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					                       Econ 308

Long and Short Term Supply and Demand Quiz
                                  Fall 2007
Administrative Details
   The article(s) for the second exam will be on the website
    Friday afternoon.
   The early exam will be in OV25 (basement of Oviatt
    Library) at 7PM on Monday.
Sample Exam Question.
   Consider the following article.
     Draw iso-cost and iso-ouput curves for output levels of 500 and 800 oil pans at
      Davis Manufacturing Japanese and America auto parts manufacturers before and
      after the improvements described in the article. Explain in words the changes
      depicted on your graph.
     Show how these changes will affect the MC, AVC, and ATC of production of
      automobiles and depict how these changes will affect the short and long run
      industry supply curves. Describe in words what is happening.
     Show and describe how the auto industry will adjust in the short and the long
      run?
     Who will benefit in the short and long run? Depict and explain.
The New York Times
June 19, 1994, Sunday, Late Edition - Final
HEADLINE: Detroit Struggles to Learn Another Lesson From Japan
BYLINE: By JAMES BENNET
BODY:
CLOSE to half a million times a year, a freshly minted, glistening Altima sedan, Sentra
subcompact or pickup truck rolls out the northern doors of the mammoth Nissan assembly plant
here. But to understand the continuing impact that Nissan and other Japanese transplants have
on American auto making, it helps to start elsewhere, on the northeast side of the plant, where
grimy tractor trailers back up to unload transmissions, truck frames, wiper blades and bucket
seats.
Detroit has made great strides in catching up to its Japanese rivals in production efficiency,
partly by studying and learning the lessons of Japanese car-assembly techniques. Today, though,
the focus is farther down the manufacturing chain -- the payoff Japanese companies get from
close relationships with their suppliers. The companies believe the benefits will include improved
quality, faster development of new models and lower costs.
Yet changing the old, arms-length relations between car companies -- Japanese or American --
and American suppliers is proving to be a gradual process at best. In the traditional model,
dating back the 1920's, the Big Three held control, designing their own parts and treating their
suppliers as second-class industrial citizens competing for their business based on price.
But the car makers want to target their investment on engines, assembly and new-model
design, while farming out the design of parts to the some 6,000 suppliers who sell to the
American auto industry. For suppliers, the new arrangement means investing more money and
acquiring new skills, especially the engineering expertise needed to design parts. For the car
makers, it means giving up some control, sharing their skills and treating suppliers as partners
and equals.
"What you've got is a massive cultural change," said David C. Eisenhart, a partner at Coopers
& Lybrand, who heads the accounting firm's automotive industry group.
Mr. Eisenhart recently surveyed more than 140 Midwest automotive suppliers who sell both to
the Big Three and the Japanese transplants. The American companies in general, he says,
remain more focused on squeezing their suppliers for price concessions. The transplants, by
contrast, show more patience and work to eliminate the forces that push up costs for their
suppliers and prices for them.
"The Japanese have been willing to work with their vendors much more closely," Mr. Eisenhart
said.
The Japanese plants in America have plenty of reason these days to work closely with
American suppliers. Politically, they are under pressure to increase the domestic content of the
cars they assemble here. Several plants claim to have slowly raised the share of components
produced in North America to more than 60 percent. Nissan said its purchases of parts and
materials in America for the fiscal year ended in March 1993, the most recent calculation, rose
67 percent to $2.35 billion from a year earlier.
The Japanese are being pushed in Washington for further progress. <Toyota> last week told
its American suppliers at a gathering in San Francisco that their quality ratings were below the
levels of Japanese suppliers. And the company also said that additional purchases in America
will depend on improvements in quality, cost and development-time on the part of the
suppliers.
Economically, the strong yen raises the price of cars and parts imported from Japan. So the
Japanese companies must make the difficult choice of raising car prices sharply or absorbing
big losses. Last month, Nissan reported a pretax loss of nearly $2 billion in the fiscal year
ended last March.
THE strong yen places a greater burden on Nissan's Tennessee transplant. "Because of the
change in the environment, our vehicles have to carry a lot more of the load," said Jerry L.
Benefield, president and chief executive of the Nissan Motor Manufacturing Corporation U.S.A.
Still, despite the political and economic incentives to buy made-in-America parts, Nissan has
found that nurturing Japanese-style supplier relationships in America is slow going.
Nissan started hunting for American suppliers even before it opened in Smyrna in 1983.
Repeatedly, Mr. Benefield said, Nissan was disappointed because most prospective suppliers
lacked the engineering skills the Japanese company had grown to expect. Again, auto industry
traditions in America were to blame. For decades, Mr. Benefield explained, "the Big Three
handed them a set of designs and said, 'Do it this way. Don't vary.' "
Detroit's centralized design programs slowed the development of new cars and trucks. While
Japanese producers, like Nissan, developed new vehicles in four years, the Big Three typically
operated on five-year cycles. Not until the late 1980's did the American companies really start
to close that gap.
Nissan and the other transplants had prodded their American suppliers to build up the needed
research and development skills in-house.
The Big Three, once again, are following Japan's lead. And suppliers point to the Chrysler
Corporation as the American company that has made the most progress. For its new compact
sedans, the Chrysler Cirrus, due in showrooms this fall, and Dodge Stratus, due early next
year, 95 percent of the parts were "presourced." That is, the suppliers were chosen before the
parts were even designed, which meant Chrysler virtually eliminated traditional supplier
bidding. By contrast, for Chrysler's line of LH cars -- the vehicles for which Chrysler began
using a Japanese-style development approach -- only 50 percent of the parts were
presourced.
Chrysler is also adopting the traditional Japanese form of price pressure on its suppliers --
lengthy contracts, extending at least the life of the model, that call for step-by-step price
reductions. The contracts assume that suppliers, helped by the car makers, will steadily find
ways to improve efficiency and reduce waste. Such contracts are one of the tenets of so-called
<lean manufacturing,> a system developed by Taiichi Ohno, <Toyota's> longtime chief
production engineer, during the postwar years.
AT Nissan's plant here, imported parts and components still represent more than 30 percent
of the total value of the company's cars and trucks. Yet Nissan has steadily increased its use
of American suppliers like the Davis Tool and Engineering Company, a privately owned, $80
million-a-year producer of oil pans and other metal stampings. The Davis Tool experience with
Nissan shows how the transplants work with their suppliers. When Davis Tool bid five years
ago to supply parts to the Smyrna plant, Nissan sent engineers from Smyrna and Japan to
examine the Davis Tool factory in Detroit, before awarding the company a contract.
Then, as it has done with two dozen suppliers across the United States, Nissan dispatched a
pair of engineers from Smyrna for five days to help workers at Davis Tool's factory rethink
their jobs.
THE results astounded the managers at Davis Tool. At the end of five days, two workers were
churning out 800 oil pans each shift, where four workers used to make 500 each shift. At
Nissan's urging, Davis Tool assured its workers that they would not lose their jobs because of
efficiency gains. Any displaced workers would be moved elsewhere in the Detroit plant.
Some of the changes seemed obvious, like raising parts bins to hip level so that workers were
not forever bending all the way over and straining their backs. The team broke down each
workers job, timing each activity to identify any waste. The company then was able to
combine tasks, saving time and space. The company had never before been prodded into such
thorough scrutiny of its practices, explained Richard L. Davis 2d, president of Davis Industries,
the parent for Davis Tool. The Japanese, he said, are "bringing these skills to their new supply
base." He added, "Nissan encouraged us to apply the techniques to our other customers."
To help suppliers, Nissan has also created a training program in Smyrna. Managers from
supplier companies are brought in for courses that last about 16 days and range from problem
solving to W. Edwards Deming techniques for improving quality. And Nissan has divided its
suppliers into regional groups. Suppliers from each region tour each other's factories to
examine efficiency-enhancing tactics on everything from layout to lighting.
Yet working with companies that ship their parts and components directly to the Nissan plant
is really the last leg of the supply chain. For every so-called first-tier supplier shipping straight
to the auto makers, there are several second- and third-tier suppliers whose quality is also
crucial to the vehicle, and whose efficiency is critical to the auto makers' financial
performance.
Here again, the Japanese companies appear to have an edge over the Big Three, partly
because the transplants brought some of their Japanese suppliers with them. Grand Rapids
Spring and Wire Products Inc. is one of the second-tier American suppliers that has managed
to adapt to the Japanese methods. The $13 million-a-year, Michigan company sells springs
and clips to the Calsonic Corporation, an American subsidiary of one of Nissan's stable of
Japanese suppliers. The Calsonic plant, near Smyrna, makes air-conditioners, heaters and
exhaust systems used in Nissan cars and trucks.
While tiny, Grand Rapids Spring and Wire considered itself a high-quality producer. So it was
confident when it approached Calsonic in 1987, recalled Larry Beurkens, the company's
general manager. Its performance ratings from its American customers were consistently high.
So when Calsonic gave Grand Rapids a marginal score, "we were in a state of shock," he said.
Still, Calsonic offered the company a contract in 1988. But Grand Rapids Spring and Wire,
despite its big investment in production for Calsonic, kept falling short of the company's
quality and other standards. Finally, by 1990, Mr. Beurkens was frustrated with trying to
satisfy Calsonic, which only accounted for a tiny proportion of its business. "I just said, 'Let's
get rid of them -- it's not worth it,' " he recalled. But then, he said, Calsonic did something
unusual. The day after Mr. Beurkens's company called and said it wanted out, Calsonic officials
were at his Grand Rapids plant, coaching Mr. Beurkens and others, and the company's scores
began to rise. Since then, Grand Rapids's business with transplants has risen to 15 percent of
its annual revenue.
Calsonic's approach, Mr. Beurkens said, was a sharp break from his experience with American
suppliers to the Big Three. "If I've got a problem," he said, "They say, 'Yeah? What are you
going to do about it?' "
And when it came to pricing, Mr. Beurkens added, his company has a real partnership with
Calsonic, far more so than with domestic companies. "In the other world, it's domination," he
said. " 'If you don't like what I say, there are a hundred suppliers just like you.' The hammer,
we call it."
   Unit Costs With Lean Manufacturing


Capital


                    After lean manufacturing techniques, the firm can
                    produce 800 oil pans with half the labor.



                          Before lean manufacturing techniques



                           After fully adjusting to lean manufacturing techniques,
                           the firm will reduce the amount of capital further
                           reducing the ATC and AVC of production.


                                                     500 oil pans-before Jap.

                                      800 oil pans-After Japanese


               4                                Labor
          2
  Short and Long Run Adjustments

                                                                  Market
            Japanese
Price                                            Price



                 MC    ATCbefore lean manufacturing                  S1 S
                                                                          2
                                                                                 Safter entry
    P1                                                                              Long-run
                        ATCafter lean manufacturing   P1
                                                      P2                            supply
    P2
  P3
                                                                     D1


        0                   Quantity                     0   Q1               Quantity
                            (firm)                                            (market)

				
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