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(originally published by Booz & Company)


Designing the Factory Footprint for Competitive Advantage

Historically, companies rarely adjusted manufacturing footprints. The headaches associated with moving a plant greatly outweighed the operational benefits, and a high degree of vertical integration ensured that any change in plant sites could have a massive impact on the supply chain. In addition, because of a lack of necessary infrastructure in many locales, it was often costly to locate factories at a distance from sources of supply, end markets, and customers. But today’s business conditions — improved logistics, better computer systems and telecommunications infrastructure, less vertical integration, streamlined supply chains, the emergence of low-cost, high-productivity nations as qualified manufacturing locations, and competition that is stronger than ever before — have made it absolutely necessary to address network design issues.

Designing an appropriate manufacturing footprint is not an easy process, but the complexity is manageable when a few essential principles are followed (see Exhibit 1):

• Let the product and customer guide the process from the market back. Customer and market requirements need to be well understood so that the footprint is designed to meet those needs. Networks that are not configured with the customer in mind will invariably lead to low customer satisfaction and lost revenue, and, eventually, can drive the company out of business. Target customers may value short lead times; whole-order delivery; reliability; responsiveness; or low-cost, value-added services such as kitting; or some combination of these variables, and what is valued may vary by subsegment. Each of these customer differentiators, however, could have a different implication for footprint design (see “Types of Networks,” below).

Types of Networks: Eight Benchmarks in Building an Advantaged Supply Network

Manufacturing footprints are typically structured according to one of five geographic alternatives. Each alternative signifies a different trade-off between production scale and logistics cost and time.

1. Integrated. Production and/or assembly occur within a prime product facility. An integrated model is often advantageous when components are specific to the prime product, or when component production processes are not scale intensive or not compatible across prime products. Similarly, when high logistics costs outweigh potential scale benefits from sharing prime product demand, an integrated model is apt to be the most economical option.

2. Regional/Feeder Plant. Production and/or assembly are located near a prime product facility. Feeder plants are often used because of space constraints or high labor cost in the product facility. In these cases, the benefits from lower wages and minimizing capital spending outweigh the higher logistics, transaction, and overhead costs.

3. Hub and Spoke. The demand from all prime product facilities within the regions is steered to one facility for production and assembly. The rationale for choosing this option may be to take advantage of improved scale economies and lower sensitivity to demand fluctuation, particularly when component production is capital intensive. Alternatively, wages may be a large portion of production costs, driving component production to low-wage locations.

4. Integrated Hub and Spoke. Similar to hub and spoke, in this alternative, manufacturers leverage scale across components by producing multiple components in a facility within the region. When component production processes are scale sensitive and similar processes can be shared across components, an integrated hub-and-spoke model may be economically advantageous because of the improved scale and utilization of the combined production processes. When logistics costs are high, the economic benefits of combined component production can sometimes even drive horizontal integration of prime production.

5. Global. A single component or a group of components is produced in one facility or region and shipped to fulfill global demand. The global network/distribution model has received much media and public attention in recent years. It is generally advantageous when production is very scale sensitive or wage sensitive and when logistics costs are relatively low. Semiconductor and chip production, which are scale sensitive and involve relatively low transportation cost, use the global model. Another example is the apparel industry: Current forecasts predict that 67 percent of the clothing sold by the U.S. garment industry will be manufactured in the world’s lowest-wage nations, with the majority of growth expected in China and India.

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