Global Business Today
Quiz 15 :
Global Production and Supply Chain Management
A country like India has all the factor endowments for a successful automobile operation. The reasons are as following: 1) A large and upward mobile middle class. Hence, an expanding domestic market. 2) It is well situated between the Far East, Europe, Middle East and Africa to have a logistical advantage in those markets. 3) It has a large pool of well-educated automobile engineers. 4) It has a low cost work-force that can easily be trained. 5) It has a network of ancillary companies to support the automobile manufacture. 6) It has a FDI friendly policy for this sector. These factors make India a good place for locating an automobile manufacturing unit. Most Japanese manufacturers and some US and European manufacturers have already set up their operations in India.
The firm should adopt a concentrated manufacturing strategy; $500 million up front fixed costs when the entire market over a decade for all companies in the industry is $10 to $15 billion makes a single factory a good idea. Since tariffs are low, this single factory could supply a lot of markets at little higher cost than multiple factories could. The firm should favor putting the factory in places where there is little chance the factory will be nationalized or disrupted, where there is a highly skilled workforce, near the firm's industrial/consumer electronics customer's factories, and/or near significant transport nodes like railways or ports.
To understand the main strategic objectives of production and logistics, one has to first understand these two terms. Production is defined as any process involved in the creation of a product. Here the words product and service are freely interchangeable. Logistics is defined as the activity involved with physical movement of materials through the value chain. It also involves the movement of information up and down the value chain. This information flow is essential for the effective operation of both production as well as logistics. The main strategic objectives of production and logistics are: 1) Cost reduction of the creation of value. This is usually achieved by dispersing the production activities to locations where the individual activities can be carried out most efficiently and economically. Another pre-requisite, especially for technologically inclined products, is where the best technology is available. Another factor in reducing the cost is managing the supply chain most efficiently. This means that supply and demand at each and every stage have to be closely matched. This ensures that the amount of inventory in the pipeline is minimized to an absolute minimum. This will reduce the working capital requirements and hence the overall product cost. Still another factor in reducing cost is quality. By increasing the quality the firm ensures that: a. Increasing the productivity of quality products and eliminating sub-standard products which directly impact the unit cost. b. Lowering the rework and scrap cost of defective products. c. Reducing the warranty costs and the cost and time associated in fixing defects. To achieve many companies have implemented quality assurance programs like Total Quality Management and Six Sigma. Following ISO 9000 can also ensure that quality standards are followed consistently. 2) Increase the value by providing to the customers' needs. Firstly, it should be able to cater to the customer requirements that arise from national differences in preferences and tastes. This may require the implementation of a flexible manufacturing process. While this local responsiveness may drive up the product cost, it also increases the value creation by being sensitive to the customer needs. Secondly, the firm should be able to be agile and respond to the ever changing customer needs in today's time-based competitive world. Therefore it can be seen that both production and logistics are strategically important.