Type: Research Essays
Sample donated: Barry Dixon
Last updated: August 23, 2019
Forseveral decades now, there has been a focus on optimizing manufacturingactivity. Although firms have also expanded manufacturing overseas in theeffort to tap into the customer base of emerging markets (Goker et al.
, 2014),several large multinational firms have outsourced manufacturing activities to offshorethird-party suppliers, decreasing their owned assets in the effort to benefitfrom lower labour, raw material costs and cope with changing technologies. Thisstrategy, however, has several downsides. It may create competition from thesupplier, if they create and market their own similar product. In fact, Asianfirms are known to make market entries based by first making supplieragreements with US manufacturing firms.
In the perspective of the tech industry,typically, less than 10 per cent of a high-tech company’s costs are directlabour. Hence the decision to source offshore, simply to save on labour costs,makes little sense if penalties are incurred elsewhere in the supply chain (Martin,2016). Focusedmanufacturing also referred to as focused factories is another strategy globalfirms have adopted in the effort to optimize their production activities. Theway focused factories work is that each factory produces a limited range andmix of products for the firm to take advantage of economies of scale. A goodexample of a company that has adopted this strategy is Procter and Gamble thatproduces Pringles in just two manufacturing plants and distributes to itsentire global market.
Another similar example is Tomato ketchup, a Heinz productwhich is produced from just three plants for all of Europe. Heinz will switchproduction depending upon how local costs and demand conditions vary againstexchange rate fluctuations. This is a good strategy to cope with demanduncertainty.
The downside of this strategy is characterized by longer deliverylead times and higher transportation cost. The cost of transportation from themanufacturing plant to the customer may deplete some of the production costsavings that were the primary reason for adopting the strategy in the firstplace. Similarly, the longer lead times may encourage companies to keep safetystock that will increase the holding costs, again eroding the production costsavings. Another limitation of this strategy is seen when a customer ordersdifferent products in the same purchase order where the products are producedin plants in different locations. Forexample, Sony used to manufacture digital cameras and camcorders in China,attracted by the lower labour costs.
However, they came to recognise thatbecause life cycles were so short for these products, it was better to bringthe assembly back to Japan where the product design took place and, indeed,where most of the components originated. Onthe contrary, some firms have employed a strategy to have manufacturing plantsin all the countries they do business, treating each market as local and henceproducing to satisfy only the local market. The downside to this strategy isthat there is a big risk of shortages or surplus products when local demand fluctuates.
As a result, firms have decided to include some flexibility into this model,allowing the plants to also serve the international market. Take an example ofToyota Motor Corporation, whose strategy was to own manufacturing plants inevery market in which it operates. It however designed the plants to be able toexport products to other markets in case the local market weakens.Globalmanufacturing will continue to evolve with the change in demand, labour, energyand transportation costs.1.
1 Informationsharing Informationsharing can be explained in terms of information Flow Integration. Arun et al. defined Information flow integration as theextent to which operational, tactical, and strategic information are shared betweena focal firm and its supply chain partners. In this research, they consideredthe sharing of demand-related information, inventory and sales positions,production and delivery schedules, and performance metrics as indicators ofinformation flow integration. However, information flow integration can also belooked at in the context of sharing information among the different functionsof a focal firm’s global supply chain.Different methods of informationsharing between focal firms and supply chain partners have not only beenexplored by academic literature but also been implemented in industry. Some ofthe early initiatives of information sharing included efficient customerresponse(ECR).
1.1.1 Efficient Consumer response (ECR)Efficient Consumer response is aconcept that was created by the processed food distribution industry. It wasdefined as a strategic initiative working to overcome traditional barriersbetween trading partners, thus eliminating internal barriers that result incosts and time that add little or no value to consumers (ECRE 1996). It focuseson using the accurate actual demand information of the consumer to drivedownstream flow of goods through the supply chain. For ECR initiatives to workeffectively, there needs to be a lot of data sharing between the supplier andthe focal firm. Historically, the use of Electronic Data Interchange(EDI) hasenabled data sharing among different stakeholders of a supply chain.
With accurate demand data flowingfrom a focal firm to a supplier, value is created by improving the demandplanning, forecasting and replenishment (Arun et al., 2006). However, sharing in accurate demanddata will only distort the demand signal further as it travels up the supplychain causing issues such as poor production and capacity planning, cash flowutilization and inventory management problems such as excessive inventoryholding or inventory shortage. Another perceived limitation of this method isthe information systems compatibility required between the supply chainpartners.
Procter & Gamble implemented ECRpractices for their European laundry detergent market in the 1990s and reportedhigher margins (8%), faster category turnover (27%) and greater retailer marketshare (12%). It can be argued that ECR practices lead to increased sales orreduction of lost sales by reducing demand uncertainty for the supplier andsupply uncertainty for a buyer or focal firm.