The concern that is brought to attention in a situation like the quake in Japan is should companies outsource products to multiple countries or continents. Many companies had the problem of focusing on one single source for their production needs and this can cause companies to stop all processes in their tracks. We understand that countries that have comparative advantage in a certain product are meant to produce that product. However should companies disregard this and move to a production system that is outsourced across multiple regions.
I personally believe that companies need to take natural disasters such as this into consideration and should make sure they do not have all the eggs in one basket. Events like the quake in Japan are bound to happen and companies can avoid having to stop production by making sure they outsource to multiple countries.
Article: Economic aftershocks of Japan quake roil Asia
Publisher: The Washington Post
Author: Erika Kinetz
Published: March 20, 2011
I totally agree with you. Diversification is definitely important in the outsourcing process. Based on the relatively high frequency of earthquakes in Japan, companies need to take into account that Japan is located on a tectonic plate. Putting all your 'eggs in one basket' limits your choices. Thus, companies that make the mistake of relying on one source for their production are reducing their ability to find ways to cut costs and are limiting their choices as to how they could continue to help consumers save their money during the time that they each import from a single country which has experienced a natural disaster or some other catastrophic unplanned event. By diversifying their outsourced investments instead of putting all their eggs in one basket, companies are more likely to find trade situations where both parties gain. Conversely, companies that keep their foreign production in one source can only hope that they and their individual partners do not experience instability or tragedy.
ReplyDeleteI agree with Scott and Brian in a sense that these large manufacturing companies should limit the amount they produce in a certain geographical area unless it would be inefficient and less cost effective to outsource to other regions. I experienced the negative outcomes of this situation last year. Before the earthquake and tsunami the price of a 1TB external hard drive was around $80-90, but after the earthquake destroyed one of Toshiba's main production facility of hard drives the supply substantially decrease. This in turn sharply raised the price of a 1TB hard drive to around $160-170. I would like to think that if the company had multiple production facilities the price would not have increased so drastically. This, as well as the other destruction of business in Japan, must have greatly reduced their ability to supply to foreigners which hurt their overall gains from trade.
ReplyDeleteI agree with everyone else on this issue. It is much like investing in a diversified portfolio. If you take the shot gun approach and invest in different industries and sectors you are less inclined to loose everything due to poor performance in one industry. Much is the same with out sourcing manufacturing. With multiple plants in different locations a company can more easily transition themselves into a temporary state where they can still produce other goods or perhaps have a back up plan where plants elsewhere can pick up the slack should a natural disaster destroy a plant. This can of course benefit trade partners as traded goods will be effected less with proper back up procedures instead of halted completely.
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