Strategies for Global Manufacturing Networks

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 1 Overview 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 2 Overview - 2 Major changes (continued) The proliferation of higher value, lower-weight products The effects of exchange rates on traditional supply chain strategies 3 Overview - 3 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 4 Agend a 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 5 Traditional concepts in strategic 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

6 Top-level concepts External Environment Internal Strengths Strategy R&D Marketing Operations Logistics Functions

Facilities Transportation Planning Technology etc. etc. Decisions Finance 7 Traditional approaches to supply chain strategy emphasize a number of issues Scale Logistics

Focus Global flexibility and access Access to R&D 8 Geographic network Focus on customer demand zones Include production economics Look at flows from raw materials to customers Suppliers Plants Distribution Centers

Customers 9 Scale analysis Subcontract Technology 1 Technology 2 COST VOLUME 10 Some examples of strategies 1. 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 11 Case Study Worldwide consumer goods manufacturer 25 Product Groups About 10 Production Locations Variety of Product Values and Weights Over Capacity Lack of Focus Significant Tax Issues

12 fixed costs variable costs fixed costs variable costs taxes Stage 1 Stage 2 Why Separate? Customer

Approach Cross sectional analysis Scale Tax analysis Capacity Tax Laws Model of variable costs Focus Detailed analysis of actual fixed costs Relative Technological

Complexity Solution: Move "light" products to tax havens Better focus facilities by product group 13 Traditional strategies are subject to question 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 14 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

15 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 16 New strategies emphasize several 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 17 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 is

advantageous to have extra capacity and plants and cut back production in each period at the most expensive plants 18 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 19

Exchange rate model 460 450 one plant Cost 440 two plants 430 three plants four plants 420

five plants 410 400 0 100 200 300 400 Total capacity 20

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." 21 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 22 Background:Polaroids Camera Manufacturing Network in 1995 Russia Norwood MA Vale of Leven Scotland

Shanghai China India (planned) Manufacturing Design & Devel. Materials Mfg. Eng. (Size Capacity) 23 These concepts lead to a new approach to strategic planning for supply chains

Strengths Business and Operations Strategy Global Market Supply Chain Strategy Industry Life Cycle Location Strategy

Production Technologies Supply Chain Modeling Logistics Costs Factor Costs Competitive Environment Internal Constraints Supplier

Industries Political and Market Issues Infrastructure Issues 24 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 25 Summar y 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 26

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