Global Commodity Chain and Production Network - Essay Example

Global Commodity Chain and Production Network Table of Contents Table of Contents 2 Introduction 3 Critical Evaluation 3 Advantages and Disadvantages 5 Reference List 6 Introduction Globalisation has given birth to two aspects of production: Global Commodity Chain and Global Production Network. Global Commodity Chain (GCC) is the international trading mechanism of transforming raw materials into finished goods. It also includes marketing and distribution of outputs to consumers. It was introduced by Gereffi in the mid 90s. GCC includes stages of production that include different sectors of an economy or can be managed by the original and same business (Coe, 2013). Coe, Dicken and Hess (2006) have remarked that in this age of technology, commodity chains are becoming transparent. Also known as the Global Value Chain (GVC), it is a sophisticated model that shows how a firm retrieves raw materials, imbibes value to them through different processes and techniques and sell the final goods to consumers. There is slight distinction between GCC and GVC. GCC focuses on effective role of powerful retailers and branded merchandisers and GVC provides approaches to expand firm level research on the dynamics and strategies of global industries. Dicken (2015) observed that the Global Production Network (GPN) associates concentrated diffusion of the value chains beyond firms and nations with the process of accumulation of stratified layers of participants of the network. It is also known as Value Network, Input- Output Matrix. It is basically a collection of two or more value chains in which at least one network linkage is shared. According to Ernest and Kim (2001), the chief firm or flagships can be of two types; the first type of flagships constitutes the part of brand leaders that permits suppliers to be self-reliant but demand powerful performance from them. The second type consists of contract manufacturers which built their own production channels and create unified supply chain which are accessible to brand leaders. A GPN lead by firms can participate in different value chains. Hence, a global value chain can have two or more production networks. Solectron, a renowned international electronics manufacturing company, is an example of GPN (Fleischmann and Koberstein, 2014). Critical Evaluation There is a wide difference in the terms of the two concepts. ‘Chain’ identifies the vertical arrangement of acts that leads to maintenance, delivery and consumption of a distinct goods or services. ‘Network’, on the other hand, designs both the horizontal and vertical linkages between economics factors, i.e., identifying the common economics factors in the value chains which are effective. Gereffi and Korzeniewicz (1994) suggest that value chain is more stationary and narrow conceptual tool as compared to the production network which is more active. GPN condemns chain approaches pointing out that it manipulates the evaluation. GPN claims that chain system does not assimilate all kinds of configurations; it focuses only on inter-firm trades and does not take into account other factors. Networks with vertical, horizontal, diagonal links establishing multilayered or multi-dimensional combinations reflect reality clearly. Family-based networks of China in East Asia and Silicon Valley are examples of GPN. Henderson, et al. (2002) noticed that GVCs do not put much attention to the relations and different agencies involved in heterogeneous networks. They also accept “artificial dualisms”. Whereas, Actor Network Theory (ATN) that complements GPN defines networks as hybrid combinations of human and non-human agents. GPN approaches are more multi-directional and achieve more intra- variations. GVC captures only economical aspects and GNP focuses on the sociological and cultural elements along with the economic dimensions. For GCCs to successfully take place, it is essential that the cultural and sociological differences are subtracted. So the network is established with the aid of network members, agents, institutions both intra and inert organisations. GVCs put extra importance on management of inter-firm relationships. The role of government also differs in case of GCC and GNP. GCC takes the concept of state as a background for specific action related to firms. GNP researchers explicitly incorporate institutions of state in structuring the GNPs. It has been observed that the transactions involved are complex (Roukova, et al., 2009). To overcome that, strong governance is required. On the other hand, there is no scope of governance in GPN. In GNP, complex information is codified so that GCC partners can easily handle them. Also, suppliers have to be highly capable of receiving and acting upon this complex information. GPN does not involve such critical process. Electronics Industry of Taiwan which produces large share of the world’s personal computers has close coordination with the leading firms and suppliers from Japan and US. Its firms are also located in the Hsinchu Science Park which resembles an industrial district. This district is an example of strong GCC and GNP approach. This reveals a reunion between the local and global market. It can also be argued through this example that some GCCs and GPNs act as the instruments which helps in the collaborations of different specialised industries, which is giving birth to a collection of networks (Sturgeon, 2000). Advantages and Disadvantages Sturgeon (2000) cites that GCC is extremely competitive and flexible. Hence, this can imply that the quality standard is high and supplies can be sold off at good price. It also brings with it benefit for the participating firms in the form of reduced cost and hence, ensuring optimality in their business. In GCC, both designers and retailer grab a large share of added value. In Chinese GCC, statistics reveal 25% and 50% value added captured by the designers and the retailer respectively. The advantages of GCC include low labour wages. For example, developing countries are abundant in cheap labour and they easily collaborate with the GCC Company. The GCC functions 24/7 on a regular basis and so the requirements are timely fulfilled. This indicates the progressiveness of the GCC. Since it is global concept, GCC has broader network of direct suppliers and the companies have to be completely dependent on their supplies. However, unreliable contractors can disrupt smooth functioning of the business. It also involves long lead time because the whole procedure of shipping is elongated in GCC. Yeung and Coe (2014) observed that GCC faces more environmental risks than domestic commodity chain. Since companies are outsourcing aspects of their business, manufacturing technique is becoming more critical and complex. As companies are dispersing globally, they also face the problem of lack of data. The advantages of GPN is that they have close buyer-supplier linkages which are highly efficient triggered by technological modifications in the supply base, close analysis of “just-in-time” deliveries and flexible market as workers are deployed again on short notice. In the context of flexible market, renowned firms can compel their suppliers to reduce costs and output in the time of crisis or make investments in new goods during good times. The GPN approach is flexible and dynamic (Fleischmann and Koberstein, 2014). The flexible system is identified by low barriers to entry and exit, easy geographical movement, rapid technological dispersion and effective economies of scale and scope. SCI Systems, Solectron, Celestica, and Flextronics are examples of GPN (Sturgeon, 2000). GPN also has its challenges. Mutual dependence in GPN makes it costly and difficult to form or destroy supplier relationships. This makes the entire system less adaptable and curbs opportunities, unnecessary offshore production arrangement, excessive aggregation of debts which result in economic downfall and restrictions in the scope of economies. In GPN, as suppliers gain access in technical, operational and financial sectors and as companies start depending on them, they try to develop their own-end goods. This results in the loss of control over manufacturing of the goods. This occurred in 1970s and 80s when Japanese electronics firms were used extensively by the American consumer electronics like RCA (Yeung and Coe, 2014). In some GPNs, where networks are built through social proximity, trust needs time to build. Reference List Coe, N. M., Dicken, P. and Hess, M., 2006. Global Production Networks: Realising the Potential. Journal of Economic Geography, 8(3), pp. 271-295. Coe, N.M., 2013.Production Networks: Organising the Global Economy. [pdf] Available at: [Accessed 18 May 2015]. Dicken, P., 2015. Global Shift: mapping the changing contours of the world economy. New York: Guilford Publications. Ernest, D. and Kim, L., 2001. Global Production Networks, Knowledge Diffusion, and Local Capability Formation. [pdf]. Available at: < http://www.druid.dk/conferences/nw/paper1/Ernst_and_Kim.pdf> [Accessed 18 May 2015]. Fleischmann, B. and Koberstein, A., 2014. Strategic Network Design. Boston: Springer Verlag. Gereffi, G. and Korzeniewicz, M., 1994. Commodity Chain and Global Capitalism. Claifornia: Greenwood Publishing Group. Henderson, J., Dicken, P., Hess, M., Coe, N. and Yeung, H.W.C., 2002. Global Production Networks and the Analysis of Economic Development. [pdf] Available at: [Accessed 18 May 2015]. Roukova, P., Varbanov, M., Ravnachka, A., Hamme, G.V and Lockhart, P.M., 2009. Global Commodity/ Value Chain Approach to Access the Position of Regions in the European and Global Economy. [pdf]. Available at: [Accessed 18 May 2015]. Sturgeon, T.J., 2000. How do we define Value Chains and Production Networks? [pdf] Available at: [Accessed 18 May 2015]. Yeung, W. H. and Coe, N. M., 2014. Toward a Dynamic Theory of Global Production Networks. Economics Geography. 91(1), pp. 29-58. Read More