Page 270 - DMGT545_INTERNATIONAL_BUSINESS

Unit 14: International Production and Logistics Management

advantages of make notes

Lower costs-it may pay a firm to continue manufacturing a product or component par in-house if
the firm is more efficient at that production activity than any other enterprise.
Facilitating specialized investments – when substantial investments in specialized assets are
required to manufacture a component, the firm will prefer to make the component internally
rather than contract it out to a supplier.
Proprietary Product Technology Protection – Proprietary Product technology is a technology
unique to a firm. If it enables the firm to produce a product containing superior features,
proprietary technology can give the firm a competitive advantage. The firm would not want this
technology to fall into the hands of competitors.

Improved scheduling – the argument for vertical integration is that production cost savings result
from it because it makes planning, coordination, and scheduling of adjacent processes easier.

advantages of Buy

Strategic Flexibility: The greatest advantages of buying component parts from independent
suppliers is that the firm can maintain its flexibility, switching orders between suppliers as
circumstances dictate. This is particularly important internationally where changes in exchange
rates and trade barriers can alter the attractiveness of supply sources.

Lower Costs: Vertical integration into the manufacture of component parts increases an
organisation’s scope and the resulting increase in organizational complexity can raise a firm’s cost
structure due to three reasons. First, the greater the number of sub-units in an organization, the
greater is the problems of coordinating and controlling those units. Second, the firm that vertically
integrates into component part manufacture may find that because its internal suppliers have a
captive customer of the firm, they lack an incentive to reduce costs. Third, vertically integrated
firms have to determine appropriate prices for goods transferred to subunits within the firm.

Offsets: Another reason for outsourcing some manufacturing to independent suppliers based in
other countries is that it may help the firm capture more orders from that country.

14.1.5 strategic alliances with suppliers

In order to reap the benefits of vertical integration without the associated operational problems
by entering strategic alliances with essential suppliers. For example, an alliance between Kodak
and Canon, under which Canon builds photocopiers for sale by Kodak and an alliance between
Apple and Sony under which Sony builds laptop computers for Apple. Strategic alliances build
trust between the firm and its supplier Trust is built when a firm makes a creditable commitment
to continue purchasing from a supplier on reasonable terms. For example a firm may invest
money in a supplier-perhaps by taking a minority share holding – to signal its intention to build
a productive, mutually beneficial long-term relationship.

In general the trends toward just-in-time inventory systems (JIT), Computer-aided Design
(CAD), and Computer-aided Manufacturing (CAM) seem to have increased pressures for firms
to establish long term relationships with their suppliers. JIT, CAD and CAM systems all rely on
close links between firms and their suppliers supported by substantial specialized investment in
equipment and information systems hardware.

14.1.6 coordinating a Global manufacturing system

Materials Management which encompasses logistics, embraces the activities necessary to get
materials from suppliers to a manufacturing facility, through the manufacturing process, and

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