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Category: *Year 12

Global Restructuring-Path to  a successful global business*
Global Restructuring-Path to a successful global business*

According to Farell (2004), most managers focus on globalisation as a lever to reduce costs. Yet, they should be viewing it as a means to generate new revenues too.

In order to realize the full potential of globalisation, the place where the industry falls along the globalisation spectrum should be assessed first. To do this, the ratio of annual value of global trade to the annual value of industry sales should be considered. Ratios over 100% indicate that these industries are global.

Next, globalisation’s full potential for your company should be defined. In this case, it is difficult to figure out how different forces will strenghten or weaken your business over time and how to capitalize on that evolution.

Three types of factors usually determine the course of globalisation in an industry.

  • production
  • regulatory
  • organizational

Production

In this case, there are two factors which determine an industry’s potential for disaggregating its value chain.

  • relocation sensitivity- how feasible and attractive it is for an industry to relocate parts of its production process
  • location specific advantages

Relocation senstitivity can be figured out using metrics like

  • bulk to value ratio(currency value per pound of production material)
  • ease with which your company can ensure quality standards remotely
  • how quickly your products or components become obsolete
  • volatility of the demand for your service
  • sunk costs

Location specific advantages can be determined using

  • labor intensity
  • skill requirements
  • natural resources intensity
  • economies of scale and scope

Regulatory

Particularly countries’ efforts to restrict imports or foreign investment are among the biggest constraints to globalisation in many industries.

  • tariffs
  • quotas
  • minimum content from local production
  • ban foreign investment outright
  • failure to invest in regulatory and legal infrastructure

Organisational

The main organisational factors that can limit globalisation for a company or an industry include

  • internal management structures
  • incentive systems
  • unionization

Yet, all production, regulatory and organisational forces evolve over time. Along the line, the full potential of globalisation for companies and industries change with the geopolitical and macro economic environment.

Thereby, with escalating competition, steady trade liberalisation and continuous introduction of new technologies, the pressure on companies to globalise tend to increase.

Then, the options to capture value in the new global environment should be considered.

According to Farrell (2004), industries and companies both tend to globalise in stages and in each stage, there are different opportunities for creating value.

Stage 1: Market Entry

This is when companies enter new countries using production models that are very similar to the ones they deploy in their home markets. In this case, typically companies need to establish their production presence due to the nature of their businesses or due to local tariffs and import restrictions.

Stage 2: Product Specialisation

This is when companies transform the full production process of a particular product to a single low cost location and export the goods to various consumer markets. For example, GM now manufactures all Pontiac Azteks in Mexico ad all Chevrolet TrailBlazers in the U.S.

Stage 3: Value Chain Disaggregation

This is when companies start to disaggregate the production process and focus each activity in the most advantageous location. Eg: Recent trends for U.S companies to offshore business processes and IT services

Stage 4: Value Chain Re-engineering

This is where processes are re-engineered to suit local market conditions. For example, Indian car makers have a manufacturing process tailored to take advantage of low labor costs. They also design and build the capital equipment for their plants locally.

Stage 5: Creation of New markets

This is the expansion of the market.

However, these 5 stages are not necessarily a rigid sequence that all industries follow. Companies can skip or combine steps.

If the business wants to shape rather than react to the industry’s evolution, it is necessary to size up the opportunities that emerge for your business at each stage of globalisation. This means determining potential cost savings from global industry restructuring and identifying new market opportunities which it can create.

  • Labor
  • Re-engineering their production processes
  • Utilizing capital equipment more intensively
  • Hiring local engineers in low wage environments to design and build cheaper capital equipment
  • Manage other fixed costs of doing business

For example, Maruti Udyog, an Indian carmaker designed its won robots for its assembly lines. This cost the company a fraction of what Suzuki, its Japanese partner paid a third party vendor for similar machines.

However, experiences of French retailer Carrefour and U.S. retailer Walmart in Brazil and Mexico indicate the need for both optimism and caution in the pursuit of globalisation.

In order to ensure success as your industry restructures along the global lines, a sound strategy, consistent execution and new ways of viewing the business and managing people are required.

Accordingly, the following are some lessons drawn from the experiences of companies that have ensure success.

  • Abandon incremental thinking- Adopt bold performance targets sooner rather than later
  • Use global assets effectively and efficiently- Get the best mix by increasing labor resources to better use expensive capital, improving shift utilization, developing cheaper capital equipment.
  • Tailor your best practices to local conditions- Leverage the best practices in ways that fit conditions in the host country. For example, in Mexico, Walmart uses the same trademark “Everyday low price” strategy which it uses in U.S.
  • Aim for higher quality

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Maximizing benefits of Off Shoring*
Maximizing benefits of Off Shoring*

When a European or North American manufacturer thinks about off shoring a factory or function, it often looks first at China and India. This is because both of these countries offer an attractive combination of

  • low costs
  • well developed capabilities
  • business friendly regulatory environments
  • large domestic markets

However, for people considering offshoring, it is dangerous to take a narrow geographical view. This is mainly because every country has a different mix of strengths and weaknesses.

For example, a country may have very low labor costs but a high degree of political instability and a small domestic market. Another might have engineering talents, but quickly rising labor rates.

Hence, to obtain the maximum benefit from offshoring, the foreign operations should be spread over a broader and well balanced mix of regions and countries.

Vestring et al(2005)’s research into industrial offshoring confirms the wisdom of a portfolio approach. Accordingly, in creating their offshoring portfolios, cost leaders take into account a wide range of decision criteria. For example, current labor rates, related costs like facility construction and utilities, education and skill levels of local workers, their business experience, maturity and stability of the nation’s infrastructure. Also, these cost leaders consider both short term and long term benefits which affect all relevant criteria.

However, maintaining production facilities in higher cost countries makes sense when labor is a minor cost component or when transportation costs are high. For example, call centers and textile industry.

Thereby, deciding whether to shift costs requires making focused decisions for each product line, while looking deeply into issues like relative labor costs, logistics costs, customer requirements and time to market.

For example, Emerson Electric Co a U.S. based conglomerate embarked on a strategy to methodically and progressively shift sourcing, manufacturing and engineering from its traditional bases in Western Europe and U.S. to a variety of low cost countries around the world in Asia, Latin America and Eastern Europe.

It set up production operation in Mexico, for its low costs and proximity of the operation to U.S. Also, production capacity was established throughout in Asia to tap both into low costs and ensure a high degree of responsiveness to rapidly growing Asian markets. For example, Emerson hedged its risks by accessing skilled labor pools in Phillipines, India and China. By 2002, low cost countries accounted for 44% of Emerson’s total manufacturing labor cost. This has led to improvement in the company’s operating profit margin.

Emerson is thus known to have benefited from being earlier and bolder in its pursuit of cost migration.

This has led to the understanding that offshoring is not limited to routine production and assembly jobs. This is why cost leaders examine specific functions like finance, ICT, marketing on a case by case basis.

For example, Boeing Co. has a center that designs and does technical work in Russia. P & G gets its taxes done in Costa Rica, which has a strong cadre of workers with accounting skills. General Electric Co, has an R&D center in India with a staff of about 500 with about a third of them being locales with doctorates.

Considering portfolio diversity, it should be highly disciplined, balancing the risk advantages of consolidation. For example, Emerson concentrates its activities in 4 major production centers.

Achieving such a balanced portfolio requires a centralized approach to planning, with headquarters overseeing and coordinating a company wide offshoring program. This is mainly because leaving offshoring decisions upto individual business units has its own drawbacks.

  • It provides no mechanism to temper risk by distributing functions across a range of countries
  • It prevents companies from reaping savings across business units

Thereby, cost-migration leaders take a number of practical steps to ensure that their portfolios are constructed successfully.

  • Establish and constantly update a detailed and robust database of current costs and other key criteria across low cost countries
  • Carefully set priorities for both functions and countries
  • For each activity, a short list of target countries are evaluated on the basis of long term competitiveness, current costs and capabilities
  • Upfront investment in building its infrastructure and capabilities

Thus, benefits of off shoring can be maximized.

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Negatives of global supply chains*
Negatives of global supply chains*

Global supply chain offers unlimited opportunities for achieving economies of scale. However, recent problems related to the global supply chain highlight some important issues regarding the limitations of the global supply chain.

The US Consumer Product Safety Commission in 2008, stated that recalls have increased drastically in the 2000s. Also, a vast majority of the recalled products were made in China. However, the product quality had fallen due to several reasons.

  • Trade policies of the U.S.A
  • Poor regulatory regimes in China
  • Squeezing of suppliers by big box retailers
  • Poor supply chain management
  • Focus on branding at the expense of quality by companies

Beamish and Bapuji(2008) studied the US toy industry. This industry in 2006 has an estimated annual sales of 22.3 billion US dollars. Over the years, these toy companies shifted their production overseas. They focused on product design, marketing, research and development and other high value activities in the domestic range.

Studying the industry, it was found that toy recalls that took place due to design flaws have not only been higher, but increased at a faster rate. There were also recalls due to manufacturing flaws.

For example, several industry experts agreed with the findings that the single largest cause of recalls, deaths and injuries involving toys was small parts. This clearly means it is a design flaw, not a manufacturing error. Despite this, some toy company executives and the public blamed China for virtually all the flaws in toy recalls.

This has increased calls for evidence based management and research which could make an impact on practice by providing evidence.

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Role of EDI (Electronic Data Interchange) in Global Supply Chain Management*
Role of EDI (Electronic Data Interchange) in Global Supply Chain Management*

By tracking component parts, ICT enables a firm to optimize its production scheduling based on when the components are expected to arrive. This allows the firm to accelerate production when needed. Such accelerateion is possibel by pulling key components out of the regular supply chain and having them flown to the manufacturing plant.

At preset, EDI (Electronic Data Interchange) is used by firms to coordinate the flow of materials into manufacturing, through manufacturing and to customers.

In EDI, electronic links are used to

  • place orders with suppliers
  • register parts leaving a supplier
  • track the orders
  • register the arrival of orders

As a result of EDI, suppliers, shippers and the purchasing firm can communicate with each other in no time delay. This increases the flexibility and responsiveness of the global supply system.

Also, EDI eliminates paperwork. Good EDI systems can help to decentralize materials management decisions to the plant level by giving corporate level managers the information they need for coordinating and controlling decentralized materials management groups.

Talking about history, before the internet became a mjor source of communication, firms and their suppliers had ti purchase expensive proprietary software to implement EDI. But, less expensive web based EDI has managed to dominate the market now.

Thus, web based EDI has transformed the management of globally dispersed supply chains. This allows even small firms to achieve a better balance between demand and supply. Today, not using a web based EDI can mean a competitive disadvantage.

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Role of JIT in Global Supply Chain Management*
Role of JIT in Global Supply Chain Management*

In international business, logistics manages the global supply chain. The two main objectives of logistics are

  • to manage a firm’s global supply chain at the lowest possible cost
  • to serve the customers’ needs to the best

The JIT(Just in time) inventory systems, pioneered by Japanese firms during the country’s remarkable economic transformation during the 1960s and 1970s, was mainly built to enable achievement of the above objectives.

JIT economizes inventory holding costs by having the materials arrive at a manufacturign plant just in time to enter the production process and not before. Thereby, the major cost savings come from speeding up inventory turnover. This reduces warehousing and storage costs.

This also reduces the amount of working capital it needs to finance inventory, which fress the capital for other uses.

Also, JIT can help to improve product quality. Under JIT, parts enter the manufacturing process immediately. This allows defective inputs to be spotted at the same time.

However, JIT leaves a firm without a buffer stock of inventory. Yet, there are ways of reducing the risks associated with JIT.

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Evaluation of Outsourcing*
Evaluation of Outsourcing*

In recent years, the outsourcing decision has gone beyond manufacturing physical products, to service activities. For example, many U.S. based companies have outsourced their customer call centers to India.

However, not always is outsourcing better. At times, producing in house is better. This is especially the case when the following benefits can be obtained.

Lower costs : If the firm is more efficient in producing the product

Facilitating specialized investments: Specialized assets are those whose value is contingent on a particular relationship. For example, manufacturing in uniquely designed systems require investments in equipment which can only be used for this purpose. In this case, if there is lack of trust between the two parties, it may be unable to persuade any independent supplier to manufacture them.

Protecting proprietary technology: If this involves producing a product containing superior features, proprietary technology can give the firm a competitive advantage.

Accumulation of dynamic capabilities: Dynamic capabilities are the skills that become more valuable over time, through learning. Thereby, firms that outsource activities to gain a short term cost advantage may miss out on the opportunity to build important capabilities in that activity. Thereby, firms should not outsource if those activities are potentially important for the long term competitive advantage.

Improving scheduling: Planning, coordination and scheduling of processes is easier with in house production. For international businesses that source worldwide, scheduling problems are exacerbated by the time and distance between the firm and its suppliers.

However, outsourcing would be better in certain cases. Thsi is mainly due to the following benefits of buying.

Strategic Flexibility: When operating internationally, changes in exchange rates and trade barriers can alter the attractiveness of supply sources. In this case, having flexibility to switch orders between suppliers as circumstances dictate is good. This is why most firms source the same products from suppliers based in two countries primarily, as a hedge against adverse movements in factor costs, exchange rates, etc.

Also, when the optimal location for manufacturing a product is beset by political risks, it is better to source products from independent suppliers. However, maintaining strategic flexibility has its downside. If a supplier perceives that a firm might change suppliers in response to exchange rates, trade barriers or political circumstances, then the supplier might not be willing to make investments in specialized plants and equipment.

Lower costs: When producing in house, the organization’s scope increases. This results in an increase in organizational complexity which can raise a firm’s cost structure. This increase in cost structure happens due to the following reasons.

  1. Greater number of sub units in an organization- With greater number of sub units, there will be more problems coordinating and controlling the units. This will require top management to process large amounts of information about sub unit activities.
  2. Lack of incentive to reduce costs- Vertically integrated firms may lack incentive to lower costs because of captive customers in the firm.
  3. Determination of proper transfer pricing is tough- Deciding the appropriate prices for goods transferred to subunits within the firm is a challenge in any firm.

Offsets: Outsourcing some manufacturing to independent suppliers based in other countries may help the firm to capture more orders from that country. For example, U.S. has repetitively urged Japanese automobile companies to purchase more component parts from U.S. suppliers to partially offset the large volume of automobile exports from Japan to U.S.

However, some international businesses have attempted to reap benefits of vertical integration without the above problems, by entering strategic alliances with essential suppliers.

For example, Kodak and Canon under which Canon built photocopiers for sale by Kodak.

Microsoft and Flextronics in which Flextronics built Xbox for Microsoft.

Such strategic alliances build trust between the firm and its suppliers. This kind of arrangement betweent he firm and its parts uppliers was pioneered in Japan by large auto companies like Toyota. However, if a firm enters into long term alliances, this may limit strategic flexibility by the commitments it makes to its alliance partners.

Thus, both producing in house and outsourcing is not favorable at all times.

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Evolution of strategic roles of foreign sites*
Evolution of strategic roles of foreign sites*

The strategic role of foreign sites usually evolves over time. Initially, most of the time, the strategic role of foreign production sites is to produce labor –intensive products at a low cost as possible.

Then, over time, the strategic role of these factories expanded.  The production sites will then become an important place for design and assembly of the products for the global market place.

For example, HP’s operation in Singapore was established at a low location to produce circuit boards. But, this facility then became the center for the design and final assembly of portable inkjet printers for the global marketplace. This type of upward migration in strategic roles of foreign production sites arise due to many foreign sites upgrading their own capabilities.

Such upgrades mainly arise from two sources.

  1. Pressure from the head office to improve a site’s cost structure & to customize a product to the demands of consumers
  2. Capabilities of a foreign site: Advanced infrastructure

As a result of the above, most foreign production sites are now not only low cost production facilities, but also globally dispersed centers of excellence. This also implies that once a foreign factory has been established and valuable skills have been accumulated, it is not wise to switch production to another location just because the costs increased or for such simple reasons.

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Make or Buy Decision in the business world*
Make or Buy Decision in the business world*

In classical economics, based on Ronald Coase, the decision on whether to make or buy a product was seen as based on minimising transaction costs. This was centred around the structure of the market and the nature of the transactions.

For example, if there is a large number of competitive suppliers and purchasers can easily access the market without any cost, then it is better to purchase the product.

For businesses, this decision is based in a dynamic environment. That is, usually the initial stages of the products will comprise of few suppliers and difficult transactions. Then, as the market grows, new entrants are attracted and they get more skilled at buying. This will lead to the development of a liquid market. Later, as mergers and acquisitions occur, weaker companies fall while the number of suppliers shrink.

Thereby, when applied in a global level, the make or buy decision is vital. These choices range from fully integrated production to the company that exists by co-ordinating efforts of others in a series of contracts.

Considering on make or buy decisions, from Hill and Hult (2017)’s point of view, make or buy decisions are made at both the strategic and operational levels.

The strategic level make or buy decisions will be focused on the long term. The operational level ones will be focused on the short term. These decisions are also considered as the starting point for operations’influence on global supply chains.

When making these decisions, issues of product success, specialized knowledge and strategic fit should be considered. Yet, the make or buy decision is most often decided based on only two critical factors, being the cost and production capacity.

In terms of cost, concerns should be on acquiring raw materials, component parts and any other inputs into the process along with the costs of finishing the product.

In terms of production capacity, the concerns should be on whether the firm has the capacity to produce the product at a cost at least not higher than buying from the external supplier.

Understanding that make or buy decisions are complex, when deciding on producing it in house, the firms has to consider the following very carefully.

  • Cost
  • Quality control
  • Presence of proprietary technology
  • Are suppliers limited? If they are, consider the excess capacity available.
  • Can we have control?
  • Will there be continuous supply?
  • Industry drivers
  • Production capacity

On the other hand, when considering a decision of buying, the following should be concerned.

  • Cost
  • Multi source policy
  • Do we lack the expertise?
  • What are the competencies of suppliers?
  • Should we buy in small volumes? If yes, how does our inventory plan work?
  • Brand preferences
  • Is the product and essential or non essential item for the business?
  • Production capacity

Therefore, the decision of whether to make or buy your products are crucial and will affect your value chain greatly.

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Crucial Production location decisions*
Crucial Production location decisions*

General Electric(GE) is a multi national conglomerate in New York City. For decades, GE has been at the forefront of the move in shifting production offshore from high cost locations within U.S. to cheaper locations like China.

However, wage rates in China and other developing nations have been rising fast. This has closed the differences between costs in the U.S. and overseas. In terms of U.S. Dollars, wage rates in China were five times higher in 2012 than they were in 2020 and they are still rising fast.

This gap between Chinese and U.S. is further closing down with the rise in labor productivity in U.S. Furthermore, high oil prices have raised the cost of shipping products across oceans. On the other hand, there is so much of cheap natural gas in the U.S, which helps to lower production costs.

For example, considering GE’s Geo Spring Water Heater, it was originally designed in the U.S. and manufactured in China. This was then shipped back for sale in U.S.

However, in 2010, with the macro trends in labor productivity and energy prices, GE decided to see what would happen if it brought some of its appliance products back to U.S. With the Geo Spring being considered not easy to manufacture due to poor design, GE redesigned the product, eliminating about 25% of material costs. As a result, Ge could produce the product within 2 hours in U.S. in comparison to 10 hours in China. Thus, GE’s material costs and labor requirement went down and product quality went up.

Therefore, GE could reduce the price of Geo Spring by 20% than the Chinese Manufacturing cost and still maintain a profit margin. This improved the time to market too; reducing it from 5 weeks to a number of days. This led to improved inventory management too.

Thereby, now GE is trying to get the other productions also done in U.S. Accordingly, GE plans to have 75% of the revenue from American made appliances.

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Deciding the operational plant location*
Deciding the operational plant location*

Considering a global value chain, companies should take every link in the chain and find the optimum location for it.

If a company that makes products requiring such components does not have a market share that is large enough to justify building a plant to make them, it is forced to outsource that component. But, if the company that has the plant is also a manufacturer of the end product, possession of the components is a strong barrier to entry to new competitors in the final product market.

However, some industries consist of independent businesses taking care of different parts of the supply chain. For example, in garment industry, various parts of the production of fabric are often done by different businesses and the garments finished in a cut, manufacture and trim plant. In this case, the garment themselves may be designed and marketed by other, totally independent businesses. And, each part of the business can be located wherever it makes most sense for the business.

Thus, businesses can find market niches at various points of the value chain and for various functions. Also, within the manufacturing part of the value chain, minimum cost operations will not always give competitive advantage because every business tries to generate some competitive advantage through differentiation.

Thereby, according to Hill and Hult (2017), an international firm should decide where to locate its production activities to best minimize its costs and improve product quality. Thereby, firms which engage in international production have to consider several factors like country factors, technological factors and production factors.

Country Factors

This includes political and economic systems, culture and relative factor costs. In this case, in some industries, the presence of global concentrations of activities at certain locations are required.

Also, externalities can play a major role in deciding where to locate production activities. For example, due to a cluster of semi conductor manufacturing plants in Taiwan, labor with experience in the semi conductor business have developed in Taiwan.

The same has happened in Hyderabad and Bangalore, in India where both Western and Indian companies have established operations. For example, locals refer to an area of Hyderabad as Cyberabad. This is the area where Microsoft, IBM, Infosys and Qualcomm have major facilities.

However, formal and informal trade barriers influence location decisions. Also, expected future movements in its exchange rate is another key country factor to consider. That is, adverse changes in exchange rates can quickly alter a country’s attractiveness as a manufacturing base. In simple, currency appreciation can transform a low cost location into a high cost location.

For example, the relatively low value of the yen on foreign exchange markets between 1950 and 1980 helped strengthen Japan’s position as a low cost location for manufacturing. More recently, the yen’s steady appreciation against the dollar increased the dollar cost of products exported from Japan. This made Japan less attractive as a manufacturing location. Therefore, many Japanese firms moved their manufacturing offshore to lower cost locations in East Asia.

Technological factors

In this case, firms should consider three key things; fixed costs, minimum efficient scale and the flexibility of technology.

Considering fixed costs, when there is a relatively low level of fixed costs, it is much economical to perform a particular activity in several locations at once. This permits the firm to better accommodate demands for local responsiveness. This helps the firm to avoid being dependent on one single location. Specially, being dependent on one location is very risky in the presence of floating exchange rates.

Considering minimum efficient scale, the level of output at which most plant level scale economies are used is known as the minimum efficient scale of output. Therefore, this is the scale of output that a plant must operate to realize all major plant level scale of economies.

Hence, the larger the minimum efficient scale of a plant relative to global demand, the greater the better to centralize production in a single location or limited locations. For example, the low level of minimum efficient scale in relation to global demand, for PCs makes it better for companies like Dell and Lenovo to assemble PCs in multiple locations.

Flexible manufacturing and mass customization is the next technological factor to be considered. Here the trade off is between unit costs and product variety. Accordingly, the way to increase efficiency is to limit product variety and produce a standardized product in large volumes.

The above view of production efficiency has been challenged by the rise of flexible manufacturing technologies or lean production. This covers a range of manufacturing technologies designed to

  • reduce setup times for complex equipment
  • increase the utilization of individual machines through better scheduling
  • improve quality control at all stages of the manufacturing process

Thus, flexible manufacturing technologies allow the company to produce a wider variety of end products at a unit cost that could only be achieved through mass production. This indicates that mass customization is possible through flexible manufacturing technologies.

For example, Toyota’s flexible manufacturing system was developed by Ohno. The development begins with Ohno having completed 5 years at Toyota and visiting Ford’s U.S. plants.

Ohno identified several problems with mass production. First, massive inventory held up due to long production runs meant high costs for warehousing. Second, when the initial machine settings were wrong, long production runs resulted in the production of a large number of defects. Third, the mass production system was unable to accommodate consumer preferences for product diversity.

As a response to these identifications, Ohno developed a number of techniques to reduce setup times for production equipment. This made small production runs economical resulting in lower warehousing costs. Waste was also reduced. With all of these innovations, Toyota could produce a more diverse product range at a lower unit cost.

Another flexible manufacturing technology that is common is flexible machine cells. This is a grouping of various types of machinery, a common materials handler and a centralized cell controller. A typical cell is dedicated to the production of a family of parts or products. The settings on these machines are computer controlled and allows each cell to switch quickly between the production of different parts or products.

Through flexible machine cells, setup times are reduced and the production flow is coordinated by the computer. This eliminates bottlenecks and improves capacity utilization. Also, the tight coordination between machines also reduces work in progress. Adding on top of them, waste is reduced because of the ability of computer controlled machinery to identify ways to transform inputs to outputs while producing minimum waste.

Apart from improving efficiency and lowering costs, flexible manufacturing technologies enable companies to customize products to the demands of small consumer groups. Thus, mass customization can be achieved.

For example, Ford’s introduction of flexible manufacturing technologies enabled Ford to produce multiple models from the same line and to switch products from one model to another much quickly than in the past.

Production Factors

In this case, product features, locating production facilities and strategic roles for production facilities are key things to be considered.

Considering product features, first the value to weight ratio affects the location decision because of its influence on transportation costs. For example, electronic components and pharmaceuticals have high value to weight ratios. Therefore, there is high pressure to produce them in optimal locations and to serve the world from there on.

The choice of whether the product serves universal needs, also influences the location decision. If there are few national differences in consumer taste and preference for such products, the attractiveness of concentrating production at an optimal location increases.

Accordingly, for locating production facilities, a firm can either concentrate them in a centralized location and serve the world market from there, or decentralize them in various regional or national locations that are near to major markets.

The correct strategy of the two will be based on country specific, technological and product factors. Accordingly, concentration of production makes most sense in the following circumstances.

  • Differences among countries in factor costs, political economy and culture have a substantial impact on the costs of manufacturing in various countries.
  • Low trade barriers
  • Externalities arising from the concentration of entreprises favor certain locations.
  • Important exchange rates are expected to remain relatively stable.
  • Presence of high fixed costs and high minimum efficient scale relative to global demand.
  • Presence of flexible manufacturing technology.
  • High product’s value to weight ratio.
  • Product serves universal needs.

Another factor to consider in location decisions include global learning. This means that valuable knowledge does not reside in a firm’s domestic operations; it may be found in foreign subsidiaries. In simple, foreign factories upgrade their capabilities over time. This creates valuable knowledge.

These foreign factories can have a number of strategic roles like offshore factory, source factory, server factory, contributor factory, outpost factory and lead factory.

Offshore factory is a factory that is developed and set up mainly for producing component parts of finished goods at a lower cost than producing them anywhere else. In such factories, investments in technology and managerial resources should ideally be kept to a minimum, in order to achieve greater cost efficiencies. But, some strategic decisions are expected to include input from the offshore factory personnel.

Source factory is one that drives down costs in the global supply chain. In this type of factory, the managers have a say in certain decisions like purchase of raw materials and component parts. Thereby, these factories should be located where production costs are low and infrastructure is well developed. It should also be relatively easy to find a knowledgeable and skilled workforce to make the products.

A server factory is a factory which supplies a specific country or regional markets around the globe. This type of factory is usually to setup to overcome intangible and tangible barriers in the global market place. Also, managers at a server factory usually have more authority to make minor customizations to satisfy their customers.

Considering a contributor factory, this factory has more choice in terms of which suppliers to use for raw materials and component parts. This type of factory has its own infrastructure when it comes to development, engineering and production. Therefore, this type of factory is more of a standalone one.

The next type, outpost factory is an intelligence gathering unit. This is often placed near a competitor’s headquarters or main operations, near the most demanding customers or key suppliers of unique and critically important parts.

A lead factory is intended to create new processes, products and technologies that can be used throughout the global firm in all parts of the world. A lead factory should set a high bar for how the global firm wants to provide products to customers. Therefore, it should be located in an area where highly skilled employees can be found. This implies that managers and employees at the site have a direct connection to suppliers, the designs implemented and other core competencies of the firm.

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