1. Read Text book: Sanders, N. R. (2014). The Definitive Guide to Manufacturing and Service Operations: Master the Strategies and Tactics for Planning, Organizing, and Managing How Products and Services are Produced. Pearson Education.

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1. Chapter 5 - Understanding the Role of Global Operations in the Modern Marketplace

2. Complete: (DB 5) Discussion #5: Chapter 5 - Discussion Questions

Due: September 29th, 2023

Instructions: new thread with your name when you start your own posting. Answer all discussion questions at the end of chapter 1 in complete sentences.

5. Understanding the Role of Global Operations in the Modern Marketplace All organizations today operate in a global environment and are affected by global trade. Even the smallest businesses are atfected by the global inux of foreign goods and trade regulations. A small tailor in Lincoln. Nebraska. may be sourcing fabric from Hong Kong. or a coffee farmer in South America is selling coffee beans to a global coffee manufacturer. \\htuallv no company today is unaffected in some way by global trade. Many companies serve multiple global markets with products sourced and produced across many continents. \\'t'almart. the world's largest retailer, operates 8.500 stores in 15 countries under 55 different names. Other multinational companies such as EBM. General Electric. Siemens. and McDonald's have a similar global reach. It is not uncommon for a company to develop a product in the United States manufacture it in Asia, and sell it in Europe. It also must orchestrate all the activities. including transportation and coordination, between customers on one end and suppliers on the other. The rapid growth of globalization and international trade is a result of a few key factors. First. advancements in transportation have connected the globe in unprecedented trays. Transportation is less expensive and more expedient than in previous years. making movements of people and goods across the globe commonplace. Another factor is information technology has enabled connectedness across the globe. In gym. \"Role of Technology in \\. *larnginggpemtigns.' we discussed enterprise resource planning (ERPl systems and shorted how this software can connect enterprises hath horizontally and vertically in reahtime. We also discussed that ERP systems can seamlessly connect organizational hierarchies regardless of global location. making managhrg plans. suppliers. distributors. and customers globally a simple task Athird factor that has pushed globalization is a sharp rise in personal income. These factors have combined to create a global customer base with a heightened ability to buy and connect with global producers and distributors. Producers and distributors. therefore. have the transportation means to deliver goods anywhere there is a market. All these forces have created a global awareness and a demand for goods that translates into opportunities for companies to rapidly expand their markets. This global trend will only continue in the future. Consider that the International Monetary Fund (EMF) announced that the global economy had grown faster than expected in 3012 and is predicted to grow by 5 percent per year in the future. Cunently China represents the fastest growing global market. followed by India. In recent years most of the growth has come from developing country markets. so that it makes sense for operations executives to target those markets for iture groom. According to McKinsey 8: Co.. Asia currently accounts for 40 percent of the global GDP and will account for more than 50 percent by 2025. However. emerging markets and competition in countries such asMalassia. Singapore, and Brazil are on the rise. All this is resulting in a changing global landscape and increased competition For you as a consumer this means greater access to a varietv of goods across the globe at competitive prices. However. for companies and their operations it means intensied and accelerated competitive pressures at all levels. It also means changes in the nature of competition. Companies that take on a global presence focus on challenges of entering markets in other countries. while their own markets are being opened to foreign competitors. This creates multiple levels of competitionone strategy for competing in new markets and another strategy to guard the home turf. Companies need to prepare themselves to compete in this new environment. Cost Considerations Companies are often attracted to [hobo] operations by lower labor costs. especially in underdeveloped or emerging nations. However. while local labor costs may be signicantly lower. companies must consider the overall costs of doing business globally. Often companies nd overall operations costs to be signicantly higher than expected. This may include higher transportation and distribution costs. cost to upgrade facilities and technology. as well as cost of space. tariffs. taxes. and other expenses related to doing business overseas. We look at these COSTS RENT. Hldden Costs The strategy of going after cheaper labor costs in developing nations became especially popular with [7.5. manufacturing rms in the 19805 in response to their own markets becoming ooded with low-priced imports. To compete. companies began to outsource the manufacnrre of goods to global sites with low-cost labor. This strategy become especially popular in the assembly of electronic devices. such as computers and cell phones. It has also been popular in the retail industry in the manufacture of clothing. Seeking low-cost labor makes sense in situations where product life cycles are short. such as the frequent changes in models of cell phones. The alternative to cheap labor would require the building of an expensive assembly plant. and the cost might not bejustied for product models that change frequently. However. often the strategy of chasing low labor cost across the globe is a poor one. There are several reasons. First. man)r companies do not understand their cost structures and that often labor cost constitutes a small percentage of overall cost. Second, locations of cheap labor change and shift over time. often after facilities have been put in place. This can leave companies with facilities and higher labor costs than originally planned. For example. Korea and Taiwan were cheap labor wage countries in the 19703. Thailand in the early 19805, and then C hints in the [9905. China continues to lead in low-cost labor. but preference is increasingly moving into rural China and western China. away from the seaport. Also. labor costs are rising in China. Third. companies oen find numerous hidden and unexpected costs in going global. Fourth. competitive priorities other than cost are increasingly becoming important. and achieving success on those dimensions may not be optimal at locations nit]: low skilled labor and poor infrastructure. Companies often overestimate the size of labor cost relative to overall cost. The production cost of many products is often less than a quarter of their delivered price to nal customers. For example. a product costing 51 to produce is often sold for S4 to the nal customer. The big costs come from distribution and delivery. This means that it makes more sense for companies to focus on reducing costs beyond the production process. such as delivery and distribution. Just being driven by labor cost can be misleading. We discuss this at greater length later in this chapter in the section "The Reshoring Trend." which is a trend for companies to bring global mamtfacnrring back home precisely for these reasons. Global Operations may also incur the unexpected costs of additional training requirements due to lack of skilled workers. Companies are often surprised to nd that workers in developing nations lack nrdimentruy education. This can actually result in high costs due to poor quality of work. lower productivity. and a lack of quality culture among workers: increased lead times and associated inventory costs due to poor transportation and communication infrasn-ucmre: and unexpected logistics complications due to multilevel and bureaucratic govenuneut Structures. stoicmres. Many rms find that the hidden costs of outsourcing to developing nations can be hard to estimate. Nike learned this lesson in the 1980s With numerous stanup problems at a new production facility in China. In 1981 Nike began shoe production in China. but by 19le production was tvell below expectations. The reasons were China's economic stnicture. on Global inverttm' pipelines can accumulate hidden costs rather quickly as well. Longer pipelines have higher costs associated with them. especially when those pipelines span several countries and multiple continents. This is because inventory in the pipeline has to pass through different governments. different modes of transportation, and different companies providing applicable services. Each of these transitions adds some cost. which the unknowing organization might not have originally accounted for. The mole steps that are introduced into the pipeline. the greater the chance for risk entering the pipeline as well. Sometimes the only way for an organization to mitigate this risk is to produceand shipntote inventory in order to minimize the impact of potential stockouts. If an initial inventory shipment does not reach its nal destination the organization risks the cost of that inventory as well as the revenue from a lost sale. Titus. it would behoove the organization to keep the pipeline \"full\" to prevent this from happening. The biggest drawback to this sttategt is that producing additional days' worth of inventory can be costly. Take Samsung and its televisions. for instance. Santsung is headquartered in South Korea but has a large presence in the American home entertainment market. Samsung might order its parts from nearby China. assemble its televisions in South Korea, and then ship its product to the United States. But. given the lead time in shipping across the Pacic to the United States. several days' worth of inventory are required to keep the pipeline owing. which adds expense. Additionally. imagine what would happen if Samsung only produces enough TV inventory to just meet American demand. and 10 percent of its cargo is damaged en route from South Korea to the port of Los Angelcs. If that were the case. Samsung would have to eat the cost of the inventory as well as the cost of lost sales. Though it is costly to produce more inventory to keep the global pipeline owing. sometimes the investment is worth making if the costs of production yield signicant economic advantages or if penetrating the destination market appears particularly fruitful in the longer term. Noncost Considerations For many businesses the order Winners in their product markets hat-'e shifted heyondjust cost toward other considerations. such as quality. delivery speed. product design and customization. To compete on these dimensions companies need superior quality of labor. productivity. transportation. teleconmnmications. and a supplier infrastructure. These factors become more important in determining the location of facilities than merely labor cost. One development that has contributed to the awareness of noncost considerations is the total quality management (TQM) movement. discussed in mm. \"Key Elements and Emcesses." TQM focuses on the total cost of quality. rather than just direct labor cost. and shifts front inspection to prevention. Companies understand that activities conducted prior to production. such as product design and worker training. signicantly impact overall costs. The costs of poor design. poor material quality, defects scrap. and poor workmanship are all measurable and added to total cost. These realizations olace access to skilled workers and unalilv suppliers high on the orioritv list for rms contacting on ottalitv. Lack of Worker skills. \fIt is true that raw material costs are about the some in both countries. and Chinese hourly wage rates are expected to remain far below L15. levels for sortie time to come. But if companies take a total cost of outteiship view that includes both direct and indirect costs. in many cases it docs not make sense for then] to source from China. This is especially true when companies add a risk calculation. Recall from the earlier discussion in this chapter about the various risks involved in global operations in addition to having to compensate for lack of infrastructure. Further. China is not the only offshore manufacturing location where costs are rapidly rising. Costs are rising in other developing nations. and these global operations and sourcing decisions also merit reconsideration. Importance of Total Cost of Ownership (TCO) As discussed. rather than just looking or labor cost or purchase price. a better way to etnluate the cost of global purchase or outsourcing is to estimate the total cost ofmmershh) (TCO). TCO is the purchase price plus of! other costs associated with acquiring the item. This includes transportation, administrative costs. follow-up. expediting. storage. inspection and testing warranty. customer service. and handling returns. These additional costs need to he added to the selling price or manufacturing price to get a more accurate assessment. Companies often nd that when adding these items to labor cost or purchase cost that they have woefully underestimated the total cost. To determine the TCO a company needs to assign a value to each factor relevant to the specic case and then accumulate asingle cost value for a product sourced from a particular supplier. This process is then repeated for all other vendors or other manufacturing locations. In this way. it is possible to readily and objectively compare the .T C O for the same product from multiple vendors. whether local or offshore. TCO is an important metric. The kinds of variables that should be included in its calculation varv depending on the specic circumstances. but the following list of items. grouped by category. is a useful guide. We begin with easily quantied \"hard cash" costs and progress to more subjective measures. Each item also includes some observations and reconunendations for comparhtg the costs of local and offshore sourcing. Let's look at these costs next. Cost or Goods Sold or Landed Cost This cost includes price. packaging. duty. and planned freight. such as surface transportation. fees. and insurance. Computing these costs is typically not a problem. This data should be readily available. especially for items that are large or valuable enough that the various costs usually are aggregated. Companies should be careful here to include all costs including all- transportation. Sometimes small distances. say. expediting between a distribution center and a retail location. are overlooked. The result is an underestimation of overall cost. Other \"Hard" Costs Other "hard" costs include factors that affect other costs that have an immediate effect on cash ow or ate calculable and highly likely to occur. These include the following: I Carrying cost for its-transit productCarrying or holding intentory incurs a cost over a period of time. Often the carrying cost for in-transit products is underestimated. For example. foreign and local suppliers often are oaid on different schedules resulting in ditteriueiand oerhaos coinolicatednovout schedules that result in di'erences in these costs. I Carr-ring cost for inttransit productCarrying or holding inventory incurs a cost over a period of time. Often the carrying cost for iii-transit products is underestimated. For example. foreign and local suppliers often are paid on different schedules resulting in dieringand perhaps complicatedpayout schedules that result in differences in these costs. Consider that Chinese suppliers generally are paid prior to shipment. typically three to six weeks prior to receipt of tire goods. L15. suppliers typically are paid too to three months after the shipment date. which essentially is the same as the receipt date. In such cases. the customer's cash will be tied up for three to four months longer with an offshore source. An appropriate measure for calculating the carrying cost for this period. therefore. is the customer's cost of capital. I Ousite taming cost ofinventoryAnother cost is the inventory cany or holding cost onsite. At the simplest level. the amorrnt of safety stock is proportional to the square root of the lead time. The longer the lead time the larger the amount of safety stock to protect against uncertainty and. therefore. the higher the carrying cost. Consider an example. Lel's say the lead time for a product sourced in China is nine weeks. whereas tlte local lead time for the same product is one week. Then the safety stock for the Chinese-made goods will be three times higher than for locally sourced products. Depending on the inventory holding cost. this cart prove to be substantial. In addition. the amount of onsite htventory will be dramatically higher for products shipped by ocean freight 'om offshore than for shipments front a local supplier. This di'erence is fruther magnied if the local supplier is njusr-irr- mire tJlTJ supplier. One reason is that offshore shipments typically arrive in container loads to minimize shipping costs. If the product arrives monthly. the cycle inventorythe amount of inventory held for immediate use-u'ill be one-half of a month [the average of maximum inventory arriving and zero when it is depleted at the end of the month). Additionally. extra inventory must be held to plan for delays in an-ixnls. defective items. or damages in shipments. These factors collectively result in carrying extra inventory and incurring .a higher inventory cost. Further. because these variables do not result in a "straightforvtard" expense they often end up being a hidden cost for companies. I Prototype development rostACompanies manufacturing or sourcing globally often want to develop the prototypes at the same location. However. this may result in unexpected development costs. Many companies prefer to source prototypes locally so their engineers and marketing organizations can work intensively with the suppliers during product development. Large geographic distances may not facilitate development. Further. local suppliers typically charge less for the prototype if they also receive the production orders. I Endeofelife or obsolete inventory cosPAn often unexpected cost occurs when a product reaches its maturity stage of the life cycle. When demand dies down or a product is raised or replaced. a company often ends up holding some obsolete inventory. With an offshore source. the amount of inventory iii-house. en route. and on order will be higher than it would be with a local source. Thus. companies that have o'shore manufacturing or sourcing are more likely to end up with obsolete inventory. This issue is becoming increasingly relevant as product life cycles heroine shorter. especially with innovative products. . Travel costsThe cost of travel associated with the startup of the truanufacturirrg or sourcing relationship is usually much higher than companies anticipate. Also many companies do not plan for ongoing auditing and problem solving and the travel costs that incurs. Problems arise and this is a normal part of business. Companies need to he. prepared to have staff quickly y to the geographic location needed. However. companies oen overlook these costs which can be substantial. For example. most customers visit a supplier several times a year. For a local supplier. this might require a few hours or a day or two. For a Chinese supplier: each trip can take a week or two and might cost US 8 I 0.000. including time and travel expenses. Offshore sources also may require more face-toface meetings because of time zone and language differences. Large companies sometimes plan for this nr'mtr'rence. lw erttnlnvincr liaisnn: nrattrlitnrs who are inated close In the offshore mnnufar'ntrino facility or source. of sunnlv llnwevr-r- mint-rattles need to cnneidar' this in the torn! I Travel costsThe cost of travel associated with the starrup of the manufacturing or sourcing relationship is usually much higher than companies anticipate. Also many companies do not plan for ongoing auditing and problem solving and the travel costs that incurs. Problems arise and this is a normal part of business. Companies need to be prepared to have stuff quickly fly to the geographic location needed. However. companies oilen overlook these costs. which can be substantial. For example. most customers visit a supplier several times a year. For a local supplier. this might requite a few hours or a day or tum. For a Chinese supplier. each trip can take a week or rice and might cost US 310000. including time and travel expenses. Offshore sources also may require more face-to-face meetings because oftinte zone and language differences. Large companies sometimes plan for tltis occurrence by employing liaisons or auditors who are located close to the offshore manuacruring facility or source of supply, Hon-"ever. companies need to consider this in the total cost. l'otcutlal RiskRelated Costs Risk evaluation and cost assessment is important at this stage to assess true cost. The cost impact ofhigh-ftequency risks. such as emergency airheigln. Scrap, and rework can be calculated based on past experience with manufacturers and suppliers in the geographic region. New products or potential new suppliers require estimates. Other risls. even of low probability. have to be considered. particularly those with high impact on operations. Cost estimates new to be made as Well as backup plans. Here are examples of such risks. I ReworkIf an individual item or an entire lot is bad. it must be scrapped. Contracting is important here to address thesc issues. For exam ple. will the supplier send a replacement without charge. or will the buying company incur costs whenever rework is required? These costs can be especially high for custom products. such as molds or dies. and should be negotiated prior to purchase. Sourcing these globally adds extra problems when coupled with lack of geographic proximity. . QIInlityklslau}.r companies that have global operations discover that low labor costs oen go hand in hand with lower quality. Quality standards and requirements need to be set ahead of time. Issues such as who pays and is responsible for scrap need to be ironed out. In addition to the cost of lost production and tummyrelated payouts when the product fails. quality problems are costly in other. less tangible ways. Think of the cost impact of lost market share. pemiaueut loss of customers. or the negative impact on brand image. These. are often reasons cited for reshoriug. a Product liabilityIssues of product liability often come up with oshoring as legal requirements and liability laws differ across the globe. It can be difcult to stte a foreign company for damages. and even harder to collect. A local supplier. by contrast. could be audited to verify that it has sufcient product liability insurance. When considering sourcing globally companies need to compare sources ol'supply in terms ofacceSsibility. willingness, and ability to pay any product liability claims. I Intellectual property liSkIGuan'fell or pirated goods are increasingly becoming a problem for global operations and supply chains. Some products. such as software. movies. and fashion accessories. are more at risk than others. Pharmaceuticals are yet another category that must be watched carefully. These factors should he considered in the cost calculations. I Opportunity costCompanies need to assess the cost of lost orders and customers when a supplier cannot respond quickly enough to changes in quantity or product specications '- an. umuuuni . Opportunity castCompanies need to assess the cost of test orders and customers when a supplier cannot respond quickly enougi to changes in quantity or product specications demanded by the market. The cost of losing customers needs to be considered. - Brand ImageOne factor that must be considered is the impact on brand image of the product's \"country of origin" label. At a time when developed nations continue to experience economic instability and people are concerned about theirjobs. consumers may consider buying locally made goods 3 way to help the economy and their neighbors. Recent product; adtdteration scandals (such as those involving pet food. medicine. milk. and drywall] have also favorably inuenced consumers' attitudes toward locally made goods. ' Economlc stability of the snppliel'wUncovering economic and nancial information about a supplier geographically far away can be difcult. It is much easier to investigate and nd accurate information about the stability of a supplier located in the home market than it is for a supplier overseas. It is also tnnch easier to track this information overtime. I Political stability of the source countryMany companies underestimate the challenge of correctly assessing the political stabiiity of a country. Certainly it is difcult to rate the stability of countries that are aiready in chaos. However. it is tnuch harder to correctly assess those that are making good economic progress but whose populations may be destabilizing because of changing consumer expectations and demands. . Exposure to another l'eresslonn-Jihe larger inventory and enorder quantities associated with offshoiing represent an exposure risk if there should be another severe business downturn. Four months of inventory on hand. en route. and on order could easily turn into nnrch more in a recession. Strategic Costs Many factors fall under this category. The following are just two examples of how sotncing decisions can affect product strategy and ca tue: I Impact on innovationUS. companies in particular are frequently urged to outsource most of their manufacturing offshore and focus on innovation and marketing. However. separating manufacturing from engineering has the danger of degrading the innovative effectiveness of both a company and its home country. For example. Michael Porter. of the Harvard Business School. has discussed the advantage for innovation of \"clustering\"].ta\\'ing suppliers. research universities. manufacturing. and others involved in product development and production located near each other. I Impact on product differentiation and mass rtmtomlzationmMany companies in developed economies are shifting their fonts from commodities to differentiated products. They often do this through mass customization. producing small quantities of products that conform to the specic desires of the market but at costs approaching those of mass production It is easier and less costly to make the move to mass customization with 511an tightly clustered supply chains. Environmental Costs These include emiromnental or \"green" related costs. In principle. for each product source a company should measure the \"cleanliness" of the elech'icint generation at each location. Environmental Costs These include environmental or "green" related costs. In principle. for each product source. a company should measure the \"cleanliness" of the electricity generation at each location. pollution from the production process, the carbon footprint of its shipping operations. the requirements for local warehousing. how it disposes of obsolete inventory, and otheractivitics that affect the environmental impact of its supply chain. Once the \" n" impact has been quantied for each source. the next step is to apply a dollar value to that impact. A common measure is the cost per ton of carbon dioxide (01) produced. Whether to assign \"green\" costs and at what late clearly is a corporate policy decision. For many products. the base price of those sourced in low-labor-cost countries is almost always lower than the price for the same product manufactured in higher-laborcost locations. However. when all true costs are included the real preferences may be different. Also. when companies focus only on price and labor. they downgrade all other priorities making them less important. Companies that employ TCO. however. usually nd that almost all the other costs favor production close to the end customer. TCO helps companies understtuid the full cost impact of global sourcing and operations. Once it becomes clear that there is not much difference between the ICU for locally mannfacmred products and offshore products. a company could decide to place more emphasis on a product-di'erentialion or brand-image strategy. It ought pursue local cost-reduction programs. such as lean or theory of constraints {1130. or automation that might have seemed insufcient to close the price gap before. We covered these topics in Chapter 3. \"y Elements and Processes." and Chapter 3. \"L'ndei'standinggpetations Strategie_s." and discussed how they can improve operations. The Role of Political and Economic Factors Decisions to develop and manage a global supply chain network must consider the global political and economic enrironment. This environment today is increasingly complex and highly moment. and must be evaluated on a continual basis. Political instability and hostility toward foreign businesses is a serious consideration. Currency rate uctuations can help or hurt global operations and require careful analysis. Regr'mml trade agreements. such as NAFTA. and trade protection mechanistic. such as tariffs and trigger price mechanisms, also inuence the decision to globalize operations. These factors can either signicantly ease global operations or create large barriers and must be carefully considered. Companies typically loolr at the host country's current or future political system to assess the political risk. It should be remembered that international businesses always face some political risk. For example. foreign customers may be unable to pay in full or on time because of instability from currency controls imposed by the government. Further. there are numerous political risks that a company needs to evaluate when analyzing levels of political risk in a country, Companies must consider the safety of both their products and their people in unstable political situations. One risk is general political instability. which may not be considered serious enough to cause investors to withdraw from a countryr but raises uncertainty about projects overseas. Numerous risks are related to political instability. One is ouwrrlup risk. which occurs when operations are threatened by govemment takeover or expropriation owners may lose their offshore property, This is referred to as protectionism and nationalization of business. 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