Modularity enables the international division of production and, therefore, naturally relies on outsourcing. Since the 1980s, brand-name companies such as Levi's and IBM have outsourced a growing number of their functions. This means that the links of common ownership over the production process have been replaced by contracts between independent enterprises.
In many ways, this new world of fragmented and specialized companies resembles the American economy of the early and mid-nineteenth century, before giant multi-unit, vertically integrated corporations such as Ford Motor started to develop. Previously, businesses had to contract with many providers of goods and services, and they commonly used others for logistics and distribution.
The Japanese Model: Lean Production and Outsourcing
In the 1980s, consumers demanded better selection and better quality products. The life cycle of a product got shorter. Companies started looking to the model of the Japanese firm, based on trust and commitment.
"The premium set on learning across all levels of the company went hand in hand with the emphasis on quality control, continuous improvement, and ‘just-in-time production.' As a result, Japanese companies did not need buffers like fat inventories and multiple suppliers that were built into the American system. The Japanese ‘lean manufacturing system' was far more flexible than the American Fordist mass production system in swiftly turning out a stream of varied new products of high quality and at reasonable prices."
(Berger, S.,
How We Compete: What Companies Around the World Are Doing to Make it in Today's Global Economy, Doubleday Broadway, 2005, p. 71)
Lean production involves subcontracting solutions that shift the burden of capital investment and the risk of overproduction onto others. Production is shifted to a "modular system in which companies [...] carry out fewer and fewer of the functions in the production process within their own walls."
(Berger, S.,
How We Compete: What Companies Around the World Are Doing to Make it in Today's Global Economy, Doubleday Broadway, 2005, p. 94)
The Impact of New Information Technologies
"Digitalization allows the lead firms to provide such detailed instructions to suppliers that there can be seamless integration of the different steps – from defining a product to selling it – with a minimum of human coordination (at least in theory.) […]
It's not only a matter of lowering cost. Modularity allows innovators to rapidly start new companies by specializing on the function they do best, while buying the rest."
(Berger, S.,
How We Compete: What Companies Around the World Are Doing to Make it in Today's Global Economy, Doubleday Broadway, 2005, pp. 100-101)
Limits of Production Modularity
"Despite all the advances in modularity over the past twenty years, there remain many activities in which processes and connections among them cannot be captured and expressed in digital code. These are areas on the cutting edge of technology where knowledge has not (yet) been standardized, or areas involving back-and-forth between engineers and workers involved in different functions – like design and manufacturing. [...]
When the production sequence is nonmodular, much tighter and more intimate forms of collaboration are needed to tap the tacit knowledge of the participants. They are likely to need face-to-face relationships to make it work. So nonmodular activities are more likely to stay home. When and if they become more modular – either because new technologies allow the rich information that used to flow between people to be captured in software, or because […] it becomes profitable to make products that are just less complex – then these operations become more vulnerable to relocation outside the home society. Once the production process can be fragmented, people with specific talents and expertise can be located in one part of the organization, and other activities can be dispersed.
Even in industries where some of the functions can be broken apart and relocated at a distance, other functions may still clump together."
(Berger, S.,
How We Compete: What Companies Around the World Are Doing to Make it in Today's Global Economy, Doubleday Broadway, 2005, p. 220)
Critical View
"Deregulation and competitiveness are the dominant criteria for investment strategies. These changes also, however, facilitate the delocalization of plants, the fragmentation of production processes and the establishment of special Export Processing Zones, which exempt industries from labour and environmental regulations and other obligations. Such effects may promote excessively low labour costs and consequently higher profits for industry, but this is frequently accompanied by situations of deplorable human and environmental exploitation. In addition, in the absence of regulations and controls, obsolete plants, technologies and equipment are being exported just as dangerous chemicals and substances which have been banned, withdrawn or severely restricted in one country for environmental or safety reasons are also being exported, particularly to developing countries."
(Mager, S.,
Encyclopaedia of Occupational Health and Safety, International Labour Office (ILO), Vol. 2, 1998, visited 2010-08-07)
