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(originally published by Booz & Company)


Relocate? Transform? Which Option Is Right?

Because decision models are typically math-based, they are unable to reflect political give-and-take between management and unions in brownfield locations that could significantly decrease the costs of manufacturing. There are many recent instances of union concessions relating to, for instance, increased working hours without concomitant salary hikes that change the relocation/transformation equation. And some companies and unions are cooperating in novel ways that would have been almost impossible as recently as five years ago. One example involves GM in Europe, which created a competition among its plants to determine the site that could offer the greatest productivity improvements and labor cost efficiency. The results of this exercise are that GM plans to move manufacturing operations for the next generation of Saab 9-3 models to the automaker’s Opel plant in Ruesselsheim, Germany, from its traditional facility in Trollhattan, Sweden.

Supply chain and infrastructure challenges in a relocation strategy can also be intractable. It’s not always easy to set up a factory in a low-cost site to which the supply base can efficiently deliver without incurring many additional, unexpected costs. These added charges as well as the risks of having to sometimes sign up untested suppliers to stock a new factory could increase the price tag of relocation significantly. Additionally, the potential expense of improving infrastructure should be taken into account: Companies must analyze the condition of roads and communications lines to determine whether they are sufficiently robust to sustain increased traffic in the future. Further, the red tape (or political connections) required to convince municipalities and utilities to provide a consistent and sufficient supply of water, energy, sewage services, and many other essential aspects of a plant cannot be controlled and often are not fully known until the factory is built. Often, during negotiations with local authorities, promises are made that authorities have no real intention of keeping.

The importance of a broad-based and diligent analysis of a relocation site was illustrated recently by the slip-up of an aerospace components company that decided to shift some parts production to a company in Siberia. Aerospace company executives visited the prospective plant site in the summertime, never once contemplating the effect that average annual temperatures of –12°C might have on its precision parts. The company, now locked into a long-term contract, is still struggling to get adequate parts from this factory and is considering buying itself out of the agreement.

The increasing desire to minimize supply chain costs and eliminate complexity in operations has also begun to highlight some of the problems with relocation strategies. Because of this, at least a few companies are finding it difficult to justify using plants in low-cost countries. A maker of synthetic materials for the automotive industry recently learned that some customers that had defected to Asian manufacturers were considering returning to Western suppliers because the working capital and complexity charges associated with sourcing 300 product varieties from 30,000 miles away were becoming untenable.

What’s the Alternative?
With offshoring often less advantageous than it’s cracked up to be, some companies are choosing transformation of existing plants in higher-cost nations and uncovering substantial benefits. To assess the alternatives to relocation, we’ve considered them within the four categories (inherent, structural, systemic, and realized) of our “ISSR” manufacturing framework. This framework offers an analysis of the cost differences and cost drivers between plants.

Inherent level: At the inherent level, which involves the technologies and processes used in manufacturing, some companies are implementing customized production lines that are designed to remove factory inefficiencies. In some cases, these systems allow the company to slash the price of manufacturing so steeply that the presumed advantages of low-cost nations are eliminated. A leading European consumer goods company, for example, developed a suite of manufacturing technologies that outperformed off-the-shelf machines by as much as 50 percent: This was achieved through line speeds more than 30 percent faster than those of off-the-shelf systems used by competitors, through end-of-line packaging automation that was previously believed to be impossible, through modular technologies that allowed for minimal downtime during maintenance overhauls, and through factory layouts that allowed technicians to tend to two lines simultaneously. With this setup, the company is able to profitably maintain manufacturing facilities close to customer markets and suppliers practically anywhere in the world.

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