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:

Globalization is often viewed as a rootless process of constantly moving jobs to low-wage countries. But the issue is more complex, as illustrated by Whirlpool's worldwide operations. What attracts Mr. Fettig and other chief executives is a relatively new form of globalization that emphasizes first-rate centers of production and design in various countries - including the United States.

Whirlpool's global network, a work in progress, includes microwave ovens engineered in Sweden and made in China for American consumers; stoves designed in America and made in Tulsa, Okla., for American consumers; refrigerators assembled in Brazil and exported to Europe; and top-loading washers made at a sprawling factory in Clyde, Ohio, for American consumers, although some are sold in Mexico.

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: David Foster on 06.17.05 at 05:54 PM [permalink]

It sounds like what fair traders need (in terms of the cost of shipping) is a goodly increase in real sea piracy. You know, rogue frigates stopping boats, killing the crew, stealing all the containers, that sort of thing. It sure seems like all the other trends aren't going to stop.

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:

Sunk Cost

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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