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(originally published by Booz & Company)


Relocate? Transform? Which Option Is Right?

Structural level: At the structural level, which involves the location, size, and activity of plants, organizations are segmenting operations on the basis of locale. Typical is the plan orchestrated by a German machine builder. The company successfully separated its manufacturing processes into an upstream parts and components metalworking operation located in Eastern Europe and a downstream assembly and testing center near corporate headquarters. By doing this, the company essentially placed its commodity operations in a low-cost region and kept its high-quality, high-skills-needed tasks in the home region, where enough trained labor and supervisory oversight was available to ensure that these processes were being managed correctly. In the process, the company realized that past outsourcing moves had wrongly favored “around the church spire” solutions — that is, outsourcing only within their local region. These approaches are now outdated owing to a very rapidly developing supplier base in Eastern Europe.

Systemic level: The systemic level involves the implementation of in-plant manufacturing practices that produce optimally performing operations. Perhaps paradoxically, such lean manufacturing principles are more easily implemented in the low-cost East. Indeed, our belief, based on empirical evidence, is that making a fresh start in a greenfield factory is often the best way to instill “leanness,” as excellence can be engineered and embedded from the beginning. But programs such as Total Productive Maintenance (TPM) are often harder to implement in low-cost countries because the lack of skills and the relatively low level of employee education demand a more heavily supervised style of management. Also, the relatively high churn rate of employees makes it harder to train workers for the more active participation required in lean manufacturing.

In addition, certain manufacturing processes are better suited for the West, near customers, marketing, and R&D staff in corporate headquarters. The debut of a new product is one example. Most automobile, pharmaceutical, and aerospace companies, which have high innovation rates, have suffered dismal product launches when low-cost countries have been involved in manufacturing — problems include late shipments, budget overruns, misplaced items, or simply low quality. For these companies, moving manufacturing facilities to low-cost nations, far from other functions critical to a product launch, is clearly a high-risk option.

One strategy is to design, engineer, and produce essential new products near corporate headquarters and shift manufacturing to lower-cost facilities after the product gains traction in the marketplace. At this systemic level, we have also observed that some pioneering companies are entirely rethinking which functions to locate in plants and which to centralize — challenging conventional wisdom about what are typically considered “plant functions” such as maintenance, quality assurance, planning, and scheduling. The German utility E.on, for example, made a significant shift recently by regionalizing its maintenance staff — in other words, having maintenance teams that circulated to many plants in an area rather than being attached to just one. This drastically cut the number of people required on-site at individual factories.

Realized level: At the realized level, which involves work-force management and labor issues, low-cost nations invariably have the edge, thanks to limited salaries, benefits, and perks. However, in most developed countries, unions are now willing for the first time to consider changes in work structure that would have been unfathomable a short time ago. Among them: the 40-hour workweek, fewer vacation days, layoff plans that favor those who find jobs elsewhere quickly, and flexible time accounts in which the number of employees needed is matched with the amount of goods that must be produced at a given time. But even with these changes in attitude, it will take decades for labor practices in the West to resemble those in the East.

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