globalization – The OM Blog by Heizer, Render, & Munson

Guest Post: DHL Express Delivers to a Global Market

Dr. Misty Blessley, Associate Professor of SCM at Temple U., shares here thoughts with our readers on a regular basis.

“Every supply chain company will have to keep a close eye on big headlines like geopolitics, climate change and wars. If you are a global company, there will be a crisis somewhere, every day,” says DHL Express’s CEO John Pearson, in a recent article in The Economic Times. DHL Express, he adds, is the undisputed global leader in international express shipping.

Pearson disputes claims that globalization is decreasing, thus making crisis management less of a supply chain concern. In actuality, he states that, “Globalization is not giving way to regionalization and aspects like friendshoring, nearshoring and stronger regional trade are not taking place in a way that makes an impact,” making it as necessary as ever for firms to work through frequent and prolonged crises. For many firms, this has caused globalization to take on a new face.

This new global face comes from adding additional facilities alongside current manufacturing bases, as a means of mitigating risk. India has become a popular location for new manufacturing plants, warehouses and regional offices. “China plus one” is another mitigation strategy by which western firms decrease their Chinese dependence by setting up facilities in Indonesia, India, Philippines, Vietnam, Mexico and Turkey. Chinese firms are doing the same, but they are also the nearshoring exception as they move into Mexico to fulfill their U.S. demand.

How does DHL remain global in a crisis, that is, how does it deliver to a global market every day? It attributes its ability to foresee and anticipate a crisis, and agility for carrying it through. DHL’s pandemic response was rooted in the 2010 Eyjafjallajokull volcano eruption in Iceland, which shut-down air travel in Europe for 30 days. DHL moved to an entirely ground network overnight, by leveraging its available assets and relationships. In sum, DHL scans externally, knows its internal capabilities and learns from the past.

Classroom discussion questions:

1. Refer to the six reasons domestic business operations decide to change to some form of international operation in Ch. 2 in your Heizer/Render/Munson textbook. What advantages propel firms to take on a new global face?
2. Refer to the Logistics Management section in Ch. 11. DHL Express was able to pivot from air to ground transportation in Europe following the volcano eruption. What tradeoffs exist between the various shipping systems?

Guest Post: Shoe Capital of the World

Our Guest Post comes from Prof. Howard Weiss, who created the ExcelOM and POM software that we provide free to our readers.

Lynn Massachusetts In colonial days shoemakers had a capacity of roughly 5 shoes–not pairs–per day. The industrial revolution moved shoe manufacturing to factories, increasing capacity to 50 pairs per day. In 1883, Jan Matzeliger of Lynn, Massachusetts patented a machine that would use a wooden mold to form the leather top of the shoe and then attach it to the bottom. The new machine replaced this step (called lasting) which was performed by hand by skilled shoemakers. And it increased the capacity to 750 pairs per day while reducing the price of shoes by 50%.

Figure 8.1 of your Heizer/Render/Munson textbook mentions several factors for a successful location which we examine now with respect to shoe manufacturing.

Labor talent Due to the continuous flow of skilled shoemakers into the state, 234 shoe manufacturers chose Lynn as their location and manufactured over 1,000,000 pairs per day. This made Lynn the Shoe Manufacturing Capital of the World. The state of Massachusetts produced more shoes than anywhere else in the U.S. through World War I.

Leon, Mexico Today, however, over 90% of shoes bought in the U.S. are not manufactured here. One of the major manufacturing locations is Leon, in the state of Guanajuato, Mexico which currently has over 3,000 shoe manufacturers including Nike, Converse, Crocs, Skechers and New Balance. This makes Leon the current Shoe Manufacturing Capital of the World. There are several reasons for this:

Location of markets Leon is located roughly 250 miles northwest of Mexico City and has easy highway access to other cities in Mexico and to the U.S. through the 45 U.S.-Mexico border crossings. Mexico’s infrastructure is in excellent shape as are its highways. Shipments by truck to the U.S. take no more than 3 days, and to Latin America no more than 7 days. Guanajuato has an international airport with flights to cities in Mexico and L.A., Houston, Chicago and Dallas. Shipments to Europe take less than 2 weeks.

Labor talent again Mexico has had large influx of skilled leatherworkers from Europe.

Proximity to raw materials/supply chain One of the key materials needed to manufacture shoes is leather and there are nearly 700 leather tanneries in Guanajuato providing this raw material.

Classroom discussion questions:

What major manufacturer or service organization is located near your home or school and what were the factors for selecting that location?
What is the effect of NAFTA in selling shoes manufactured in Mexico in the United States?

OM in the News: The End of Globalization?

“Russia’s invasion of Ukraine will reshape the world economy and further drive up inflation by prompting companies to pull back from their global supply chains,” BlackRock CEO Larry Fink has warned, reports The Financial Times (March 25, 2022). “The Russian invasion of Ukraine has put an end to the globalization we have experienced over the last three decades.”

While the immediate result had been Russia’s total isolation from capital markets, Fink predicted “companies and governments will also be looking more broadly at their dependencies on other nations. This may lead companies to onshore or nearshore more of their operations, resulting in a faster pull back from some countries. A large-scale reorientation of supply chains will inherently be inflationary.” He stated that “Mexico, Brazil, the U.S., or manufacturing hubs in Southeast Asia could stand to benefit.”

He further predicted that the Russian invasion would affect the transition to cleaner energy. Initially, the search for alternatives to Russian oil and natural gas “will inevitably slow the world’s progress toward net zero [emissions] in the near term.”

“Longer-term, I believe that recent events will actually accelerate the shift toward greener sources of energy” because higher prices for fossil fuels would make a broader range of renewables financially competitive. Though climate activists want investors to shun fossil fuels entirely, Fink rejected this approach. “BlackRock remains committed to helping clients navigate the energy transition. This includes continuing to work with hydrocarbon companies,” he stated. “To ensure the continuity of affordable energy prices during the transition, fossil fuels like natural gas will be important as a transition fuel.”

In one of his first comments on cryptocurrencies, Fink drew attention to the Ukraine war’s “potential impact on accelerating digital currencies . . . A global digital payment system, thoughtfully designed, can enhance the settlement of international transactions while reducing the risk of money laundering and corruption.”

Classroom discussion questions:

Why would the U.S. benefit from a global supply chain reorientation?
What has been the impact on global supply chains from the invasion?

OM in the News: Globalization in Retreat?

Globalization was a key driver of the world economy in the 1990s and 2000s. But global value chains—the spread of supply networks across countries—ceased expanding after the 2009 financial crisis. This year, the arrival of the pandemic has had a devastating impact on economic activity around the world, writes The Wall Street Journal (Dec. 17, 2020), and global trade has shrunk by 9.2%.

China remains an export powerhouse but has turned inward. Exports as a share of its GDP have fallen from 31% in 2008 to 17% in 2019. China is not alone. Nationalism has become a stronger force around the world, and with it economic nationalism. Indian Prime Minister Modi has a “Make in India” campaign. President Trump touts “Buy American” policies.

The Indian government offers incentives to large smartphone brands to make their products there.

Other concerns about globalization relate to national security. The U.S.-China relationship has soured partly because of fears that the security of advanced technology products, from drones to microchips, might have been compromised by the Chinese authorities. The U.S. is not alone in worrying that Chinese technology is suspect, as the controversy over Huawei and the security of its telecom equipment shows. Japan has begun investigating how to break its supply-chain dependence on China and produce more at home.

And many countries have been asking whether they have become too dependent on others for essential medical supplies and medicines of which they might be deprived in an emergency. Some temporary export bans were imposed over fears about inadequate domestic supplies of medical equipment, PPEs, and drugs. Attitudes have changed. President Macron of France believes that the coronavirus “will change the nature of globalization, with which we have lived for the past 40 years,” adding that it was “clear that this kind of globalization was reaching the end of its cycle.”

Classroom discussion questions:

In Ch. 2 (p. 33) of your Heizer/Render/Munson text, we identify 6 reasons why companies globalize. Which, if any of these, are changing if this WSJ article is on target?
What are the main factors driving this “retreat?”

OM in the News: Why U.S. Manufacturing is Poised for a Comeback

Manufacturing in the U.S. is starting to make a comeback, and is poised for even bigger gains in the years ahead, opines The Wall Street Journal (June 2, 2014). The number of factory jobs has started to rise after plunging for decades, edging up by about 600,000 over the past 4 years to more than 12 million. Some U.S. companies are bringing jobs back home, and foreign businesses are setting up shop. “The economics of the world are changing in favor of U.S. manufacturing,” says Boston Consulting Group. Here are 4 proposals why this is so:

1: U.S. Costs Are Getting More Competitive. While wages soar at double-digit rates in China and some other emerging countries, they have stayed roughly level in the U.S. in recent years, narrowing the gap between America and Asia. China’s overall manufacturing-cost advantage has shrunk to just 4%. When wages are adjusted for productivity and the costs of shipping and inventories are included, it can be more economical to make some products in the U.S. than in Asia. Further, the surge in U.S. production of oil and natural gas, made possible by fracking, has pushed down energy costs.

2: Companies Are More Eager to Produce Near Their Customers. Companies are increasingly focused on reacting quickly to changes in demand, which is a lot easier when they’re making their products close to the customer. Manufacturing here can reduce the time needed to obtain goods to days or weeks from the 2 months needed to ship goods across the Pacific and get them through customs.

3: The Political Climate for Manufacturing in the U.S. Has Improved. State and local governments in the U.S. now are competing fiercely for investments and offering some rich packages. The declining power of U.S. unions also encourages some manufacturers to set up here rather than Europe or elsewhere.

4: Foreign Companies Are Betting on U.S. Manufacturing. China remained the No. 1 destination for foreign direct investment in 2013, but its total last year rose just 2% from 2012 to $258.2 billion. The U.S. attracted $193.4 billion, up 16%, to rank No. 2.

Classroom discussion questions:

1. Ask your students to make a rebuttal to each of these 4 cases.

2. Which factor do you think is most important?

OM in the News: Walmart and the Bangladesh Factory Fire

The garment factory fire in Bangladesh last week that killed 112 workers was a horrible tragedy. Emergency exits were padlocked and fire engines could not reach the blaze through dense and overcrowded roads. But the question for your students becomes: what does Walmart do with its clothing suppliers like this one? The Wall Street Journal (Nov.27, 2012) writes: “Walmart said the factory was no longer authorized to make clothes for the retailer, and that it had cut ties to a supplier that subcontracted with the factory without its authorization.”

Walmart’s ethical-sourcing department claims it notified the factory last year that it had found it to be “high-risk” and yanked its business–yet the chain’s clothing was still being produced there when the factory went up in flames. In its 2012 report on global responsibility, the retailer said it had stopped working with 49 factories in Bangladesh because of fire-safety issues. (Garment factory fires have killed over 600 people in the past 6 years).

Labor activists are scolding global companies for tolerating such terrible conditions in Bangladesh. The Journal (Nov.29, 2012) adds that Walmart is well aware of the reputational risks of sweatshop sourcing, trying hard to monitor working conditions among their suppliers. “But determined factory owners, abetted by local authorities can always fool inspectors.” Worth noting is the fact that a country of Bangladesh’s population—approximately 150 million—is greatly dependent on a single industry in which it has no natural advantage. Garment exports earn around $19 billion per year, accounting for 80% of total export. Clothing is Bangladesh’s only major manufactured product.

The garment industry there enjoys special labor rules, including a ban on unionization, and regulated pay rates that depress wages in the name of competitiveness. In this respect, Bangladesh is like China and other East Asian tiger economies, except that Bangladesh hasn’t pushed the economy further up the value chain. Instead, it has skewed investment toward the garment industry.

Discussion questions:
1. What is Walmart’s responsibility in dealing with global suppliers’ safety issues?

2. Why does Bangladesh support this industry so heavily? Why is it afraid of Ghana?

OM in the News: What Do China, Mexico, and South Carolina Have in Common?

The answer to this question about Mexico, China, and S. Carolina is good news re American jobs. But specifically, it’s that The Wall Street Journal (Oct.6,2011) just ran three articles in the same issue that are all tied to the theme of globalization coming full circle.

In the 1st, we find that Otis Elevator is moving production from its plant in Nogales, Mexico (which it opened in 1998) to Florence, S. Carolina. Otis says the move will save money. The cost of producing abroad has risen and Otis has devised more efficient ways to make the product closer to where it sells it. Since designers and engineers had stayed in the US, it meant a lot of cross-border travel. “We needed to rationalize our supply chain”, says the CEO. Net to US: 360 jobs. (Also see the 5 min.video link in the article).

Second, the Journal reports that German tire maker Continental AG is building a new $500 million plant in S. Carolina, bolstering a major turnaround in the US tire industry. Eventually, 8 million tires will roll out annually, creating 1,600 jobs. The strategic shift comes amid reduced labor costs (partly from new 2-tiered wage plans) and a supply of highly-skilled workers, making the US competitive globally. As a bonus, Japan’s Bridgestone Corp, also announced a $1.1 billion expansion of its existing tire plant. Where? Why S. Carolina, of course!

“China is Getting Too Expensive”, talks about a S. Carolina furniture maker who moved production to China a few years back, only to be bumped aside by his Chinese partners who started selling directly to the US market. The Journal writes: “But with labor, materials and shipping costs rising, the advantage will tip (back) to the US in 4 years” in 7 major industries. Among the forces: rising costs in China, more flexible American unions, state subsidies, higher productivity here, and shorter turnaround times, meaning shorter supply chains. Automation, however, means a furniture maker can accomplish with 135 employees what took 250 to do in the past.

Discussion questions:

1. Why are some US companies abandoning Mexican production?

2. What factors are working against China?

Teaching Tip: Globalizing our OM Classes

I’ve just returned from a trip to India and was again reminded not only how much the world’s economies are intertwined, but also that we need to be sure our students appreciate that economic integration. This is a shrinking world. For instance, while in New Delhi, Boston University was having Executive MBA presentations in my hotel. And GE Chairman Jeffrey Immelt was also in town holding GE’s Corporate Excellent Council meeting and talking about added investment in GE’s energy, aviation, and locomotive facilities as well as GE’s 30% growth in India. Warren Buffett was in Bangalore speaking at the Confederation of Indian Industries and then in New Delhi discussing growth of Berkshire Hathaway’s insurance business. Michael Dell, with eight data centers across India, was also in New Delhi reportedly reviewing performance and investment opportunities. Meanwhile, Sara Palin was speaking about the US economy at the India Conclave 2011 in Mumbai. And, of course, the Indian auto assembly plants of Honda, Toyota, and Suzuki were concerned about part shortages after the earthquakes in Japan.

As an aside, perhaps I should add that Bill and Melinda Gates were also in India and slated to meet with Buffett to recruit others to join them in their philanthropic activities.

As we put on our professor hats and ‘profess’, it is hard for us to overemphasize the global perspective our students need (and that we introduce in Chapter 2). Whether it is international economics, investments by GE, Berkshire Hathaway, or Dell, automotive supply chain issues, or Boston University’s international education, we owe it to our students to ensure that they have an international perspective. The world is not flat, but it is getting there.

OM in the News: “Comparative Advantage” and American Jobs

This is the first time I recall The Wall Street Journal (Jan.26,2011) treating the subject of the Theory of Comparative Advantage. We cover this topic in Supplement 11 as a means of justifying outsourcing. The theory basically states that each country should concentrate its energy and skills on the goods and services that it is more productive at than the rest of the world.

Matt Slaughter, a dean at the Tuck School at Dartmouth, points out that the last time the US had 11.7 million manufacturing jobs (the number we have today) was in 1941. Should we have more? He writes: “A competitive America does not mean competitive success for every American industry. Many voices argue that manufacturing is somehow special….But a key insight into the principle of comparative advantage…is that hard-working Americans are not going to excel at everything….It’s okay that Phil Mickelson is better off on the golf course and not painting his own house”.

“Imports do not represent failure”, Slaughter adds. ” They raise the standards of living”. Questions of whether we have a comparative advantage in emerging clean technologies “are best left to the markets”.

He suggests that for the US to be globally competitive, we must invest abroad as well as export there. Manufacturers of aircraft engines, elevators, and earth movers, for example, require after-sales maintenance and support that requires foreign investments on our part. More maintenance and repair of tractors in China and India mean more R&D jobs here. And more Wal-Marts and Red Lobsters in those countries mean more logistics jobs in the US.

He concludes that “excessive government backing of particular companies and industries typically squanders taxpayer resources and stifles sustainable growth”.

Discussion questions:

1. Compare Slaughter’s comments to the ideas of Liveres in yesterday’s blog.

2. What is our comparative advantage in this country?

3. Where do services fit into this mix?

OM in the News: Where Should Starbucks Open More Stores?

Under pressure to increase sales and share prices, Starbucks needs to add new stores in the right locations. The trouble is, the US market is saturated. So far, Starbucks has done very well in a handful of overseas markets. About 55% of its sales are in Canada, Japan, the UK, and China. But now even the UK and Canada are near capacity. Toronto, Vancouver, and London already have more Starbucks per person than NY or Philadelphia.

So the title of The Wall Street Journal article (Nov.4,2010) on the subject tells it all: “Starbucks Must Open More Stores–Overseas“. The Journal suggests Starbucks follows the McDonald’s international expansion. Where will the growth be? Germany and France are two prime candidates, as Starbucks has relatively few locations in each.

While McDonald’s draws about half its operating profit from overseas, Starbucks gets only 15% abroad. The Journal concludes: “Whether dry or wet, tall or grande, Starbucks needs to find a combination for similar overseas success”.

Discussion questions:

1. Why was McDonald’s so successful in its expansion abroad, and why will it be harder for Starbucks?

2. How can Starbucks increase profits without going overseas?

OM in the News: BMW Loves Making Cars in the U.S.

As the Big 3 auto makers still struggle to reclaim markets and manufacturing leadership, BMW announces that employment will hit 7,600 workers in its South Carolina plant next year. Its $750 million expansion means the plant will be the largest car factory in the U.S., dwarfing any Detroit operation.

Of course, with the economy so bad, this is good news, even if some profits end up in the company’s German headquarters. And because of high-tech firms like BMW, South Carolina is the 4th largest net importer of college-educated adults.

Why did BMW decide to make its luxury SUVs here, when it exports 70% of these vehicles to the rest of the world? The Wall Street Journal (Oct.14,2010) reports that US production helps BMW hedge against currency fluctuations around the globe. Another reason…according to U.S.-BMW President Josef Kerscher (in Fortune, Oct.15,2010): This U.S. group has absenteeism of “less than 3%, better than in Germany”.

Similar good news is that Mercedes plans to shift some production of its best-seller, the C-class sedan, from Germany to the US in 2014. Its not only a currency issue for Mercedes, but the strategy reduces labor and other costs. As we note in Ch.8 (Location), Mercedes already makes SUVs in it Vance , Alabama plant.

Discussion questions:

1. What others reasons are there for foreign car makers to be attracted to the US?

2.Why is South Carolina a primary destination for auto manufacturers?

3. What brought Mercedes to Alabama (see Ch.8’s OM in Action box)?

OM in the News: China’s Massive Foxconn Facing Wage Increases

Foxconn, the giant Chinese manufacturer employing 920,000 workers,may not have been a household name a year ago. But that is rapidly changing. Business Week’s cover story recently highlighted Foxconn (see our Blog dated 9/21/10) where we learned that the firm’s products include iPads, Nokia phones, Dell computers, and HP printers.

The thrust of this WSJ article, though, is wages. Foxconn’s chairman Terry Gou is rapidly moving manufacturing inland, to 2nd tier cities where wages are only 2/3 of the more -developed coastal areas. Gou intends to expand to 1.5 million workers, with the majority inland, in the next 5 years.

And Gou plans to keep plowing billions into China. “I think in the next 20 years China won’t have a competitor” as the world’s manufacturing center, he states.

As the BusinessWeek article detailed, 11 employee suicides have caused Gou to accelerate his plans to move jobs closer to inland towns where he recruits employees.The long hours of overtime in the coastal factories, living in Gou’s dorms, and eating at his cafeterias, may have contributed to the bleak lifestyle.

Gou also raised the minimum pay for assembly line workers to about $295, more than double, starting this month.

Discussion Questions:

1. Will China still dominate the world manufacturing scene in 20 years? Where will the US lie?

2. Why isn’t Gou afraid of Vietnam, India, Brazil, or Russia?

3. How does managing wages by moving inland affect Apple, Nokia, and HP?