Academic journal article Journal of Business Administration

International Operations Management

Academic journal article Journal of Business Administration

International Operations Management

Article excerpt

1.0 INTRODUCTION

This paper will describe a global network of manufacturing plants, operated to respond to changing market demands. Before I begin let me recount my personal motivation for the network thinking that permeates this paper.

* In 1962, thirty years ago, I helped develop one of the first oil refinery linear programs to link together the operations of two oil refineries. All refineries input crude oil. Standard of California's refinery in Hawaii was designed to also input butane, alkylate, and heavy straight run gasoline. I developed the Hawaiian Envelope Linear Program to optimise operations and blending, using as input transfer prices the dual variables from Social's refinery in Los Angeles. I modelled the Hawaiian refinery in the context of other refineries.

* My wife is a family therapist who sees individuals in the context of their family of origin, their present family, and the families their children might create. She best understands an individual in the context of these families.

* Twenty five years ago as a doctoral student at the University of California (Berkeley) my dissertation chairman was C. West Churchman, who believed that the only way to understand a system was to embed it in a larger system, and work to understand its functioning as a subsystem of this larger system.

This paper will not describe manufacturing in any one foreign nation. For example, personally I am interested in Japanese JIT inventory practice, and was delighted when Womack et al. (1990) enlarged the concept into lean production in their study of the world's auto industry. But such is not the focus of this paper. This paper embeds each factory into a global production network, and strives to understand how the other plants respond to and interact with one another as they serve the global markets.

2.0 IF MC = 0, FOCUS ON GLOBAL MARKET SHARE AND THAT OF RIVALS

So much of our training in economics and accounting has assumed that the direct cost is substantial enough to analyse. But sometimes a more realistic assumption is that the marginal cost MC = 0. For example, in a software company the marginal cost of copying another set of discs is minimal. In the pharmaceutical industry the significant cost is that of the research, the animal and human testing, and then the expense of engineering the plant to make the active ingredient. Once ingredient plants are running, the incremental cost of making one more pill is insignificant. In many parts of the world, labour has tenure, so to hire someone is to commit to the present value of a lifetime of wages. If the corporation needs liquidity, it may be easier to sell the plant machinery than to lay off the workers. Many American rules of thumb need to be rethought if MC = 0.

If MC = 0 then the only relevant market share is global. In fact, if a corporation is so slow (or lazy) that it permits a foreigner to copy its core skill (whether technology or insight) then it is permitting the establishment of a rival, a rival whose intent on global market share will surely spell trouble for the originating company. Simon (1992) explains that a company with just a few hundred employees, such as a German Mittelstadt, can be sufficiently specialized that it is dominant in terms of both global and market share, and in market share compared to their nearest rival. The Mittelstadt do not share their technology.

In the decades to come I expect there will be more global studies of single industries. Currently at the Harvard Business School there are global studies underway on roller bearings, micro electronics, insurance, and others. Such studies are quite complicated to manage because their necessary tools include economic geography, business history, oligopoly theory, corporate strategy, and national economic strategies.

3.0 HOW MANY SPECIALIZED PLANTS IS RIGHT?

3.1 Logistics and Economies of Scale

Over the last thirty years logistics costs have dropped steadily. …

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