In this chapter production strategy has been defined in its most general sense-as the process of supplying a target market, whether through buying the needed goods or producing them. An MNC supplies a target market via a combination of sourcing tactics. The overriding objective is, of course, to minimize the cost of supplying the target market.
From the nation-state's viewpoint, factories are preferable to sales offices because they bring jobs, incomes, consumption, savings, houses, tax revenues, technologies, import substitutions and/ or exports, and, in general, progress. From the MNC's point of view, the more closely it is involved in the production process, the more money it makes. Thus, both the MNC and the nation-state stand to gain considerably from manufacturing. Most U.S. MNCs would rather set up factories abroad than establish any other arrangement. The Japanese, who have in the past preferred joint ventures and other contractual agreements, seem to have developed an appetite for wholly owned subsidiaries, through which considerable control can be exerted over the long-term as well as the short-term plans of an enterprise.
An MNC has a variety of ways of smoothing out the entire supplying strategy. For example, the MNC can (1) use the inventory-logistics system to buffer sudden and unexpected changes in either production or marketing systems; (2) turn inward, resorting to overtime or layoffs; (3) subcontract to other business entities; or (4) source from its own minority joint ventures or wholly owned subsidiaries overseas. Last but not least, the MNC can rationalize its own internal procedures for handling material and/or final products. Just-in-time (JIT) production and inventorying techniques can be substituted for conventional methods of moving raw materials and products.
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