Chapter 14 Competing Effectively through Global Marketing, Distribution, and Supply-Chain Management
14.5 Global Production and Supply-Chain Management
LEARNING OBJECTIVES
1. Understand the differences between outsourcing and offshoring.
2. Explain three strategies for locating production operations.
3. Know the value of supply-chain management.
Strategic Choices: Export, Local Assembly, and Local Production
When deciding where and how to produce products for international markets,
companies typically have a choice of three strategies. The strategies vary in terms
of levels of risk, cost, exposure to exchange-rate fluctuations, and leveraging of
local capabilities. Companies need to tailor their strategy to fit their product and
the country.
Manufacture in the United States and Then Export
The lowest-investment production strategy is to make the product at the company’s
existing manufacturing locations and then export them to the new market.
Companies use this solution in situations where the total opportunity in the new
market doesn’t justify opening a plant. For example, EMC supplies its Asia-Pacific
customers from plants in the United States and Ireland. This strategy does have
several downsides. Specifically, the company faces higher shipping costs,
importation delays, local import duties, risks due to exchange-rate fluctuations, and
isolation from local knowledge.
Global Components with Local Assembly
The next level of strategy uses of out-of-country suppliers but local assembly. Dell
Latin America uses this approach. It buys high-tech computer components globally
but performs customized assembly in Brazil. Being closer to the market improves
Dell’s sales, service, and customer knowledge.
Another example is Iams. Iams makes its proprietary pet food in the United States
and ships it to other countries for packaging. This strategy lets Iams do some local
customization and offer better customer response, while gaining tax or tariff
incentives from local assembly.
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Chapter 14 Competing Effectively through Global Marketing, Distribution, and Supply-Chain Management
Along with these advantages come increased supplier-coordination issues and
concerns about supplier quality. In some cases, local assembly can harm the
product, which leads back to the country-of-origin effect discussed in Section 14.3
"Standardized or Customized Products". For example, some markets like Colombia
don’t want to buy Colombian-made goods. In those cases, local assembly can harm
product sales.
Local Production
Finally, a company can go completely local, sourcing materials in the foreign
country and manufacturing the product there. Nokia used this strategy in India.
This strategy takes the greatest advantage of lower-cost labor, regional suppliers,
and local knowledge. However, it involves high investment and depends heavily on
the quality of local resources. It also exposes the company to political risks.
However, going 100 percent local may work well in BRIC countries (i.e., Brazil,
Russia, India, and China) for labor-intensive, low-value products. These types of
products can tolerate the potentially lower levels of quality associated with local
suppliers.
Companies that decide to build a local plant have to decide in which country to
locate the plant. The criteria to consider are
• political stability,
• statutory/legal environments,
• infrastructure quality,
• foreign-investment incentives,
• local telecommunications and utility infrastructure,
• workforce quality,
• security and privacy,
• compensation costs,
• tax and regulatory costs, and
• communication costs.
Government Incentives
Countries sometimes offer special incentives to attract companies to their area.
Malaysia, for example, set up the Multimedia Super Corridor that offers tax breaks,
desirable facilities, and excellent infrastructure to foreign companies. Similarly,
China has special economic zones (SEZs) that promote international high-quality
standards in the Hainan Province, Shenzhen, Shantou, and elsewhere. While one
component is a government initiative to set up SEZs or corridors that boast
excellent communications infrastructure, other factors, such as uninterrupted
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Chapter 14 Competing Effectively through Global Marketing, Distribution, and Supply-Chain Management
power supply and connections to transportation infrastructure, play an important
role as well. Even though the economic or political picture of a country may appear
appealing, companies also need to understand public policy and the regulatory
environment of the specific state or municipality in which they plan to set up
operations, because laws on a local level may be different and may create
roadblocks for new company operations.
Infrastructure Issues
Emerging-market countries are investing in new infrastructure to varying degrees.
China is working hard to grow rail, road, and port infrastructure. In other
countries, investment may be lagging. And in some cases, companies have been
caught in the middle of governmental problems arising from dealing with officials
who turn out to be corrupt.
Locating a plant in China means having to ship products from China. If a company’s
primary market is in the United States, China is halfway around the world. The
company may save on labor, but there are other added costs—extra shipping costs
as well as hidden costs of uncertainty.April Terreri, “Supply Chain Trends to
Watch,” World Trade, July 2010, 16–21. If the company’s products are en route and
experience delays, for example, customers might experience a stock-out24. A stock-
out means that there is no more stock of the company’s product. The product is
unavailable to customers who want to buy it. To avoid stock-out situations, a
company may decide to hold inventory close to its customers. Called safety stock25,
this inventory helps ensure that the company won’t run out of products if there’s a
delay or crisis in a distant manufacturing region. The downsides of safety stock,
however, include the increased costs of carrying that inventory, such as the
investment in the products, taxes and insurance, and storage space. In addition,
companies risk obsolescence of the products before they’re sold.
It’s important to note that China is far away only if the company’s primary markets
are outside Asia. The distance that truly matters is the distance to the company’s
markets. Companies that sell their products around the world may want to have
production facilities around the world as well, so that their products are closer to
24. Means that there is no more customers—wherever those customers may be.
stock of the company’s
product. The product is
unavailable to customers who
want to buy it.
25. Inventory the company holds
to help ensure that it won’t run
out of products if there is a
delay or crisis in a distant
manufacturing region.
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