International Operations Unit VI Pokhara University MBA trimester

International Operations

What is Global Production?

Global production refers to the process where companies design, manufacture, and assemble products or components in multiple countries around the world. The goal is to take advantage of global efficiencies, such as lower labor costs, skilled labor, or access to raw materials.

• A product might be designed in the USA, manufactured in China, and assembled in Mexico.
• Companies use global production to reduce costs, increase quality, and access new markets.
• Global production is a core feature of globalization and international trade.

Example: Apple designs iPhones in the USA, manufactures components in Japan and South Korea, assembles them in China, and sells them worldwide.

What is Outsourcing?

Outsourcing is the business practice of hiring an external organization to perform services or create goods that were traditionally performed in-house by the company’s own employees and staff.

·         Outsourcing allows companies to focus on their core competencies.

·         It can reduce operational costs and provide flexibility.

·         Functions commonly outsourced: IT services, customer support, manufacturing, HR, etc.

Example: A clothing brand outsourcing its manufacturing to a textile factory in Bangladesh.

Differentiate between Domestic Outsourcing and International Outsourcing

Basis	Domestic Outsourcing	International Outsourcing
1. Location	Within the same country	Across national borders
2. Communication	Easier due to shared language/time zone	Can be harder due to cultural/time differences
3. Legal Framework	Same laws and regulations	Different countries’ laws apply
4. Cost	May be higher due to local wages	Often lower due to cheaper labor abroad

Examples:

• Domestic: A US company outsources its IT support to a firm in Texas.
• International: The same company outsources IT support to India.

What is Logistics?

Logistics refers to the management of the flow of goods, services, and information between the point of origin and the point of consumption to meet customer requirements.

Key Functions:

·         Transportation

·         Warehousing

·         Inventory management

·         Order fulfillment

·         Packaging

Objectives: Deliver the right product, to the right place, at the right time, in the right condition, at the lowest cost.

Difference Between Inbound Logistics and Outbound Logistics:

Basis	Inbound Logistics	Outbound Logistics
Definition	Movement of raw materials and parts from suppliers to manufacturing	Movement of finished goods from manufacturing to customers
Focus	Supply and inventory management	Distribution and delivery
Processes	Receiving, storing, transporting inputs	Order processing, shipping, delivery
Example	Transporting cotton to a textile factory	Shipping finished clothes to retailers

 

Relationship Between Outsourcing and Logistics

Outsourcing and logistics are closely related because efficient logistics is essential for managing outsourced functions, especially when they are international.

·         Outsourcing relies on logistics to move raw materials and finished goods between countries.

·         Logistics helps coordinate and streamline production and delivery across different locations.

·         Delays or inefficiencies in logistics can disrupt outsourced operations.

A. Location Strategies

These refer to how companies choose locations for manufacturing, sourcing, and distributing products.

Factors Considered:

·         Cost of labor

·         Proximity to market

·         Infrastructure quality

·         Political stability

·         Tax and trade incentives

Example: Toyota opening plants in the US to reduce transportation costs and avoid import tariffs.

B. Strategic Roles of Foreign Factories

Different factories in different countries may have varied roles beyond just low-cost production:

1.      Offshore Factory: Low-cost production, e.g., garments in Bangladesh.

2.      Source Factory: Adds value via skills, e.g., automotive parts in Mexico.

3.      Server Factory: Located close to the market to reduce delivery times, e.g., Nestlé in Brazil.

4.      Contributor Factory: Involved in product development, e.g., Samsung in South Korea.

5.      Outpost Factory: Supports R&D and innovation, e.g., Intel in Israel.

6.      Lead Factory: Takes a leadership role in process and product development.

C. Make or Buy Decisions

This decision involves choosing between producing in-house (make) or outsourcing (buy).

Factors Affecting Decision:

·         Cost of production

·         Availability of skilled labor

·         Quality control

·         Strategic importance of the component

·         Flexibility and speed of supply

Example:

• "Make" if it's a critical component (e.g., Apple's custom chips).
• "Buy" if it's a standard part (e.g., screws, packaging).

D. Managing Global Logistics and Supply Chain

To effectively manage global logistics and supply chains, companies use several strategies:

1. Use of Technology

·         ERP systems

·         Real-time tracking

·         AI for forecasting demand

2. Collaboration with Global Suppliers

·         Long-term contracts

·         Supplier relationship management

3. Flexible Supply Chain Design

·         Multiple suppliers

·         Diversified sourcing (China +1 strategy)

4. Risk Management

• Planning for disruptions (e.g., pandemics, wars)
• Backup suppliers

5. Compliance and Regulations

• Customs regulations
• International trade laws

6. Sustainability

• Eco-friendly packaging
• Optimized transport routes to reduce emissions

Global Marketing: Pricing Decisions

Pricing is one of the most critical components of global marketing strategy. It directly affects revenue, competitiveness, market entry, and brand perception in international markets. When making global pricing decisions, companies must balance internal cost structures with external market conditions, local consumer expectations, and competitive dynamics.

Factors Influencing Global Pricing Decisions

1. Cost Considerations
• Production costs (labor, materials, overheads)
• Logistics and distribution costs
• Tariffs and taxes
• Exchange rates and currency fluctuations
2. Market Demand
• Consumer purchasing power
• Price sensitivity
• Local preferences and expectations
3. Competition
• Local competitors’ pricing
• Global brand positioning
• Presence of substitutes
4. Company Objectives
• Market penetration vs. skimming
• Profit maximization
• Market share growth
5. Legal and Regulatory Factors
• Price controls
• Anti-dumping laws
• Import/export restrictions
6. Cultural Factors
• Perception of value
• Premium pricing tolerance
• Negotiation norms

Global Pricing Strategies

1. Standardized Pricing

• Same price across all international markets (adjusted for currency)
• Pros: Simplicity, brand consistency
• Cons: May not reflect local market conditions

Example: Apple charges similar iPhone prices globally (after adjusting for taxes and currency).

2. Differentiated Pricing (Market-Based)

• Prices vary by country or region
• Reflects local demand, competition, and cost structures

Example: Netflix charges different subscription rates in India vs. the U.S.

3. Cost-Plus Pricing

• Add a fixed markup to the cost of production
• Common for industrial products or B2B

Limitation: May not align with what the market is willing to pay.

4. Penetration Pricing

• Set a low initial price to enter and gain market share
• Later, prices may increase as the brand establishes itself

Example: Xiaomi used penetration pricing to enter global smartphone markets.

5. Price Skimming

• High initial price, gradually reduced over time
• Used for new or innovative products

Example: Sony PlayStation launches at a premium, then reduces price over time.

6. Psychological Pricing

• Pricing to influence perception (e.g., $9.99 instead of $10)
• Can differ culturally; some numbers are lucky/unlucky in certain regions

Challenges in Global Pricing

• Currency volatility: Profit margins can be eroded by exchange rate changes.
• Gray markets: Products resold in unintended markets due to price differences.
• Price escalation: Final consumer price becomes too high due to added costs (tariffs, shipping, local distribution).

Global Pricing Tools and Practices

• Transfer pricing: Price set between company divisions in different countries for tax and profitability optimization.
• Geo-pricing models: Dynamic pricing based on region-specific algorithms.
• Pricing dashboards and analytics: For real-time monitoring and adjustments.

 

Element	Key Consideration
Internal Costs	Production, logistics, tariffs
External Factors	Demand, competition, regulations
Strategy	Standardized vs. adaptive pricing
Long-term Goals	Market share, profitability, brand equity