Summary lecture on facilities and capacity strategy

1
Summary lecture on facilities and capacity
strategy

• Conclusions from American Connector, ITT, Eli
  Lilly, Applichem, Australian Paper etc.
• An integrated approach
• New paradigms for the global environment

2
Conclusions from American Connector, ITT, Eli
Lilly, Applichem, Australian Paper, etc

• Fit with strategy
• Focus of plants
• Scale and cost
• Means of evaluation and plant roles
• Technology transfer
• Implications of change
• Capacity imvestments

3
Traditional approaches to facilities emphasize
a number of issues

• ? Scale
• ? Logistics
• ? Focus
• ? Global flexibility and access
• ? Access to RD

4
Product/Market-Process Focus

• Mean of Focus
• ? Volume
• ? Product
• ? Market
• ? Process
• Example

Off
On
Low Vol. High Vol.
Low Vol. High Vol.
Job Batch Line
Detroit Fremont Lancaster
Mayesville
Job Batch Line
Detroit Saginaw Lima
5
Geographic Network

• ? Focus on customer demand zones
• ? Include production economics
• ? Look at flows from raw materials to customers

Distri- bution Centers
Customers
Suppliers
Plants
6
Scale Analysis
Subcontract
Technology 1
Technology 2
COST
VOLUME
7
Logistics drivers

• Raw material access (e.g.wood products)
• Distributed production for heavy products
• Warehouses for commodities because of
  transportation scale
• Customer service requirements

8
Some Examples of Strategies

• 1. Different process steps and scale, significant
  logistics
• ? Central stage 1, decentralized stage 2
• 2. Significant central RD
• ? Central plant for at least early life cycle
• 3. Significant product flexibility
• ? Decentralized satellite plants for some stages
• The examples underscore the need to develop a
  strategically consistent focus approach and then
  appropriately analyze scale and logistics

9
A suggested approach

• Develop a strategy and appropriate means of focus
• Using data, benchmarking and analysis of
  technology, develop scale curves
• Identify major decision choices and service
  requirements covering plant and process options
• Do the analysis

10
Case StudyWorldwide Consumer Goods Manufacturer

• ? 25 Product Groups
• ? About 10 Production Locations
• ? Variety of Product Values and Weights
• ? Over Capacity
• ? Lack of Focus
• ? Significant Tax Issues

11

fixed costs variable costs taxes
fixed costs variable costs
Stage 1
Stage 2
Customer
Why Separate? ?Scale ?Capacity ? Tax Laws ?
Focus ? Relative Technological Complexity

• Approach
• ? Cross sectional analysis
• ???? Tax analysis
• ? Model of variable costs
• ?Detailed analysis of actual fixed costs

Solution ? Move "light" products to tax
havens ? Better focus facilities by product group
12
Traditional strategies are subject toquestion
given a number of important trends
? Increase in worldwide exports ? Business
level trends

• lower scale, higher-skill level manufacturing
  systems such as FMS
• JIT systems that also underscore the need for
  sophisticated vendor infrastructure
• TQM and organizational learning
• Faster product development
• Customization needs
• Products such as wafers and chips

13
Traditional strategies and trends (continued)

• ? Macro level trends
• Large, sophisticated overseas markets
  with local needs
• Non-tariff barriers
• Regionalized trading economies
• ? Variable factor costs

14
New strategies emphasizeseveral key factors
? Global product volumes ? Decentralized network
based on regional presence ?Infrastructure versus
cost
Changing product cost structure Skill
requirements Vendors
? Flexibility in several ways ??Multiple stages,
players and movements ??The new role of supply
chain in design ??Development in several
countries
15
Don Lessard, in his Survey on Corporate Responses
to Volatile Exchange Rates, has shown that
companies may value this flexibility.

• ? Out of 37 foreign exchange managers, 7 cited
  "siting new plants with a view to flexibility in
  shifting production capacity" as a method of
  managing exposure.
• ? Out of 19 responses in international siting, 12
  cited locations to "increase flexibility by
  shifting plant loadings when exchange rates
  changed."

16
The flexibility strategy can actuallydecrease
expected costs with increased risk
Quotation
?
range
single plant
cost
extra flexibility
?
risk factors
17
Exchange rate model
18
Four-stage approach to
strategy development
Strengths
Capacity Factors
Business and Operations Strategy
Competitive Environment
Global Market
Supply Chain Strategy and Plant Scale
Internal Constraints
Cross- sectional Data
Production Technologies
Supplier Industries
Location Strategy
Infrastructural Requirements
Supply Chain Modeling
Political and Market Issues
Logistics Costs
Factor Costs
19
The validity of these strategies are confirmed
by the cases at Polaroid and Motorola, but are
subject to some Caveats

• ? Early life cycle products
• ? Products of high unskilled labor content
• ? Products with high minimum scale

20
Background Polaroids Camera Manufacturing
Network
Norwood MA
21
Product development at Polaroid incameras
further illustrates complexities

• Why is this now important?

Current Environment

• Flat market
• Labor intensive assembly

• Effective New Product Introduction
• Collocation of Design, Development,
• and Manufacturing in US
• Developments relationship with US
• vendor base

US Mfg Activity

• Cost Pressures
• high factor costs in US

22
Summary

• While traditional methods of analyzing scale,
  logistics and focus are still crucial, a new
  paradigm must emphasize some additional issues.
• ? Decentralized and more sophisticated markets
• ? Lower-scale, but more advanced technologies
• ? Global product design and flow patterns
• ? Flexibility