-It allows for geographical specialization for individual operating units.
-The need for geographical specialization arises because various factors of production viz. power, materials, water, labour, manufacturing facilities are located at a considerable distance from the major markets.
-For instance, tyres, batteries, transmission equipments and springs for an automobile assembly. The production facilities for each of the these are traditionally located near the source of materials to minimize transportation cost.
This strategy leads to specialization of manufacturing each automobile component and hence economically.
– This will also involve internal inventory transfer to completely integrate various components into final assembly.
– Thus, manufactured goods from various locations are collected at a single warehouse and then combined as a consolidated/ assorted shipment.
– P&G uses distribution centres to combine products from its laundry, food, and healthcare divisions to offer the customer a single integrated shipment.
-Economies gained through geographical specialization invariably offset increased inventory and transportation cost.
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