Food loss is a serious issue in the United States. It affects all aspects of the supply chain, from farmers to consumers. While much is already known about loss at the consumer level, our understanding of the amount of food that never makes it to this stage is more limited. The Economics of Food Loss in the Produce Industry focuses on the economics of food loss as they apply to on-farm produce production, and the losses that are experienced early. The book both analyses current food loss literature and presents new empirical research. It draws lessons from those who have encountered these issues by focusing on how past regional or national estimates of food loss have been conducted with varying degrees of success.
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- Board of Governors of the Federal Reserve System
- A reliable partner for many industries
- Industry, Economy of Russia
- When Your Contract Manufacturer Becomes Your Competitor
- GROCERIES ON A MISSION
- How Technology Is Transforming The Food Industry
- Forestry and Forest Products
- How the paper and forest-products industry thrives in the digital age
Board of Governors of the Federal Reserve SystemVIDEO ON THE TOPIC: Food Industry Machines That Are At Another Level
But the hungry ones are starting to bite the hand that feeds them. Smart OEMs know how to keep such hazards under control. PC maker Lenovo started out as a distributor of equipment made by IBM and other companies; now it has formed a joint venture with IBM and will eventually affix its own logo to its computers.
Lenovo and SAIC represent a host of formerly anonymous makers of brand-name products that are breaking out of their defined roles and pushing the brands themselves aside. In this article, the authors explore the double-edged relationships original equipment manufacturers OEMs forge with their contract manufacturers CMs.
On the one hand, an OEM can reduce its labor costs, free up capital, and improve worker productivity by outsourcing all the manufacturing of a product. The company can then concentrate on value-adding activities—research and development, product design, and marketing, for instance. OEMs cannot simply terminate their outsourcing arrangements—they need contract manufacturers in order to keep specializing, adding value, and staying competitive.
Doing so requires modesty about revealing trade secrets; caution about whom one consorts with; and a judicious degree of intimacy, loyalty, and generosity toward partners and customers. IBM essentially created the personal computer industry. Founded in as a distributor in China of equipment made by IBM and other companies, Lenovo will eventually affix its own logo to the PCs.
Certainly, Lenovo has come a long way. Like Lenovo, Sanmina assembles products for a variety of well-known brand owners. The company has expanded its role, however, and now also designs and engineers custom electronic components. These two firms are representative of a host of formerly anonymous makers of brand-name products that are stepping up and pushing the brands themselves aside.
Yes, outsourcing the entire manufacturing of a product allows original equipment manufacturers OEMs to reduce labor costs, free up capital, and improve worker productivity.
As IBM and other companies have learned, however, contract manufacturing is a two-edged sword. When these things happen, the OEM may find itself facing not only more dangerous incumbents but also a competitor of a new kind: the once-underestimated CM. Moreover, a CM working for several OEMs has experience making a wider range of products than do most of its clients, permitting it to concentrate on producing the most profitable ones.
Put simply, OEMs that retain contract manufacturers may unleash forces they find hard to control. OEMs and contract manufacturers can find themselves immersed in a melodrama replete with promiscuity, infidelity, and betrayal.
OEMs cannot evade this dilemma by terminating their outsourcing arrangements: Modularization, codification of manufacturing processes, and diminished transaction costs make contract manufacturing irresistible to less well-capitalized OEMs. Few industrial companies still consider manufacturing an essential part of their businesses. Traditional brand owners—what we know today as OEMs—prefer to focus now on product research, design, and sales, leaving production to the new specialists: contract manufacturers.
The practice began in , with the manufacture of the first IBM PCs, but a decade passed before it reached such everyday products as toys, clothing, footwear, beer, and pharmaceuticals. The diffusion of contract manufacturing has heightened competition in some industries in four ways. Contract manufacturing facilitates the creation of new firms and divisions.
Thus, they can bypass the traditional deterrents to entering new markets. Indeed, any firm—even one selling low volumes—can decrease its unit costs simply by retaining the CM with the biggest scale. It happens as follows: As CMs reach efficient scale, their cost levels converge. At the same time, the products they make begin to commoditize.
Once they have achieved manufacturing mastery, CMs can begin innovating, something they have been doing for some time: The surging volume of Chinese patent applications filed under the European patent treaty—26 in and in —offers at least indirect proof of this. Contract manufacturer Solectron developed its manufacturing expertise in the course of working for IBM, Hewlett-Packard, and Mitsubishi.
However, if an enterprising CM threatened to stop making items for a retailer, it would only drive its client into the arms of another CM—one that could translate the additional business into improved or even superior economies of scale.
A CM can exploit for the benefit of its own brands the knowledge it acquires in the course of working for a given OEM; or the CM can transfer legitimately or not this knowledge to other client OEMs.
Such leakage may occur even if the CM does no more than assemble components made by others: Three-dimensional scanning, computer-aided design, and computer-aided manufacturing allow companies to copy in a matter of hours components that may have taken years to design.
The potential for abuse is high. Sure, OEMs can resort to lawsuits, banishment, or lobbying. None of these is a panacea, however. The results of litigation are uncertain and may arrive only after years of expensive proceedings. Meanwhile, profits keep falling. Finally, as globalization spreads, interventions from individual governments become less decisive. Contract manufacturing is inevitable, though it entails inescapable hazards.
First of all, OEMs that embrace contract manufacturing can reduce their direct costs even if the number of units they sell is well below the level otherwise required to achieve meaningful economies of scale. In turn, working for many OEMs gives CMs the revenues to keep making essential investments in factory automation. It would be more difficult for IBM, Hewlett-Packard, or contract manufacturer Sanmina to obtain equivalent economies of scale if their products were made in their own factories, and if those factories produced exclusively for their own brands.
Organizational arrangements between original equipment manufacturers and contract manufacturers run the gamut—from one-off contracts to more interdependent pacts that may or may not be renewed.
Third, firms can communicate and coordinate among themselves more efficiently than ever before. Consequently, the economic logic that once impelled OEMs to perform almost every specialized function in-house no longer applies.
The Internet is driving most of these efficiencies, as are the standardized production methods, management procedures, electronic communication protocols, and digital design formats promoted by the International Organization for Standardization, a federation of national standards bodies.
Such measures free OEMs to separate their innovation activities from their production activities. Fourth, flexible manufacturing systems allow OEMs to replace one product with another on short notice. Valmet Automotive, for example, was able to start assembling the Porsche Boxster within seven months of landing the production deal with the automaker.
And Ford makes three different chassis in its factories, each of which can accommodate nine different car models, allowing the company to shift production rapidly to the models generating the greatest market demand.
Finally, the combination of standardization and flexible manufacturing lets OEMs replace underachieving or uncooperative CMs about as easily as they can replace ebbing products. The reciprocal nature of these relationships—and, conversely, the ability of either party to withdraw at the first sign of a hold-up by its partner—makes them easy to embrace.
Leading OEMs cannot afford to retreat to the safety of vertical integration; the benefits of specialization are too great. Clearly, OEMs have no choice but to coexist with contract manufacturing. Fortunately, a few defensive moves are available for coping with its dangers. Sony Ericsson, for example, outsources only the manufacturing of its aging, and therefore already copied, products.
Cisco Systems retains an in-house manufacturing capacity for its cutting-edge routers and switches and their prototypes. Although Alcatel in began selling most of its or so plants—some of them to CMs such as Solectron and Sanmina—it withheld half a dozen for the purpose of fabricating new products as well as high-tech items that can be made only on proprietary equipment.
In such cases, the risk of infringement—the dearest of transaction costs—is high. And sales volumes would not be so great that contract manufacturing could deliver important economies of scale; it would be too soon for the technology to have spread to competitors, whose additional business CMs could then translate into a lower cost per unit for everyone. Moreover, a company that has outsourced all its manufacturing will in time lose most of its manufacturing knowledge, which, if nothing else, it needs to oversee and inform the work of its CMs.
One might expect that managers would be aware of the risk of externalizing core competencies. Why, then, do they seem so eager to outsource? The answer may be found in several countervailing influences. Furthermore, by downsizing the workforce, managers can usually improve productivity ratios and avoid long and arduous negotiations with trade unions; changing suppliers is almost certainly much easier.
Therefore, a long-term contract becomes valuable because it also hinders the CM from abandoning the OEM or extracting prohibitive terms as the price of remaining.
The contracts that are drawn up to anticipate and deal with such eventualities cannot avoid being complex themselves, though the cost and difficulty of preparing them is justified by the seriousness of the stakes. Conversely, if the OEM can easily switch CMs because the product is simple to make or has been around long enough to have become generic, a contract of shorter duration would be practical—even advantageous—for the OEM.
In such cases, nothing should prevent an OEM from pursuing more attractive terms from a different CM, or vice versa. The first unit left the factory within only eight months of the initial venture agreement. In that case, a contract of limited duration was all both parties needed to protect their investments. When BMW asked Magna to assemble its X3s, however, the parties prepared and signed a lengthier contract.
Organizational arrangements between OEMs and CMs range from one-off contracts—known as market agreements—to more interdependent and ongoing pacts, such as framework arrangements, joint ventures, and other kinds of partnerships.
A market agreement, which might or might not be renewable, would involve the manufacture of, say, a particular type of MP3 player, and the pact would contain very precise technical and design details.
By contrast, a framework arrangement could require the CM to produce several models of an MP3 player in a given year. There are two interesting varieties of short-term agreement. Elamex, a contract manufacturer of electronic components, lets customers choose either a turnkey contract or a shelter agreement. In the former arrangement, an Elamex customer shares the assembly line with other customers; each pays Elamex according to the number of units the company has produced for it.
Because Elamex lacks design capabilities, the firm enters into few long-term alliances. It follows that the company prefers to work with experienced manufacturers rather than start-ups. Curiously, many strategic alliances end up devolving into temporary market-agreement relationships. This happens for three main reasons: First, many OEMs seem to lose track of the ultimate purpose of their long-term arrangements and start pressing CMs hard for savings.
As a result, the CMs begin to feel that their investments in learning how to make and improve a specialized or unique product will not generate a return. This is an especially dangerous development for the OEM when it cannot easily find another capable CM—one of the main reasons for forming a long-term partnership in the first place.
A second reason for the devolution of strategic alliances is the eventual devaluation of whatever was new and unique about the product.
This problem is especially pronounced in the high-tech arena, where products have such short life spans. As products commodify, OEMs gain a wide choice of interchangeable suppliers. Take the case of PCs: Many were originally built by brand owners.
Later, surface-mount technology, the increasing codification of knowledge, and the routinization of internal processes made the assembly of PCs easier and thus within the capabilities of external suppliers, to which the work was outsourced. The third reason strategic alliances weaken is the increasing modularization of components.
Automation demands fewer judgment calls and less improvisation from workers. And assembly has become simpler for CMs now that OEMs are transferring ever-larger portions of manufacturing jobs from CMs to suppliers, which are responsible for turning parts into a single piece of equipment, such as the seat of a car. Both developments make it less important for CMs to have special skills and knowledge. As mentioned above, in noncommodity situations, OEMs should seek close relationships with trustworthy contract manufacturers to minimize the risk of IP leaks and to protect their investments.
Such closeness would have the incidental benefit of making CMs dependent on OEMs for funding and technical guidance.
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Industry, Economy of Russia
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When Your Contract Manufacturer Becomes Your Competitor
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GROCERIES ON A MISSION
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How Technology Is Transforming The Food Industry
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But the hungry ones are starting to bite the hand that feeds them. Smart OEMs know how to keep such hazards under control. PC maker Lenovo started out as a distributor of equipment made by IBM and other companies; now it has formed a joint venture with IBM and will eventually affix its own logo to its computers. Lenovo and SAIC represent a host of formerly anonymous makers of brand-name products that are breaking out of their defined roles and pushing the brands themselves aside.
How the paper and forest-products industry thrives in the digital age
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