Thursday, March 5, 2009

INTERNATIONAL OPERATIONS MANAGEMENT

BUSINESS MANAGEMENT
Lesson Objectives
· To understand the process of Global Supply Chain
Management
· To understand how to distinguish make or buy decision
· To understand the process of Global Sourcing
· To clearly distinguish between the concepts of
“Partnering” and “Relationship Marketing”
· To have a clear cut understanding on Buyer-Supplier
Relationships
· To understand the various components of International
Logistics
· To understand the various Global Manufacturing
Strategies
· To decide about the Location Strategies
· To have an understanding on Country evaluation and
Selection Criterion
Interaction
The term international operations management is used in this
chapter in a very broad sense to include all functional aspects
related to the conduct of international business.
Operations management is becoming more and more international
in its scope. Even a firm, which markets the products
only within the domestic market, may be conducting its
business operations internationally like sourcing the inputs or
finished products internationally or manufacturing the product
abroad. A dynamic company will take advantage of the
favorable conditions that exist anywhere in the world.
Conceptual Discussion
The business system involves the integration and management
of diverse activities. On the one extreme, a firm may undertake
all of these different activities, carrying on the whole production
process and doing all the other operations encompassing the
business system. On the other extreme, a firm can outsource
most of these. Many firms now concentrate on its core
competence/business and outsource the rest. The multinational
Nike, for example, concentrates itself on the two strategic ends
of the business - R&D and marketing - and gets its products
manufactured by independent subcontractors located in
different countries as per the design and other’s specifications
given b1 the company, with the result that while Nike directly
employs about 9,000 people it indirectl1 employs about 7,5000
people. In fact, many products put to the market by a number
of companies embody substantial outsourced parts/components.
Global Supply Chain Management
Operations management, in fact, is, to a very large extent,
supply chain management. As Scary and Larsen observe,
“managing the supply chain is vital for international business.
The alternate objective is to deliver products to market with
variety, responsiveness, timeliness and efficiency. Corporate
strategy must include organizing; coordinating and executing
the processor product flow as a competitive necessity and as a
source of potential competitive advantage. The strategic
requirements of international business determine the extent,
characteristics and strategic direction of the supply chain. Some
businesses are only involved with international operations to
secure a supply of materials and components; marketing is
domestic. Other businesses manufacture and export from a
home base an~ procure materials overseas. Some corporations
serving global markets rationalize production using international
factory networks for supply.
A company’s supply chain encompasses the coordination of
materials, information, and funds from the initial raw material
supplier to the ultimate.2 It is the management of the valueadded
process from the suppliers’ supplier to the customers’
customer.3 The scope of supply chain, thus, encompasses
almost the entire system of business process.
According to Houlihan, the underlying concept of the supply
chain embraces the following points:4
· The supply chain identifies the complete process of
providing goods and services to the final user.
· It includes all parties and logistics operations from supplier
to customer within a single system.
· The scope of the supply chain includes procurement,
production and distribution operations.
· The supply chain extends across organizational boundaries.
· It is coordinated through an information system accessible
to all members.
· The primary objective of the supply chain is service to
customers. This must be balanced against costs and assets.
· Objectives of individual supply chain members are achieved
through the performance of the chain as a whole.
The above exposition of the scope of the supply chain
connotes that operations management is, by and large, supply
chain management (note, particularly, the third point). As the
supply chain becomes more complex, there is an increasing need
to integrate each stage as part of a larger system.

Make or Buy

One of the critical considerations in the supply chain management
is make or buy. Globalization, having increased the scope
of sourcing, has made the make or buy question more relevant.
Table 9.1 gives a summary of the advantages and disadvantages
of both the make and buys options.
The make or buy decision is influenced by a number of factors.
The organizational technological environment may affect the
buying decision. Some of the firms that outsource components

design or redesign the component parts in-house and select
suppliers who can offer the best combination of quality, price,
service and delivery. In other words, in such cases, called make to
print, the buying company provides the product technology to the
supplier who has the required process technology. Some firms want
the product technology also to be developed by the supplier. In
some cases both the supplier and buyer work in collaboration
to develop proper solution to the problem.
Global Sourcing
Buy strategy is greatly benefited by the opportunities for global
sourcing. The major factors determining the input-output ratio,
output volume, cost and quality are the appropriateness and
cost of technology and the quality and cost of other inputs. A
great advantage of globalization is the opportunity to source
them from the best source anywhere in the world.
The trend of global sourcing and production sharing has been
growing.
According to a survey by Purchasing, the reasons for offshore
purchases are the following, listed in the order of importance.5
1. Lower price.
2. Better quality
3. Only source available
4. More advanced technology
5. More consistent attitude
6. More co-operative delivery
7. Counter trade requirements
It may be noted that besides the above, outsourcing has certain
other advantages. It reduces the capital and manpower requirements.
It may also impart more flexibility to adjust to certain
conditions like a recession.
International sourcing accounts for an estimated one-third of
the world trade. Many developing countries have taken a lot of
advantage of this trend. Although India did not benefit
significantly in the past, India is emerging as a major sourcing
destination for a variety of products.
Partnering / Relationship Marketing
Buyer-supplier relationship is emerging as a very important
strategic element in industrial marketing. The conventional winlose
approach is giving way to a dynamic and enduring win- -win
mind set. It is pointed out that “never before in the history of
man’s industrial endeavor has the value of building effective
and responsive relationships between suppliers and customers
been more crucial to the survival of free-market enterprise than
today.”6
The collaborating relationship between the supplier and
customer is known by different names such as company
marketing, partnering partnership-sourcing relationships
marketing and co-petition.
As Nalebuff and Branden burger point out, “one strategy that
co-opetition emphasizes is working with what we term
‘complementary.’ A complement or is the opposite of a
competitor. It’s someone who makes your products and
services more, rather than less, valuable. Not surprisingly, the
complement or concept is especially relevant to the builders of
the Information Economy. Hardware needs software, and the
Internet needs high-speed phone lines. No one, alone, can ‘;”
build the infrastructure for the new economy. It’s a whole new
system made up of many complimentary parts.”7 As they
further exemplify, “in fact, most businesses succeed only if
others also succeed. The demand for Intel chips increases when
Microsoft creates more powerful software. ‘-8[ Microsoft
becomes more valuable when Intel produces faster chips. It’s
mutual success rather (;’Z than mutual destruction. It’s winwin.
The cold war is over and along with it the old assumptions
about competition.”8
The benefits reaped by the Japanese industry by the collaborative
relationship have encouraged industry in other parts of the
world, particularly North America and Western Europe, to
rethink and restrategise the supplier-customer relationship. For
example, Philips has laid down supplier partnership as one of
the five principles of its quality philosophy and the
multination31 cultivates supplier relationships based on trust
and cooperation, sharing experience and expertise to benefit not
only the buyer and the supplier but also the end customer.
Philips and its suppliers jointly develop technology, solve
problems, learn from experience and try to avoid errors and
misunderstandings.
A look at the three categories of suppliers of Philips has would
indicate the emerging pattern Of buyer supplier relationships.
1. Supplier-Partners: These are the most important suppliers,
albeit might be the smallest group among the three. Philips
builds intense, involved relationships with them and the
important focus of the cooperation is innovation, the
development of new expertise and new opportunities. These
suppliers might well have essential knowledge and/or
expertise that Philips could not otherwise access or develop
for itself. This makes these suppliers extremely significant
strategically as their loss could seriously undermine Philip’s
current business and future direction.
2. Preferred suppliers: This category is less important than the
first and there is not the same degree of mutual dependence
as in the first category. The company works closely with them
on issues such as quality, logistics and price to gain mutual
benefit. The suppliers may also adopt themselves, to some
extent, to suit Philip’s requirements.
3. Commercial Suppliers: These are the least important
suppliers and although the company will encourage better
performance in terms of quality ete. it is unlikely to get
involved in helping the supplier to achieve it.
According to Anderson and Narus, partnering “is a process
where a customer firm and supplier firm form strong and
extensive social, economic, service, and technical ties over
time, with the intent of lowering total costs and/or
increasing value, thereby achieving mutual benefit.”9
International Logistics
An important dimension of the supply chain is logistics, also
sometimes called materials management. to According to the
Council of Logistics Management, USA, logistics management
is the “process of planning, implementing and controlling the
efficient, cost effective flow and storage of raw materials, in-
process inventory, finished goods, and related information
from point of origin to point of consumption for the purpose
of conforming to customer requirements.”
The difference between supply chain management and materials
management is on degree. Materials management, or logistics,
focuses much more on the transport and storage of materials
and final goods, whereas supply chain management extends
beyond that to include the management of supplier and
customer relations.
Logistics, also known by such other names as marketing
logistics, industrial logistics/ business logistics/ distribution/
channels of distribution logistics/ distribution engineering
materials logistics management supply chain management is a
very important component of operations management.
Components of Logistics
Logistics encompasses the total movement concept, covering
the entire range of operations concerned with the movement of
materials and products to, through, and out of the firm to the
consumer. It includes a variety of activities such as inventory
management, warehousing and storage, transportation,
materials handling, order processing, distribution, communications,
packaging, salvage and scrap disposal, returned goods
handling, customer service etc.
Some of the major components of logistics are the following:
Fixed Facilities Location:
The major consideration is the location of fixed facilities like
production and warehousing in such a way as to maximize the
total efficiency of the logistics system. Factors like future
potential of the markets, future plans of the company,
competitive factors, political stability, etc. are also important
considerations.
Inventory Management:
The main objective of inventory management is to minimize
the cost of the inventory while ensuring smooth supplies.
Developments in inventory management by the customers
order processing and in the total logistics system have made
inventory management both challenging and efficient.
Order Processing:
The efficiency of order processing by the client as well as the
company have important implications for inventory levels and
other aspects of the logistics. Rapid order processing shortens
the order cycle and allows for lower safety stocks on the part of
the client. Exporters from developing countries like India face
the challenge of coping up with such situations.
Material Handling and Transportation: Material handling and
transportation are also an important part of the logistics
management. The technologies in use in material handling and
transportation affect the efficiency of logistics.
Global Manufacturing Strategies.
Location of the manufacturing facilities is one of the most
important of the global operations management decisions.
4 Cs of Global Manufacturing
The success of a global manufacturing strategy depends on four
key factors:
compatibility, configuration, coordination, and control.
Compatibility in this context is the degree of consistency
between the foreign investment decision and the company’s
competitive strategy. Company strategies that managers must
consider are:
Efficiency/cost - reduction of manufacturing costs.
Dependability - degree of trust in a company’s products and its
delivery and price promises.
· Quality - performance reliability, service quality, speed of
delivery, and maintenance quality of the product(s).
· Flexibility - ability of the production process to make
different kinds of products and to adjust the volume of
output.
· Innovation - ability to develop new products and ideas.
Cost minimization strategies often prompt companies to opt
for offshore manufacturing locations like developing countries
and for outsourcing. Factors like characteristics of supplier.
Firms in respect of, dependability flexibility, quality and
innovation influence the make or buy decision, choice of
vendors etc. in case of the make situations, the choice of
production location will be based on evaluation of the location
with its environment vis-a-vis the above critical factors.
Manufacturing Configuration refers to the strategy of centralization
or dispersion of manufacturing facilities. There are broadly
three broad categories of manufacturing configuration, viz.,
centralized facility, regional facilities, and multi-domestic
facilities. The choice of the configuration strategy is influenced
by several factors such as scale economies, nature of technology
and skill requirements, firm strategies such as internalization or
externalization, international orientation and the organisational
mode of the company, foreign market prospects and other
characteristics ete.
Coordination and Control which are two sides of the same
coin, refer to the integration, monitoring and taking of required
actions to ensure that the implementation of he plans progress
as envisaged.
Location Strategy
The location of production facilities of a global corporation
may be influenced by a number of factors.
Nature of Organization
The organizational model is a major determinant of the
location. For example, in a Multinational Company, the
subsidiaries do most of the production for their respective
markets. In an International Company and Global Company,
there is tendency to centralize core production activities in the
home country. The transnational corporation is characterised by
globally integrated networks of production facilities and other
factors.(See the chapter on Multinational Enterprises for a
description of the important characteristics of the different
organizational models.}

Cost
Given other factors (like political factors, organizational model
and strategic orientation etc.), the overall cost of operations is
often the most important consideration in the location
decision-making. Important factors, which determine the cost,
include the following:
1. Scale Economies: Where there are large-scale economies in
production, production tends to concentrate in one or very
limited number of locations. Such concentration may be in
the home country or foreign countries.
2. Nature of Assembly Operations: If there is large economies
of scale in production of components and if the assembly
operations are labour-intensive, the locations of
components manufacture and assembly operations could be
different. The assembly operations may be carried out in
countries where the labour is very cheap.
3. Taxes and Transport Costs: The import duty structure also
influences the location of production phases. If the import
duty is very high on finished product and comparatively low
on components it would encourage assembling of the
product in the foreign market, coterie~ paribus. If the cost
of transporting the finished product is significantly higher
than for the components, export in the CKD form would be
preferred and the assembling of the product would be done
in the foreign market. This will be particularly attractive if the
labour is cheap in the foreign market. Sometimes the import
duty and transport cost will favour the complete or most of
the manufacturing activity in the foreign market.
Exchange Rate Variation
Exchange rate fluctuations may also influence the import vs.
manufacturing decision. A depreciation of the foreign currency
vis-à-vis the home currency will make imports into the foreign
country costly and this may encourage production within the
foreign market.
Availability and Cost of Inputs
Availability and cost of inputs (including land and infrastructure),
obviously, are critical factors influencing the location
decision. The infrastructure and other facilities and incentives are
the attraction of export processing/special economic zones.
Logistical Factors
Certain locations are preferred because of logistical reasons - the
cost and ease of moving products to various markets. Some
locations (Singapore, for example) are indeed regarded as the
hub of international operations.
Product Life Cycle and Pattern of
Demand
The stage in the product life cycle may influence the location of
production base. As explained in the International Product .Life
Cycle Theory, when the product is in the declining stage of the
life cycle or when the technology/product becomes standardized,
the production base tends to shift to the developing
countries.
Nature of Product
Nature of the product, like Perish ability, weight-losing or
weight-adding characteristic during production process ete. also
influence the location decision.
Government Policies and Regulations
Government regulations like foreign investment policy,
environmental regulations, local content stipulations, labour
laws, taxation, assistances and incentives, dividend policies ete.,
influence the location.
Social and Political Factors
Social and political factors such as attitude towards foreign
business, domestic harmony and peace ete also influence the
location decision.
Country Evaluation and Select
The global market, made up of well over 200 independent
nations with their own distinctive characteristics is too vast
indeed. It would be very difficult for a company to operate in all
these markets. There are barriers, which make entry to a number
of markets impossible or very difficult. There may be markets,
which are not profitable or are not worth the trouble. Further,
there may be markets, which are very risky due to political or
other reasons. Moreover, the company resources may not
permit the operation in a large number of countries. There are,
of course, companies, which operate in majority of the
countries of the world. These companies have not achieved
such a massive expansion overnight. It has been a gradual
expansion achieved over a long period. Further, all types of
business do not lend themselves for such substantial international
expansion. It is, therefore, necessary to make an
evaluation of the prospective markets and make rank list of
them for the company to operate in.
Market Selection Process
The important steps involved in the market selection process
are depicted in figure 9.1.
International Business Objectives
The first step in any management decision making process is to
determine/ascertain the objectives. The market selected to serve
a particular international business objective need not necessarily
be the best suited to achieve some other international marketing
objective. Various markets may have different degrees of
attractiveness from the point of view of different objectives.
More about this is stated under the subtitle firm related factors
little later in this chapter.
Parameters for Selection
For proper evaluation and selection of the markets, it is
essential to clearly lay down the parameters and criteria for
evaluation. Important parameters often used for market
selection are shown in the evaluation matrix described elsewhere
in this chapter.

Preliminary Screening
After determining the criteria for market selection, the next
important step in market selection process is to conduct a
preliminary screening of the markets. The objective of the
preliminary screening process is to eliminate the markets which
are obviously not potential enough as revealed by a cursory
look.
The parameters used for the preliminary screening may vary
from product to product. However, parameters like the size of
population, per capita income, structure of the economy,
infrastructural factors, political conditions ete. are commonly
used. Information about some of the factors would enable a
company to eliminate certain markets from its consideration.
For example, in a country where there is no telecasting, there is
obviously no market for T.Y. sets. Similarly if the rural areas are
not electrified, there may be no demand for electrical agricultural
pump sets. If the household income of the majority of a
country with a small population is very low, the demand for
costly consumer durables will be limited. Further, there may be
countries which should be omitted due to political reasons,
including government polices.
A lot of information required for the preliminary screening is
available from such publications as the Statistical Year Book of
the United Nations and the World Bank’s World Development
Report.
Short-listing of Markets
Preliminary screening enables to eliminate markets, which
obviously do not merit consideration at the very outset. There
would be a large number of markets left even after the preliminary
screening. They are further screened with the help of more
information than was used at the preliminary screening stage.
The objective is to distill out a small number of markets, which
are likely to satisfy the company’s criteria for market selection for
a detailed analysis for ranking them and final selection.
Evaluation and Selection
A thorough evaluation of the short-listed markets is done with
reference to the specific parameters and criteria and the markets
are ranked on the basis of their overall attractiveness. One or
more market(s) is/are selected from the rank list. For further
details, see the section evaluation matrix.
Determinants of Market Selection
The market selection is normally based on two sets of factors,
viz., the firm-related factors and the market related factors.
Firm Related Factors
A firm whose export objective is only to sell out a marginal
surplus will select a foreign market suited to serve this purpose.
Another firm with the same product, which wants to export a
very large quantity, forming a very significant share of its total
output, may have different considerations than he fir firm in
market selection. In the case of the second firm, as the total
quantity involved is large and 0" It forms a significant share of
its total output, market diversification would be important to
minimize the risk. If we think of a third firms which also
wants to export the same product as the first two firms but
which wants to export several other products also, the market(s)
which it selects may perhaps be different from what the first
two firms have chosen; it would give more importance to the
total exports of all its products than that of any single product.
Further, the market selection may be influenced by other
objectives like growth. When business growth is an important
objective, growth potential of the market will be an important
criterion for selection.
The planned business strategy may also influence the market
selection. For example, a market considered the most important
from the point of view of exporting need not necessarily be the
one that would be selected for locating production base or a
sales office. A company that has plans for large expansion of
foreign business may choose a market, to start with, which can
serve as a hub of international business.
· The market selection is also influenced by the international
orientation (refer chapter 1 for details) of the company.
· Another very important determinant is the company
resources comprising financial, human, technological and
managerial factors.
· The dynamism and philosophy of the top management and
the internal power relations may also influence the market
selection decision.
Market-Related Factors
There are a number of market related factors which need to be
carefully evaluated for market selection. The market related
factors may be broadly grouped into general factors and specific
factors. General factors are factors general to the market as a
whole where as the specific factors are factors which are specific
to the industry concerned.
General Factors
1. Economic Factors: Include factors like economic stability,
CDP growth trends, income distribution, per capita income,
sectoral distribution of CDP and trends, nature of and
trends in foreign trade and Bop, indebtedness, etc.
2. Economic Policy: Includes industrial policy, foreign
investment policy, commercial policy, monetary policy, fiscal
policy and other economic policies.
3. Business Regulations: Regulations of business like industrial
licensing; restrictions on growth, takeovers, mergers etc.,
restrictions on foreign remittances, repatriations etc; tax laws;
import restrictions and local content stipulations; export
obligations and so on.
4. Currency Stability: Stability of the national currency is another
very important Consideration in the market selection.
5. Political Factors: Character of the political system including
the nature and behavior of the ruling party/parties and
opposition party/parties, the government system etc. and
political stability are among the most important
determinants of market selection.
6. Ethnic Factors: Ethnic factors like ethnic characteristics,
including ethnic differences, and their implications for
the business, ethnic harmony etc. should also be analyzed.
7. Infrastructure: Infrastructure facilities seriously affect
business. For example, power shortage could cause
considerable production losses. Shipping and other
communication bottlenecks could cause lot of delays and
loss of business, in addition to high costs.
8. Bureaucracy and Procedures: The nature and behavior of the
bureaucracy and the procedural system or styles are also
important factors to be considered.
9. Market Hub: The ability of a market to act as a hub, a base
from where the company can operate in a contiguous region
or countries, is a very important factor in the market selection
of a company with plans for expansion of international
business. South Africa, for example, could be such a hub for
the entire sub-Saharan Africa.
A large number of Indian companies have opened offices in
Singapore to use it as a hub to trade with the booming markets
of South-East Asia and the Pacific. Singapore is attractive for
Indian companies because of its infrastructure, tax incentives
and the large Indian population. A company, which sets up, an
operational headquarters (OHQ) in Singapore has to pay only
10 per cent corporate tax against the normal 30 per cent.
Indian industrialists feel that Sweden could be used as a base for
exporting to third countries, especially the Baltic states. They
also feel that the Swedish industrialists could use India as a
sourcing ground to manufacture goods for export to the Asia-
Pacific.
Specific Factors
Besides the general factors, there are a number of factors specific
to the industry which need to be analysed for evaluating the
market. Important specific factors are:
1. Trends in domestic production and consumption and
estimates for the future of the product(s) concerned
2. Trends in imports and exports and estimates for the future
3. Nature of competition
4. Government policy and regulations pertaining to the industry
5. Infrastructure relevant to the industry
6. Supply conditions of raw materials and other inputs
7. Trade practices and customs
8. Cultural factors and consumer characteristics
9. Market characteristics including the number and nature of
market segments, price trends etc.

Evaluation Matrix
An evaluation matrix is often used for ranking the markets with
reference to their attractive less for the company.
The evaluation matrix will include the relevant general and
specific factors. These factors will be expressed in such specific
terms so that they lend themselves for clear measurement and
evolution.
The countries to be evaluated may be listed on the horizontal
axis and the factors on the vertical ax; Each factor is assigned a
raw score and a weightage. The weighted score is obtained by
multiplying the raw score with the respective weightage.
Comparing the total weighted scores ranks markets.

1 comment:

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