Many people are oblivious of the processes by which goods are produced and are only content with the satisfaction that a product offers them.
They may not appreciate the fact that a commodity such as a vehicle or a computer would have many of its components manufactured in different locations across the globe.
Thereafter, all the components would be transported to a final assembly point for the production of the final commodity, which eventually gives joy and satisfaction to the consumer.
Factor cost differentials in the location of businesses
As globalisation develops with the shrinking of global markets, international businesses leverage differentials in factor costs to ensure the sourcing of components to put together products at optimum cost and ensure great value to consumers.
Due to the exigencies of globalisation, with the progressive lowering of trade barriers leading to the establishment of businesses by many companies around the globe, firms have to take strategic decisions regarding their value chain propositions.
A critical decision that international businesses take in maximising their value chain relates to selecting the appropriate locations for the siting of production facilities. In selecting the appropriate locations to site production facilities, an international business will consider factors such as locating the entire production process in one place or dispersing it in multiple locations. In taking such decisions, the international business would consider optimising advantages like labour costs, tariff barriers, ethical and environmental factors, tax incentives, the legal environment, political risks, etc., in doing business in the host country.
For example, several US firms have relocated their production plants in China and other Asian countries to leverage relative differentials in production factor costs.
This gives opportunity to US computer firms to leverage lower factor costs in Asian countries to produce goods, which are then shipped to the US and sold for relatively moderate prices, which eventually benefits US consumers.
Single-site production vs multiple-site production
Another critical factor in the value chain propositions of international businesses, avoiding the threat of suffering major disruptions to their production cycles, is the avoidance of situations where the entire value chain is concentrated in one particular country.
Though it may be advantageous for a business to site its production in one particular country due to cost efficiencies and other related factors, it may not eventually inure to the wider strategic considerations informing the operations of the business.
This is particularly the case with some businesses siting their entire operations in some countries, which at first may appear to have all the factors conducive for business operations.
However, later circumstances, which might be totally unforeseen when the business was operationalised, might erupt with the entire value chain being compromised.
Such events may include a situation where an enterprise gains the overwhelming favour of a ruling elite, which was in power at the time of the establishment of the business, leading to the business being granted overgenerous incentives. Where a business, which is granted such overgenerous incentives and sometimes even pampered, suffers a loss of patronage on account of the government under whose tenure it operated, losing power, that business may experience a dip in its fortunes.
An example is the Guptas in South Africa during the regime of ex-President Jacob Zuma.
Coordination of production and supply chain management
An international business should strive to maximise its value chain propositions by coordinating in a very efficient manner its supply chain and production activities.
While production relates to the processes for the actual manufacture of goods, supply chain relates to the coordination and integration of logistics, purchasing, operations and the whole range of activities involved with the procurement of raw materials ending with the eventual delivery of the product to the consumer or end user.
In ensuring the coordination of the production and supply chain functions of an international business, the international business must aim to achieve the strategic objective of obtaining the lowest cost possible in the movement of raw materials to the production site and the processes involved with production for the delivery of the appropriate commodity to the consumer at an optimum price.
The international business must configure its processes in achieving this objective by siting its production plants at convenient locations around the globe for the performance of each activity in the production process most efficiently at an optimum cost.
There should also be the efficient coordination and integration of the supply chain straddling across production, purchasing, logistics and operations management.
The business can do all this by itself or design a programme of coordination where it engages in outsourcing for the performance of some of these functions. In placing a premium on efficient operations at optimum cost with the delivery of the right products to the consumer or end-user, the international business must prioritise the selection of the appropriate location to site its production facility, select the most efficient production methods and prioritise its supply chain models.
Emphasising product quality
Sometimes products, which have been certified as appropriate and usable after leaving the production line, are recalled.
This may be due to defects arising from a slip on the production line or the incorrect application of components during the manufacturing process. Such recalls often come at a huge cost to the manufacturer and cause significant inconvenience to the end-user.
To avoid these inconveniences, expenses and embarrassment to the manufacturer and end-user, the international business must carefully coordinate and integrate its production and supply chain functions by emphasising product quality.
It may do this by setting up rigorous quality assurance mechanisms for the elimination of defective raw materials, parts and faulty products from the manufacturing line for rectification. This ultimately ensures the reliability of the final product from the production line, eliminates embarrassment to the business, and avoids unbudgeted expense and inconvenience to the consumer.
A successful interplay and coordination of the production and supply chain management of an international business is a prerequisite for placing reliability on the end product. In placing a premium on quality assurance for the elimination of defective goods, international businesses have successfully imbibed the concept of the Six Sigma Quality Improvement Methodology.
This was developed from the Total Quality Management Concept and first adopted by Japanese engineers in industry, and later by American engineers.
The proponents of the Six Sigma Technology, W. Edward Deming, Joseph Juran and A.V. Feigenbaum postulated the imperative of managers to avoid mistakes and thereby eliminate defective goods in the production process.
To achieve the Six Sigma Quality, they stated the necessity for management to provide quality tools for workers for deployment in the production process.
The proponents of the Six Sigma, a statistical philosophy in business, envisaged an assurance of 99.99966 per cent accuracy in the production process to assure product quality for the consumer or end-user and cement the reputation of the international business of the assurance of the production of quality goods.
It will also avoid the international business incurring unnecessary expense in recalling defective goods for replacement or rectification.
The writer is a lawyer with specialisation in international business law.
Email: joseph.a@akyeampongandco.com