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Facility and Supply Chain Strategy in a Global Environment

Donald B. Rosenfield

Leaders for Manufacturing Program

LGO and SDM Alumni Web-cast 4/27/01

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This talk will present a new model and paradigm for managing global supply chains and dealing with major changes and complexities of today's global networks.

Major Changes:

New technologies and business-level changes such as lean manufacturing, FMS , cellular flow and TQM

Macro level changes such as large global sophisticated markets, non tariff trade barriers and regionalized trading economies

Competitive factors that focus on customization, rapid product development, and quick response

The breakdown of intercompany barriers

Overview

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Major changes (continued)

The proliferation of higher value, lower-weight products

The effects of exchange rates on traditional supply chain strategies

Overview - 2

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These trends point to some new types of strategies

Decentralized plants based on regional markets

Locations based on infrastructure issues such as work force capabilities

Smaller plants with customization capabilities

Extra plants and capacity to build flexibility for exchange rate risks

Globally coordinated systems with multiple movements

A global product life cycle

We will present some arguments for all of these strategies

Overview - 3

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• Traditional approaches to strategic planning for the supply chain

• Important trends in global competition

• A new approach for managing global supply chains and for strategic planning

Agenda

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Traditional concepts instrategic planning

• Top-level concepts

- Roles by all functions

- Consistency for functions and decisions

- Levering capabilities

• Supply chain concepts

- Modeling flows

- Incorporating focus and scale

These are often separate and do not address global trends

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Top-level concepts

ExternalEnvironment

Internal Strengths

Strategy

R&D Marketing Finance Operations Logistics Functions

FacilitiesTechnology

etc.

TransportationPlanning

etc. Decisions

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Traditional approaches to supply chain

strategy emphasize a number of issues Scale

Logistics

Focus

Global flexibility and access

Access to R&D

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Geographic network Focus on customer demand zones

Include production economics

Look at flows from raw materials to customers

Suppliers PlantsDistri-butionCenters

Customers

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Scale analysis

COST

VOLUME

Technology 2

Technology 1

Subcontract

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Some examples of strategies1. Different process steps and scale, significant logistics

Central stage 1, decentralized stage 2

2. Significant central R&D

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

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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

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Stage 1 Stage 2 Customer

fixed costsvariable costs

fixed costsvariable coststaxes

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

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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

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Traditional strategies and trends (continued)

Macro level trends

• Large, sophisticated overseas markets with local needs

• Non-tariff barriers

• Regionalized trading economies

Variable factor costs

The internet

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These same factors are leading away from integration

Information technology and e-commerce

Past advantages of tariff, pricing, scale and oligopolies

Current advantages of focus, risk management and

economies of scale and scope

Internet networks and the virtual supply chain

While this is not a strictly global trend, it will have implications for global supply chains

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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

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An exchange rate model explores a number of tradeoffs

Scale economies

Transportation costs, duties and other costs of servicing a market externally

Flexibility for servicing high-cost markets

The most important result of the model is that it isadvantageous to have extra capacity and plants and cut back production in each period at the most expensive plants

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A simplified model showed the

viability of flexibility• With ten markets of ten units each, we explored

strategies of up to ten plants with varying capacities

• With additional plants, the expected value of the most expensive plants are significantly higher than the mean

• With exchange rates showing an annual standard deviation of .12, the minimum was at four plants at forty units each--in each period we deploy two at forty and two at ten

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Exchange rate model

400

410

420

430

440

450

460

0 100 200 300 400

Total capacity

Co

st

one plant

two plants

three plants

four plants

five plants

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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."

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The validity of these facility 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

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Background:Polaroid’s Camera Manufacturing Network in

1995

Norwood MA

Vale of LevenScotland

Russia

India

(planned)

ShanghaiChina

Design & Devel. MaterialsManufacturing

Mfg. Eng.

(Size Capacity)

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These concepts lead to a new approachto strategic planning for supply chains

Business and Operations

Strategy

Supply ChainStrategy

Location Strategy

Supply ChainModeling

Strengths

GlobalMarket

IndustryLife

Cycle

ProductionTechnologies

LogisticsCosts

CompetitiveEnvironment

Internal Constraints

Supplier Industries

Political and Market

Issues

InfrastructureIssuesFactor

Costs

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What do these changes imply for supply

chains? Quick response strategies such as postponement

Channel coordination strategies that use information systems to link the multiple players using lean concepts on a global basis

• Shorter lead times

• Reduced uncertainty

• Low lot sizes

More multiple stage and player moves and delayed value added

The role of the flexible supply chain in design

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Summary

While traditional strategic planning methods and supply chain analysis are still crucial, supply chain management and strategy need to incorporate two principles

• Integrating strategic planning and supply chain analysis

• Emphasis of the new global reality

- Decentralized and more sophisticated markets

- Lower-scale but more advanced technologies

- Global product design and flow patterns

- Flexibility