Chapter 11 - Managing International Operation (Part 1)

Summary

This lecture delves into managing international operations, focusing on capacity planning and facility location strategies. It discusses assessing a company's production capabilities to meet fluctuating market demands, including decisions on reducing output or expanding facilities. The importance of selecting optimal production sites based on resource availability, labor costs, customer needs, and transportation is highlighted. The script also covers the economic benefits of location economies and the strategic decisions between centralization for cost efficiency and decentralization for market customization.

Takeaways

• 📈 Capacity Planning: It's crucial for a company to assess its ability to produce enough output to meet market demand, which can fluctuate and thus requires flexible production strategies.
• 🔍 Estimating Global Demand: Firms must accurately estimate the global demand for their products to align production with market needs effectively.
• 🛠️ Adjusting Production: When output exceeds demand, companies may reduce production by cutting manpower or work shifts to avoid overproduction.
• 🏭 Facility Expansion: Managers must decide whether to expand existing facilities or add new ones to meet growing market demands.
• 🌐 Location Decisions: Firms need to consider adding facilities in new locations to better serve customer demand in different areas.
• 🏗️ Facility Location Planning: Choosing the right location for manufacturing facilities is key, considering access to resources, labor, and transportation.
• 🌳 Resource Availability: The availability and cost of raw materials are significant factors in facility location decisions, with examples like Goodyear Tire opting for Malaysia due to abundant rubber resources.
• 💼 Labor Costs and Productivity: Multinational companies often seek locations with lower wages and high productivity to optimize labor costs.
• 🛒 Customer Needs and Accessibility: Firms must consider customer accessibility and needs, such as choosing non-congested areas for stores like Tesco with ample parking.
• 🚚 Factory to Market Proximity: The distance between production facilities and target markets affects transportation costs and delivery times, influencing location decisions.
• 🌐 Location Economies: Firms aim to locate production in areas that offer the best economic benefits, such as lower production costs, to achieve a competitive advantage.
• 🔧 Centralization vs. Decentralization: Centralization focuses on concentrating production in one optimal location for cost efficiency, while decentralization involves spreading facilities across different markets for product customization and adaptation.

Q & A

What does capacity planning involve in the context of managing international operations?

Capacity planning involves assessing a company's ability to produce enough output to satisfy market demand, taking into account the fluctuating nature of customer demand, and making decisions on production adjustments, such as reducing manpower or work shifts when demand decreases.

How can a firm reduce production when the output exceeds market demand?

A firm can reduce production by decreasing the number of workers or adjusting work shifts to align with the reduced market demand.

What factors must managers consider when market demand is growing and they need to expand output?

Managers must determine whether the existing facility can expand output or if additional facilities are needed, considering the maximum capacity of the firm and potentially adding more machinery or manpower to fulfill the increased demand.

Why might a firm decide to open a new facility in a different location?

A firm may decide to open a new facility in a different location if the existing facility cannot capture the demand anymore, requiring an estimation of the number of rooms, manpower, and other resources suitable for the new area to meet customer demand.

What is the concept of subcontracting in the context of capacity planning?

Subcontracting involves letting another party produce part or all of the finished product on behalf of the firm, which can be a strategy to maintain good customer service and avoid stock unavailability.

What is facility location planning and why is it important?

Facility location planning is the selection of an optimal location for production facilities, ensuring sufficient access to customers, resources, and transportation. It is important because it affects production costs, efficiency, and the ability to meet customer needs.

What are the key considerations for a firm when choosing a location for its manufacturing facility?

Key considerations include the availability and cost of raw materials, labor costs and productivity, customer needs, and the distance between the factory and the market to minimize transportation costs and time.

Why might a firm choose a particular location for its production facility based on resource availability?

A firm might choose a location with abundant and cost-effective resources, such as rubber in Malaysia for a tire manufacturing company, to ensure a steady supply of raw materials for production.

What is the significance of location economy in facility location planning?

Location economy refers to the economic benefits derived from locating production in an optimal location, which can help lower the cost of production and achieve a competitive advantage by taking advantage of lower labor costs, skilled labor, or other economic incentives.

What are the two basic strategies for locating production facilities, and how do they differ?

The two basic strategies are centralization, which involves concentrating production in one location to achieve economies of scale and lower costs, and decentralization, which involves spreading facilities across different locations to cater to regional markets and customize products according to local preferences.

How does a firm benefit from centralizing its production facilities?

Centralizing production allows a firm to focus on mass production in a location that offers lower costs, skilled labor, and other economic benefits, which can lead to reduced production costs and increased efficiency.

What are the advantages of decentralization in managing international operations?

Decentralization allows a firm to have various regional or national facilities that can focus on producing customized products tailored to local market preferences, infrastructure, and government requirements, enhancing customer satisfaction and market adaptation.

Outlines

00:00

📈 Capacity Planning and Production Strategies

The first paragraph introduces the concept of capacity planning, which is the assessment of a company's ability to produce sufficient output to meet market demand. It highlights the fluctuating nature of customer demand and the challenges it poses for businesses. The speaker explains that firms must estimate global demand accurately and adjust production accordingly, which may involve reducing manpower or work shifts if demand decreases. Conversely, if demand grows, managers must decide whether to expand existing facilities or add new ones. The paragraph also touches on subcontracting as an alternative to in-house production when demand exceeds capacity, emphasizing the importance of maintaining customer satisfaction and product availability.

05:00

🌏 Facility Location Planning and Economic Considerations

The second paragraph delves into facility location planning, discussing the selection of optimal sites for production facilities based on access to resources, labor costs, productivity, customer needs, and transportation efficiency. It uses the example of Goodyear Tires establishing a facility in Malaysia due to abundant rubber resources and lower labor costs. The paragraph also covers the importance of proximity to the target market to reduce shipping time and costs, as illustrated by Toyota's decision to build a manufacturing plant in the U.S. for easier market access. Additionally, the concept of location economies is introduced, where firms choose locations that offer the best economic benefits for production, potentially leading to lower costs and a competitive advantage.

10:03

🏭 Centralization and Decentralization in Production Facility Strategy

The third paragraph contrasts two strategies for locating production facilities: centralization and decentralization. Centralization involves concentrating production in one optimal location to achieve economies of scale and reduce costs, suitable for products with universal needs that do not require customization. Decentralization, on the other hand, involves spreading facilities across different locations to cater to regional preferences and requirements, allowing for product differentiation and adaptation. The paragraph emphasizes the strategic decision-making involved in choosing between these approaches based on product characteristics and market demands, using examples from various industries to illustrate the concepts.

Keywords

💡Capacity Planning

Capacity planning is the assessment of a company's ability to produce sufficient output to meet market demand. It's crucial in managing international operations as it helps firms adapt to fluctuating customer demands, which can be unpredictable. In the script, capacity planning is discussed in the context of adjusting production levels by either reducing manpower or adding facilities to match the market demand.

💡Product Differentiation

Product differentiation refers to the process of making a product unique from others in the market to appeal to different customer preferences. It is a key concept in international business as it allows firms to customize their products for different markets. The script mentions product differentiation in the context of adjusting products to meet the tastes and preferences of customers in various regions.

💡Market Demand

Market demand is the total quantity of a product or service that customers are willing and able to purchase at a given price. It is a fundamental concept in the script as it drives the need for capacity planning. The transcript discusses how firms must estimate and respond to changes in market demand to ensure they neither overproduce nor undersupply.

💡Facility Location Planning

Facility location planning involves selecting the optimal site for production facilities, considering factors like access to resources, labor costs, and proximity to customers. The script emphasizes the importance of choosing the right location to minimize costs and maximize efficiency in international operations.

💡Resources Condition

Resources condition pertains to the availability, quality, and timely acquisition of raw materials needed for production. The script highlights the necessity for firms to ensure a continuous supply of raw materials to avoid interruptions in production, especially when dealing with perishable items.

💡Labor Costs and Productivity

Labor costs and productivity are critical factors in facility location planning. The script discusses how multinational companies often seek locations with lower wages, but also consider the productivity levels of the local workforce. Balancing these factors is essential for maintaining competitiveness in international markets.

💡Customer Needs

Understanding and meeting customer needs is vital for business success. The script uses the example of a hypermarket needing to be in an accessible location with free parking to cater to customer convenience, emphasizing the importance of considering customer needs in facility location decisions.

💡Factory to Market Distance

The distance between the production facility and the target market is a key factor affecting transportation costs and delivery times. The script mentions that facilities should be located closer to markets to reduce these costs and improve customer satisfaction by ensuring faster product availability.

💡Location Economy

Location economy refers to the economic benefits derived from situating production in an optimal location. The script explains that firms aim to lower production costs by choosing locations that offer the best combination of resources, labor, and infrastructure, such as Silicon Valley for tech firms or Southeast Asia for labor-intensive manufacturing.

💡Centralization

Centralization is a strategy where production facilities are concentrated in one location to take advantage of economies of scale and reduce costs. The script describes how centralization is suitable for products with universal needs, where customization for different markets is not necessary.

💡Decentralization

Decentralization involves spreading production facilities across different locations to cater to regional or national markets. The script contrasts this with centralization, noting that decentralization allows for product customization and adaptation to meet specific market preferences and requirements.

Highlights

Capacity planning involves assessing a company's ability to produce enough output to meet market demand amidst fluctuating customer demand.

Firms need to estimate global demand accurately to manage the complexity of capacity planning due to uncertain customer demand.

In situations of overcapacity, firms may reduce production by decreasing manpower or work shifts.

Managers must decide whether to expand existing facilities or add new ones to meet growing market demand.

Firms can increase production capacity by adding machines or manpower or by opening additional facilities in different locations.

Subcontracting is an option for firms to outsource part or all of the production to maintain customer satisfaction and availability.

Facility location planning is crucial for selecting the optimal site for production facilities with access to customers, resources, and transportation.

Raw material availability must be in the right quantity, quality, and delivered on time to ensure uninterrupted production.

Firms may choose locations with abundant and cost-effective resources, such as rubber in Malaysia for Goodyear Tire.

Labor costs and productivity are key considerations in multinational companies' decisions on where to establish production facilities.

Proximity to the target market is essential to reduce transportation costs and time in reaching customers, as exemplified by Toyota's U.S. manufacturing plant.

Location economy refers to the economic benefits derived from choosing the optimal location for production to lower costs.

Firms can achieve a low-cost position by locating production activities where they have a comparative advantage, like Silicon Valley for tech firms.

Centralization involves concentrating production in one location to take advantage of economies of scale and lower production costs.

Decentralization spreads production facilities across various locations to cater to regional preferences and requirements.

Decentralized production allows for customization and adaptation of products to meet specific market demands and regulations.

Boeing's example illustrates the benefits of decentralization, with R&D in the US, assembly in Seattle, and global sourcing for components.

Transcripts

assalamualaikum and greetings to all my

international business students so today

we will continue with the remaining part

of chapter 11 managing international

operation okay from that last class I

have explained what is production what

is local CD and product differentiation

so now we will proceed with capacity

planning okay you can see here from the

slide capacity planning means assessing

a company's ability to produce enough

output to satisfy the market demand as

what we know the customer demand are not

constant okay you can reduce or it also

can increase so for the uncertainty of

customer demand this will increase the

complexity of the capacity planning so

for this situation the firm need to meet

the changing demand of their product or

services so firm need to estimate the

global demand for their product

accurately but in the situation where by

the capacity or the output is more than

the market demand so the firm has to

make the decision to reduce the

production so how to do reduce to the

production is by by reducing the number

of manpower and to reduce the book ship

work shift okay so if market demand is

growing managers must determine if

present facility can expand output or

whether additional facility are needed

so the firmly to see in terms of the

maximum capacity of the firm let's say

in the assisting from as you see

facility what they can do they can add

more machine or can add more power

manpower to fulfill the demand but let's

say if the thing cannot capture the

demand anymore they need to make

decision to add more facility in another

location okay so for example there is no

telling qaddafi

can they opened a branch in understa and

literally decide to open another branch

in Detra so

in this situation they need to estimate

the number of room the number of

manpower they are suitable to get the

customer in the new area which is titre

okay so another option for the firm okay

beside of either they need to expand the

editing facility or to add more facility

in other locations they also can have

option whether they can suck on the work

to other producer ok subcode mean to let

the other party to reduce the part or

also the finished product

on behalf okay so this situation need to

be done because the firm again need to

maintain a good image to their customer

ok they don't want to have a situation

whereby they meet they need to tell

their customer

sorry stock not available we are out of

top ok so this is not good for that mesh

ok so for a firm day we will try their

best to fulfill the customer demand and

always able to - to fulfill ok they

always the stock is always available

when customers need the stock ok next we

move to the facility location planning

okay so for F a CT location planning it

was selection of location for production

facility so in this situation it means

the the firm need to find the right

location for the manufacturing facility

so it should have the sufficient access

to customer work resources ok and also

transportation ok first I will explain

about the resources condition ok

resources a firm need to get raw

material ok to produce product they need

to get the raw material so the raw

material must be in the right quantity

quality and also need to be received on

the right time ok this is to ensure that

we there will be no interruption in

terms of production beside that when it

involves a perishable item ok

everything the transportation

and the item of path it's the raw

materials need to receive at a

production site as soon as possible this

is to avoid the thing to get from from

sport or damage okay another thing about

resources condition is the availability

of the resources that the location can

offer the resources at cheaper costs

okay so one example we can see that we

have this good year tire from us

okay they also have open a facility in

Malaysia because there's abundant of

rubber resources that offer energy

because in Malaysia ok next the labor

costs productivity so the firm or

multinational company usually they will

take advantage of the lower wages in

another country okay beside the lower

wages they also need to see in terms of

the productivity

here we no use if I say low wages but

low productivity they need to balance ok

the country must offer lower wages and

also the worker can what can offer high

productivity for the firm's ok sometimes

the productivity in poor or developing

country is very low ok so they need to

find country work and offer low wages

and high productivity the third one is

service customer needs ok so a firm must

consider the wide variety of customer

needs ok for example like a Tesco a big

hypermarket they decide they want to

open in the hypermarket they must choose

the right area the area must not be

congested easily for a customer to reach

the hypermarket they have to offer free

parking

ok so they have to identify what

actually customer needs ok

and last one is the factory to market

distance so the greater the distance

between the production facility and a

target market so this means the shipment

will take

the time okay this means that the

shipment we take longer time to reach to

customer and sometimes involve greater

distance larger distance it means more

transportation casa okay facility

locations selected need to be closer to

the market trouser to the customer so

that in this situation they can reduce

the transportation cost and also reduce

the time in reaching the customer so for

example like what we have is to your

table from Japan they also have decided

to build a manufacturing plant in u.s.

ok they can produce or assemble the

automobile and the car can be easily

sell to the customer customer in u.s. ok

now we move to location economy so the

explanation here location economy means

the economic benefit derived from

locating the production in optimum

location ok

so in this situation it means the

location can do it best and the cheapest

ok compared to other location they have

made the comparison so this location is

best the best location for them to do

the creation to do the valuation

activity skillful for why they choose

this location the aim is to lower the

cost of the production which can help

them to achieve a low cost positions ok

for example let's see if the best

programmer okay there are many best

programmer they are located in the

Silicon Valley in u.s. so the

programming activity should be like

located there in this Silicon Valley

okay let's see if the best assembly

operation ok for pc or automobile are in

mexico so the firm should locate the

assembly in mexico so by locating the

value creation activity on optimal

location as i mentioned it can help

lower the cost of production and help

the company to achieve low-cost position

okay so that's why for the location of

economy many firms from US and Japan

they decided to set up production in

Southeast Asia because of the cheap

labor costs okay for does for this

location economy okay it doesn't mean

that focusing only on production okay if

you remembered for the value chain

activity we have rnd we have production

we have marketing customer service again

so example let's say company Eve okay

design ice-hockey treatment in Sweden

then they can assemble they can focus on

assembling the product in Denmark

okay and then they can sell the ice

hockey product with North American in

Europe

okay same like Boeing okay for the R&D

and designed after aircraft they will

focusing the location in Washington US

and Japan they will assemble the

aircraft in Seattle and the engine they

will get it from rewritten the aircraft

till ok it's made in China okay so this

is what we call the advantage of each

location where they can perform each of

the value change activity so what we

expect is the end result is the cheaper

cost and also good product quality okay

now we move to centralization and

decentralization okay as we can see here

they are two basic strategy for locating

the production facility

number one is centralization

centralization mean concentration of

production facility in one location so

they need to choose one best location

for them to focus their production there

and once the product is ready then they

can export and sell their product

worldwide okay for the location that

they choose okay the same thing okay

they need to find a location that they

can offer

lower costs and lower costs okay so they

want to pursuit what they want to gain

is the low cost and also to take

advantage of economical skill produce in

validation produced in large quantity

mass production they can reduce the cost

of production yeah and then the

centralization here is suitable for

product that serf the universal needs

universal needs product for example like

ba chemical pharmaceutical product steel

paint okay I buy for this Universal

product the no need for the firm to do

customization or adaptation the taste

and preferences of customer in different

market are similar que no need for them

to customize ax so that's why they can

choose one location and then they des

can export to do to any market to the

market truck to any market throughout

the world okay the second one is

decentralized decentralization which is

the opposite okay does it mean they will

have many facility in different market

in different location so it will spread

the facility over several location

okay so decentralization means they will

have various regional or national

facility okay and then each of this

facility will focus on the production

and producing for that for each market

okay so for this centralization what the

focus is different Asian it is now

centralization they focus on lower costs

okay on the other hand is relaxed

decentralization will focus more on

different agenda product different Asian

edition on a product that means

customization doing adaptation for each

of the different market for market area

is different okay Maccabi is different

market see is different

okay so product differentiation need to

be done because there is a significant

differences in customer taste customer

preferences

infrastructure the technical the

government requirement so that's why

they need to use some kind different

machine need to change the ingredient

the content modify the design ok the

specification okay so each of the

location will focus on production for

that market only