International Operations Management

1. International Operations Management MGMT 6367 Lecture 10 Instructor: Yan Qin Fall 2012

2. Outline • Logistics Network Configuration • Modularization Vs. Postponement • Orientation of Facility Networks • Factors that affect location decisions • Three options of focusing facility networks • By Market • By Product • By Process • Location methods • Factor-rating • Centroid method

3. Logistics Network Configuration • Two key characteristics in logistics networks: • Modularization: a product design approach in which products are assembled from a set of standardized components; • Postponement: a process design approach in which customization of products is postponed as late as possible in the value-addition process. • For example, HP Deskjet printers are manufactured centrally to obtain scale benefits but assembled in the local distribution centers to customize.

4. Logistics Network Configuration • Both approaches are adopted to marry the advantages of economies of scale and economies of scope. • Economies of scale refers to the cost savings derived from manufacturing many of the same product. • Economies of scope refers to the cost savings derived from manufacturing a variety of products. • Simply put, the approaches are adopted to increase product variety at a lower cost.

5. Example: Economies of scope • Let's assume Company XYZ strictly manufactures vacuum cleaners. What would happen if the company decided to branch out into brooms? • Adding brooms to the product line would allow XYZ to spread certain fixed costs over a larger number of units. Thus, the company could reach more customers with its advertising budget, its sales force could be used to sell both products, brooms could be stored and shipped from the firm's existing vacuum warehouse, and the company's factory could turn leftover broom bristles into cleaning brushes for its vacuums. Furthermore, XYZ could then market itself as a "cleaning products" company rather than just a "vacuum" company. In this situation, economies of scope might be achieved. Source: http://www.investinganswers.com/term/economies-scope-1009

6. Impact of Modularization and Postponement • Use of Modularization and Postponement in designing plant layout Example: Manufacturing facilities of Magneto-Marelli can be divided into two broad sections: basic products and model-specific lines. The basic-product section manufactures standardized components that will be used subsequently in manufacturing different end (model-specific) products. This layout simplifies material flow and control.

7. Impact of Modularization and Postponement • Use of Modularization and Postponement in capacity planning Example: At Texas Instrument, a specialized product and process design makes 90% of the production process identical for the low-cost memory chips and expensive customized microprocessors. TI always operates its plant at full capacity by adjusting the production of low cost products to the demand for expensive customized microprocessors.

8. Impact of Modularization and Postponement • Modularization in product design can help speed up the new product development process. • Companies can reap strategic benefits of modularization in outsourcing. • Further cost savings in outsourcing standardized components; • Modularization facilitates “consolidated” outsourcing activities.

9. Categorizing logistics networks • Logistics networks can be categorized by degree of inbound outsourcing and outbound postponement. • It is believed that inbound outsourcing captures the degree of modularization and usage of subcontractors for making the components. • Outbound postponement captures the degree of customization the supply chain offers.

10. Framework for logistics structures

11. Interpretation • Notation: • S: Source of components • A: Assembly • P: Product • Multiple S’s refers to multiple subcontractors of components, which indicates a high level of inbound outsourcing. • Multiple P’s refers to multiple end products, which indicates a high level of customization.

12. Interpretation (Cont.) • The rigid structure is the classic vertically integrated supply chain, which intends to capture the benefits of economies of scale. • It is usually build-to-stock in this structure. • The flexible structure uses many subcontractors to make components that will be used in manufacturing a number of products. • It is usually build-to-order in this structure due to the difficulty in forecasting demand for a large product pool.

13. Interpretation (Cont.) • The modularized structure has many subcontractors for components that will be used in manufacturing a single product. • It is usually build-to-stock as in the rigid structure. • The postponed structure manufactures many different products in house, which intends to capture the benefits of economies of scope. • It is usually build-to-order as in the flexible structure.

14. Location decisions • Location options include: • Expanding the existing facility instead of moving; • Maintaining current sites while adding another facility elsewhere; • Closing the existing facility and/or moving to another location. • The sequence of location decisions is usually the following: • Choose a country in which to operate; • Choose a region/community in that country; • Choose a site in that region/community in a particular country.

15. Country decision • Factors that may affect the choice of country: • Political risks, government rules, attitudes, incentives; • Cultural and economic issues • Location of markets • Labor talent, attitudes, productivity, costs • Availability of supplies, communications, energy • Exchange rates and currency risk • World Economic Forum (www.weforum.org) biannually ranks the global competitiveness of 125 countries.

16. Region decision • Factors that may affect the region decision: • Corporate desires, that is, what competitive advantages a company wants to achieve • Attractiveness of region (culture, taxes, climate, etc.) • Labor availability, costs, attitudes toward unions • Cost and availability of utilities • Environmental regulations of state and town • Government incentives and fiscal policies • Proximity to raw materials and customers • Land/construction costs

17. Site decision • Factors that may affect site choice: • Site size and cost • Air, rail, highway, waterway systems • Zoning restrictions • Proximity to services/supplies needed • Environmental impact issues

18. Low-wage offshore labor policy • When deciding on a location, management tend to be tempted by an area’s low wage rates. However, wage rates cannot be considered by themselves. • Low labor productivity, transportation costs, and difficulty in long-distance management may be ignored. • Example: Quality Coils, Inc., saw the savings of low Mexican wages and headed south. A factory in Connecticut was shut down and a new factory was opened in Juarez. However, the company was nearly destroyed due to high absenteeism, low productivity, and problems of long-distance management. The company moved back to the US in 4 years and rehired some of the original workers.

19. Orientation of facility networks • In general, companies have three options for focusing their facility networks: • Market focus • Product family focus • Process focus

20. Market focus • Advantages: • Proximity to markets • Speedy delivery • Managers have control over both manufacturing and marketing • High responsiveness to changes in market • Disadvantages: • Economies of scale not exploited if the market is not big enough • Significant duplication of process equipment • Difficulty in managing many different products

21. Product family focus • Advantages: • Economies of scale as the plant serves all markets • Reduced duplication of equipment • High level of product learning within a family • Easier quality control • Disadvantages: • Lack of local presence • Significant exchange rate exposure • Difficulty in coordination between manufacturing and marketing • Transportation diseconomies

22. Process focus • Advantages: • Economies of scale • Significant process learning and potential for process improvement • Well-controlled manufacturing • Postponement can be easily applied • Avoid almost completely the duplication of equipment • Disadvantages: • Significant exchange rate exposure • Significant transportation diseconomies • High level of component inventory • Difficulty in controlling the quality of the final product

23. Location methods • Common methods in locating a facility include: • Factor rating • Probably the most widely used because it provides a mechanism to combine diverse factors in an easy-to-understand format. • Centroid method • Often used to locate intermediate or distribution warehouses. • Linear Programming (Not covered here)

24. Example: Factor rating • A company is evaluating potential sites to locate a refinery. The management team have decided the following range of point values to major factors that need to be considered in the decision.

25. Centroid Method • Steps to take in using the Centroid method: • Place the existing n facilities on a coordinate grid system; • Establish relative distances between those facilities (Longitude and latitude can be used for international locations); • Let denote the x coordinate of location i and denote the y coordinate of location i. Let be the volume to be transported to/from locationi. Then the x and y coordinates of the centroid, which is the location of the new facility suggested by the centroid method, can be calculated as follows. ,

26. Example: Centroid method • A small manufacturing facility is being planned that will feed parts to three heavy manufacturing facilities. The locations of the current facilities and demands are given in the following table: • Use the Centroid method to determine the best location for the new facility.

27. Transportation model • Transportation model finds the least cost means of shipping products from multiple origins to multiple destinations. • In each transportation model, we know the following: • The origin points and the capacity or supply available at each; • The destination points and the demand at each; • The cost of shipping one unit from each origin to each destination. • Can be solved using Linear Programming or stepping-stone method, which will not be covered in this course.

28. Example: Transportation model

29. Example: Transportation model

30. Example: Stepping-stone method

32. Example: Excel solver setup

33. Next Week • Global Product Launch • Role of product management • Product launch strategy • Global launch strategy considerations