The chief operating officer (COO) at a consumer products manufacturer was preparing for the quarterly management team update and was not expecting an easy time. In the previous few years, the company had opened plants around the globe, closer to its markets, to be more responsive to local demand. But the medium-sized factories in Europe were not operating efficiently compared with their larger-scale sister plants in the U.S., and the recently opened, supposedly low-cost plant in Vietnam was demonstrating very poor labor productivity and quality results. At the same time, currency fluctuations had begun to make it difficult to predict profitability in any region. Relentless coverage of the pros and cons of offshoring in “low-cost” geographies in the press had led the COO to worry that his company might be missing out on the opportunity to dramatically improve its cost structure — but his experience in Vietnam had convinced him that he did not have a well-thought-out strategy or a full understanding of the total supply costs from changing his manufacturing network.
The COO was starting to conclude that the number and location of the company’s manufacturing facilities were creating a drain on profitability. It was becoming clear that to stay competitive, he would have to rethink the design of his “manufacturing footprint.”
Similar reevaluations are occurring at more and more companies, as manufacturing network design has become an economic and strategic imperative. Companies in virtually every industry are trying to determine the best way to use their manufacturing footprints, realizing that if they want to stay competitive, they can’t wait until their manufacturing costs are out of line to take action. In many industries, target costs are set for product launches and their associated manufacturing programs, which are scheduled for years in the future. Use of these forward-looking cost positions to identify a supply chain that can help the organization come in at or under budget is critical to executing profitable product launch programs.
Companies that have adjusted their manufacturing networks have realized impressive success: A defense electronics manufacturer consolidated plants to reduce costs by 24 percent annually; a pharmaceutical company combined plant consolidation and outsourcing to boost the bottom line by $20 million; and an automotive supplier generated yearly savings of $320 million, which put the company on the road to 15 percent profit growth, from restructuring its manufacturing footprint and supply base.
As is clear from these and other examples, proactive companies can reduce unit costs by as much as 40 percent of total acquisition cost (that is, raw material, manufacturing, inventory, and freight to end-customer markets) by asking: How many plants should we have? Where should they be? What should their focus and mission be?
Finding the Benefits
New product-line or business-line launches provide the best opportunities to rethink the design and strategy of the entire network of manufacturing footprint and supply base structure, because there are no sunk costs or existing resource commitments and fewer vested interests. In the relatively clear air surrounding a launch, it is possible to design a manufacturing footprint from scratch. But even for existing business lines, assessing network design is critical, so important that it can be the key to profitability and even survival. Unless companies analyze their manufacturing footprint and adjust their existing network — proactively, not reactively — to ensure maximum financial performance, they could be out of business in a matter of years. The benefits of optimum network design include:
Lower product unit and total acquisition costs
Alignment with major customers as they move to low-cost geographies
Improved margins — the company whose network costs are lowest can capture the difference between its own internal costs and the next best competitive supply option
Flexibility to adjust to market or technology changes and other business disruptions