Production and Logistics Management in Multinational Enterprises

International production is the essence of a multinational enterprise. An MNE produces at home as well as abroad through establishment of foreign subsidiaries. It is commonly agreed that the MNE is a firm with manufacturing subsidiaries in six or more foreign nations. The advantage of the MNEs lies in the product variety and adaptability since they can use information from their subsidiaries to learn about changes in the markets of host nations and thereby adapt their products to service host-nation variety in tastes.

Business cycles, competition, product substitution, and government-induced changes in tariffs cause the fluctuation of demand over time. The MNE, through its internal market, must smooth production and avoid the periodic conditions of under- and overcapacity. To allow the coordination of the movements and storage of inputs and outputs the firm must apply efficient logistics. The aim of logistics activities is to ensure that supplies are secured and demand for the final product is satisfied. Logistics activities include order processing, shipment of output, forecasting, purchasing, and production scheduling. The functions necessary to support these activities are transportation, storage, packaging, materials handling, and site location. The three major types of MNEs treat the process of production and logistics smoothing differently.

Ethnocentric. For the ethnocentric MNE, production smoothing is actually demand smoothing. The MNE will carefully select its markets and promotional methods so that demand will not exceed its capacity. When demand declines in one market, it will reduce production as quickly as possible, but it does so at the risk of losing customers in future periods. Logistics for the ethnocentric MNE is confined to exporting in the most cost- and time-efficient manner. The basic modes available for transportation are air, sea, rail, and road freight. While considering which of the modes to choose the MNE must evaluate such costs as holding extra inventory for a freight forwarder, packaging, paperwork, freight costs, customs fees, storage and delivery fees, repackaging, and others, all involving two or more nations with different bureaucratic, economic, and commercial systems.

Polycentrie. The polycentrie MNE will try to use small-capacity production facilities and carry larger inventories and/or use overtime production to meet periods of increased demand. The polycentrie MNE can also rely upon subcontracting production if demand exceeds its capacity. As the polycentrie MNE usually serves the host nation's market only there is a tendency to neglect logistics.

That's why the MNE's foreign subsidiaries are often slow to respond to new product launches by competitors as well as to excess demand or production stock-outs.

Geocentric The geocentric MNE manufactures the same product in a variety of nations and can efficiently shift capacity and output on a global basis. Such MNE can specialize production into four types of facilities: low unit cost, seasonal, stockpile, and flexible plants.

The low unit cost plant is intended to produce at full capacity. When foreign markets experience excess demand or oversupply, the lower unit costs are expected to compensate for the added logistics (movements and storage of inputs and outputs) and inventory costs (raw materials, semi-finished and finished goods). In situations where a product's demand is seasonal and variations in demand can be forecasted accurately, a seasonal plant is put into operation. A stockpile plant may complement a low unit cost plant or operate independently. Flexible plants are designed to shift production quickly into new or existing products. They are not mass production oriented. With flexible plants the MNE can react rapidly to the introduction of new products by competitors or unexpected changes in demand.

The geocentric MNE will have a separate logistics department which coordinates all activities between a multitude of foreign subsidiaries' markets, production locations, and input sources. Computers and an experienced staff are required for the efficient operation of a logistics department.