Extent of vertical/functional integration.As firms develop from subcontracting toOBM, organisation structures become significantly more elaborated: vertical andfunctional integration increases. Initially, as subcontractors they are often simpleassembly shops with basic technology. Once they receive an OEM order they have toacquire raw materials and component parts, organise production processes, do qualitycontrol, and arrange transportation and shipping of the product according to buyerinstructions. (The parallel development in the shipbuilding firm is the developmentfrom ship repairs to shipbuilding). Backward integration to making component partsbecomes necessary in the ODM phase to provide customised components for in-house designed products, to reduce costs, and gain control over quality and delivery.‘‘Just-in-time’’ planning of the production of components will also reduce inventoryrequirements for parts to produce cost savings. The toy company provides a goodexample of the increasing functional complexity of the firm as its ODM work assumedgreater strategic importance (see Table I).The firm has continuously introduced increasing complexity into its organisation.Its backward integration into paint making, metalizing (plating), and blister forming ofthe packaging was initiated for reasons of quality, time, and cost controls. Cost is theprime consideration in gaining orders, followed by quality management and delivery on time. The quality control function has developed from inspection into a full qualitymanagement function that depends on engineering quality into the production process
rather than rejecting faulty products discovered through inspection. The company has
set up industrial engineering (software) and production engineering (hardware)
trouble-shooting functions in the costing department to analyse ways of increasing
productivity and reducing costs. The company’s information system was computerised
and integrated, so that raw data, previously transformed by some 50 clerks for use by
supervisors, is converted into computer reports providing data on areas such as
efficiency, production rates, materials usage, and scheduling. Product design and
development was initially carried out primarily in Hong Kong with support in the
China factory. Increasingly, design and development functions are being transferred to
China and strengthened as the company plans the launch of its own brand on the China
market. A consultancy conducted market research and the managing director
investigated the critical issue of distribution and sales channels. The possibility of
diversified sources of financing, in particular through a public listing, is under
consideration.
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