Introduction to product circuits Develop an understanding of production chains, circuits and networks and the differences between them Auto industry case study

Production or Value Chains  “a transactionally linked sequence of functions in which each stage adds value to the process of production of goods or services” (Dicken p. 13) Adding value along the production chain: Raw materials Primary processing Secondary processing Etc. Economies seek to capture and retain as much value as possible

Supply chain Production chain Distribution chain Product, commodity or value circuit (vs. chain) Illustrates economic relationships and flows (material and non-material) Dicken p.14

Commodity: supplied by many (i.e. basic resources and agricultural products), considered to be of uniform quality, prices are determined as a function of their market as a whole – respond quickly to changes in supply/demand, often actively traded in commodity markets vs. product: may be more differentiated (different brands, varieties, quality, prices)

a. Basic product/ production chain b. Product circuits with ongoing service and technology inputs c. Product networks –multiple levels and actors -beyond the firm and single production process Complexity Complexity

Recognizing the environment

Product Life Cycle “Life cycle analysis takes a ‘cradle- to-grave’ approach in helping determine how components are created, used and disposed of…” Dr. Heather MacLean, U of T Automotive Life Cycle Assessments

Life-cycle analysis

Product Chains/Circuits  Co-ordination through: Types of business organization a)Vertical integration – forward/backward linkages – internalized transactions  Example: Petro-Canada – oil & gas exploration; development; refining; retailing  Example: FPI – fish harvesting; processing; retailing

Product Chains/Circuits Types of business organization b) Sub-contracting, outsourcing – contracts with other firms – externalized transactions - Search for inexpensive parts and labour  Example: Nike, Adidas, Reebok shoes – contracting to firms in China, Indonesia, etc.  Auto industry  Choices impact organization and location

Auto industry production circuit

Product Chains/Circuits Producer-driven Example: Traditional auto-industry – Ford, GM, Toyota etc. – networks more likely to be vertically integrated and centralized (today increasingly buyer driven) Buyer-driven Example: Major retailers – Wal-Mart Target, etc. – networks more likely to be decentralized

The breakdown of vertical integration  Response to competitive and cost pressures (eliminate stocks, reduce delivery time, etc.), Japanese JIT influence  Advances in technology allow lead firms to ask more of their suppliers  Rising competence of suppliers  Increasing customer demands (quality, price, speed, flexibility, standards)

Cross-border, multi-tier production networks  Trend away from ‘arms length’ market- based transactions toward ‘network linkages’ in the value chain (deep vs. shallow integration, often dispersed, fragmented production processes)  Focus on core competence of enterprise, ‘outsource’ other tasks  Competitiveness a function of overall network efficiency (systemic) not only or even primarily enterprise performance

Class Activity #1: Draw a production circuit for something you ate for breakfast (auto example p. 279)