to domestic or foreign suppliers)

    • Location advantages can change over time; firms must adapt to preserve competitiveness

    • Intellectual property, patents, and headquarters location (e.g., GEOX’s patent on a shoe transpiration/ventilation technology and its Luxembourg HQ for tax purposes) illustrate strategic asset placement

  • Significance: the international production network is dynamic and adaptable to changing costs, capabilities, and policy incentives

Four Illustrative Cases: Personal Computers and the Make/Buy vs Onshore/Offshore Decisions

  • Lenovo (China): In-house manufacturing with six major wholly owned centers in China and additional facilities in Mexico and India; major R&D in Japan and China

    • Why: to keep pace with rapid product innovation and to tightly match supply with demand

    • Quote used: production is like selling fresh fruits — speed and tight control matter for match between supply and demand

    • Conclusion: strong emphasis on insourcing and onshoring for core capabilities; control over manufacturing to stay responsive

  • VAIO (Sony’s PC division, referred to as Bio in slides): Primarily in-house production in Japan and low-cost countries; high-end positioning

    • Why: to lock up technologies and avoid leakage through outsourcing; concerns about flow of knowledge and vulnerability when outsourcing

    • Conclusion: retains significant in-house production to protect proprietary assets

  • Dell: Assemblies in older factories in the US and China with global component sourcing; product customization and online sales focus; just-in-time (JIT) and lean practices

    • What they did: components sourced abroad; assembled to order; customization aligned with customer requirements

    • How: sophisticated supply chain management, lean practices, and flexible assembly to order

    • Conclusion: a model prioritizing external sourcing with agile assembly and customer-centric customization

  • Apple: Historically outsourced-heavy, with later strategic shifts

    • Early stance: focused on design, software, and brand; relied on suppliers for components and manufacturing

    • 2011 shift: Samsung expanded production in the US (Texas) to mitigate tariff risks and closer to key markets

    • 2019: Apple began internal development of critical chips (e.g., Apple Silicon) to reduce supplier dependency for key components

    • 2024: TSMC and US incentives to invest in Arizona; Apple expanding domestic manufacturing footprint

    • Takeaway: even a paradigmatic outsourcing company moves toward re-shoring core capabilities (e.g., chip design/manufacture) when strategic risk and policy signals demand it

Why and How: Interdependencies Among the Four Questions (Why/What/Where/How)

  • Why (drivers of internationalization): several drivers push firms to invest abroad; cost is central

  • What (the make vs buy decision): determine which activities to keep in-house vs outsource; whether to internalize a process across borders depends on strategic value and capabilities

  • Where (location): location choices depend on costs (labor, transport, energy, land), workforce, distance (geographic and cultural), infrastructure, business environment, and the market profile

  • How (entry mode): entry modes should align with location, cost, and risk considerations; flexibility is important for adapting to evolving conditions

  • Interdependencies: if the driver is low labor costs, expect offshore, labor-intensive activities and flexible entry modes; if the driver is protection of strategic capabilities, expect in-house and possibly onshore backshoring

  • Foundational message: these decisions are interdependent and context-specific, evolving with technology, policy, and market conditions

Why Internationalization Happens: Drivers and Trends (Data and Indicators)

  • European Union survey of over 8,000 companies: main reasons to invest abroad

    • 1) Reduction of labor costs (primary driver)

    • 2) Reduction of other costs (e.g., energy, bureaucracy, taxes)

    • 3) Focus on core business

    • 4) Reduction of delivery times

    • 5) Access to nearby markets

  • Interpretation: cost is the dominant driver, but non-cost considerations are increasingly influential

  • Real wage index for the G20: trend analysis of labor costs over time

    • Note: in constant prices, labor costs in advanced economies have risen relatively slowly; labor costs in emerging G20 economies have grown more rapidly, narrowing traditional cost differentials

    • Implication: the labor-cost advantage of offshore locations is shifting

    • Expression (conceptual):

    • Let W{ ext{advanced}}(t) and W{ ext{emerging}}(t) denote real wages over time; then relative cost advantage is diminishing if
      racW<em>extemerging(t)W</em>extadvanced(t)<br>ightarrow1extorincreasesrac{W<em>{ ext{emerging}}(t)}{W</em>{ ext{advanced}}(t)} <br>ightarrow 1 ext{ or increases}

  • World Container Index (WCI): measures container shipping costs and availability

    • Observation: significant spikes and volatility; rising transport costs influence total landed cost and may affect offshoring/offshore decisions

    • Implication: transport costs are a key component of location and supply-chain strategy

  • Trade flows and blocs (qualitative snapshot):

    • The world map shows major blocs and regional trade agreements (EU, USMCA, ASEAN, etc.)

    • Europe trades more intra-regionally; Asia trades heavily within Asia; Latin America shows varied patterns

    • The rise of regional blocs supports the argument that governance structures are increasingly regional rather than strictly national

  • Top exporters and importers (illustrative):

    • Top exporters: China, United States, others; Italy ranks around 7th by share

    • Top importers: United States, China, Italy (rank varies by year)

    • Trade balances: China is a major exporter with a positive trade balance; the US runs a sizeable trade deficit; Italy’s trade balance fluctuates with energy prices

  • Global governance and opportunities: regional blocks as a response to global challenges (sustainability, pandemics, climate change) often require collective action beyond a single country

  • Conclusion: globalization remains substantial, but the pattern is increasingly regionalized and governed by blocs; policy incentives and geopolitical shifts continuously reshape optimal locations

Location Decisions: What to Consider When Choosing a Country

  • Location factors to compare across potential host countries:

    • Costs: labor, transport, energy, land, construction, and other operating costs

    • Workforce: availability, skills, industrial relations

    • Distance: geographical and cultural distance to markets and suppliers

    • Infrastructure: physical infrastructure and logistics readiness (ports, roads, utilities)

    • Business environment: ease of doing business, regulatory clarity, taxation, bureaucracy, time to start a business

    • Market profile: overall income level, per-capita income, distribution channels, and growth prospects

    • Society characteristics: life expectancy, education level, inequality, demographics

  • Data sources and tools to compare countries (methodology overview):

    • World Bank: Ease of Doing Business rankings (freely accessible data)

    • World Bank: Logistics Performance Index (LPI) for infrastructure and logistics profile

    • United Nations: Human Development Index (HDI) for societal development

    • International organizations and national agencies: Investment Opportunity Index (and related data)

    • International Labour Office (ILO): workforce availability and cost

    • Hofstede Insights: cultural distance between countries (power distance, individualism/collectivism, uncertainty avoidance, masculinity/femininity, long-term orientation, indulgence)

  • Data integration approach: multi-criteria decision making (MCDM) to select among 2–4 country options

    • Steps include collecting data on cost, workforce, distance, infrastructure, business environment, economy, market, society, and cultural distance

  • Coffee belt caveat: certain commodities (e.g., coffee) have geographically constrained supply; not all countries can be considered for production due to climate and agronomic suitability

  • Practical teaching note: Excel-based exercises and case studies (to be used in subsequent lessons) help students apply the data to location choices

The Coffee Chain: Where to Internalize Activities

  • The coffee value chain (illustrative steps):

    • Growers (small plots and farms)

    • Processors (farm-level equipment or pooled processing)

    • Intermediaries (specialists who buy, aggregate, and move coffee through the chain)

    • Exporters (buy from producers and sell to dealers)

    • Dealers/Brokers (supply beans to roasters)

    • Roasters (convert green beans into roasted products; branding and packaging added here)

    • Retailers (supermarkets, hotels, catering) selling final products

  • Strategic questions for the chain: which steps to cover in-house vs outsource; whether to become growers, processors, intermediaries, exporters, dealers, roasters, or retailers or to focus on a subset

  • Trade-offs: more steps can yield greater value capture and control, but increase complexity and risk; specialization can create efficiency but may reduce control over downstream stages

  • Takeaway: the choose-and-conquer approach to value chain coverage is a strategic lever that varies by firm and industry

  • Example note: Tata (an Indian conglomerate) represents a firm focusing on specific steps rather than the entire chain; others may cover multiple steps or every step

How to Decide: A Simple Framework for What to Make and What to Buy

  • Core screening questions (adapted from Slack and others):

    • Is the process/activity strategic? If yes, keep it inside; if no, consider outsourcing

    • Does the company have distinctive capabilities? If yes, keep it inside to build competitive advantage

    • Is the company’s performance superior? If yes, leverage superior capabilities to sustain advantage

    • Is significant performance improvement possible? If yes, keep inside; otherwise consider externalizing

  • Practical implications: these questions guide whether to insource/offshore or outsource/onshore depending on whether the activity is strategically critical and whether the firm has unique capabilities

  • Important caveat: these are simplifications; industry context and product characteristics heavily influence the decision

How to Compare Countries: Tools, Data, and Methods (MCMD Overview)

  • Data sources and what they measure:

    • World Bank: Ease of Doing Business — measures the overall ease of starting and running a business in a country

    • World Bank: Logistics Performance Index (LPI) — measures logistics efficiency and infrastructure readiness

    • United Nations: Human Development Index (HDI) — captures health, education, and standard of living

    • Investment Opportunity Index (or similar indices) — measures attractiveness for foreign investment

    • International Labour Office (ILO) — data on labor availability and costs

    • Hofstede Insights — cultural distance across six dimensions

  • Methodological note: Multi-Criteria Decision Making (MCDM) combines these diverse indicators to compare countries and select the best location among several options

  • Practical instruction: use the provided Excel workbook to populate country scores, then apply the MCDM approach to derive the best location

  • Important caveat: for specific commodities (e.g., coffee), geographic suitability (tropics, altitude) constrains the candidate country list

Illustrative Takeaways: What to Watch For in Global Production Networks

  • The “world is still highly internationalized,” but conditions are shifting due to:

    • Rising labor costs in emerging economies narrowing some advantages

    • Increased transport costs and supply-chain volatility influencing location choices

    • Tariffs and protectionist actions prompting backshoring or nearshoring in high-volume markets

    • Strategic considerations (IP protection, control over critical components) driving in-house or domestic manufacturing

  • Firms continually rebalance their networks as costs, policy signals, and technology evolve

  • The role of regional blocs is growing as a governance mechanism to address global challenges (e.g., sustainability, pandemic response, climate issues)

Exercise and Coursework (What’s Ahead)

  • Exercise: LogBlack Ltd — an Italian manufacturer of professional exercise machines planning to open a unit in an Eastern European country; alternatives considered: Hungary, Croatia, Czech Republic

    • Task: use the provided data to identify the most suitable location for either a manufacturing unit or a commercial unit

  • Preparatory assignments for the next session:

    • Open and review the Exercise Excel file containing Easy of Doing Business data, LPI, HDI, Investment indices, etc.

    • Read the Greek case study and prepare responses to the guiding questions

  • Next session: solve the LogBlack exercise and discuss the Greek case study in depth

Quick Reference: Key Formulas and Numeric Anchors

  • Four-session plan (per the course):

    • 4imes1.5exthours=6exthours4 imes 1.5 ext{ hours} = 6 ext{ hours}

  • World GDP reference (illustrative):

    • extWorldGDP ≈ 1.10×1014 extUSDext{World GDP} \,\approx\, 1.10\times 10^{14}\ ext{USD}

  • World exports reference (relative to 1989):

    • Exports<em>todayExports</em>1989≈9\frac{\text{Exports}<em>{\text{today}}}{\text{Exports}</em>{1989}} \approx 9

  • Trade in intermediates: roughly a majority share (historically around 60% of global trade involves intermediate goods and services)

    • extShareintermediate≈0.60ext{Share}_{\text{intermediate}} \approx 0.60

  • Cultural distance and Hofstede dimensions are measured on standard scales (power distance, individualism/collectivism, uncertainty avoidance, masculinity/femininity, long-term orientation, indulgence) as a basis for cross-country comparisons

Ethical, Philosophical, and Practical Implications

  • Ethical: supply chain decisions affect workers, communities, and environmental outcomes; offshoring can shift risks and responsibilities across borders

  • Philosophical: the concept of “regional governance over nation-states” reflects a shift in how global problems are addressed (collaboration vs isolation)

  • Practical: firms must monitor policy signals, currency risk, tariffs, and logistics costs; technology (e.g., automation, AI for planning) can change the calculus of what to produce where

Summary of Key Takeaways

  • There are two core questions that drive international manufacturing and sourcing: what to produce in-house vs outsource, and where to produce (onshore vs offshore)

  • These questions form a flexible 2×2 framework that helps analyze production networks and strategic fit over time

  • Real-world cases (GEOX/JEOX and the four PC players) illustrate how firms move across quadrants in response to costs, technology, and policy incentives

  • Drivers of internationalization are primarily cost-related, but non-cost factors (lead time, focus on core competencies, proximity to markets) are increasingly influential

  • Location decisions rely on a broad set of quantitative indicators and qualitative factors; a multi-criteria decision-making approach helps synthesize data from World Bank, UN, ILO, Hofstede, and other sources

  • The coffee value chain provides a concrete example of how firms may choose which steps to internalize and which to outsource

  • Ongoing coursework and exercises (Excel-based data exercises and Greek case study) prepare you to apply these concepts to real-world location decisions