Fragmentation

Reviewed by Anjaneyulu | Updated on Aug 27, 2020

Introduction

In economics, fragmentation is the use of various suppliers and producers of components in the production of a good. Fragmentation, also known as the trade of parts, materials, and accessories, is the result of different firms manufacturing component parts rather than the finished item, with the materials being assembled elsewhere as a final product.

Businesses fragment its operations to manufacture products more cost-effectively. Globalisation and advanced technologies have made things much easier; shipping and monitoring of products are becoming increasingly cheaper and simpler as they move from place to place.

Fragmentation is popular in the telecommunications, transportation (manufacturing of vehicles and aircraft), and apparel industries. In 2016, Canada, China, Mexico, and Ireland were the top suppliers of intermediate products to the US.

Understanding Fragmentation

Fragmentation is also correlated with globalisation because companies tend to use the most cost-effective vendors, even though those companies are located outside. Companies plan for the components needed to finish their goods and the possible suppliers available. The cheapest places are used to source and assemble parts of the finished items.

Suppliers need not be in the same geographical area to accomplish this. Many components are manufactured by less-developed nations, where labour is abundant and inexpensive. Development offshoring is usually performed with associates or individual suppliers and manufacturers.

Example

An aircraft, for example, has parts that are imported from and assembled around many parts of the world. The metallic parts of products must not only be purchased but also assembled irrespective of its size, such as in the case of computer devices.

An aeroplane has its wings manufactured in Germany with African metals, its electronics made in Japan with chips made in China, glass in China, seats constructed in Mexico with textiles and Indian thread. Suppliers and distributors import, assemble, and distribute the parts to the United States as a finished product.