Over the recent months, the price of spice commodities has begun to rise. The majority of these spices are grown near the equator. The region around the equator has experienced some devastating weather events that have affected the supply and also driven up the prices of spices. Additionally, countries which produce spices, such as Egypt, have experienced long periods of political unrest, which has also affected the cost of the commodities. Further still, the economic downturn has affected the demand for spices, especially among restaurants. McCormick & Co., one of the world’s largest spice dealers has seen the effects of these factors. In an interview with the Wall Street Journal, McCormick’s CEO Alan Wilson states; “the prices of most of our commodities have really surged in the last year.” All the while, demand for spices has declined as people have begun making simple and inexpensive meals in an effort to save money.
In the face of these natural, political, and economic factors, McCormick & Co. has had to make important capacity and inventory decisions in order to try to keep their profit margins. In response to political unrest in Egypt, the company decided to build up their inventory of herbs from the country in order to ensure they had those commodities in the future. As we know from our activity “The Gaming Company” from last week, it costs money to hold high levels of inventory, especially if a large quantity is purchased up front. The company also made sure to find additional suppliers of the herbs they normally purchased from Egypt to ensure they wouldn’t face shortages.
As costs of certain inputs rise, McCormick has had to make decisions about their production levels in order to once again achieve optimal operating levels. They forecasted that the demand they had been receiving from restaurants would decrease, and subsequently changed their strategies to regular consumers. In order to try to ride out the economic downturn, the company has turned their focus to marketing simple and inexpensive, yet delicious, meals to families by recommending popular spices and recipes cooked in the home.
Lastly, in an effort to save money and reach more optimal operating levels, McCormick & Co. has made a four year goal of saving $150 million in operating costs. They project that they will meet their goal a year ahead of schedule because they have been so successful at creating more capacity at their plants and have been able to avoid building new plants.
I have outlined only a few scenarios where McCormick & Co. has had to make important capacity and inventory decisions. It is imperative for companies to maintain a close eye on the environment outside their business so they are prepared for whatever may come up. Do you think the company is on the right track with their strategies as they face different external factors that impact their business?
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In recent decades, a growing and sometimes controversial trend in business has been moving or expanding operations to countries overseas. Businesses in the United States have sought to increase productivity and efficiency by opening plants, especially manufacturing plants, in countries such as China and Indonesia. Recently, big U.S. manufacturers have begun to expand research and development labs to Asian countries as manufacturing has shifted from domestic factories to foreign factories. As a result, job growth in the science and technology sectors has slowed. In a recent article in the Wall Street Journal, “U.S. Loses High-Tech Jobs As R&D Shifts Toward Asia,” James Hagerty writes that “in the six years through 2009, about 85% of the growth in R&D workers employed by U.S.-based multinational companies has been abroad.” He continues by citing that it isn’t that U.S. companies are necessarily closing domestic labs, but that their growth is focused on opening new labs overseas. These statistics are staggering and can be seen as troubling by many as the U.S. job market is trying to recover from the recent economic downturn.
Why are companies opening R&D labs in addition to manufacturing plants in foreign markets? Companies are seeking to streamline their production and manufacturing and to improve their operations. Product development can happen more quickly if research, testing, and manufacturing are done in closer proximity to each other. Additionally, costs related to product development can be decreased if the process is more efficient. Think about a project timeline. Let’s say a project timeline from start to finish, including R&D, testing, and production is six months, with R&D done in a domestic lab and manufacturing done in a foreign plant. A company that has an R&D lab close to their foreign lab could most likely decrease their project time by eliminating the lag time between R&D in the U.S., and testing and production in the foreign factory. If adjustments need to be made after testing, it would take longer to relay the project back to the lab in the U.S., only to send it back to the factory for testing. Logically, moving R&D closer to factories seems like a smart business move.
What does this mean for us, today’s college students relying on the assumption that we will be able to find a job after we earn our degrees? I believe it is hard to tell. It seems that this trend of shipping a large portion of operations to cheaper foreign markets will continue, as the price of doing business climbs and companies seek better efficiency. What do you think? What are the implications for the domestic labor market? As a college of commerce student, do you feel torn by the knowledge you have about business operations and the need to operate as efficiently as possible and the fear that you may not be able to find employment after you earn your degree?
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