Introduction
In the opening case, Li & Fung deals with a number of issues that many other firms competing in today's global economy also have had to deal with. To serve the needs of its customers, Li & Fung has to decide how best to distribute manufacturing activities among operations based in various countries so as to minimize costs, produce products that have an acceptable level of quality, and do so in a timely manner. Li & Fung scans its global network of some 7,000 suppliers located in 26 countries to make these decisions, weighing factors such as labor costs, trade barriers, transportation costs, and product quality, and only then deciding what should be produced where and in what quantities. Li & Fung often unbundles the value chain associated with producing a product, dispersing various parts of the chain to different locations depending on an assessment of the value that can be created by performing an activity in a particular location. Li & Fung must then coordinate and control the globally dispersed value chain so that it minimizes the time between receipt of an order and delivery of the finished product.
In this chapter, we look at the problems that Li & Fung and many other enterprises are facing and at the various solutions. We will be concerned with answering three central questions:
Where in the world should productive activities be located?
How much production should be performed in-house and how much should be out-sourced to foreign suppliers?
What is the best way to coordinate a globally dispersed supply chain?
We will examine each of the three questions posed above in turn. We begin, however, by reviewing how the information covered in this chapter fits into the "big picture" of global strategy that we introduced in Chapter 12.
Strategy, Manufacturing, and Materials Management
In Chapter 12, we introduced the concept of the value chain and discussed a number of value creation activities, including production, marketing, materials management, R&D, human resources, and information systems. In this chapter we will focus on two of these activities--production and materials management--and attempt to clarify how they might be performed internationally to (1) lower the costs of value creation and (2) add value by better serving customer needs. We will discuss the contributions of information technology to these activities. In later chapters, we will look at other value creation activities in this international context (marketing, R&D, and human resource management).
In Chapter 12, we defined production as "the activities involved in creating a product." We used the term production to denote both service and manufacturing activities, since one can produce a service or produce a physical product. In this chapter, we focus more on manufacturing than on service activities, so we will use the term manufacturing rather than production. We defined materials management as "the activity that controls the transmission of physical materials through the value chain, from procurement through production and into distribution." Materials management includes logistics, which refers to the procurement and physical transmission of material through the supply chain, from suppliers to customers. Manufacturing and materials management are closely linked, since a firm's ability to perform its manufacturing function efficiently depends on a continuous supply of highquality material inputs, for which materials management is responsible.
The manufacturing and materials management functions of an international firm have a number of important strategic objectives.1 Two important objectives shared by
