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Cost Saving at National Machine and Electronics

Michael Phillips is faced with a considerable challenge in terms of optimizing his company’s supply expenditures. More specifically, the president of National Machine and Electronics (NME) has instructed him to consider new avenues of reducing the costs through global sourcing. Traditionally, NME relied on domestic supplier as a central part of its supply policy, as conditioned by the defense-oriented framework of the company. However, in the age of globalization, international operations become the new norm. As markets and industries become closer and partially merge, such activities extend beyond mere convenience. In fact, global operations have become a key element of sustained growth and competitiveness in business. NME’s supply managers have been reluctant to implement a globalized approach because of the past experiences. Nevertheless, the current situation dictates otherwise, the emerging opportunities make it feasible to establish international supply chains, optimizing the organization’s expenses.

Following the analysis of the circumstances, Michael Phillips remains convinced of a global sourcing program’s effectiveness. In this regard, there are several modes of establishing such a framework for NME. First of all, the quickest approach consists of a partnership agreement with an existing supplier. Phillips can select a company, which produces similar equipment, and sign a contract that would establish supplies for NME. This method appears optimal in terms of budget, as it relies on the existing infrastructure, allowing the company to avoid the construction of new facilities. However, while the economic aspect is favorable, the remaining elements of the process reveal certain flaws. Most importantly, foreign contractors require a considerable degree of supervision. NME wants to ensure an interrupted supply of the equipment, which may be challenging in this case. In addition, the organization is heavily engaged in defense contracts, meaning that the presence of foreign outsourced producers should be reduced to a minimum.

On the other hand, the complete ownership of the foreign supplier contributes to the sufficient degree of control and discretion. Thus, another opportunity for NME consists of an acquisition of an international supply factory. This way, the company will have full operational control, facilitating the supervision and keeping classified information within the organization. The primary downside of the acquisition approach is conditioned by the matters of infrastructure. While NME and the acquisition target may operate within similar settings, the specifics often vary across companies. Michael Phillips’ organization might face the necessity of readjusting the new facility to its particular purposes, which will entail increased short-term expenditures in addition to the acquisition cost. Otherwise, the production process favored by the NME’s management will be altered or event disrupted.

Finally, there is the third key opportunity in terms of establishing a global sourcing framework in Asia. More specifically, greenfield venturing is a prominent approach in the discussed context. NME has already had a reportedly positive experience in this area, consisting of its Singapore supply factory. As per the discussion between Michael Phillips and the Commercial Aviation Electronics supply manager, the first attempt at global sourcing yielded excellent results. NME built its own factory, virtually organizing the assembly process from scratch. While it may have been consuming in terms of resources and time in the short term, the company was able to adjust the infrastructure to its specific goals and regulations (Amoroso & Müller, 2017). As a result, the supply cost optimization exceeded the management’s expectations, creating a strong benchmark for Michael Phillps’ initiative.

Evidently, the functioning of a new entity retains the demand for strong supervision, especially in its early stages. Therefore, an international supply office in Asia will be a beneficial addition to NME’s structure. Through this office, the headquarters will remain informed of the company’s foreign operations. Modern means of communication will become major facilitators, allowing NME to receive up-to-date information. Ultimately, Michael Phillips should be able to achieve the envisaged level of cost optimization through a proper organization of the global sourcing.

Reference

Amoroso, S., & Müller, B. (2018). The short-run effects of knowledge intensive greenfield FDI on new domestic entry. The Journal of Technology Transfer, 43, 815–836.

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