IB CHAPTER 4 international bussiness lecture.ppt

international bussiness lectures

1. CHAPTER FOUR
INTERNATIONAL OPERATIONS
AND LOGISTICS

2. Strategic Manufacturing and Materials Management
•In this section we will focus on two of these activities—
production and materials management—and attempt 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.
•It can be defined production: as the activities involved in
creating a product.
•We used the term production to denote both service and
manufacturing activities because one can produce a service
or a physical product.
•In this section we focus more on manufacturing than on
service activities, so we will use the term manufacturing
rather than production.

3. •Materials management: is the activity that controls the
transmission of physical materials through the value chain,
from procurement through production and into distribution.
•Materials management includes logistics, which refers to
the procurement and physical transmission of material
through the supply chain, from suppliers to customers.
•Manufacturing and materials management are closely linked
because a firm’s ability to perform its manufacturing
function efficiently depends on a continuous supply of high-
quality material inputs, for which materials management is
responsible.
• The manufacturing and materials management functions of
an international firm have a number of important strategic
objectives.

4. •Two important objectives that are shared by both
manufacturing and materials management are
1.to lower costs and
2.to simultaneously increase product quality by
eliminating defective products from both the supply
chain and the manufacturing process.
–These two objectives are not independent of each other.
–The firm that improves its quality control will also
reduce its costs of value creation.
•Improved quality reduces costs in three ways:
1.Productivity increases because time is not wasted
manufacturing poor-quality products that cannot be
sold. This leads to a direct reduction in unit costs.
2.Rework and scrap costs decline.
3.Warranty and rework costs decrease

5. •The effect is to lower the costs of value creation by reducing
both manufacturing and service costs.
•The main management technique that companies are using to
boost their product quality is total quality management (TQM).
•TQM is a management philosophy that takes as its central focus
the need to improve the quality of a company’s products and
services.
•He 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 recommended that management should create an
environment in which employees will not fear reporting
problems or recommending improvements.
•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.

6. •In addition to lowering costs and improving quality, two
other objectives have particular importance in international
businesses.
–First, manufacturing and materials management must be
able to accommodate demands for local responsiveness.
–Demands for local responsiveness create pressures to
decentralize manufacturing activities to the major
national or regional markets in which the firm does
business.
–Second, manufacturing and materials management must
be able to respond quickly to shifts in customer demand.

7. Choice of Location
•Where to Manufacture:
–An essential decision facing an international firm is
where to locate its manufacturing activities to achieve
the twin goals of minimizing costs and improving
product quality.
–For the firm that considers international production to
be a feasible option, a number of factors must be
considered.
–These factors can be grouped under three broad
headings:
1.Country factors,
2.Technological factors, and
3.Product factors

8. 1. Country Factors
•Political, economy, culture, and relative factor costs differ
from country to country.
•It can be said that because of differences in factor costs,
some countries have a comparative advantage for producing
certain products.
•Other things being equal, a firm should locate its various
manufacturing activities where the economic, political, and
cultural conditions, including relative factor costs, are more
conducive to the performance of those activities.
•Of course, other things are not equal.
•Other country factors that impinge on location decisions
include formal and informal trade barriers and rules and
regulations regarding foreign direct investment.

9. •Thus, although relative factor costs may make a country
look attractive as a location for performing a manufacturing
activity, regulations prohibiting foreign direct investment
may eliminate this option.
•Similarly, a consideration of factor costs might suggest that
a firm should source production of a certain component part
from a particular country, but trade barriers could make this
uneconomical.
•Another country factor is expected future movements in the
currency’s exchange rate.
• 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.

10. 2. Technological Factors
•The type of technology a firm uses in its manufacturing
can be pivotal in location decisions.
• Because of technological constraints, in some cases it is
feasible to perform certain manufacturing activities in
only one location and serve the world market from there.
•In other cases, the technology may make it possible to
perform an activity in multiple locations.
•Three characteristics of a manufacturing technology are of
interest here:
a.the level of its fixed costs,
b.its minimum efficient scale, and
c.its flexibility.

11. a) FIXED COSTS
•Sometimes the fixed costs of setting up a manufacturing
plant are so high that a firm must serve the world market
from a single location or from a very few locations.
•For example, it can cost more than $1 billion to set up a
plant to manufacture semiconductor chips.
•Given this, serving the world market from a single plant
sited at the optimal location makes sense.
•A relatively low level of fixed costs can make it economical
to perform a particular activity in several locations at once,
allowing 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, which can
be risky in a world of floating exchange rates.

12. B) Minimum Efficient Scale
•The concept of economies of scale tells us that as plant
output expands, unit costs decrease.
•The reasons for this relationship include the greater
utilization of capital equipment and the productivity gains
that come with greater specialization of employees within
the plant.
•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.

13. •This is the scale of output a plant must operate at to realize
all major plant-level scale economies. (See Figure 4.2.)
Figure 4.2 A Typical Unit Cost Curve
Units
Costs

Minimum
Efficient
Scale
Volume

14. •The larger the minimum efficient scale of a plant, the
greater the argument for centralizing production in a single
location or a limited number of locations.
•When the minimum efficient scale of production is
relatively low, it may be economical to manufacture a
product at several locations.
•As in the case of low fixed costs, this allows the firm to
better meet demands for local responsiveness or to hedge
against currency risk by manufacturing the same product in
several locations.

15. c) FLEXIBLE MANUFACTURING (LEAN PRODUCTION)
•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 tradeoff is one of unit costs and product variety.
•Producing greater product variety from a factory implies
shorter production runs, which implies an inability to realize
economies of scale.
•Increasing product variety makes it difficult for a company
to increase its manufacturing efficiency and thus reduce its
unit costs.

16. •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 manufacturing efficiency has been challenged
by the recent 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 reduce setup times
for complex equipment, increase the utilization of
individual machines through better scheduling, and improve
quality control at all stages of manufacturing.

17. •Flexible manufacturing technologies allow a company to
produce a wide variety of end products at a unit cost that at
one time could be achieved only through the mass
production of a standardized output.
•The term mass customization has been coined to describe
this ability.’ Mass customization implies that a firm may be
able to customize its product range to suit the needs of
different customer groups without a cost penalty.
•Research suggests that the adoption of flexible
manufacturing technologies may increase efficiency and
lower unit costs relative to what can be achieved by the
mass production of a standardized output.”

18. Product Factors
•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 manufacture these products in the optimal location and to
serve the world market from there

19. •The opposite holds for products with low value-to- weight
ratios.
•Refined sugar, certain bulk chemicals, paints, 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
manufacture 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.

20. •Examples include many industrial products (e.g., industrial
electronics, steel, bulk chemicals) and modern consumer products
(e.g., handheld calculators and personal computers).
•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 manufacturing at an
optimal location.
Locating Manufacturing Facilities
•There are two basic strategies for locating manufacturing facilities:
concentrating them in the optimal location and serving the world
market from there, and decentralizing them in various regional or
national locations that are close to major markets.

21. •Concentration of manufacturing makes most sense
when:
–Differences between countries in factor costs, political
economy, and culture have a substantial impact on the
costs of manufacturing in various countries.
–Trade barriers are low.
–Important exchange rates are expected to remain
relatively stable.
–The production technology has high fixed costs and a
high minimum efficient scale, or a flexible
manufacturing technology exists.
–The product’s value-to-weight ratio is high.
–The product serves universal needs.

22. •Alternatively, decentralization of manufacturing is
appropriate when:
–Differences between 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.
–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 (that is, significant
differences in consumer tastes and preferences exist between
nations).

23. Make-or-Buy Decisions
•International businesses frequently face sourcing decisions,
decisions about whether they should make or buy the
component parts that go into their final product.
•Should the firm vertically integrate into the manufacture of
its own component parts, or should it outsource them—buy
them from independent suppliers?
•Make-or-buy decisions are important factors of many firms’
manufacturing strategies.
•The typical car contains more than 10,000 components, so
automobile firms constantly face make-or-buy decisions.
•Ford of Europe, for example, produces only about 45
percent of the value of the Fiesta in its own plants.

24. •The remaining 55 percent, mainly accounted for by
component parts, comes from independent suppliers.
•In the athletic shoe industry the make-or-buy issue has been
taken to an extreme.
•Companies such as Nike and Reebok have no involvement
in manufacturing; all production has been outsourced,
primarily to manufacturers based in low-wage countries.
The Advantages of Make
LOWER COSTS It may pay a firm to manufacture a product
or component part in-house, as opposed to outsourcing it to
an independent manufacturer, if the firm is more efficient at
that production activity than any other enterprise.

25. FACILITATING SPECIALIZED INVESTMENTS
•Imagine Ford of Europe has developed a high-performance,
high-quality, and uniquely designed carburetor.
•The carburetor’s increased fuel efficiency will help sell Ford
cars.
•Ford must decide whether to make the carburetor in-house
or to contract out the manufacturing to an independent
supplier.
• Manufacturing these uniquely designed carburetors requires
investments in equipment that can be used only for this
purpose;

26. •It cannot be used to make carburetors for any other auto
firm. In such cases, we say that this constitutes an
investment in specialized assets.
•Proprietary Product Technology Protection :Proprietary
product technology is unique to a firm.
•If it enables the firm to produce a product containing
superior features, proprietary technology can give the firm
competitive advantage.
•Obviously the firm would not want this technology to fall
into the hands of competitors.

27. •If the firm contracts out the manufacture of components containing
proprietary technology, it runs the risk that those suppliers will
expropriate the technology for their own use or that they will sell it to
the firm’s competitors.
•Thus, to maintain control over its technology, the firm might make
such component parts in-house.
•IMPROVED SCHEDULING: The vertical integration is that
production cost savings result from it because it makes planning,
coordination, and scheduling of adjacent processes easier.

28. The Advantages of Buy
•Strategic Flexibility: The great advantage of buying component
parts from independent suppliers is that the firm can maintain its
flexibility, switching orders between suppliers as circumstances
dictate.
•This is particularly important in the international context, where
changes in exchange rates and trade barriers can alter the
attractiveness of supply sources.
•Lower Costs: Although vertical integration is often undertaken
to lower costs, it may end up raising costs.
• One potential source of higher costs arises because vertical
integration into the manufacture of component parts increases an
organization’s scope, and the resulting increase in organizational
complexity can raise a firm’s cost structure.

29. •OFFSETS: Another reason for outsourcing some
manufacturing to independent suppliers based in other
countries is that it may help the firm capture more orders
from that country.

30. International Logistics and Supply-Chain Management
•International logistics is the design and management of a
system that controls the flow of materials into, through, and
out of the international corporation.
•It encompasses the total movement concept by covering the
entire range of operations concerned with goods movement,
including therefore both exports and imports
simultaneously.
•By taking a systems approach, the firm explicitly recognizes
the linkages among the traditionally separate logistics
components within and outside of corporation.

31. •As a result of implementing these systems considerations
successfully, the firm can develop just-in-time (JIT) delivery for
lower inventory cost, electronic data interchange (EDI) for more
efficient order processing, and early supplier involvement (ESI)
for better planning of goods development and movement.
•In addition, the use of such a systems approach allows a firm to
concentrate on its core competencies and to form outsourcing
alliances with other companies.
•Two major phases in the movement of materials are of logistical
importance.
•The first phase is materials management, or the timely
movement of raw materials, parts, and supplies into and through
the firm.
•The second phase is physical distribution, which involves the
movement of the firm’s finished product to its customers.

32. •The growth of logistics as a field has brought to the
forefront three major new concepts:
–the systems concept,
–the total cost concept, and
–the trade-off concept.
The systems concept is based on the notion that
materials-flow activities within and outside of the firm
are so extensive and complex that they can be considered
only in the context of their interaction.
Instead of each corporate function, supplier, and
customer operating with the goal of individual
optimization, the systems concept stipulates that some
components may have to work sub optimally to
maximize the benefits of the system as a whole.

33. •The systems concept intends to provide the firm, its
suppliers, and its customers, both domestic and foreign,
with the benefits of synergism expected from the
coordinated application of size
•A logical outgrowth of the systems concept is the
development of the total cost concept.
•To evaluate and optimize logistical activities, cost is used as
a basis for measurement.
•The purpose of the total cost concept is to minimize the
firm’s overall logistics cost by implementing the systems
concept appropriately.
•Implementation of the total cost concept requires that the
members of the system understand the sources of costs.

34. •To develop such understanding, a system of activity-based
costing has been developed, which is a technique designed
to more accurately assign the indirect and direct resources
of an organization to the activities performed based on
consumption.
•The trade-off concept, finally, recognizes the linkages
within logistics systems that result from the interaction of
their components.
•For example, locating a warehouse near the customer may
reduce the cost of transportation.
•However, additional costs are associated with new
warehouses.

35. •Similarly, a reduction of inventories will save money but
may increase the need for costly emergency shipments.
•Managers can maximize performance of logistics systems
only by formulating decisions based on the recognition and
analysis of trade-offs.
•A trade-off of costs may go against one’s immediate
interests.

36. Supply-chain management
•The integration of these three concepts has resulted in the
new paradigm of supply-chain management, where a series
of value-adding activities connect a company’s supply side
with its demand side.

37. Differences Between Domestic and International Logistics
•In domestic operations, logistics decisions are guided by the
experience of the manager, possible industry comparisons, an
intimate knowledge of trends, and discovered heuristics—or
rules of thumb.
•The logistics manager in the international firm, on the other
hand, frequently has to depend on educated guesses to determine
the steps required to obtain a desired service level.
•Variations in locale mean variations in environment.
•Lack of familiarity with such variations leads to uncertainty in
the decision-making process.
•By applying decision rules based only on the environment
encountered at home, the firm will be unable to adapt well to
new circumstances, and the result will be inadequate profit
performance.

38. •The long-term survival of international activities depends
on an understanding of the differences inherent in the
international logistics field.
•The variations can be classified as
–basic differences and
–country-specific differences.
•Basic differences
–Basic differences in international logistics emerge
because the corporation is active in more than one
country.
–One example of a basic difference is distance.
International business activities frequently require goods
to be shipped farther to reach final customers.

39. –These distances in turn result in
•longer lead times,
•more opportunities for things to go wrong,
•more inventories—in short,
•greater complexity.
•Currency variation is a second basic difference in
international logistics.
•The corporation must adjust its planning to incorporate
different currencies and changes in exchange rates.
•The border-crossing process brings with it the need for
conformity with national regulations, an inspection at
customs, and proper documentation.

40. •Most domestic transportation is either by truck or by rail,
whereas the multinational corporation quite frequently ships
its products by air or by sea.
• Airfreight and ocean freight have their own stipulations and
rules that require new knowledge and skills.
•Country-Specific Differences
–Within each country, the firm faces specific logistical
attributes that may be quite different from those
experienced at home.
–Differences and barriers in the areas of infrastructure,
transportation services, inventory control, and
warehousing services often mean long transit times, high
transportation costs, and high inventory levels.’

41. –Transportation systems and intermediaries may vary.
–The computation of freight rates may be unfamiliar.
–Packaging and labeling requirements differ from country
to country.
Management must consider all of these factors to develop
an efficient international logistics operation.

42. International Transportation Issues
•International transportation is of major concern to the
international firm because transportation determines how
and when goods will be received.
•The transportation issue can be divided into three
components:
1.infrastructure,
2.the availability of modes, and
3.the choice of modes among the given alternatives.

43. 1) Transportation Infrastructure
•In industrialized countries, firms can count on an
established transportation network.
•Around the globe, however, major infrastructural variations
will be encountered.
•Some countries may have excellent inbound and outbound
transportation systems but weak internal transportation
links.
•This is particularly true in former colonies, where the
original transportation systems were designed to maximize
the extractive potential of the countries.
•In such instances, shipping to the market may be easy, but
distribution within the market may represent a very difficult
and time-consuming task.

44. •Infrastructure problems can also be found in countries
where most transportation networks were established
between major ports and cities in past centuries.
•The areas lying outside the major transportation networks
will encounter problems in bringing their goods to market.
2) Availability of Modes
•International transportation frequently requires ocean or
airfreight modes, which many corporations only rarely use
domestically.
•In addition, combinations such as land bridges or sea
bridges may permit the transfer of freight among various
modes of transportation, resulting in intermodal movements.
•The international logistics manager must understand the
specific properties of the different modes to be able to use
them intelligently.

45. •Ocean Shipping Water transportation is a key mode for
international freight movement.
•Three types of vessels operating in ocean shipping can be
distinguished by their service:
–Liner Service,
–bulk service, and
–tramp or charter service.
Liner service offers regularly scheduled passage on
established routes.
Bulk service mainly provides contractual services for
individual voyages or for prolonged periods of time.
Tramp service is available for irregular routes and
scheduled only on demand.

46. •In addition to the services offered by ocean carriers, the type
of cargo a vessel can carry is also important.
•Most common are
–conventional (break bulk) cargo vessels,
–container ships, and
–roll-on-roll-off vessels.
•Conventional cargo vessels are useful for oversized and
unusual cargoes but may be less efficient in their port
operations.
•Container ships carry standardized containers that greatly
facilitate the loading and unloading of cargo and intermodal
transfers.
•As a result, the time the ship has to spend in port is reduced
as are the port charges.
•Roll-on-roll-off (RORO) vessels are essentially oceangoing
ferries.
•Trucks can drive onto built-in ramps and roll off at the
destination.

47. •Another vessel similar to the RORO vessel is the LASH (lighter
aboard ship) vessel.
•LASH vessels consist of barges stored on the ship and lowered at the
point of destination.
•The individual barges can then operate on inland waterways, a feature
that is particularly useful in shallow water.
•Air Shipping Airfreight is available to and from most countries.
•This includes the developing world, where it is often a matter of
national prestige to operate a national airline.
•The total volume of airfreight in relation to total shipping volume in
international business remains quite small.
•It accounts for less than 1 percent of the total volume of international
shipments, although it often represents more than 20 percent of the
value shipped by industrialized countries

48. 3) Choice of Modes
•The international logistics manager must make the
appropriate selection from the available modes of
transportation.
•The decision will be heavily influenced by the needs of the
firm and its customers.
•The manager must consider the performance of each mode
on four dimensions:
1.transit time,
2.predictability
3.cost, and
4.noneconomic factors

49. •Transit Time The period between departure and arrival of
the carrier varies significantly between ocean freight and
airfreight.
•For example, the 45-day transit time of an ocean shipment
can be reduced to 24 hours if the firm chooses airfreight.
•Perishable products require shorter transit times
•Predictability Providers of both ocean freight and airfreight
service wrestle with the issue of reliability.
•For example, because of the higher predictability of
airfreight, inventory safety stock can be kept at lower levels.
•Greater predictability also can serve as a useful sales tool,
since it permits more precise delivery promises to
customers.
•If inadequate port facilities exist, airfreight may again be the
better alternative.

50. •Cost of Transportation
–International transportation services are usually priced on the basis
of both cost of the service provided and value of the service to the
shipper.
–Due to the high value of the products shipped by air, airfreight is
often priced according to the value of the service. In this instance,
of course, price becomes a function of market demand and the
monopolistic power of the carrier.
International Inventory Issues
•Carrying cost
•Order cycle time
•Customer service levels

51. International Packaging Issues
•Type of the product
•Weight of the product
International Trade Terms
Incoterms (international commercial terms): Incoterms are
the internationally accepted standard definitions for terms of
sale set by the International Chamber of Commerce (ICC)
since 1936.

52. EX- works (EXW)
•Prices quoted ex-works (EXW) apply only at the point of origin, and the
seller agrees to place the goods at the disposal of the buyer at the
specified place on the date or within a fixed period. All other charges are
for the account of the buyer.
Free carrier (FCA)
•One of the new Incoterms is free carrier (FCA), which replaced a
variety of FOB terms for all modes of transportation except vessel.
•FCA (named inland point) applies only at a designated inland shipping
point.
•The seller is responsible for loading goods into the means of
transportation; the buyer is responsible for all subsequent expenses.
•f a port of exportation is named, the costs of transporting the goods to
the named port are included in the price.

53. •Free alongside ship (FAS)
•Free alongside ship (FAS) at a named port of export means
that the exporter quotes a price for the goods including
charges for delivery of the goods alongside a vessel at the
port. The seller handles the cost of unloading and wharfage;
loading, ocean transportation, and insurance are left to the
buyer.
•Free on board (FOB)
•Free on board (FOB) applies only to vessel shipments. The
seller quotes a price covering all expenses up to, and
including, delivery of goods on an overseas vessel provided
by or for the buyer.

54. •Cost and freight (CFR)
•Under cost and freight (CFR) to a named
overseas port of import, the seller quotes a
price for the goods, including the cost of
transportation to the named port of
debarkation. The cost of insurance and the
choice of insurer are left to the buyer.
• 

55. •Cost, insurance, and freight (CIF)
•With cost, insurance, and freight (CIF) to a named overseas port of
import, the seller quotes a price including insurance, all
transportation, and miscellaneous charges to the point of debarkation
from the vessel or aircraft. Items that may enter into the calculation
of the CIF cost are (1) port charges: unloading, wharfage (terminal
use) handling, storage, cartage, heavy lift, and demurrage; (2)
documentation charges: certification of invoice, certificate of origin,
weight certificate, and consular forms; and (3) other charges, such as
fees of the freight forwarder and freight (inland and ocean) insurance
premiums (marine, war, credit).
•Delivered duty paid (DDP)
•With delivered duty paid (DDP), the seller delivers the goods, with
import duties paid, including inland transportation from import point
to the buyer’s premises.

56. •Ex-works signifies the maximum obligation for
the buyer; delivered duty paid puts the maximum
burden on the seller.
• 
•The careful determination and clear understanding
of terms used and their acceptance by the parties
involved are vital if subsequent misunderstandings
and disputes are to be avoided.
• 

57. •These terms are also powerful competitive tools.
The exporter should therefore learn what importers
usually prefer in the particular market and what the
specific transaction may require. An inexperienced
importer may be discouraged from further action by
a quote such as ex-plant MAA Garment, Mekelle,
whereas CIF Naples will enable the Italian importer
to handle the remaining costs because they are
incurred in a familiar environment.