Loading

Alison's New App is now available on iOS and Android! Download Now

Study Reminders
Support
Text Version

Set your study reminders

We will email you at these times to remind you to study.
  • Monday

    -

    7am

    +

    Tuesday

    -

    7am

    +

    Wednesday

    -

    7am

    +

    Thursday

    -

    7am

    +

    Friday

    -

    7am

    +

    Saturday

    -

    7am

    +

    Sunday

    -

    7am

    +

Global Sourcing and Production Strategy
Welcome friends, welcome again to the class of a International Business. So, in the lastlecture we started discussing about the effect of supply chain management, globalsourcing and manufacturing strategy on international business right, of a firm.So, as we discussed that you know the most important thing that firms today are doing,are managing their supply chain in the most efficient manner right. And thanks to theinternet that it today it has been possible that supply chain systems have become verymuch effective right. In comparison to the earlier days when there was no that not muchof internet systems and there was no development in that.So, we realize that today companies are all competing against each other, for maybe it isa for example, companies like you talk about the big Unilever or for example, Johnsonand Johnson, or you talk about Hyundai, you talk about Honda Motors, you talk aboutToyota, you talk about for example, Apple right, Cisco Systems.So, all these companies whoever you can think of right, whichever company you canthink of they have created a very strong robust, very strong efficient you know a supplychain system right. And then we also talked about what is the role of global sourcingbecause today the whole world has become like one big market.No wonder that you know most of the American companies are having their operationsin China, in Taiwan, in India, because they find it they find that the markets are alsothere and not. And as well as you know there is lot of opportunity in production andmanufacturing because the quality is good enough and in addition to the good qualitythere is a high advantage of low cost manufacturing right.So, in the last lecture we discussed we started discussing about this global sourcing andproduction strategy.(Refer Slide Time: 02:22)So, look at this diagram right. So, when you talk about global sourcing and theproduction strategy. So, the how does it look like, first it starts with a sourcing of the rawmaterials the parts and the components, which are important in the production or themanufacturing process right.So, once this components are sourced right, it could be sourced you know from the homecountry or abroad or you know some foreign other places or both right. Then it goes tothe manufacture and assembly of components and the final products. So, either it goesinto the manufacturing system or the assembling of the parts. For example, most of thecomputer manufacturers are today assemblers whereas, you see most of the carmanufacturer or you know or many other companies, they manufacture their ownproducts.So, that then it goes to the manufacturing a process or assembly process. Then finally, itgoes to the sales of the products. So, this is the, this stage is called the stage ofproduction and sales where you source manufacture and sell the product. So, and this isthe location of the sourcing right.It could be home in the home country or it could be somewhere outside. So, it dependsand all this then done efficiently this complex system when they can be managedefficiently, it leads to a very high optimization all of the businesses right.So, the global firms they do extremely well because they could they can manage thissupply chain systems and everything right. So, they gain advantage, they createddifferentiating factor, they become low cost manufacturers and that is how they becomesuccessful.(Refer Slide Time: 04:05)Now, what is the advantage of the global sourcing? Now first of all when you talk aboutthe global sourcing, you see all the countries when you talk about international business,you have to talk about you know global sourcing we have already understood that. Nowwhy global sourcing is required first of all it creates a low cost manufacturing right.So, you most of the companies who come to India from Europe or USA or from Canadaanywhere from, so most of these companies come to these places the Asian economics,just because they find a good market and also equally a very low cost manufacturingsystem, then tapping skills and resources that are not available in the home nation.So, countries have understood that had the dependence on Chinese vendors been littleless, it would have been much better because the supply chain disruptions would nothave been as high as it is today.Negotiating lower rates by pitting one supplier against another there, so by comparingmaking the suppliers compete against each other the buyer can take advantage of theprice, price advantage. But what is the disadvantage? Disadvantage is the disadvantage isthat because of the lesser price may be the quality suffers suppose a vendor is selected onbasis of price the quality of the produce might the component might be severely affected.Similarly, the influence with each suppliers also low, because you are not involved youdo not know who the supplier is exactly as good as when you have few suppliers, so thatalso becomes a disadvantage. And we have seen you know and moreover that the thirdpoint can tell you better the higher coordination and the management cost. Because youhave large number of suppliers how to coordinate with them and how to manage thecoordination cost. So, that becomes a challenge.So, overall it has been seen in the recent times that companies have preferred a solesourcing strategy, but that would not be say true to say in as an umbrella you know, youknow a blanket of ice. Because it depends on the what kind of products also thecompanies are manufacturing.If the company’s products are very sensitive or very, you know much elastic price ishighly sensitive to price and all and they are very suppose sensitive products. In that casea you know you need to have a lot of backup. So, that time maybe you know dependingon a of large numbers of suppliers might be good, but suppose it is a regular rightproduct to be manufactured, then a few suppliers is always preferable. So, there could bedifferent arguments for and against both the points right.(Refer Slide Time: 13:40)Now, major sourcing configurations, so earlier since the past it has been seen the worldhas gone through several changes. For example, when you talk about the sourcingcompanies in the past had gone for a after you know, when Ronald coarse theory cameup, Ronald coarse gave this theory of transition cost right and with Williamson. So, notwith Williamson, Williamson in a different time frame, but Williamson also has talkedabout transition cost.So, vertical integration was a concept which said that companies need to be independentand they should do everything on their own. So, that there is very little dependency onoutsiders and that is how they can control the maximum. So, they would not have aproblem of let us say quality, problem of availability of raw material or all these thingsright.But, then these sourcing methods were sometimes were largely challenged and verticalintegration give way to a you know to new methods of thinking in the recent future. Andcompanies thought why not get into a more specialized thing right where companies onecompany does only one thing in a good way. And not that one company does everythingon it is own. So, this help in reducing the cost of the products.Because; obviously vertical integration you are doing everything so you did not have the,you could not optimize and everything and the cost of manufacturing was not being ableto control. But when the idea specialisation came in though the companies did only oneor two things and they become experts in that become really helpful for reducing costand having better qualities.Similarly, industrial clusters are preferred to nowadays because industrial clusters alsohelp in reducing the transaction cost to a large extent because a large number ofindustries are clustered around. And because they are close to each other thetransportation costs are very less, that is how the idea of a you know special economiczone has also come into play.So, industrial clusters are very also important concepts which help in sourcing right.Another important point when the company talks about you know manufacturingstrategy and optimizing and supply chain optimization, it is to make to decide whether tomake or buy right.(Refer Slide Time: 15:53)So, this becomes what it is saying is the make or buy decision is an act of choosingbetween manufacturing a product in house or purchasing it, from an external supplier.So, would you like to make it in house; that means, would the manufacturer want wouldlike to make the product by it is own or they would like to give it to somebody else. Nowthis was an idea which came out from the theory of Prahalad and Hamel Gary Hamel,when they talked about the idea of core competency.They said there is no it is not wise that a company should do you know this the productthe you know everything on their own, rather they should depend on most of the product,they should do it they get should get it from outside from vendors who are good at doingthis right.So, core competency was the idea which said that, a company has a core competency andthey should focus on their core competency right. So, the make or buy decision become avery integral part after that when this kind of discussions arised right. So, sometimes it isreferred to as an outsourcing this buy decision is sometimes referred to as an outsourcingalso right.So, it the a make or buy decision compares the cost and benefits associated withproducing a necessary good or service internally, to the cost and benefits involved inhiring an outside supplier. Now to compare cause accurately a company must considerall aspects regarding the acquisition and storage versus creating the items in house.So, the point is this is a very debatable thing, there have been lots of research papers onthis. Whether the company should go for a make decision or should they go for a buydecision and I am talking about only on a from economical point of view, I am nottalking from a political point of view.So, if you talk from economical point of view sometimes it looks imperative to make itbecause as vertical integration said you do everything on your own, but then they later onthey said there is no point in doing everything. Rather you work on your corecompetency and you buy the other products from suppliers or vendors who are good at it.But the question is, if you know do this buying decision. Or you do make it you have tofirst compare one has the company has to compare, whether in the trade off if they makeit is a profitable or they buy it is a profitable. And this profitability is necessarily to beseen not only from a short term perspective, it is from a long term perspective also.Because there is a very famous paper called the hollow corporation in which, the authorBetvis has said that, buy outsourcing most of the products from external vendors, thecompanies are losing their ability to manufacture in house.So, that is a very threatening point. For a short term profit it is ok, but what about when acompany outsources you know system, for a very long time and it loses it is ability tohave it is to do it in house. And then after that maybe the companies or the suppliers canhave a higher negotiation power. So, that is kind of these are the kind of worries whichone can have when you talk about a make or buy decision right.(Refer Slide Time: 19:06)Then we talk about the global logistics and the distribution, how global logistics happenand what is how it you know with the how the distribution happens. Now global logisticsand distribution have played a critical role in the growth and development of world tradeand in the integration of manufacturing on a worldwide scale. Because we understandlogistics is basically the entire transfer of goods and services right from one place to theother.Now, when you talk about this the use of appropriate distribution channels in theinternational markets, increases the chances of success dramatically now what kind of adistribution channel? If you have a right distribution channel, now what is the rightdistribution channel?A right distribution channel is a my means what I mean is that the channel should be asper the local conditions. So, in some countries the distribution channels are very longsome the distribution channels are very short. So, it depends on the culture of the countryright.As firms start operating on global basis logistic managers need to manage shipping ofraw materials components and supplies among various manufacturing sites, at the mosteconomical and reliable rates. So, and finally, the development of intermodaltransportation and electronic tracking methods has resulted in a quantum jump inefficiency of the logistic method.So, as I said thanks to internet and you know all this RFID and you know systems likewhich can tracking devices and all, which have helped in maintaining the logistics andoptimizing in the logistic sector.So, earlier it is what used to happen for a, let us say a shipping or a truck has moved. So,we did not know where it was and how it was doing where it how many days would taketo reach the destination, but today it has become very simple to keep a track on it andthen you know manage it right. So, let us look at this how it looks the global logistics.(Refer Slide Time: 21:02)So, the raw materials components and supplies this is the raw material component andsupplies and it goes. So, this is goes to the firm right. So, this part is called the materialmanagement. And here when it comes to the firm there is processing and assembly rightand finished products are made right. So, this is the sourcing strategy of the firm andafter this finished product is made then physical distribution happens.So, there are you there are sub topic like a transportation, how to transport, how to wearto warehouse and how to warehouse, how to manage the inventory how to take thecustomer you know order entry and how to administer it or what how to you know, whatis the administration method.So, these factors affect the physical distribution also right. So, now, and then with thehelp of this thus a product is supplied to customers around the world. Now theseprocesses this only three steps, they are looks it looks very simple, but there is a lot towork on it and it is every step you can see in transportation you can optimize, how youcan optimize in the warehousing system you, how to manage your inventory, how toforecast your inventory, how to take the order, how to reduce the lead time everythingright, how to manage your people the labour, who is working right how to create a totalquality management.All these things in total have a large impact on the global logistics system. And furtheron the international business or the profitability of the company to spread their businessin so many different countries right.(Refer Slide Time: 22:38)Now, how do you define this global logistics? Material management refers to the inflowof raw material parts and supplies through the form so, when you talk about this here thispoint material management? So, when you talk about global logistics we said if the entirespread of you know distribution, or spread of the goods and services from one part to theother is logistics.Now, this two things let us say will discuss, material management out of it refers to theinflow of raw material parts and supplies it is not all through the firm. So, materialmanagement also includes the even the managing the products for example, how to codethe products how to manage it in different order in a particular order.So, that getting it in the right time becomes easier and simpler right. And what isphysical distribution when we say physical distribution refers to the movement of thefinished products, to it is customers consisting of transportation warehousing inventoryorder entry and administration which we discuss.(Refer Slide Time: 23:33)Now, this is how a distribution channel looks like. So, the manufacturer inside thecountry the manufacturer is inside the country, the when the manufacturers outside thecountry. So, there is a you see there is a wholesale distributor, then a retail distributorand the final customer right.So, when it is outside the country the manufacture out is outside the country, it has animport agent and this import agent then tries to connect through the wholesaledistributors, or the retail distributes or the final customers. So, the manufacturer can do itdirectly or you can do it through an import agent, but when it is inside the country it canhave a better control over the distribution channel.(Refer Slide Time: 24:15)Now, what are the differences between the distribution system? Now four maindifferences between the distribution system exists. What are they? Retail concentration,so what is retail concentration? We will see first let us discuss the four retailconcentration, length of the channel, channel exclusivity and channel quality right.What they are let us see one by one. Retail concentration in some countries retail systemis concentrated, but it is fragmented in others, now what is it is meaning? In aconcentrated system a few; that means, concentrated is few retail supplier supply most ofthe market, the most of the products in the United States example.A few retailers are large retailers control the system. In a fragmented retail system thereare many retailers and none of them have a major share in the market. For example,Japan you cannot although you can there is if there are few major ones, but you cannotsay as in US you have large ones like the Walmart, home depot or anybody you cannotfind that in this fragmented system ok.(Refer Slide Time: 25:24)Now, what is channel length? It refers to the number of intermediaries between theproducer and the consumer. If producer sells directly to the consumer the channel is veryshort, if the producer sells through an import agent a wholesaler a retailer and long andretailer is the channel length is exit increasing. In some countries in fact, they have ashort channel lengths.That means, they try to remove the intermediaries as much as possible. For example,there could be for example, let us see the manufacturer then there is a C and F agent,there is a wholesaler, there is a distributor, also there is a retailer, then there is acustomer.So, 1, 2, 3, 4, 5, 6 so, there can be 6 lengths also right. But in some countries they couldbe they could you know just jumbled up 1 or 2 of them and then make it 1 right. Or eventhese 3 could be made 1 right. So, this you know intermediary works like all the 3 jobs itis doing. So, the more the channel length we can understand; obviously, the more thecost also, but to maintain the efficiency that the quality sometimes it is important and thespread also to make it you know efficient.So, the most important determinant of a channel length is the degree to which, the retailsystem is fragmented. Fragmented retail system tend to promote the growth ofwholesaler, to serve retailers, which lengthens the channel. Now if you have a veryconcentrated channel then it is you have few. So, there is a you can there is scope ofreducing the channel length. Japan and India have a larger or longer instead of a largerlonger channel length. US, Britain, Germany have shorter channel lengths ok.(Refer Slide Time: 27:02)Third point is the channel exclusivity. Now exclusive distribution channel is one, that isdifficult for a new firm, to get access to the self space to the supermarkets. Now thisexclusivity varies among countries. Let us see Japan system is often held up as anexample of very exclusive system. In Japan why you see this is important relationshipamong the manufacturer wholesaler and retailer often go back to decades.Because the Japanese give lot of importance to loyalty and trust right. So, they do notthey would not switch from one supplier to the other just because of a some small changein the price, some benefit in price or cost. So, because of this, this is an exclusivedistribution system right.Many of these relationships are based on the understanding that, distributors will notcarry the products of the competing firms that kind of a trust or loyalties there. In returnthe distributors are guaranteed mark up by the manufacturer. So, the distributor alsoguaranteed about the product and the benefits to the that it offers.(Refer Slide Time: 28:13)Finally the channel quality, it refers to expertise, competencies and skills of establishedretailers in a nation, and their ability to sell and support the products of internationalbusiness right. So, what is the expertise they are having, what competencies and theskills that they have although. The quality of retailers is good in most developed nationsin emerging markets like for example, India you know and the close by nations. And lessdeveloping nations from Russia to Indonesia channel quality is variable right.So, sometimes it is good, but sometimes it is not so good. When channel quality is poorinternational business may have to devote a lot of attention to upgrading the channel andproviding extensive education and support to the existing retailers. So, this becomes alsoa channel challenge for managing the distribution system.And as we have understood the distribution system is basically nothing, but theintermediary between the manufacturer and the customer. So, this is a major player in theentire process. So, any small disturbance also can affect the profitability, the image brandimage and the acceptance of the you know company in the local market ok.(Refer Slide Time: 29:34)Thanks to you know international business, global marketing, thanks to internet actuallyfor you know the expansion in global marketing and international business right.Because of the internet as we have discussed it has revolutionized the internationalbusiness arena and global marketing in particular. Roughly speaking, the internet is anetwork of computers interconnected through the world operating on a standard protocolthat allows data to be transmitted.Until the early 90s, so that was a time when we said supply chain was there, but then itwas not as efficient as it is today. But today you see the supply chain system as I said theone company wins over the other with an efficient because of an efficient supplies in.The internet was primarily the preserve of the military and academic researchers it wasnot available for business largely.(Refer Slide Time: 30:19)Now, this is how today the top 15 countries in internet usage is visible right. So, this is alittle old data, but this is must have increased dramatically, but still it gives you a fairamount of idea. Now if you look at the kind of China and has 253 internet users inmillions, 253 million users, United States 220, Japan 94. So, it depends on the percentageof world uses if you can see and penetration of the country.For example: in the 73.8 percent of penetration because Japans population is also lessright. So, Japan has a very high penetration, United States has a very high penetration,Germany has a very high penetration, then United Kingdom has a high penetration,France is also there, South Korea is there, Italy is also there and then Canada is also veryhigh, even Spain is very high.So, you can get a understanding that most of this country which ever high penetration ofinternet they are actually the developed ones and they are doing well right. So; thatmeans, there is a correlation between the internet usage and the kind of growth ininternational business that has happened.(Refer Slide Time: 31:30)So, internet and the competitive advantage so, the internet offers two major benefits tothe companies, that use this tool as a gateway to the global marketing and you knowmanaging their supply chain. One it helps in cost and efficiency savings. Second isaccessibility.Today taking an order from a foreign buyer or a supplier has become very simple right, itis just through a mail you can do. It earlier days it use to be; obviously, tough becausethere was no proper technology. The internet also offers access to customers around theworld right, the value of some of the pre internet source of competitive advantage hasbeen deflated.So, the competitive advantage which earlier companies had before when, internet wasnot there today these companies today are no more having those competitive advantage;because they have been completely flattened after the advent of the internet right.(Refer Slide Time: 32:23)Some observers argue that a small and large firms are on equal footing, as equal globalcompetitors because today it does not matter what your size is. Earlier days it was a pointof concern because a big firm used to have take the advantage, but internet has helped inmaking everybody equal. Because, now what is important is you may be a small firm,but then if you are you are fast and accessible you can do better business.Although size related advantages will probably lessen, claims that the internet provides alevel playing field for all are somewhat a somewhat overblown, but then it is through a toa large extent ok.(Refer Slide Time: 32:58)So, how internet is helping? For example, advantage of internet advertising a globalreach, low cost, allows precision. So, who you want to target for example, how, whomdo you want to target you can just do that. Interactivity; so, you can interact with yourcustomer’s ability to customize, ability to instantly monitor. So, all these are veryimportant you know aspects of the internet.So, after internet has come you see, as I said it has been very easy to monitor the supplychain, to control the supply chain movements right, the logistics; the logisticsmovements. And today you know what exactly your customer is thinking, what yourcustomer want us, how he want us, what you can segment your customer very cleanly,you can target your customer in a more efficient manner.So, all these things and you can even buy through interaction with your customers youknow online system, you can understand what he want us and how you can achieve thosekind of you know activities.So, all this has a helped you know in improving the global business to a very largeextent. And today’s international business has become highly dependent on the internet.And; obviously, the other factors, but the internet has really become a boom andimproving the global supply chain the production and the manufacturing system.Even you can think of a manufacturing process today there have been. So, manydifferent activities which are helping, for example, you know you can control the youknow through machines, the you can control your machines through an online system,you can track the monitoring of the work and everything. So, all this has become a veryhighly advantage, big advantage and which has led to zero waste management.Zero wastage, you know zero waste and you can also control automation has improveddramatically. So, less of labour is required in condition where labours are in short. So, allthese things have become a very important factor right.So, today we have completed the supply chain management part. So, how supply, globalsupply chain management and how it affects the international business. What it is role ishow do companies make the most with the help of the supply chain systems and howinternet has helped in there we have discussed today.So, this is all for the day.Thank you very much.