Academic journal article The McKinsey Quarterly

Seeding Plants for a Global Harvest

Academic journal article The McKinsey Quarterly

Seeding Plants for a Global Harvest

Article excerpt

Successful manufacturers site their plants to build a global network of strategic capabilities

In their struggle to drive down manufacturing costs, many companies look to relocation overseas as a possible solution. The immediate labor cost savings from such moves can be tempting. But they also involve great risks. Siting a plant at a distance from other functions can damage the vital relationships that sustain an organization's proficiency in those critical, hard-to-develop business processes that deliver value to customers. Though often underrated, geographical proximity is a powerful ingredient in the mix of factors that keeps a company flexible and responsive.

THE TRANSITION TO global competition in many US manufacturing industries has made deciding on facility locations more complex than ever. Unfortunately, few companies have responded well to this challenge. Many plant location decisions made during the past decade could be characterized as tactical, stop-gap actions which resulted in short-lived benefits and created company facility networks that are unbalanced, inefficient, or ineffective. The financial performance of the plants themselves has frequently been disappointing. Typical management comments include:

"Our savings were significant initially, but wage rates at our overseas plants have risen consistently, and at current exchange rates our savings are almost insignificant."

"We save a lot on labor over there, but we have also added a lot of new people here to support the foreign plants and brought in additional finished goods to support our customers."

"The process of communicating with our [South American] plant is incredibly burdensome. It is almost never in synch on engineering changes, and timely new product releases are next to impossible."

There have, however, been some exceptions to this pattern. A few companies have made location decisions that have fostered the development of critical capabilities and created lasting competitive advantage. The resulting plants fit into well-conceived facility networks which solidly support the companies' businesses. Not surprisingly, the decision processes utilized by these firms are quite different from those of most others. By understanding the nature of these processes, and the key ways in which they differ from more typical processes, managers can:

* Make better plant location decisions through recognizing the importance of such decisions to the firm as a whole.

* Improve decisions about which products, processes, or organizations to relocate overseas, and appreciate what the implications will be.

* Facilitate interactions both between internal functions (such as design, manufacturing, and marketing) and with the company's external suppliers and markets.

* Support critical capabilities in the company that are an ongoing source of competitive advantage.

The traditional approach

In 1990, Kodak's Business Imaging Systems (BIS) division found itself facing increasing pressure from foreign competition. Japanese rivals were experiencing growing success with small, low-priced microfilm capture and retrieval equipment. To engineers and managers at Kodak, the design of these machines seemed "cheap": their frames were of lower gauge metal and tended to flex; power supplies and other components were smaller; and functionality was much more limited.

But these apparent shortcomings did not deter foreign customers and price-sensitive domestic customers from switching to the cheaper models, thereby eroding BIS's market share. Marketing management responded by putting pressure on manufacturing personnel, who they felt were responsible for producing products that were "not competitive." This pressure quickly grew as the division general manager also became concerned about manufacturing's cost position.

Faced with this issue, manufacturing management determined that changes to production methods and sourcing -- the traditional arenas for manufacturing cost reduction -- could not yield the savings required to compete with the Japanese products. …

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