Advantages and disadvantages of consolidating production of product lines at single factories in EU

By | April 30, 2014

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1. Advantages and disadvantages of consolidating production of product lines at single factories in EU

1.1 Advantages of consolidating production at single factories in EU

Consolidating production refers to the combining of separate companies, functional areas, or product lines, into a single one; it is different from a merger in that a new entity is created in the consolidation (investorwords.com 2010). As in the case of consolidating production of product lines at single factories in EU, it has several major advantages for companies targeting in the big EU market.

1.1.1 Cost saving

While product lines are located in various countries in the area of EU, cost could be higher. For example, different small factories would require separate operation management, human resource management and R&D (research and development) efforts which are duplicated in the perspective of the senior management of the company. When the production of product lines are consolidated at single factories in the broad EU market, these functional departments could also be consolidated and hence contributes to the cost saving of the whole company. For instance, when the product lines are consolidates in the company Whirlpool for the whole market of EU, the various functional departments would also be integrated into large single departments and hence results in cost saving for the company. Also, the consolidating production at single factories in EU would also eliminate some necessity to travel between different factories for purposes such as maintenance of the machines.

1.1.2 Economy of scales

The economies of scale is a concept that arises in the context of production of a good or service, and other similar activities undertaken by a business or non-business organization, it refers to economic efficiency that results from carrying out a process (such as production or sales) on a larger and larger scale. The resulting economic efficiencies are usually measured in terms of the costs incurred as the scale of the relevant operation increases (referenceforbusiness.com 2008). Take Whirlpool as an example, as mentioned in the case study, the company concentrated the production of refrigerators for the European customers in Trento, Italy, and that of automatic washers in Schondorf, Germany while similar case could also be found in the manufacturing of cooktop and oven appliances (Poland) for the whole EU market. By do so, the company managed to achieve the economy of scale and to obtain the advantage of marginal cost of the additional product manufacturing compared to that of the industrial average and thus contributes to the competitiveness over the competitors. In term of the rationality of the economy of scale, it could be achieved by consolidating production at single factories by pouring the various resources such as capital, market, equipments (could be more advanced) and talents and other key resources. For example, the relatively small market in Germany may not be big enough for the factory in charge of the production of the products to serve the national market to invest in the highly large automated machines, but if the factories in the EU markets are combined together to be a large factories being in charge of the whole EU market, there is possibility that the large production scale could offer to buy the more advanced machines and production techniques.

1.2 Disadvantages of consolidating production at single factories in EU

1.2.1 Increased transportation costs

The first disadvantage is that consolidating production at single factories in EU it will increase the transportation costs of the final goods while as mentioned above it will save up cost of the employees and management’s travelling costs. Since white goods of several product lines under the same series will be produced at a single factory, the final goods will be ready to be sold at only a country; therefore there will be necessity to travel the goods to other countries in EU frequently.

1.2.2 Higher risk for putting all the eggs in one basket

By gathering all the product lines in one place is like putting all the eggs in one basket, if there should be any contingency or risks happen to the factory in the country, all the EU market will be impacted significantly. For example, if there should be a strike happening to the factory, all the product lines will be affected; but the company keeps several factories in different countries, there is high possibility that the strict will be confined to one country only. Similar case could happen to the issue of system down, transportation problems and so on. Therefore, by consolidating production at single factories in EU it would require the company to strengthen all the aspects and proactively eliminate these risks and uncertainties.