Why would one firm try to completely copy another firm’s production processes and why would the firm being copied let it happen? If two firms have identical processes, then it is essentially impossible for them to be differentiated. If they are competing for the same customers, they are basically setting themselves up for brutal price competition. But the Wall Street Journal reports that two big players in the semiconductor industry are doing just this (Samsung, Globalfoundries Agree to Adopt Same Production Process, Apr 17).
Samsung Electronics Co. and Globalfoundries Inc. said Thursday they have agreed to adopt the same production process as they upgrade their chip-manufacturing services, an unusual alliance with implications for many designers of computer chips and other devices, notably Apple Inc.
With the agreement, chips produced by Samsung and Globalfoundries will be essentially identical; companies that design chips could have their products produced in factories operated by either company with no extra effort.
Companies generally prefer to reduce their reliance on a single supplier for components. In this case, the pact between Globalfoundries and Samsung provides a new selling point as the two companies try to woo customers away from Taiwan Semiconductor Manufacturing Co., the biggest of the chip-making services known as foundries.
Custom-made bikes are a very small slice of the US bike market. According to The Atlantic, the vast majority of bikes sold in the US are made in Asia and a handful of companies dominate the market (America’s Rebel Band of Custom-Bike Builders, Apr 3).
Though thriving, the 100 or so builders in the hand-built bicycle scene make up about 3.3 percent of the overall U.S. bike industry, which was valued at $6.1 billion in 2012 and is sourced almost completely overseas, according to bicycle industry expert Jay Townley with the Gluskin-Townley market research firm and a report by the National Bicycle Dealers Association. In 2011, 99 percent of bicycles sold in the U.S. were assembled in Asia—93 percent in China and six percent in Taiwan.
Additionally, just four companies—Dorel Industries, Accell Group, Trek Bicycle Corporation, and Specialized Bicycle Components—own about half of the 140 bicycle brands available in this country, including Schwinn, Cannondale, Raleigh, Gary Fisher, Trek, and Specialized, Townley said.
The article goes on to note that while small, those custom builders are responsible for a lot of the innovation in the industry. Because their work is premised on doing something unique, they are inclined to take more chances than a larger firm. So what does it take for these small guys to be successful?
One of my favorite topics to teach is the newsvendor problem, an inventory model for very short-lived products like newspapers and fashion goods. One of the points that gets made in that class is that variability is costly. Having to commit resources before knowing what will sell means risk and risk may be a reason not to be in the business. But that risk also suggests an opportunity: If one can find a way to reverse the order of things and commit resources only after knowing what will be demanded, then an otherwise unprofitable business can be a profitable one.
That is essentially the idea behind Gustin, a maker of high-end jeans. It initially sold its jeans trough boutiques, which bought jeans at a wholesale price near $80 but then marked them up to around $200. Gustin had to front all the cost of production and then wait for stuff to sell. Now, they have reversed the order of things and take orders directly from customers ahead of production. As the founders tell it on Marketplace, they have positioned themselves as a totally crowdsourced fashion company (Burning down the house that Levi’s built, Apr 8). You can hear the story here:
Inside Toyota Motor Corp.’s oldest plant, there’s a corner where humans have taken over from robots in thwacking glowing lumps of metal into crankshafts. This is Mitsuru Kawai’s vision of the future.
“We need to become more solid and get back to basics, to sharpen our manual skills and further develop them,” said Kawai, a half century-long company veteran tapped by President Akio Toyoda to promote craftsmanship at Toyota’s plants. “When I was a novice, experienced masters used to be called gods, and they could make anything.”
These gods, or Kami-sama in Japanese, are making a comeback at Toyota, the company that long set the pace for manufacturing prowess in the auto industry and beyond. Toyota’s next step forward is counter-intuitive in an age of automation: Humans are taking the place of machines in plants across Japan so workers can develop new skills and figure out ways to improve production lines and the car-building process.
That expansion has to a large extent come at the expense of the rest of the North American industry as this graph from the Chicago Federal Reserve demonstrates.
Note that overall assembly capacity has declined. That’s not too surprising. The industry was generally seen as being overcapacitated, and the Big Three took the never-let-a-crisis-go-to-waste route to reduce the number of factories and resize their business. But Mexico clearly gained and it is forecasted to gain even more. Here’s another graph from the Chicago Fed.
It should be noted that this growth is driven by Japanese brands. GM is the only US or European firm to open a new plant following NAFTA. All the action lately has been due to the likes of Honda, Mazda and Nissan. Given this growth in capacity, it is not too surprising that Mexico is expected to pass Japan this year and Canada next year to become the top source of imported cars in the US. But why has there been such a rush invest there? (more…)
This blog has covered many different topics over the years. We have talked about everything from managing hospital emergency departments to supply chain risk to baseball. But we have so far ignored hard liquor. That ends today. We are going to talk about bourbon. Corn whiskey has been an industry in the US for a long, long time (remember the Whiskey Rebellion?) but, as Fortune tells it, the industry is incredibly hot right now (The billion-dollar bourbon boom, Feb 6).
In absolute numbers, the bourbon industry’s $8 billion in global sales is relatively modest. (The Coca-Cola company alone has 16 drink brands with annual sales above $1 billion.) What’s extraordinary is the growth—and the fact that bourbon’s popularity appears to have come out of nowhere. According to Euromonitor, domestic whiskey sales have soared by 40% in the past five years—NASCAR-fast numbers in a sector where good growth often means 2% or 3% a year, and a revolution for a spirit whose sales declined almost without a break for 30 years. Things are even better abroad. In 2002, American distillers exported just $376 million in whiskey; by 2013 that number had almost tripled, to $1 billion, according to numbers released this month by the Distilled Spirits Council of the United States.
Growth is particularly strong in the so-called super-premium category—that is, the brands that cost about $30 or more, like Maker’s Mark—where sales were up 14.4% in 2012 alone, according to the Distilled Spirits Council. “We have trouble keeping bourbon in stock that’s over $50,” says David Othenin-Girard, a spirits buyer for California’s K&L Wines. “It’s just flying off the shelves.”
Just what is behind the growth is open to speculation. Don Draper knocking back Manhattans on Mad Men helps as does marketing that emphasizes an “authentic” American product. However, there is a problem. Producers cannot simply flip a switch and produce more.
Whiskey is unlike most spirits—or most any consumer good, for that matter—in that production cycles are measured in years, not days or weeks. No matter how efficiently a distillery mills its grain or ferments its mash, a four-year-old bourbon has to sit in a barrel for at least four years. That means production levels are based on projections far into the future. …
“We only have as much [10-year-old bourbon] available as we made 10 years ago,” says Comstock. “We’ll continue to make more, but it won’t help today.”
There has been a lot written recently about the state and future of making stuff in the US. Just in the past month, Strategy & Business has touted new technology and software as a way forward for American manufacturing (America’s Real Manufacturing Advantage, Jan 20) while Steven Rattner, the administration’s former Car Czar, took the New York Times pooh-poohing talk of a revitalized manufacturing base (The Myth of Industrial Rebound, Jan 25). As Rattner sees it, whatever boost there has been in manufacturing has been inconsequential and not beneficial for workers.
But we need to get real about the so-called renaissance, which has in reality been a trickle of jobs, often dependent on huge public subsidies. Most important, in order to compete with China and other low-wage countries, these new jobs offer less in health care, pension and benefits than industrial workers historically received. …
This disturbing trend is particularly pronounced in the automobile industry. When Volkswagen opened a plant in Chattanooga, Tenn., in 2011, the company was hailed for bringing around 2,000 fresh auto jobs to America. Little attention was paid to the fact that the beginning wage for assembly line workers was $14.50 per hour, about half of what traditional, unionized workers employed by General Motors or Ford received.
With benefits added in, those workers cost Volkswagen $27 per hour. Consider, though, that in Germany, the average autoworker earns $67 per hour. In effect, even factoring in future pay increases for the Chattanooga employees, Volkswagen has moved production from a high-wage country (Germany) to a low-wage country (the United States).
This all gets us to a different New York Times on Harley Davidson that describes changes the firm made to save itself (Building a Harley Faster, Jan 28). What is interesting is that Harley’s approach differs fundamentally from either of the approaches above. They are relying on humans over widespread automation and working with their existing, unionized workforce as opposed to hightailing it to a location with cheaper labor. (more…)
The basic premise is that there is a coherent strategy that firms can execute that works well for both its investors and customers while creating desirable, good jobs for its front-line employees. Furthermore, this does not depend on charging customers a premium. Indeed, her focus is on low-cost retail and she discusses several retailers that price quite competitively despite treating their employees quite well. Said another way, the fact that, say, Wal-Mart offers crummy jobs is a choice on its part, not an absolute necessity for being a low-cost player. (more…)
This is the breakdown for a Johnny Rockets burger and some of the numbers might seem out of whack — Why should iceberg (!) lettuce costly nearly five times as much in Africa as New Jersey? The answer is simple: It’s imported. Why import lettuce? Because the local supply chains are simply not sophisticated enough to support the quick service business.
But that quest is straining a supply chain that is short on the refrigerated trucks and warehouses needed to keep patties and vegetable toppings fresh. And in many places, Africans are consuming beef at a faster clip than cattle ranchers can deliver new cows, meaning beef prices keep climbing. That is testing the limits of what the continent’s young urbanites can afford.