Conversion system cost characteristics in global manufacturing: the maquiladora example

Abstract

The increase in competitive pressure faced by US manufacturers has led many firms to adopt global manufacturing strategies. The successful implementation of global manufacturing strategies depends on the firm's ability to coordinate its rationalized production activities. Logistics activities provide the essential coordinating mechanism. However, the complexity and costs associated with international logistics activities typically increase. Thus, a potential tradeoff between reductions in manufacturing costs and increases in logistics costs arises in global manufacturing. To determine the nature and extent of this cost tradeoff, an empirical examination of maquiladora operations was performed.

Study findings show that a significant cost tradeoff does exist. Further, the costs of the various logistics and manufacturing activities are affected differently by maquiladora operations. This is largely the result of either (1) the longer supply lines required to support maquiladora operations or (2) the labour intensity of the activity. Interestingly, the low-cost labour found in maquiladora operations is extensively used to reduce the costs of non-manufacturing activities. The bottom line is that manufacturing firms should carefully assess the impact of global production on their particular operations to determine whether a good match between a firm's operation and the production setting is present. Taking a proactive stance regarding the design of both the logistics and the manufacturing systems will help a firm avoid negative cost and performance outcomes.