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(originally published by Booz & Company)


Designing the Factory Footprint for Competitive Advantage

Customers that require short lead times may force companies to rule out having key manufacturing operations in distant low-cost countries and instead locate final assembly and test operations in nearby markets or regions, while components could be supplied by low-cost locations. On the other hand, customers that demand low-cost products above all else might drive the supply chain to the inexpensive cost structures that can be found in such countries as China, Thailand, Russia, and Brazil. Similarly, flexibility, customization, and design or manufacturing responsiveness might dictate the number of plants required or the technologies and processes used in each plant.

The key to establishing the requirements that the supply chain and manufacturing network must serve is to look ahead and not fixate on current conditions. Areas of potential change that should be monitored are: 1) shifts in channel strategies among direct sales force models, indirect channels, and e-business channels; 2) shifts in required lead times for crucial customer segments; 3) shifts in product makeup (for example, more software or software-enabled components and less hardware); and 4) shifts in volume growth in geographic markets served. All of these can have significant implications for optimal supply chain design.

Future product architecture and product technology are additional critical areas of influence on supply chain design. Increasingly, companies are proactively adjusting product architecture to enable highly efficient supply chain design. Product architecture can drive the ability to do late-stage customization by allowing, for example, high-velocity flows of standard product modules and adding complexity to the product later in the manufacturing cycle, closer to the end market. Similarly, product architecture will strongly determine decisions on how to control the supply chain: Different supply chain networks are required for configure-to-order, make-to-order, and build-to-inventory architectures. The level of component proliferation — for example, the number of power supplies or cable types — can drive significant complexity in the supply chain and can easily degrade manufacturing and distribution performance or raise the cost of meeting customer requirements.

In many industries, increased importance is being placed on software to enable product features. Software-enabled changes can greatly simplify both the supply chain and late-stage customization. In addition, a growing number of companies sell software exclusively, or sometimes unbundled from hardware, to customers. These types of sales require manufacturers to build new capabilities to manage their “software supply chains.” For example, they may have to create online sales channels, offer the ability to unlock the product through password keys, provide customers with ways to configure the software, and proactively push software patches and updates.

• Identify economics and challenge constraints. All costs associated with designing a network need to be fully understood so that the trade-offs can be analyzed. Costs can be categorized into four “buckets”:

  1. Inherent Costs: a function of product design and process technology. Addressing inherent costs means revisiting what the supply chain is being designed to do: the customer response requirements being promised by market segment, the underlying product architecture or design, and which manufacturing processes and technology it uses. These usually offer the greatest potential for improvement.
  2. Structural Costs: a function of make versus buy, production scale, process complexity, sourcing strategy, location, etc. Addressing structural costs means changing where and how the company makes the product.
  3. Systemic Costs: a function of operating practices, overhead, capabilities, and supply chain control philosophy, such as “pulling” to true end-market demand rather than “pushing” inventory to forecast. A critical lever in this category is “tailored business streams,” that is, supply chain processes (and their associated overhead) that have been redesigned to match the requirements of the demand streams (for instance, low-overhead, simple product flows for high-volume “runners” versus more complex support for custom products, or “strangers”). Addressing systemic costs means changing organization and operating policies.
  4. Realized Costs: a function of efficiency and performance in execution (e.g., operating asset effectiveness, labor productivity, negotiated wage rates, material price variances, rush freight charges, etc.). Addressing realized costs means changing actual work practices to make them more efficient.
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