CHAPTER 6

OPERATIONS
IN GLOBAL SUPPLY CHAINS
 Global supply chain management
2

LOGISTICS
Global logistics is responsible for transportation, inventory
management, packaging, and materials handling

Global Customers
Global Suppliers

MARKET
PURCHASING
CHANNELS
Global purchasing is
responsible for the boundary Global market channels is
spanning role with suppliers responsible for the boundary
spanning role with customers

OPERATIONS
Global operations is responsible for the managing of production,
competitive priorities, vertical integration, and quality
3
 Global opertations strategy
4

Global operations management refers to the systematic design,

direction, and control of domestic and global processes that
transform various inputs into services and products for internal and
external global customers

A global operations strategy is the

means by which operations implements
the MNC’s corporate strategy and
facilitates the firm’s being market driven
 Global opertations strategy
5
 A framework for operations and supply
chain strategy
6
 Global opertations strategy
7

 Involes the worldwide management of:

 Make-or-buy decisions in GSC
 Global production and manufacturing
 Competitive priorities in GSC
 Total cost analyses in GSC
 Process-based quality standards
 Productivity Measurement
 Decisions on the usage of operational (logistics) providers
within the field of global operations across the supply chain
 Make-or-buy decisions in GSC
8

 The make-or-buy decision for a global firm is 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
 Strategic level: long term
 Operational level: short term

 Make-or-buy decisions are based on two critical factors:

 Cost
 Production capacity
 Discussion: Make-or-buy decisions in GSC
9

Where should Let’s move our production to China

we manufacture because we can get the same quality
the new for a dime-on-the-dollar cost, and
products? that will free up production capacity
that we can use to focus on other
products
 Make-or-buy decisions in GSC

Choose
Make
Buy

Cost Control

Flexibility Cost
Management
 Global production and manufacturing
11

Product Design Product Manufacturing

1. Product development 1. Capacity planning
process 2. Job management
2. Economic analysis of 3. Production Process
product development
projects 4. Facility layout
3. Designing products for 5. Quality management
manufacture and
assembly
4. Measureing product
development performance
 Product Design
12

• Product development process

1

• Economic analysis of product development

2 projects

• Designing products for manufacture and

3 assembly

• Measureing product development performance

4
 (1) Product development process
Phase
13 0: Planning
• Consider product platform and architecture Assess new technologies

Phase 1: Concept development

• Investigate feasibility of product concepts Develop industrial design concepts
• Build and test experimental prototypes
Phase 2: System-level design
• Generate alternative product architectures Define major subsystems and interfaces
• Refine indestrial design
Phase 3: Detail design
• Define part geometry Choose materials Assign tolerances
• Complete industrial design control documentation
Phase 4: Testing and Refinement
• Reliability testing Life testing Performance testing
• Obtain regulary approvals Implement design changes
Phase 5: Production Ramp-up
• Evaluate early production output
Process type Description Distinct features Examples

Generic Begin with a market opportunity Process generally includes distinct planning, Sporting goods,
(market-pull and selects appropriate concept development, system-level design, detail furniture, tools
products) technologies to meet customer design, testing and refinement, and production
needs ramp-up phases
Technology-push Begin with a new technology, then Planning phase involves matching technology and Gore-tex rainwear,
products finds an appropriate market market; concept development assumes a given Tyvek envelopes
technology
Platform products Assume that the new product will Concept development assumes a proven Consumer
be built around an estimated technology platform electronics,
technological subsystem computers, printers
Proces-intensive Characteristics of the product are Either an existing production process must be Snack foods,
products highly constrained by the specified from the start or both product and chemicals,
production process process must be developed together from the start semiconductors

Customized New products are slight variations Similarity of projects allows for a streamlined and Motors, switches,
products of existing configurations highly structured development process batteries, containers

High-risk Technical or market uncertainties Risks are identified early and tracked throughout Pharmaceuticals,
products create high risks of failure the process space systems
Analysis and testing activities take place as early
as possible
Quick-build Rapid modeling and prototyping Detail design and testing phases are repeated a Software, cellular
products enables many design-build-test number of times until the product is completed phones
cycles ore time/budget runs out

Complex systems System must be decomposed into Subsystems and components are developed by Airplanes, jet
several subsystems and many many teams working in parallel, followed by engines, automobiles
components system integration and validation
 (2) Economic analysis of product development projects

Build a base-case financial model

Sensitivity analysis
 Building Base-case model consists of:
1. Estimate the timing and magnitude of future  Use the finalcial model to
cash flows answer “what if” questions by
calculating the change in
2. Then, computing NPV of those cash flows NPV corresponding to a
3. By, merging the project schedule with: change in the factors included
◼ Project budget in the model
◼ Sales volume forecasts
 Other scenarios:
◼ Estimate production costs
1. Project development time
 Basics categories of cash flow for a new 2. Sale volume
product development project are: 3. Product cost
1. Development cost (design, test, refinement) 4. Sale price
5. Development cost
2. Ramp-up cost
3. Marketing and support cost
4. Production cost
5. Sales revenue
 Total cost in Global supply chain
16

 Total supply chain costs include all costs across all

companies in the global supply chain
 All first-tier suppliers
 All second-tier suppliers
 All third-tier suppliers
 The producer
 The agents and/or facilitators in the chain
 The wholesaler
 The retailer
 And many other actors in the supply chain

 Total cost analysis is one of the most important aspects

of the global supply chain
 Total cost in GSC
17

Process Flow including Entities and Activities

Raw Assemble Assemble Market Primary

Build parts
materials modules products channels customer

Cost Cost Cost Cost Cost Total cost

Adding cost centers to be analyzed

 (2) Economic analysis: Case
18

Vidmark, a manufacture of cell phones, is currently developing a new model (VidPhone

X70) that will be released on the market when development is complete. This phone
will be revolutionary in that it will allow the user to place video phone calls. Vidmark is
concerned about the development cost and time. They are also worried about market
estimates of the sales of the new phone VidPhone X70. The cost estimates and forecast
are given in the table below.
Development cost $ 2,000,000
Development time 2 years
Ramp-up cost $750,000
Marketing and support cost $500,000/year
Unit production cost $75
Unit price $135
Sales and production volume
Year 3 40,000
Year 4 50,000
Year 5 40,000
 (2) Economic analysis: Case (cont)
19

 Use the data above to develop a base-case analysis. The schedule is shown below
with timings of the cash flows.
Project schedule VidPhone X70 Year 1 Year 2 Year 3 Year 4 Year 5
Development
Ramp-up
Marketing and support
Production and sales

 VidMark has questions on this project:

1. What are the yearly cash flows and their present value (discounted ar 12%) of this project? What is
the NPV?
2. What is the impact on VidMark if sale estimates are off by 20%?
3. What is the impact on VidMark if unit production cost is $85?
4. VidMark thinks that it can cut the development time in half by spending an extra $1,500,000 on
development for this project. If the product is launched a year earlier, then the product will still have
a 3-year life but the forecast starting in year 2 will be 48,000; 60,000; and 50,000. Is it worth to
VidMark to spend extra money on development?
 (3) Designing products for manufacture and assembly
20

 Establish the basic paraerters of a system

 Detailing of the materials, shapes, and tolerance of
the individual parts of a product

 This activity starts with sketches of parts and

assemblies and then progresses to the computer-
aided design (CAD) workstation.
 (4) Measureing product development performance
21

Performance
dimension Measures Impact on competitiveness

Time to market ✓Frequency of new product introductions ✓Responsiveness to

✓Time from initial concept to market introduction customers/competitors
✓Number started and number completed ✓Quality of design – close to market
✓Actual vesus plan ✓Frequency of projects – model life
✓Percentage of sales coming from new products

Productivity ➢Engineering hours per projects ➢Number of projects – freshness

➢Cost of materials and tooling per project and breadth of line
➢Actual vesus plan ➢Frequency of projects – economics
of development

Quality ❖Conformance – reliability in use ❖Reputation – customer loyalty

❖Design – performance and customer satisfaction ❖Relative attractiveness to
❖Yield – factory and field customers – market share
❖Profitability – cost of ongoing
service
 Productivity measurement
22

 Operations and supplychain management focuses

on making the best use of the resources available to
a firm
 Productivity measurement is fundamental to
understanding operations-ralated performance

Outputs
Pr oductivity =
Inputs
 Examples of Productivity measurement
23

 Partial measure
Output Output Output Output
Labor Capital Materials Energy

 Multifactor measure
Output Output
Labor + Capital + Energy Labor + Capital + Materials

 Total measure
Outputs Goods & Services _ produced
Inputs All _ resouces _ used
 Examples of Productivity measurement
Input
24 & Output production data ($) Productivity measure examples
 Total measure
 Output
1. Finished unit $10,000 Total _ output 13,500
= = 0.89
2. Work in process $2,500 Total _ input 15,193
3. Dividends $1,000
 Multifactor measure
4. Bonds
Other income Total _ output 13,500
5.
= = 4.28
Total output $13,500 Human + Material 3,153

 Input Finished _ units

=
10, 000
= 3.17
1. Human $3,000 Human + Material 3,153
2. Materials $153  Partial measure
3. Capital $10,000
Total _ output 13,500
4. Energy $540 = = 25
Energy 540
5. Other expenses $1,500
Finished _ units 10,000
Total inout $15,193 = = 18.52
Energy 540
 Efficiency measures used by Wall Street
25

A Comparison of Automotive Companies

Management
Efficiency General
Measure Toyota Ford Motors Chrysler Industry

Income per
employee $40,000 $8,000 $10,000 $8,000 $15,000

Revenue per
employee $663,000 $535,000 $597,000 $510,000 $568,000

Receivables
turnover 4.0 1.5 1.0 2.2 2.1

Inventory
turnover 12.0 11.5 11.7 5.9 `11.0

Asset
turnover 0.8 0.6 0.4 0.8 0.8
 Product Manufacturing
26

1
• Capacity planning

2
• Job management

3
• Production Process

4
• Facility layout

5
• Quality management
 (1) Capacity planning
27

Demand
 Considerations in forecast
Capacity level
changing capacity (Infrequent expansion)

Capacity level
 Determning (Frequent expansion)
capacity Volume

requirements
Small Large chunk
chunk
 Evaluate capacity
alternatives

Years
 (2) Job management
28

Where When
Geographic locale of
organization; location of Time of day; time of
work areas occurrence in the work flow

Why
What
Organizational rationale
Task(s) to be performed for the job; objectives and
motivation of the worker

Who Ultimate How

Mental and physical job
Method of performance
characteristics of the structure and motivation
workforce
 (3) Production Process
29

Low

Project

Workcenter

Product
standardization Manufacturing
cell
Assembly
line
Continuous
process
High

Low Product volume High

 (4) Facility layout
30

1. Project layout
2. Workcenter
3. Manufacturing cell
4. Assembly line
 (5) Quality management
31

TQM- total quality management

“managing the entire organization so that it excels
on all dimensions of products and sevives that are
important to the customer”

1. Six-sigma Quality
2. ISO
 Process-based quality standards
32

IS0 – International Organization

Six-Sigma
for Standardization
 If a process, such as a global supply  ISO 9001:2008
chain, has six standard deviations  ISO 9000:2005
between the process mean and the
nearest specification limit, then  ISO 9004:2009
practically no items will fail to meet  ISO 19011:2011
specifications  ISO 9000 system: 8 principles
 Includes: five defined steps:  Customer focus
◼ Define  Leadership
 Involvement of people
◼ Measure
 A process approach
◼ Analyze  A system approach to management
◼ Improve  Continual improvement
 A factual approach to decision making
◼ And control
 Mutrually beneficial supplier
relationships
 Competitive priorities in GSC
33

 Competitve priorities:
Trade-offs in operations strategy were an
important element of the firm’s overall strategy,
and, more important, a way for operations to
contribute to the competitive edge of the global
firm

 Firms should seldom, try to

compete in multiple competitive
priorities
 Guidelines for operations in GSC
34

1. Each decision – make or buy – needs to be evaluated jointly on the

basis of cost and production capacity
2. Evaluate the strategic options for each production choice overseas,
including whether firms should establish factories, used for
offshoring, sourcing, serving, contributing, outposting or leading.
Not just “go to China”
3. Select one competitive priority – mix of the appropriate speed,
qualiy, cost and flexibility
4. To run an effective and efficient global supply chain, outcome of a
total cost analysis is measured by resulting in the lowest total cost
when all operations in the global supply chain are included.
5. All global supply chains need structure: Six Sigma, ISO 9000, and
the SCOR model