Q1. Identify the various ways in which Hon Hai has kept its costs low
Hon Hai Precision is a Taiwanese multinational company and the largest contract manufacturer of electronic products in the world. The company’s manufacturing plants are located in low-cost labor markets areas in China, Latin America, and Eastern Europe. Most of its factories are located in China because of relatively inexpensive labor in the country. In China again, the company has most of its operations in the Western parts of the country where a majority of the China’s poor people live. According to Wu, Young & Cai (2012), over 60% of China’s poor people live in rural Western regions that are far from coastal areas. According to Lee and Strategos (2012), Hoi Hai hires most of its workers from low-income families for a contract of one year. The firm lowers its operational costs by operating in low labor rate markets. The company has also been accused poorly paying its workers to cut labor costs. Chan (2013) argues that the company is obsessed with profits and production goals at the expense of basic human needs.
According to Hoi Hai’s 2015 financial statement, the company’s, general and administrative cost which include salaries accounts for about 2% of its revenues. The figure ratio is the same as that of 2014, an indication that the firm focuses on maintaining low labor expenditures. About 93% of Hoi Hai’s revenues go into funding cost of goods, raw materials. The company is manufacturing some of the components it uses in production to lower the cost of outsourcing raw materials. Moreover, the firm has been able to reduce its cost through leveraging on the economy of scale. It has a vast clientele that includes Apple, Microsoft, Blackberry, Acer, Nokia, Sony and HP which contract it to assemble millions of their electronic products. Hussain (2010) says that economy of scale means a firm can produce more output at lower cost.
Q2. How easy will it be for Hon Hai’s competitors to copy the way it has kept its low costs.
Hon Hai is an established company that has been operating for over 35 years. Its closest competitor is Pegatron Corporation was formed nine years ago, 2007. Hon Hai has immense financial resources mainly generated from manufacturing of phones, tablets and laptops for Apple, Sony, Dell, and Hewett-Packard. According to Yahoo Finance, the company generated about 4.8 trillion Taiwanese dollars in 2015 compared with Pegatron’s 1.2 trillion. Hon Hai has a higher financial capacity to invest in setting up manufacturing capacity for components it uses in production. Pegatron does not have such a capacity. Hon Hai enjoys large economies of scale than Pegatron owing to a large number of units it assembles for multinational electronic companies. According to Pegatron’s 2014 financial report, the company’s cost of sales which include the cost of raw material and production was 95% of total revenue compared to 93% for Hon Hai. This ratio is an indication that Hoi Hai enjoys more economy of scale than Pegatron and it may be difficult for the company to lower its manufacturing cost below Hon Hai’s. It may also imply that Hon Hai has a higher bargaining power the components it sources from other manufacturers because it buys them on a large scale.
Q3. Explain the five performance objectives of the operation. Discuss the effect of the four objectives on the cost objective. Support your answer with relevant examples.
There are five performance objectives namely quality, speed, dependability, flexibility, and cost. Quality means producing products and services that meet customers’ expectations and requirements in a consistent manner (Neely 2007). It also means adherence to the specification of goods. Quality affects customer satisfaction or dissatisfaction and includes aspects such as aesthetics, durability, and reliability. For businesses, quality is associated with the provision of error-free services and products. Consequently, it reduces cost through having products and services with fewer mistakes or discrepancies, so the cost of detecting and correcting the errors is saved.
Speed is concerned about delivering products and services to customers quickly (Batista, 2009). It can also be defined as the time taken between a client ordering a product or service and receiving it. It is also time between ordering for a product and receiving. Delivering goods and services on time is a vital component of customer service. The quicker products are delivered to a customer, the more they are likely to purchase them. Speed save cost by eliminating the cost associated with management of inventories.
Dependability means consistency in providing goods and services as pledged to customers (Greasley 2008). It is doing things faster in a consistent manner as promised. It is an aspect of effective customer service. It enhances customers’ reliance on a product or service from a particular business. It saves cost by preventing late deliveries that waste time and causes disruptions. It also reduces the cost of checking the progress of delivering goods and services to customers.
Flexibility means the ability of a firm to change its operation to meet new requirements (Batista, 2009). It also means the ability for a business to adapt to the new situation quickly. For example, it measures the ability of a firm to produce products with modified specifications, volume or mix. It also implies the ability to deliver product and services with new shortened timing. Flexibility is concerned about meeting or adapting to customers’ changing needs (Greasley 2008).
Cost means funding that goes into the acquisition of inputs and transformation of those inputs to finished products and services and manages the processes and inventories. It is concerned about producing products and services and delivering them to customers cheaply. Lower production cost translates to reduced prices for customers. For businesses, it means increased profitability. It is influenced by quality, speed, flexibility and dependability.
Batista, L., 2009. Key operations performance factors on trade and transport facilitation. Logistics Research Network Conference, Cardiff, UK.
Chan, J., 2013. A suicide survivor: The life of a Chinese worker. New Technology, Work and Employment, 28(2), pp.84-99.
Greasley, A., 2008. Operations management. Los Angeles: SAGE Publications.
Hussain, T., 2010.Engineering Economics: New Delhi.
Lee, Q. and Strategos, P.E., 2012. Apple, Foxconn & Manufacturing Strategy. reported by Strategos, Inc.
Neely, A., 2007. Business performance measurement:Unifying theories and integrating practice. Cambridge New York: Cambridge University Press.
Wu, K., Young, M. & Cai, J., 2012. Early child development in China: Breaking the cycle of poverty and improving future competitiveness. Washington, D.C: World Bank.
Yahoo Finance, April 3, 2017. Hon Hai Precision Industry Co., Ltd. [Online]. [Accessed 3 April 2017]. Available from: https://finance.yahoo.com/quote/2317.TW/financials?p=2317.TW
Yahoo Finance, April 3, 2017. Pegatron Corporation. [Online]. [Accessed 3 April 2017]. Available from: https://finance.yahoo.com/quote/4938.TW/financials?p=4938.TW