Friday, June 17, 2005
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How whirlpool does globalization
Louis Uchitelle has a nice case study of how one U.S. multinational deals with global sourcing questions in the New York Times:
Read the whole thing. One interesting result is that despite the fact that globalization supposedly flattens the world, geography (in the form of shipping costs) and history (in the form of past investments) still matter a great deal.posted by Dan on 06.17.05 at 05:54 PM
The article may give the impression that Maytag is behind Whirlpool in sophisticated globalization strategies; however, I think this Maytag story is even more interesting from a global logistics standpoint:
posted by: Klug on 06.17.05 at 05:54 PM [permalink]
This paragraph bothered me:
The "global production footprints," as Ms. Farrell calls them, draw on a growing network of first-rate suppliers in Mexico, China and elsewhere that allow manufacturers to go beyond mere assembly overseas into complex production. And the investment, once made, becomes an anchor; a sunk cost, as economists put it.
Correct me if I'm wrong, Dan, but that isn't my understanding of the typical economic analysis of "sunk costs". Usually, we're taught to ignore sunk costs, as opposed to viewing them as "anchors". I think the wikipedia description makes more sense to me:
I'm not sure what to call the phenomenon the article is describing -- it seems more of a case of one factor of production (labor) becoming less important relative to others (especially transportation) via automation. Thoughts from others?posted by: Rick on 06.17.05 at 05:54 PM [permalink]
It's true that one should ignore sunk costs when analyzing investments: however, if you own a plant in country "A", then by abandoning it and building a new plant in country "B" you will incur new out-of-pocket costs which would not have been incurred had you continued doing your manufacturing in "A"...and these costs should indeed be included in the analysis.
Logistics factors include much more than transportation costs per se. For example, if you are shipping by sea from China, you might need to plan on 3-4 weeks to get the goods to the port in China, across the ocean, and finally to your warehouse in the US. If your product demand mix changes while goods are in transit, you're kind of stuck, and in any event you will have to carry higher inventories due to the shipping times. There's a lot to be said for doing final assembly at a point reasonably close to the point of demand.posted by: David Foster on 06.17.05 at 05:54 PM [permalink]
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