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MGCR 382 (35)
Chapter 17

MGCR382 Chapter 17 Notes - International Operations Management.docx

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Department
Management Core
Course Code
MGCR 382
Professor
Nicholas Matziorinis

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MGCR382 Chapter 17 Notes: International Operations Management The Nature of International Operations Management Operations management – the set of activities an organization uses to transform different kinds of inputs (materials, labour, etc) into final goods and services International operations management – refers to the transformation-related activities of an international firm A firm’s strategic context provides a necessary backdrop against which it develops and then manages its operations functions. Flowing directly from the strategic context is the question of standardized vs. customized production The positioning of a firm along this continuum in turn helps dictate the appropriate strategies and tactics for other parts of the OM process The next part of international OMG is the activities and processes connected with the acquisition of resources the firm needs to produce the goods or services it intends to sell. Location decisions are also important. In addition, international operations managers are concerned within logistics and materials management. OM is also closely linked with quality, productivity, and information technology. A firm’s OM system largely determines how inputs are transformed into goods and services. Properly designed and managed operating systems and procedures play a major role in determining product quality and productivity. Conversely, poorly designed operating systems are a major cause of poor quality and lower productivity. They promote inefficiency and can contribute in various ways to higher costs and suboptimal profit performance. The Strategic Context of International Operations Management  Central role of OM is to create the potential for achieving superior value for the firm. That is, OM is a value- adding activity intended to create or add new value to the organization’s inputs in ways that directly impact outputs  Indeed, the business strategy set by top managers at the firm’s corporate and regional levels will affect all facets of the planning and implementing of operations management activities, such as supply chain management strategies, location decisions, facilities design, and logistics management  For a company pursuing a differentiation strategy, the OM function must be able to create goods or services that are clearly different from those of the company’s competitors  For a firm following a cost leadership strategy, the OM function must be able to reduce the costs of creating goods or services to the absolute minimum so the firm can lower its prices while still earning an acceptable level of profits. In this case cost and price issues are central, whereas quality may be less critical. As a result, locating production facilities where labour costs are especially low may be highly appropriate  Another factor affecting the firm’s choices is the extent to which it uses standardizes or customized production processes and technologies. On the one hand, if the firm uses standardized production processes and technologies in every market where it does business, then its operations systems can be globally integrated. Such firms may choose to adopt global product designs to capture more easily global efficiencies generated by their operations. On the other hand, if a firm uses a unique operations system in each market where it does business, such global integration is not only unnecessary but also likely to be impossible. Often such firms adopt a global area design to promote responsiveness of their operations managers to local conditions Complexities of International Operations Management Resources: managers must decide where and how to obtain the resources the firm needs to produce its products. Key decisions relate to supply chain management and vertical integration Location: managers must decide where to build administrative facilities, sales offices, and plants; how to design them; and so on Logistics: managers must decide on modes of transportation and methods of inventory control  A domestic manufacturer may deal with only local suppliers, be subject to one set of government regulations, compete in a relatively homogenous market, have access to an integrated transportation network, and ship its goods relatively short distances  An international manufacturer is likely to deal with suppliers from different countries and confront different government regulations where it does business, as well as very heterogeneous markets, disparate transportation facilities and networks, and relatively long shipping distances  International operations managers must choose the countries in which to locate production facilities, taking into account factors such as costs, tax laws, resource availability, and marketing considerations; they must also consider potential exchange rate movements and noneconomic factors such as government regulations, political risk, and predictability of a country’s legal system  They must consider the impact of facilities’ locations on the firm’s ability to respond to changes in customer tastes and preferences. Finally, they must factor in logistical problems Production Management Production management – OM decisions, processes, and issues that involve the creation of tangible goods Service operations management – involving the creation of intangible services Manufacturing is the creation of goods by transforming raw materials and component parts in combination with capital, labour, and technology. Most successful manufacturers use many sophisticated techniques to produce high-quality goods efficiently Supply Chain Management and Vertical Integration Supply chain management – the set of processes and steps a firm uses to acquire the various resources it needs to create its products (sourcing/procuring)  clearly affects product costs, product quality, and internal demands for capital. Because of these impacts, most international firms approach SCM as a strategic issue to be carefully planned and implemented First step: vertical integration – the extent to which a firm either provides its own resources or obtains them from other sources. At one extreme, firms that practice relatively high levels of vertical integration are engaged in every step of the OM process as goods are developed, transformed, packaged, and sold to customers. Various units within the firm can be seen as suppliers to other units within the firm, which can be viewed as the customers of the supplying units. At the other extreme, firms that have little vertical integration are involved in only one step or just a few steps in the production chain. They may buy their inputs and component parts from other suppliers, perform one operation or transformation, and then sell their outputs to other firms or consumers  The extent of a firm’s vertical integration is the result of a series of SCM decisions made by production managers  Make-or-buy decision – firms can make the inputs itself, or it can buy them from outside suppliers  A decision to buy rather than make dictates the need to choose between long-term and short-term supplier relationships  A decision to make rather than buy leaves open the option of making by self or making in partnership with others. If partnership is the choice, yet another decision relates to the degree of control the firm wants to have The make-or-buy decision can be influenced by a firm’s size, scope of operations, and technological expertise and by the nature of its product. At other time the make-or-buy decision will depend on existing investments in technology and manufacturing facilities. All else being equal, a firm will choose to make or buy simply on the basis of whether it can obtain the resource cheaper by making it internally or by buying it from an external supplier. If a high potential for competitive advantage exists along with a high degree of strategic vulnerability, the firm is likely to maintain strategic control by producing internally. However, if the potential for competitive advantage and the degree of strategic vulnerability are both low, the firm will need less control and therefore will be more likely to buy “off the shelf:. Finally, when intermediate potential for competitive advantage and moderate degree of strategic vulnerability call for moderate control, special ventures or contract arrangements may be most appropriate. Control – making a component has the advantage of increasing the firm’s control over product quality, delivery schedules, design changes, and costs. A firm that buys from external suppliers may become overly dependent on those suppliers. If a given supplier goes out of business, raises it prices, or produces poor-quality material, the firm will lose its sources of inputs, see its costs increase, or experience its own quality-related problems  Another issue of control relates to the ability to enforce contract with outside suppliers. Enforcing contracts with foreign suppliers may be difficult or costly because of differences in national legal systems Risk – buying a component from an external supplier has the advantage of reducing the firm’s financial and operating risks. Equally important, the firm that buys rather than makes can reduce its political risk in a host country Investments in facilities, technology, and people – buying from others lowers the firm’s level of investment. By not having to build a new factory or learn a new technology, a firm can free up capital for other productive uses  Buying from others also reduces a firm’s training costs and expertise requirements Flexibility – a firm that buys rather than makes retains the flexibility to change suppliers as circumstances dictate. This is particularly helpful in cases in which technology is evolving rapidly or delivered costs can change as a result of inflation or exchange rate fluctuations  Sometimes a firm must make trade-offs that reduce flexibility. Not long ago, managers assumed it was useful to use a variety of suppliers to avoid becoming too dependent on a single one. A drawback of this approach is the complexity associated with dealing with a large network of suppliers, especially if that network is global. More recently, some firms have come to realize that by engaging in exclusive or semi-exclusive long-term relationships with fewer suppliers, the firms can better benefit from these suppliers’ experience and product knowledge Location Decisions Country-related issues – resource availability and cost, infrastructure, and country-of-origin marketing effects  Resource availability and cost constitute a primary determinant of whether an individual country is a suitable location for a facility. Countries that enjoy large, low-costs endowments of a factor of production will attract firms needing that factor of production  Infrastructure also affects the location of production facilities. Most facilities require at least some minimal level of infrastructural support. To build a facility requires construction materials and equipment as well as materials suppliers and construction contractors  Country-or-origin effects also may play a role in locating a facility. Certain countries have “brand images” that affect product marketing Product-related issues – product’s value-to-weight ratio and the required production technology  Product’s value-to-weight ratio affects the importance of transportation costs in the product’s delivered price. Goods with low value-to-weight ratios, such as iron ore, tend to be produce in multiple locations to minimize transpiration costs. Conversely, goods with high value-to-weight ratios, such as microprocessors, can be produced in a single location or handful of locations without loss of competitiveness  The production technology used to manufacture the good also may affect facility location. A firm must compare its expected product sales with the efficient size of a facility in the industry. If a firm’s sales are large relative to an efficient-sized facility, the firm is likely to operate many facilities in various locations. If its sales are small relative to an efficient-sized facility, the firm probably will utilize only one plant  The relative importance of customer feedback also may influence the location decision. Products for which firms desire quick customer feedback often are produced close to the point of final sale. Government policies – stability of the political process, national trade policies, economic development incentives, and the existence of foreign trade zones  Stability of the political process within a country can clearly affect the desirability of locating a factory there. Firms like to know what the rules of the game are so they can make knowledgeable investment, production, and staffing decisions. A government that alters fiscal, monetary, and regulatory policies seemingly on whim and without consulting the business community raises the risk and uncertainty of operating in that country. Unforeseen changes in taxation policy, exchange rates, inflation, and labour laws are particularly troublesome to international firms  National trade policies also may affect the location decision. To serve its customers, a firm may be forced to locate a facility within a country that has high tariff walls and other trade barriers  Economic development incentives may influence the location decision. Communities eager to create jobs and add to the local tax base often seek to attract new factories by offering international firms inexpensive land, highway improvements, job-training programs, and discounted water and electric rates  A foreign trade zone is a specially designated and controlled geographical area in which imported or exported goods receive preferential tariff treatment. A country may establish FTZs near its major ports of entry and/or major production centers. It then allows international firms to import products into those zones duty free for specified purposes, sometimes with express limitations  A firm may decide to locate in a particular area because the existence of an FTZ gives the firm greater flexibility regarding importing or exporting and creates avenues for lowering costs  Costs can be lowere
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