Global Considerations in Operations Management (VCE SSCE Business Management): Revision Notes

Global considerations in operations management

Introduction to globalisation in operations

Globalisation has transformed how businesses manage their operations. Advances in communication technology, transportation systems and digital infrastructure have created opportunities for businesses to operate on a truly international scale. This has fundamentally changed operations management by enabling businesses to increase productivity and competitiveness through global strategies.

Modern globalisation in operations management allows businesses to:

• Conduct operations activities internationally rather than being limited to domestic locations
• Position each production stage in the most cost-effective location worldwide
• Share and implement innovative product ideas from diverse global sources
• Drive innovation through accessing international knowledge and expertise

Supply chain management

A supply chain is the interconnected network of people, activities, information systems and resources involved in developing and delivering a product from suppliers through to end consumers.

Supply chain management involves meeting customer demand efficiently by coordinating the flow of materials throughout the entire supply chain. Since operations systems depend on reliable inputs, the supply chain must function consistently to ensure production continuity.

Five key elements of supply chain management

Effective supply chain management comprises five critical components:

1. Plan: Develop strategic approaches based on forecasting required resources to satisfy customer demand and meet expectations

2. Procure: Source and acquire goods or services from suppliers at optimal prices, in correct quantities, and with appropriate delivery timing

3. Manufacture: Transform raw materials into finished products through production processes

4. Logistics: Coordinate the delivery of products, including transportation and movement of materials between locations

5. Returns: Manage reverse logistics, where products failing to meet customer expectations are returned and processed

Managing global supply chains

Coordinating supply chains on a global scale presents significant challenges. Operating across diverse political systems and economic conditions requires substantial coordination and complexity management. Supply chains typically involve multiple business organisations, each seeking to maximise revenue and profit from their contribution to the overall process.

COVID-19 disruption to supply chains

Australian industries experienced significant impacts:

• Global shipping disruptions caused delays, product shortages and dramatically increased costs
• Wholesale trade, retail, manufacturing and construction sectors faced the most severe challenges
• Businesses relying on Just In Time inventory management and lean production methods lacked buffers for unpredictable circumstances
• Component shortages made it impossible to manufacture some products
• The construction industry experienced severe supply shortages despite high demand stimulated by low interest rates and government incentives

Since 90% of Australia's merchandise imports originate from China, disruptions throughout 2020 and 2021 were particularly severe. Container port closures in Shanghai and Ningbo created congestion and backlogs requiring months to resolve. Consumers faced unprecedented stock unavailability across multiple product categories, including vehicles, IT equipment, furniture, mattresses, homewares and toys.

Future supply chain resilience

To address vulnerabilities exposed by the pandemic, Australian businesses are implementing strategies to strengthen global supply chains:

Global sourcing of inputs

Global sourcing involves businesses procuring inputs from overseas suppliers rather than domestic sources. This strategy helps businesses remain competitive by lowering costs, improving quality and increasing supply to meet customer demand.

Businesses pursue global sourcing to exploit various global efficiencies, including cheaper raw materials, lower labour costs, reduced tax rates in certain jurisdictions and advantages from free trade agreements.

Different countries possess natural advantages in producing specific products due to variations in economic resources. For example, Australia can produce agricultural commodities like wheat and fine wool at lower costs and higher quality than many other nations. Similarly, many Asian countries offer access to large labour pools at significantly lower costs than developed nations like Australia, providing opportunities for better value when sourcing engineering components and manufactured parts.

Advantages of global sourcing of inputs

• Access to inputs that are cheaper and potentially superior in quality
• Reduced labour costs that lower overall production expenses
• Employment creation and economic development assistance for less-developed economies

Disadvantages of global sourcing of inputs

• Supply disruptions depending on political or economic circumstances in source countries
• Challenges in meeting CSR obligations where expectations differ between countries
• Environmental impact considerations related to transportation and production methods

Overseas manufacture

Overseas manufacture (also called overseas processing) occurs when businesses relocate the production or assembly stages of their operations system to overseas locations. Finished goods are then imported back to the company's home country or distributed to other international markets.

This strategy enables businesses to reduce costs and potentially bring products to market more quickly. Given Australia's isolated geographical location, overseas manufacture can reduce transportation costs and shipping times when supplying international markets.

Advantages of overseas manufacture

• Businesses can concentrate on other strategic areas like product development and marketing while operations functions are handled overseas
• Access to lower production costs through cheaper skilled and unskilled labour
• Design and engineering of manufacturing tools costs more than 50% less in countries like China compared to Australia
• Reduced costs enable production of larger volumes

Disadvantages of overseas manufacture

• Language barriers may prevent smooth operational execution
• Risk to intellectual property in countries with poor IP law enforcement
• Increased costs for international administration, communication and shipping
• Supply chain delays from complicated logistics, government regulations and customs clearance times

Global outsourcing

Global outsourcing involves contracting specific business operations to be performed by third-party businesses overseas. These tasks would traditionally have been completed internally within the business. Companies pursue outsourcing to reduce costs, enhance service quality or solve capacity constraints.

Common business functions suitable for global outsourcing include:

• Accounting services
• Customer support and service operations
• Human resources functions such as payroll processing
• Information technology services

Outsourced vendors assume responsibility for all logistical arrangements. Businesses simply provide necessary data or information, and the vendor delivers required services. This approach provides access to overseas talent pools with specialised skills to manage assigned work effectively.

Advantages of global outsourcing

• Access to greater expertise, potentially improving service quality
• Reduced need to hire and train new employees for outsourced activities
• Enables increased focus on core business functions and productivity improvement

Disadvantages of global outsourcing

• Challenges coordinating workflow between different business aspects
• Communication difficulties from different time zones, language barriers and cultural differences
• Loss of direct control, including quality control oversight

Case example: My Source Global Limited

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