Many firms have responded to the globalization of business by developing international supply chains1 in which the various value-adding activities comprising a finished product are dispersed geographically in a number of countries.2 At the same time, many businesses have tried to understand and implement lean production systems, pioneeered by Toyota, that encompass goals such as just-in-time (JIT) delivery, low inventories, zero defects, flexible production in small batches, and close technical cooperation with suppliers. While the business press has championed both globalization and lean production as inevitable and valuable, there has been little investigation into the interaction of the two. Are they compatible? Or will they collide?3
Managers are, of course, aware of the logistical problems in operating international value chains, such as longer lead times and higher transportation costs.4 Some writers have challenged the benefits available from international sourcing and have raised strategic concerns, such as the potential for “hollowing out” the corporation.5 Nevertheless, many writers optimistically presume that technological advances in communication and transportation are quickly scaling the barriers of distance.6
In a study of a company in the personal computer industry, I examined the implementation of lean production in an international value chain. The study demonstrates that the rapid flow of goods and information required by lean production is costly and difficult to achieve. Lead times are longer and inventory levels higher in international supply chains compared to domestic examples. Longer supply chains are also associated with poor sales-forecasting accuracy and significant delays in resolving technical problems. The study suggests that managers systematically underestimate these costs because they tend to plan for a relatively stable chain and do not fully appreciate the complex, dynamic way in which various disruptions affect a geographically dispersed supply chain.
The study also suggests, somewhat tentatively, that some elements of lean production facilitate globalization. The reduction of defects and engineering change orders to very low levels helped to stabilize the computer company’s supply chain and enabled it to accelerate the transfer of production of new products offshore. Lean production may be more difficult and expensive in the international context, but it may still be worthwhile.
1. I use the terms “value chain” and “supply chain” more or less synonymously.
2. See, for example:
M. Porter, “Changing Patterns of International Competition,” California Management Review, volume 28, Winter 1986, pp. 9–40; and
R. Reich, “Who Is Them?,” Harvard Business Review, volume 69, March–April 1991, pp. 77–88.
3. Several researchers have argued that the adoption of lean production, particularly JIT, might constrain the dispersion of production in the auto industry. See:
K. Hoffman and R. Kaplinsky, Driving Force (Boulder, Colorado: Westview Press, 1988);
D.T. Jones and J.P. Womack, “Developing Countries and the Future of the Automobile Industry,” World Development, volume 13, March 1985, pp. 393–407.
Michael A. Cusumano has argued that the dispersion of production limited lean production. See:
M.A. Cusumano, “The Limits of Lean,” Sloan Management Review, volume 35, Summer 1994, pp. 27–32.
4. F.T. Curtin, “Global Sourcing: Is It Right for Your Company?,” Management Review, volume 76, August 1987, pp. 47–49; and
E.W. Davis, “Global Sourcing: Have U.S. Managers Thrown the Baby out with the Bath Water?,” Business Horizons, volume 35, July–August 1992, pp. 58–65.
5. C.C. Markides and N. Berg, “Manufacturing Offshore Is Bad Business,” Harvard Business Review, volume 66, September–October 1988, pp. 113–120.
“Hollowing out” means outsourcing key activities so that a firm loses its core competencies and thus its ability to sustain competitive advantage.
6. C. Antonelli, “Multinational Firms, International Trade, and Telecommunications,” Information Economics and Policy, volume 1, number 4, 1984, pp. 333–343; and
P.M. Swamidass, “Import Sourcing Dynamics: An Integrative Perspective,” Journal of International Business Studies, volume 24, number 4, 1993, pp. 671–691.
One exception is Porter, who noted that “International coordination involves long distance, language problems, and cultural barriers to communication.” He does not appear to consider these barriers prohibitive, however. See:
7. For descriptions of lean production systems, see:
R.W. Hall, Zero Inventories (Homewood, Illinois: Dow Jones-Irwin, 1983);
R.H. Hayes and S.C. Wheelwright, Restoring Our Competitive Edge (New York: Wiley, 1984); and
J.P. Womack, D.T. Jones, and D. Roos, The Machine That Changed the World (New York: Rawson Macmillan, 1990).
8. Yves Doz comments, “The just-in-time manufacturing concept works best with the collocation of various facilities into an integrated system.” See:
Y. Doz, “International Industries: Fragmentation versus Globalization,” in B.K. Guile and H. Brooks, eds., Technology and Global Industry (Washington, D.C.: National Academy Press, 1987).
9. G. Stalk and T. Hout, Competing against Time (New York: Free Press, 1990).
10. C.F. Sabel, “Flexible Specialization and the Reemergence of Regional Economics,” in P. Hirst and J. Zeitlin, eds., Reversing Industrial Decline? (Oxford, England: Berg, 1989).
11. There has been considerable research into supplier relationships in the auto industry. See:
S.R. Helper, “Automotive Supplier Relations: Results of the 1989 Survey” (Cambridge, Massachusetts: MIT, Proceedings of the IMVP International Policy Forum, 1989); and
R. Lamming, “The Post-Japanese Model for International Automotive Components Supply” (Cambridge, Massachusetts: MIT, Proceedings of the IMVP International Policy Forum, 1989).
12. S.S. Cohen and J. Zysman, “Why Manufacturing Matters: The Myth of the Post-Industrial Economy,” California Management Review, volume 24, Spring 1987, pp. 9–26. See also:
13. T. Flaherty, “Coordinating International Manufacturing and Technology,” in M. Porter, ed., Competition in Global Industries (Boston: Harvard Business School, 1986).
14. K.B. Clark, “High-Performance Product Development in the World Auto Industry” (Boston: Harvard Business School, working paper 90-004, 1989).
15. More details of the methodology can be found in:
D.L. Levy, “Chaos Theory and Strategy: Theory, Application, and Managerial Implications,” Strategic Management Journal, volume 15, Summer 1994, pp. 167–178.
16. I defined a product family around the microprocessor. Within each family are several configurations with various combinations of memory and disk capacities. I defined markets at the regional rather than at the country level.
17. For more detail on the simulation, see:
18. This includes inventory in transit within the country to resellers but not inventory in transit from manufacturing sites in other countries.