Question

An electronics firm is considering how best to supply the world market for microprocessors used in consumer and industrial electronic products. A manufacturing plant costs about $500 million to construct and requires a highly skilled workforce. The total value of the world market for this product over the next 10 years is estimated to be between $10 billion and $15 billion. The tariffs prevailing in this industry are currently low. Should the firm adopt a concentrated or decentralized manufacturing strategy? What kind of location(s) should the firm favor for its plants?

Answer 1

Answer:

Explanation:

The total value of the world market for this product, over the next 10 yes is minimum of 10 billion dollars.

In a year, this will be 1 billion dollars

To start the manufacturing, a plant worth 500 million dollars has to be erected. This is half of a billion, meaning that the company will make total revenue of 1 billion and have total cost of at least half a billion, in a year.

So the company's yearly profit will be equal to the amount used to erect a manufacturing plant

But hey, the company will pay workers and its workers are highly skilled (will deserve a high pay for their skills) so the company won't even make up to the above calculated profit in a year!

Now, owing to this situation - the situation whereby the expected revenue for the product is not so much above the cost of production - we prescribe CONCENTRATED or CENTRALIZED MANUFACTURING.

This is a case where just a single plant or manufacturing facility will be used to produce the microprocessors. Since the company is virtually just starting out, starting with one plant will be better for them. The customization of their product will be efficient here, as opposed to Decentralized manufacturing (where they'll use a number of plants).

Also, centralized/concentrated manufacturing reduces production cost per unit of the good.

The cost of production is also relatively lower and there is almost no leakage in the utility of resources at the plant because that is the only plant the company has. There'll b maximum utility of facilities and resources.

(B) What kind of locations should the firm favour for its plants??

Here, we consider the fact that the prevailing tariffs in this industry are currently low.

This means that we can focus on other things like:

Nearness of the plant to source of raw materials

Nearness to the required kind of labour (highly skilled labour)

Proximity to consumers (those who purchase the product)

Of these and more factors, I prescribe nearness to highly skilled labour. If raw materials also happen to be in the same region as the required workforce, that is a plus to the company.

The company will hence be better of with a Concentrated manufacturing strategy and a location that favours lower cost of factors of production (land, labour, capital, entrepreneurship)