Modeling manufacturing and marketing options in international operations

Abstract

In this paper, we model and compare eight manufacturing–marketing options that a firm with operations in two countries (termed as an international enterprise) may adopt. Manufacturing factors incorporated in the model include factory location, inventory, economies of scale, product design, and postponement. Marketing factors include product positioning and pricing. The model also includes international factors such as the exchange rate and transportation cost. The first two options are termed core product options where the international enterprise manufactures a “core product”, in a single facility located in one of the countries. Under the first core product option, this facility also performs additional operations on the core product to develop custom-tailored products. Under the second core product option, customization of the core product takes place in facilities located in both countries. The other six options are characterized by standardization/customization of product and pricing policies as well as centralization/decentralization of the production function. The main result of the analysis is that under certain production-related conditions, the core product options dominate the other six manufacturing–marketing options. This result has significant managerial implications since it suggests that the core product options exploit the best of both worlds, customized pricing and product policies as well as savings derived from economies of scale from the centralized production of the core product.