Question

Many European countries have laws that limit the times and number of hours that employees may work. These laws are much weaker in the US, China, and many other countries. How will these laws affect ratios such as the Total Asset Turnover and the Fixed Asset Turnover? How will these laws influence the desire of manufacturing intensive companies to locate in Europe vs. China or the USA? During the development of the personal computer industry, Dell moved quickly to a just-in-time manufacturing model while competitors like Compaq did not. How would this affect the Inventory Turnover ratio and the competitiveness of Dell vs. Compaq?

Answer 1

Total Asset turnover ratio and the Fixed Asset turnover ratio will be negatively impacted in European countries and positively impacted in US, China, and many other countries. This is because, both current assets and fixed assets requires manual intervention of human for proper functioning. With limit on number of hours the employees can work, the maximum capacity of assets may not be utilized due to which both ratios will be lower in European countries as compared to countries where these laws are weak.

Manufacturing intensive company primary objective is to achieve full capacity to reduce costs and generate economies of scale. Hence, they will prefer to locate in China or USA as the laws with respect to limit on number of hours by an employee is weak and therefore, the companies can ask the employees to work for longer hour so that the production is maximized without increasing cost.

Just-in-time manufacturing model will have a positive impact on Inventory turnover ratio. In Just-in-time model, manufacturing is done when there is demand and therefore, the inventory is at a minimal level which improves inventory turnover ratio. With Just-in-time model, the company first collect customer demand and then produce thing as per customer demand. Hence, customization is possible with this model. Dell is definitely surpassing Compaq on both Inventory turnover ratio as well as competitiveness by adopting this model.