BSB119 – GLOBAL BUSINESS
LECTURE 11: INTERNATIONAL PRODUCTION
With a shift towards globalisation of production, firms increasingly source goods and services from
various locations to take advantage of national differences in cost and quality of various factors of
Today, firms are confronted with decisions regarding:
o Where should production be located?
o Should production be concentrated or dispersed around the globe?
o What should be the long-term strategic role of foreign production sites?
Consider the impact of costs both financial and to the brand
o Should production and logistics activities be owned by the firm or outsourced?
Has resulted in the creation of complex global supply networks for the distribution of
finished products and for the inbound supply of raw materials and components
How can a company best distribute their activities to minimise costs, produce
products of good quality in a timely manner?
Production: refers to activities involved in creating a product including
o Trend to outsource production to developing nations where skilled and less-skilled labour
costs are lower
o Converting inputs to a product
o What impact does this have on quality control?
Logistics and materials management: refers to activities that control the transmission of physical
materials through a value chain
o procurement production distribution
o suppliers customers
the two terms are closely linked as a firm’s ability to produce efficiently depends on
a timely supply of high-quality material inputs which is provided by logistics
Strategic objectives in global operations management
o Lowering costs while raising efficiency (maximise productivity, increase quality, reduce
Can be achieved by dispersing production activities to various locations which are
able to perform the activity more efficiently.
Manage the global supply chain efficiently – better match supply and demand
Increases inventory turnover and decreases inventory write offs
o Responding to customer demands and satisfying customer needs – need to be flexible and
o The aim is to control the costs of production while ensuring timely delivery
o Increase product quality by eliminating defective products
Results in increasing productivity
Lowering rework and scrap costs
Reducing warranty costs
Additional international logistics challenges
o Geographical distances
o Involvement of many different transport modes
o Different regulatory requirements: pricing, packaging, safety, documentation Relationship between quality and costs
The Six Sigma philosophy (modern successor to TQM) aims to reduce defects, boost productivity,
eliminate waste and cut costs throughout a company
• Eliminate mistakes, defects and poor-quality materials
• Allow staff more time and provide them with the tools to do the job
• Focus on continuous improvement
• Adjust functions to meet the local conditions and demand
• TQM = total quality management: focus on continuously improving the quality of a
Location of Production
Decision: Where to locate production activities to best minimize costs and improve quality?
Manufacturing Location Factors
o Some have a comparative advantage for producing certain goods
o Favorable economic, political and cultural conditions
o Presence of appropriately skilled labour and supporting industries
Increased use of developing nations e.g. India
o Barriers to investment influence decisions as do transport costs and barriers to FDI
o Expected movements in exchange rate
Manufacturing Technological Factors – crucial decision
o There may only be one place in the world which is capable of producing your product. Or
does technology make it possible to produce in many places?
o Is there high/low fixed costs in setting up a production plant?
Fixed costs may be high which would result in the firm producing from very few
Low fixed costs can make it economical to perform activity in many places.
Helps the firm avoid becoming too dependent on one location
o How high/low is the ‘minimum efficient scale’?
Minimum efficient scale = level of output at which most plant-level scale economies
As output increases, unit costs decrease due to greater utilization of capital
equipment and productivity increases in employees
Beyond a certain level there are very few increases Larger the minimum efficient scale = greater argument for centralizing production
o Is mass customization possible?
Mass customisation: ability of companies to use flexible manufacturing technology
to achieve product customisation at low costs
Best way to achieve high efficiency and low unit costs
May limit variety
Flexible manufacturing technology: designed to reduce set up time
o Product has high/low value-to-weight ratio?
This influences transport costs
High value to weight ratio = Expensive to transport but don’t weight very much e.g.
Produce goods in an optimal location
Low value to weight ratio = inexpensive products to ship which weigh a lot. Shipped
long distances and transportation is a considerable proportion of the total costs
o Does the product serve universal needs?
Concentrated vs. Decentralized Production
Central = concentrating activities in one location
De-central = various regional locations which are close to major markets