Importing Components from ME

Because of the high supply uncertainty in EE, a fraction of the components may be produced in the ME, and others procured in EE. They are then assembled in the local facility in EE. The finished functional products are sold in EE as well as ME, as shown in Fig. 7.6. 

This business model allows for a faster market reaction, and mediation of supply risk in EE. Dell implemented this framework in Brazil in 1999, while Coca-Cola has used it for their bottling model. The company can claim duty draw-back on the imported components that are assembled in EE and the products exported back to MEs. 

GE Healthcare makes parts for its diagnostic machines in China, Hungary, and Mexico and develops the software for those machines in India (Khaima et al. 2005). 

The company created this system when it realized that the market for diagnostic machines was small in most emerging countries, and used the Indian facility as a global sourcing base. GE Healthcare has learned to use its operations in all emerging countries as part of a system that allowed the company to produce equipment cheaply for the world market. 

To illustrate how the profits may be computed, we consider a simple case where finished products are sold only in the EE. Thus, consideration of duty draw-back and demand in ME are not included in this analysis. Note that if the total quantity produced is 2, a fraction of it will be produced using components procured from EE (= ) The remainder is produced using components procured from ME (= q ). Assuming we can specify the distributions of ye and ym the total amount of components delivered for assembling Q would equal Ye1e + Ym 1m = Q Q is clearly a random variable. The manufacturer s expected sales will be Ey Ed [Min YE E +and, therefore, his expected profit is expressed as 

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Note that the profits for examples corresponding to Figs. 7.4 and 7.7 are not comparable because the assumed values of y and unit purchase costs are not equivalent. In general, it is possible to determine the conditions in y and c that would make the profit in one scenario (Fig. 7.4) exceed the profit in the other (Fig. 7.7). Analysis like this would clearly help establish when the risk of supply xmcertainty in EE outweighs the cost of imported components from ME. 

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