Introduction

Business today is in a global environment. This environment forces companies, regardless of location or primary market base, to consider the rest of the world in their competitive strategy analysis. Firms cannot isolate themselves from or ignore external factors such as economic trends, competitive situations or technology innovation in other countries, if some of their competitors are competing or are located in those countries. Companies are going truly global with Supply-chain Management (SCM). A company can develop a product in the United States, manufacture in India and sell in Europe. Companies have changed the ways in which they manage their operations and logistics activities. Changes in trade, the spread and modernization of transport infrastructures and the intensification of competition have elevated the importance of flow management to new levels.

Driving Forces of Globalization 

The last two decades have seen the evolution of the global manufacturing environment. Majority of the manufacturers have global presence through exports, strategic alliances, joint ventures or as a part of a committed strategy to sell and produce in foreign markets.

Fig. 1: A Conceptual Framework: The Four Driving Forces of the Globalization Process. (Adapted from global operators and logistics Philippe-Puire Dernier, Recordo Ernst, Michel Fender, Panos Kouvelies). The outline of the conceptual framework is given in Figure 1 below. The factors shaping the global environment and driving the development of global operations strategies of multinational firms fall into four categories: global market forces, technological forces, global cost forces and political and macroeconomic forces.

a) Global Market Forces

There is tremendous growth potential in the foreign developing markets which has resulted in intensified foreign competition in local markets which forces the small – and medium-sized companies to upgrade their operations and even consider expanding internationally. There has also been growth in foreign demand which necessitates the development of a global network of manufacturing bases and markets. When the markets are global, the production-planning task of the manager becomes difficult on one hand and allows more efficient utilization of resources on the other. Few industries remain today in which the international product life-cycle theory still applies. Product markets, particularly in technologically intensive industries, are changing rapidly. Product -cycles are shrinking as customers demand new products faster. In addition, the advances in communication and transportation technology give customers around the world immediate access to the latest available products and technologies. Thus, manufacturers hoping to capture global demand must introduce their new products simultaneously to all major markets. Furthermore, the integration of product design and the development of related manufacturing processes have become the key success factors in many high-technology industries, where fast product introduction and extensive customization determine market success. As a result, companies must maintain production facilities, pilot production plants, engineering resources and even Research and Development (R & D) facilities all over the world. Apple Computer, for example, has built a global manufacturing and engineering infrastructure with facilities in California, Ireland and Singapore. This network allows Apple to introduce new products simultaneously in the American, European and Asian markets. Companies use the state-of-the-art markets as learning grounds for product development and effective production management, and then transfer this knowledge to their other production facilities worldwide. This rationale explains why Mercedes-Benz decided recently to locate a huge manufacturing plant in Vance, Alabama. The company recognizes that the United States is the state-of-the-art market for sport utility vehicles. It plans to produce those vehicles at the Vance plant and introduce them worldwide by 1997.

b) Technological Forces

A peculiar trend which was prevalent in the last decade, besides globalization, was a limited number of producers which emerged due to diversity among products and uniformity across national markets. Product diversity has increased as products have grown more complex and differentiated and product life cycles have shortened. The share of the US market for high-technology goods supplied by imports from foreign-based companies rose from a negligible 5 per cent to more than 20 percent with the last decade. Moreover, the sources of such imports expanded beyond Europe to include Japan and the newly industrialized countries of Hong Kong, Singapore, South Korea and Taiwan. There has been diffusion of technological knowledge and global low-cost manufacturing locations have emerged. In response to this diffusion of technological capability, multinational firms need to improve their ability to tap multiple sources of technology located in various countries. They also must be able to absorb quickly, and commercialize effectively, new technologies that, in many cases, were invented outside the firm thus overcoming the destructive and pervasive ‘not-invented-here’ attitude and resulting inertia. There has been technology sharing and interfirm collaborations. The well-known joint ventures in the auto industry between US and Japanese firms (GM-Toyota, Chrysler-Mitsubishi, Ford-Mazda) followed a similar pattern. US firms needed to obtain first-hand knowledge of Japanese production methods and accelerated product development cycles, while the Japanese producers were seeking ways to overcome US trade barriers and gain access to the vast American auto market. As competitive priorities in global products markets shift more towards product customization and fast new product development, firms are realizing the importance of co-location of manufacturing and product design facilities abroad. In certain product categories, such as Application Specific Integrated Circuits (ASICs), this was the main motivation for establishing design centres in foreign countries. Other industries such as pharmaceuticals and consumer electronics also have taken this approach.

c) Global Cost Forces

New competitive priorities in manufacturing industries, that is product and process conformance quality, delivery reliability and speed, customization and responsiveness to customers, have forced companies to reprioritize the cost factors that drive their global operations strategies. The Total Quality Management (TQM) revolution brought with it a focus on total quality costs, rather than just direct labour costs. Companies realized that early activities such as product design and worker training substantially impact production costs. They began to emphasize prevention rather than inspection. In addition, they quantified the costs of poor design, low input quality and poor workmanship by calculating internal and external failure costs. All these realizations placed access to skilled workers and quality suppliers high on the priority list for firms competing on quality. Similarly, Just-in-time (JIT) manufacturing methods, which companies widely adopted for the management of mass production systems, emphasized the importance of frequent deliveries by nearby suppliers. A number of high-technology industries have experienced dramatic growth in the capital intensity of production facilities. A state-of-the-art semiconductor factory, for instance, costs close to half a billion dollars. When R & D costs are included, the cost of production facilities for a new generation of electronic products can easily exceed $ 1 billion. Similarly, huge numbers apply for the development and production of new drugs in the pharmaceutical industry. Such high costs drive firms to adopt an economies-of-scale strategy that concentrates production in a single location, typically in a country that has the required labour and supplier infrastructures. They then achieve high-capacity utilization of the capital-intensive facility by aggressively pursuing the global market. Besides this the host government subsidies also become an important consideration.

d) Political and Macroeconomic Forces

Getting hit with unexpected or unreasonable currency devaluations in the foreign countries in which they operate is a nightmare for global operations managers. Managing exposure to changes in nominal and real exchange rates is a task which the global operations manager must master. If the economics are favourable, the firm may even go so far as to establish a supplier in a foreign country where one does not yet exist. For example, if the local currency is chronically undervalued, it is to the firm’s advantage to shift most of its sourcing to local vendors. In any case, the firm may still want to source a limited amount of its inputs from less favourable suppliers in other countries if it feels that maintaining an ongoing relationship may help in the future when strategies need to be reversed. Becton Dickinson has built a global manufacturing network for its disposable syringe business, with production facilities in the United States, Ireland, Mexico and Brazil. When the Mexican peso was devalued, the company quickly shifted its production to the Mexican plant, thereby gaining a cost advantage over its competitors’ US factories. The emergence of trading blocks in Europe (Europe 1992), North America (NAFTA), and the Pacific Rim has serious implications for the way firms A? structure or rationalize their global manufacturing/sourcing networks. These trends are clearly apparent in many industries. For instance, before 1992, 3M’s European plants turned out different versions of the same product for the various European countries. Today, 3M manufacturing plants produce goods for all of Europe and, in the process, realize significant cost savings. Similarly, Philips, Thomson, Electrolux and Ford are in the process of creating pan-European networks of factories (producing both components and finished goods). The trade protection mechanisms which exist in the form of tariff and non-tariff barriers effect the global operation strategy; but these are readily losing importance in the new borderless trade regime.

Effect of a Global Integrated Economy on Global Operations

Operations and logistics are forced to adapt to environment. The logistic framework is forced to integrate its activities to meet the challenges of an integrated economy.

a) Geographical Integration

Geographical boundaries are losing their importance. Companies view their network of worldwide facilities as a single entity. Implementing worldwide sourcing, establishing production sites on each continent and selling in multiple markets all imply the existence of an operations and logistics approach designed with more than national considerations in mind. This geographical integration has been exploited by the regional economic integration, a very good example being the European Union. After the integration process was triggered off on 1 January 1 1993. At that time, customs duties between European Economic Community countries were abolished. This elimination of borders caused companies to rethink their physical flow structures for Europe as a whole. The usual practice of setting up sales subsidiaries in each country and creating country-specific logistics support and production systems was no longer appropriate. For companies the production and marketing is not restricted to one country but is global. Geographical integration becomes possible not only because of data processing and communication technologies, but also thanks to an excellent worldwide new means of transport. Express delivery services such as Federal Express, DHL, UPS and TNT, with their planes, hubs, systems of co.llection, tracking and final delivery, allow companies to send articles long distances, in the shortest time possible, and at a much lower cost compared to the cost of carrying inventory.

b) Functional Integration

The world is moving at such a fast pace that the various functional activities are no longer sequential and compartmentalized. The responsibilities of the logistics and operations manager is not limited to coordinating the physical flows relating to production distribution, or after sales service; they are also responsible for functions such as research, development and marketing. This functional integration improves flow management considerably. When setting up projects for developing new models, automobile manufacturers such as Renault in Europe have two teams working together: one from the R&D department and the other from the logistics group. The teams’ assignment is to simulate the flows required in the procurement and manufacturing stages according to the elements prepared by the research unit. The logistics department, for instance, can affect the automobile design stage by recommending modifications in order to create savings in logistics.

c) Sectorial Integration

In traditional supply chains, suppliers, manufacturers, distributors and customers each work to optimize their own logistics and operations. They acted in isolation concerned only with their part of the flow system which resulted in creating problems and inefficiencies for other players in the channel hampering the smooth flow all of which add cost to the total system. Leading firms, realizing this situation, are beginning to extend their view beyond their corporate boundaries and work cooperatively with all channel parties in an effort to optimize the entire system. This cross-boundary cooperation is referred to as Sectorial Integration.

CONCLUSION : The world economy is becoming borderless and integrated, driven by global market forces, global technological forces, global cost forces and political and macro-economic forces. The integrated world economy and global competitive arena is changing the way in which companies traditionally operated. There is also geographical, functional and sectorial integration which gives a truly global playing field to the companies and results in global supply chains.