Cutting Operational Costs at Hon Hai

Cutting Operational Costs at Hon Hai

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Introduction

In today’s businesses, tight margins have inadvertently heightened the focus on cost. Competition in business around the world is continually increasing as businesses are continually coming up with innovative ways of outdoing each other (Vieira et al, 2016). Reducing operational costs is a proven strategy to gaining better margins as is the case for Hon Hai (Slack et al, 2010). Cost cutting strategies hold immense possibilities to businesses seeking competitive advantages in their industries of operation. This paper therefore examines such strategies through the case of Hon Hai; the world’s largest electronics contract manufacturers that produces many of the world’s computers, consumer electronics as well communications products for such customers as Dell, Apple, Sony, and Nokia.

Low Cost Operational Strategies Employed by Hon Hai

Hon Hai has employed a variety of low cost operational strategies that have propelled it to the top. To start with, Hon Hai’s strategy is based on ensuring that they are operating at the least operational costs as Terry Gow the company’s chairman holds that “Cheap is our specialty (Slowak et al, 2017).” In this regard, the company has sought to manage its costs throughout the organization. For instance, Hon Hai would rather operate in a factory located in low cost areas of China, South East Asia, Latin America and Eastern Europe (Slowak et al, 2017). In these areas, the cost of labor is a fifth of rates in Taiwan and of course higher in developed western countries. This has ensured that the cost of land or rent and labour costs are low as compared to their competitors operating in cities. Operating in town and cities where the cost of rent and labour is high denies a company valuable competitive advantages.  With no imposing headquarters, the company is able to concentrate on its core business of producing electronics. What is more, with additional clients than its competitors, the company is able to enjoy economies of scale so that it is able to achieve more for even lesser costs (Slowak et al, 2017). To further push the costs down, the Hon Hai has diversified its products range to include; more components that are used in making electronics than its competitors. This means that Hon Hai only has to outsource a few parts towards making the final product. Additionally, diversification also ensures that the Hon Hai is busy throughout the year unlike its competitors.

Ease of Competitors Copying Hon Hai’s Low Cost Strategies

As an industry leader in contract electronics manufacturing, Hon Hai’s low operational cost strategies would be difficult to copy. This is because; they have been developed over a long time from 1974 (Mahadevan, 2015). Cost cutting strategies require time and money to implement. This is because cost cutting could involve, moving to cheaper premises as Hon Hai, mechanizing most of the operations, implementing recycling, reuse and reduce strategies. Many companies would therefore not have the luxury of time and or money to instantaneously copy Hon Hai’s strategies. Even when they would be able to copy Hon Hai’s low cost operational strategies, Hon Hai in its endeavor to continually seek creative and innovative ways to cost cut would still be ahead with better cost management initiatives.

Operation Performance Objectives

A company defines its overall strategy and then identifies operational performance objectives it must meet in a bid to achieve the set strategy. Additionally, in a bid to ensure that resources are appropriately allocated in operations it is imperative to record, monitor as well as review all aspects of operations performance. Operation performance objectives include

1. Quality

Quality is more than just conformance to specification. It is also denotes how well a product accomplishes its intended functions, the product’s desirability, and the reliability of a product. Quality also denotes to the product’s durability, ease with which the product is serviced as well as the degree to which the buyers believe the product meets their needs besides being of equal or more value for their dollar.

Poor quality products increase operational costs in that it results in a lot of wasted, time, effort and raw materials.

1. Speed

Speed objectives denote the rate at which a company is able to generate sales quotes as well as how rapidly and often the company can deliver its products. Speed also refers to manufacturing turnaround time and throughput.

Slow speed denies the company the opportunity to enjoy economies of scale thereby increasing operational costs (Slack et al, 2010).

1. Dependability

A company can be said to be dependable if it can produce and deliver products to its customers on time as well as according to agreed to costs and prices. A company’s dependability is also evaluated on its products ability to satisfy functionality and durability as expected.