Production Chain and Globalisation - Essay Example

Running Head: Production Chain and Globalisation The paper deals with chain of production and its effect on globalisation. The chain of production is a part of the value chain and sub-part of the supply chain. The production chain has its own links and hence is examined in greater detail so as to find out how it determines the competitive advantage of a firm. The globalisation facilitates repositioning the links of the production chain in order to maximise apparent advantages of location and costs savings. Pharmaceutical production chain has about eight stages with each stage adding value to the product to be ultimately delivered. The stages are however not exhaustive. In spite of the goodness of the resultant globalisation due to spreading of the production chain across the globe, it renders labour a face-less force thus lacking in ethics and human values which are important ingredients for motivation. The objective of this paper is to examine what production chain is and how it has transformed over the years within the context of globalisation. The outline of the analysis will be definition of the supply chain, its components, and the production chain as one of them. An industry will be studied for the purpose of learning how a production chain will operate. Further, the purpose of the supply chain and how globalisation has impacted the production chain and the emerging ethical issues will also be examined. Supply chain Supply chain describes or portrays the logistic flow of materials from front end to back end of a firm. At the front-end is the raw material supplier and at the back-end is the customer. In between, there are manufacturing, transportation and distribution. . The supply chain management aims at a seamless flow of materials through these links so that maximum efficiency is achieved through what is known as logistics. Supply chain has much to do with its management rather than knowing what the supply chain is since the links have been there ever since businesses started. Only it has now been scientifically stated as links mainly for the purpose of their management. As stated, it starts with raw material supplier who supplies material to the manufacturing firm which in turn transfers the manufactured product to the transporters known as logistical support who ultimately delivers it to the consumer through wholesaler and retailer. These are entities playing integral roles in supply chain of the manufacturer in the chain. For him, it is the flow of materials from front-end i.e the raw material supplier and back-end, i.e the consumer. In reality it is not as simple as it may appear since it becomes complex in real terms since raw material suppliers are numerous, products are many as also customers. And this is what supply chain management is all about. Besides, in the supply chain, unique to the industry, there will be additional links such as marketing and R & D etc. (David 2003, P 41) A supply chain management is interpreted as the systemic, strategic coordination of the traditional business functions and the tactics across these business functions within a particular company and across businesses within the supply chain for the purposes of improving the long-term performance of the individual companies and the supply chain as a whole. (Braithwaite, 2002, p3) The following figure depicts supply chain. (IKEA) Production is a link in the supply chain. This link has its own chain on analysis. It can be called a chain of production. An independent analysis of this production chain facilitates understanding of different components being linked to one another. Thus a weak link in the chain can lead to poor performance of the entire production chain. And a production chain as a link of the supply chain can render it weak or strong in performance. Similarly a performance of a value chain can also be affected by the supply chain. Pharmaceutical production chain has been chosen for the study for the unique characteristics of the industry. Further, since increasing number of firms have chosen to have their production processes carried out across different countries or regions in a discrete manner depending upon the advantages accruing at the distinct locations, the supply chain beginning from conceptual stage and ending at delivery stage spans over in global dimensions. This development of chain of production or supply chain has become one of the reasons for economic globalization and resulted in serious debates in most countries as to whether globalization of the production chain is for worse or better. This aspect therefore will be discussed after dealing with the anatomy of chain of production in general and pharmaceutical chain of production in particular. Production chain explained Production chain involves series of steps to be taken to convert raw materials into finished goods fit for consumption. Raw material is the primary product, the starting point of the supply chain. For instance, an apple and some wheat are primary products which the chain of production converts into an apple pie for being consumed. Each stage or step in this kind of production or transformation process adds value to the product which is sold at a greater value on becoming a final product. An example of a production chain is described below. Primary producers who make the primary product are in the first stage of production chain. The primary product forms the raw material out of which final product will be made out. The second stage involves adding of further materials to the primary product or further treatment of the primary product alone by the manufacturing company. The last stage is delivery of the final product to the wholesale trader. Taking the case of bread, wheat is grown by primary producers and after harvest, wheat is sent to the flour mills for being ground. The flour so produced is sent to bakeries wherein the raw product of wheat flour is mixed with yeast, salt and grains. Then the dough so made is baked into bread and after being cut to sizes and packed, the bread is sent for sale in their own show rooms or to supermarkets directly or through wholesalers. In this manner value is added at each of the above stages. Hence production chain is part of value chain and supply chain. The chain of stages in production will differ from product to product. What has been shown above may be called “ bread chain” At the primary product level, it is “wheat chain” which then will go backwards to land tilling, seeding, maturing, watering, and harvesting. The entire process of wheat chain and bread chain may be combined to form a food chain or supply chain. The table below shows the different stages of chain of production in any typical product. (Landlearn) The chain of production (source LandLearn) Primary stage Secondary stage Tertiary stage Farmers, fishers, miners, foresters etc. growing, producing, harvesting, extracting. Transport of raw materials. Manufacturers processing, making and constructing goods. Transport of product, storage and other intermediary services. Distributors, retailers, e.g. shops, cafés, selling goods. A nuclear production chain is as shown in the picture below. Hence a chain of production is dependant upon the nature of the product in question and the chain is drawn with the remote possibilities of linkages. Source above (http://www.wise-uranium.org/index.html) Purpose of the study of chains The purpose of study or analysis of chain of production or any other chain for that matter, is to achieve optimal efficiency and to minimize cost of production so that consumer at the end of the chain is benefited as also the firm producing and responsible for the chain is able to maximize its profits. Rather the aim is to achieve economies of scale at the micro level which reflects in macro level benefits for the economy of countries or for the global economy. Production chain of Pharmaceutical industry Typically a pharmaceutical product is meant for the consumer and available in dosage forms. The pharmaceutical products are delivered in different forms such as tablets, liquids, capsules, injections etc. To produce a pharmaceutical product, the primary goods required are active pharmaceutical ingredients (APIs), materials required to make a vehicle for the APIs to be delivered to the consumer. To make the APIs capable of consumption, vehicle containing sweeteners, bulk solvent liquids for being mixed and binders for holding the APIs, is to be prepared and then filled into the containers which then are delivered to the distribution chain for ultimate supply to the consumers. A typical pharmaceutical production chain will have the following steps or stages. 1) Active pharmaceutical ingredient(s) (PIs) are procured from bulk drug producer or manufactured by the given manufacturer of preparations as vertical integration. There are finished products with single active ingredient or multiple active ingredients. 2) The APIs are sent for testing of their purity and action by their own lab or outside lab depending on the testing facilities available and the availability of suitably qualified testing personnel. There are many tests some of which alone may be done outside for want of either expertise, or testing facilities or for reasons of economy. 3) After testing, the APIs are processed to make semi finished product(s). 4) Semi finished products are again tested for presence of APIs in the prescribed ratios and for their stability. 5) Semi finished products are then filled into dosage form containers. 6) Samples are drawn and again tested for the presence of APIs in proper proportions. 7) The primary containers are then labelled and packed into master cartons. 8) The packed cartons are sent to warehouse. The above stages are present in a chain of pharmaceutical production. Any further steps till the stage of reaching the consumer will make it pharmaceutical supply chain and value chain. The above stages are again subject to regulatory mechanism in each country and it is relevant for a manufacturer having facilities in different countries. The first stage of the production chain needs to be elaborated a little more. Here lies the competitive advantage of the firm concerned since by virtue of vertical integration, if it can produce even the API(s), it will not only result in savings in costs but also ensure timely availability and quality of raw materials. When the same material arrives from an outside source, it needs to be tested however genuine. This duplication can be avoided if the APIs have come from its captive production. Thus time and expenditure of raw material testing once again are eliminated. The moment the goods are received, they are sent to quarantine and released for use in manufacture only after testing. Thus quarantine space, time on testing and expenditure there on are also eliminated The personnel in charge of manufacturing have to be qualified and their names are to be endorsed in the firm’s licences by the country’s drug regulatory authorities. Thus this pre-manufacturing stage is the determinant of the chain effect of standard quality or sub-standard or not-of-standard quality of the end product. If the first stage is not well-taken care of, it will result in unnecessary reconditioning or total destroying of the end product. The case study of Organon Organon, a Dutch research based company and a business unit of Akzo Nobel is one of the top 20 pharmaceutical companies in the world with the products ranging from reproductive medicine, psychiatry and anaesthesia. The company’s products are sold in about 100 countries and they have about 12,000 employees world wide. They produce prescription medicines from raw material stage as explained in stage 1 above. The company gets the API from its own affiliate as a raw material. Hence in this case, vertical integration is already formed. It should be treated as their own raw material since existence of an affiliate may be for strategic reasons or tax benefits. As the company operates in more than 100 countries, its identical products are heterogeneous in design and form due to unique requirements in each of the countries. For instance French rules requires the labels to be printed in French, while Dutch countries mandate other languages also to be printed on the packages. Branding of identical products also has to be in different names in each country for cultural reasons and because name in the home country will have a different meaning in another country. This has been a real challenge for Organon having to face an unmanageable flow of goods with variants. Further the company has to keep high stock levels to ensure no customer is denied supply on demand lest he would switch over to another competitor. More over, due to its decentralised operations and locations, it production or supply chain becomes complex. Organon has eleven production sites across the globe with each producing active ingredients (raw materials themselves), finished tablets in bulk, semi finished goods like blistered tablets or carrying out packaging operations alone. Earlier the company’s each production site operated like a stand-alone one. But after they implemented a production chain system called “infor”, it resulted in reduction in costs and improvement in service performance owing to accurate forecasts. This way, the company could achieve also minimising of end- products inventory and maximising the inventory level at the beginning point of production chain, i.e raw materials and bulk products. The streamlining of its production chain has led to meeting demand for its products in time as conferred by John Koelink, officer in charge of the company’s global supply chain management. The system it introduced to improve the efficiency of its production chain consisted of Demand Planning and Advanced planning software. The benefits accruing to Organon are many. It can now identify location and form of raw materials and finished goods in which they are available. This kind of visibility of the supply chain was not available earlier. Besides, the system helps make forecasts more accurately and production planning on monthly basis. With factory data such as installed capacity, lead time in production and stocks procurements, the system prepares master production schedule for each production site. (Organon) Ely Lilly case study Ely Lilly is the world’s another leading pharmaceutical company having $11 billion of sales turnover and products in 159 countries with a total 43,000 employees. The Indianapolis company’s products are wide ranges of ailments such as depression, schizophrenia, cancer, and osteoporosis. It spends 19% of its revenue on R & D. The company suffered a set back in the year 2000 when a U.S. court ruled that its patent rights over its invented product called Prozac forming 20% of its sales will not be valid beyond 2001. As a result, competitive generic products deprived the company of its sales of Prozac by more than 50%. Sensing this development, Ely Lilly had intensified its R & D in 1990s itself with the result, it was having several new products under development in different stages at the time Prozac went off-patent. It planned to introduce at least two new products each year and thereby aimed to double its sales. To achieve this it expanded its supply chain by doubling its manufacturing locations and go in for third party contract-manufacturing. Its focus was to never miss a single sale through its supply chain strategies. (Cohen, 2004 p1-3) Product chain in supply chain is not without risks. Financials risks can be huge through obsolescence of inventory, Products such as Personal computers devalue by more than one percent per week. Retail markdowns are about 20% of total retail turnover. Mismatched supply chains can result in surplus mismatched inventory. There are other risks such as reconditioning of the products and fines for non delivery or delayed delivery of products. There is lack of confidence on the part of the supply chain manager in respect of order cycle time, current order status, demand forecasts received, suppliers’ ability to make timely deliveries, manufacturing capacity, quality of the products turned out and delivery of services. These are intangible risks that members of the supply chain face. (Christopher 2001 p.2) Besides, Levy (1995) has concluded in an empirical study that there can be enormous costs in an international supply chain when shipping and lead times are too extensive. Costs are incurred in the form of expedited shipping, high inventories and lower demand fulfilment. What ethical implications arise with the globalisation of the production chain? And how are people managed and what effects if any has globalisation had upon this? It has been found that about 1/5th of U.S. output is met from outside the U.S. firms, 25% of the imports are from the foreign affiliates to their U.S .parent companies, and since 1980s the number of countries the U.S. companies operate in, has increased by 50% (Dornier, 1998) Globalization has made it possible for the production chain of a single product to be linked internationally with different geographical locations. Each link having a sequence of production adds value to the final product or service. (Vertova, 2006, p 3). It results in fragmentation of the value chain enabling also parts of production chain to be moved from one place to another but it creates instability in labour markets.(Wagner, 2000 ,p 185) Production chain in an environment of subcontracting through globalization does not impose legal accountability to the labour under subcontract. Though major benefits of the business are enjoyed by both the subcontractor as well as the original outsourcing producer, they are immune to accountability to workers since the latter do not have direct relationship with either manufacturers or retailers in a supply chain. Globalization produces sweatshops for mass production in almost all kinds of products. For example, in garment manufacturing, division of labour at the highest possible degree occurs resulting in de-skilling of the craft which the custom tailors and dress makers once enjoyed. A single craftsman has stopped producing full garment. Workers perform repeat operations of only their portions of seams, buttonholes, cuffs, or collars without being bale to maintain relationships with customers as in the past. (Esbenshade, 2004 p 16) Esbenshade cites Reich commenting on the emergence of new production system in which vertical integration under Fordism is absent but in which there is a formation of horizontal webs of smaller units of production chains of an enterprise across the globe in a mind-boggling proportion of networks. This development due to globalization has led to the demise of social contract but to an inevitable outcome of optimal efficiency through new technologies. (Esbenshade, 2004, pp 35-37) Thus the globalization process does not appear to be worker-friendly because of disaggregation and fragmentation of sub-contractor oriented production chains. It has also segregated work force into core-workers and disposable-workers. (Hennis, 2005 p 13) Conclusion The above discussion would go to show that production chain having its own links is an important link in the supply chain and value chain. The spread of the production chain across the globe has made the globalisation a reality for giving competitive advantage to the firms. But from the point of view of labour, the globalisation has resulted in their displacement and the already face-less labour owing to division of labour, has become even more face-less and they are called now disposable workers. Thus as globalisation becomes more and more pronounced, ethical values will be lost and workers will lose their identity and come to be known as inanimate factor of production. References Braithwaite Alan, 2002 Achieving world class supply chain and logistics in the chemical industry, P.3. Christopher Martin and Lee, L.Hau, 2001 Supply chain confidence: The Key to Effective Supply Chains Through Improved Visibility and Reliability, Cranfield University and Stanford University, p 2 Cohen, Shoshanah. Strategic Supply Chain. (P 1-3)Blacklick, OH, USA: McGraw-Hill Professional, 2004. David, Levi Simchi, Managing The Supply Chain, (p41) OH, USA, McGraw Hill Professional, 2003 Dornier, P., R. Ernst, M. Fender, and P. Kouvelis. Global Operations and Logistics: Text and Cases. New York: John Wiley, 1998. Esbenshade Louis Jill (2004) Monitoring Sweatshops: Workers, Consumers, and the Global Apparel Industry, (pp 16, 35-37), Temple University Press Hennis Marjoleine (2005) Globalization and European Integration, (pp 13, 22) Rowman & Littlefield. IKEA, Sectors of industry and sustainable supply chains, Retrieved 21 September2008 LandLearn NSW “production chains” Retrieved 21 September 2008 http://www.landlearnnsw.org.au/production-chains Levy L.David, 1995 International Sourcing and Supply Chain Stability. Journal of International Business Studies. Volume: 26. Issue: 2. Organon, “Organon acquires flexible production chain leads to lower stock and more reliable delivery of medicines” Retrieved 21 September 2008, Vertova Giovanna (2006) The Changing Economic Geography of Globalization: Reinventing Space, (pp 3) Routledge Wagner Helmut, 2000 Globalization and Unemployment: (p 185) Springer Read More