Framework for assessing the current strategic factory role and deploying an upgrading roadmap

Framework for assessing the current strategic factory role and deploying an upgrading roadmap: An empirical study within a global operations network.

Miguel Mediavilla1, Ander Errasti2 2

1 Manufacturing Engineering Department, UNED University, Madrid, Spain Industrial Organisation Department, Tecnun, University of Navarra, San Sebastián, Spain

Abstract. A globalised economy needs an efficient respond to global markets by globally sourcing, manufacturing and supplying. All size companies face difficulties when managing complex global operations networks, but meanwhile the related literature contains few models to design/restructure those. Based on the model of Ferdows for factory role analysis within global operations network, the aim of this paper is twofold: 1) to provide empirical testing of Ferdows’ model and 2) to present a framework for a focused and systematic upgrade of a given factory role within its operations network.

Keywords: global operations network, strategic factory role, case study.

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Introduction

In the recent economically expansive years, characterized by a highly dynamic macro economy and a global competitive playground, the internationalisation of operations has become a common trend among companies -mainly by multinationals but also by small-medium sized companies [1].With this emergence of the global supply and manufacturing sources, as well as the global market, such an operations network design will increasingly have to cover multiple regions and cope with a higher network complexity. Anyhow, the literature on global operations containing models to design and restructure global operations networks is scarce and fragmented [1].

Ferdows [2][3] proposed an interesting approach to classify any factory within a global operations network into a certain defined role – based on competences’ degree and the strategic location factor: offshore, source, server, contributor, outpost or lead factory. The roles for factories in a manufacturing network are therefore defined, but an operationalisation of the characteristics for each role has not explicitly broke down [4]. Thus, the upgrading paths for factory role could be difficult to formulate and deploy.

This paper will explore the Ferdows’ model application for analysing an already existing global operations network by assessing 34 production plants of a global acting company and extend the model by developing a framework that systematically helps to deploy a weakness-based improvement roadmap, which facilitates a focused gradual upgrade of the strategic role of a plant within its network.

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2

Literature Review

The operations strategy is defined as the total standard of decisions that mould the long term capacities of any kind of operation and their contribution for the general business strategy through the reconciliation of the market requirements with the operations resources [5].

This strategy should be reflected in the operations network design, which is basically about where to locate your supply sources and manufacturing and distribution operations, as well as the deployment of such operations (i.e. who should be supplying whom or the facility planning). In this process the quantitative impacts of such factors like fixed and variable costs of production or distribution facilities, inventory, freight, and other logistics costs should be captured [6]. A rationalisation or restructuring an existing network follows the same procedure. [4].

A common internationalisation approach, which looks for short-term cost reduction and competitiveness, is the establishment and management of foreign factories to benefit only from tariff and trade concessions, cheap labour, capital subsidies, and reduced logistics costs. Therefore, a limited range of work, responsibilities, network participation and resources are assigned to those factories [3].

Other companies demand much more from their foreign factories and, as a result, try to get much more out of them. This approach provides not only access to the already mentioned cost oriented incentives, but also a globally distributed manufacturing network with much higher proximity to potential regions, with close access to customers, suppliers, or specifically skilled, talented and motivated workforce. Those factories have a wider range of responsibilities and network interaction beyond a mere production work, as e.g. product or process engineering, purchasing decisions, after-sales service, etc.[3]. Therefore, evolving from an independent managed (or with lower interaction) plant network to a coordinated manufacturing network allows to benefit from the synergy among the plants, to improve cost and delivery performance, and to enhance the learning curve from the experiences of network partners [7].

If managers do not consider manufacturing to be a source of competitive advantage, they are likely to establish foreign factories with a narrow strategic scope.

In contrast, if managers regard manufacturing as a major source of competitive advantage, then the foreign plants will reward the company in the form of higher market share and greater profits [3]. Moreover, because of increasing global competition, the gap between the companies that treat their foreign plants as a source of competitive advantage and those that do not is widening [3].

The operations management literature has several models which cope with the supply chain analysis and performance (see a list of models e.g. in [1][8]), but only few widen their scope from a supply chain perspective to an entire value chain approach –which is defined by Porter [9].

Ferdows [2][3] does implicitly cover the value chain and the idea of the international manufacturing network, especially when introducing the concept of “lead plant”: it would be a plant contributing to the company’s strategy by e.g. developing capabilities as new processes, products or technologies, or the local skills, contact to end customers, suppliers, etc. And these capabilities would be shared with other plants in the network. Another work that deserves attention is the

Framework for assessing the current strategic factory role and deploying an upgrading roadmap: An empirical study within a global operations network.

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“Manufacturing Value Chain” concept by Singh Srai and Shi [10], which provides a value chain perspective that could be linked to the factory role concept of Ferdows.

However, despite of being reference model which is gaining academic recognition in the international operations field, as e.g. [1][4][11][12][13][14][15], there are still few evidences of empirical testing of Ferdows’ model [4] - even when this model is easily recognisable in practice for executives.

2.1

Environment and Dynamic Strategic Plant Role

The enlargement of the European Union (EU) has created a larger and unified economic cluster, which provides greater access of low-cost labour and new market for the multinational companies [16]. Similarly happens with other low-cost countries (e.g. Turkey, Russia or other Eastern Europe countries) with a geographical closeness to the European Union. Consequently, many businesses have extended their operations and redefined the roles of organisation units at different countries [17][18][19]. Some companies have started reacting with new European strategies such as moving labour intensive factories to low cost countries, consolidating and moving logistics centres further east and consolidating regional or country organisation units to become European operation units [20].

These changes lead to need for new knowledge in managing operations in an expanding Europe [21], situating these western European companies in a paradoxical situation regarding their production facilities in high-cost countries. Most new European strategies lead to redefinition of the roles of foreign factories and sales organisations and the headquarters. Similar pattern is also observed on multinational companies from USA or the Western-Europe with subsidiaries on other low-cost countries out of the EU [22].

Anyhow, the inherent economic and social development of countries receiving offshores makes nowadays more and more difficult to maintain a classification of countries as “high-cost” country (HCC) or “low-cost” country (LCC). Any given circumstantial change e.g. macro economical factor (e.g. inflation), socioeconomic change (e.g. wages, labour law) or political instability could rapidly downgrade an already achieved factory role and harm its competitiveness. Those changing conditions enhance the need of developing different operational capabilities or competences, making the dynamism a constant in the strategic role of each role within a global operations network.

International manufacturing networks design should therefore integrate dynamic capabilities evaluation [23], as happens in any rationalisation or restructuring of operations network. These dynamic capabilities are defined by Teece et al. [24] as “the ability to achieve new forms of competitive advantage to emphasise two key aspects that were not the main focus of attention in previous strategy perspectives.

The term dynamic refers to the capacity to renew competences so as to achieve congruence with the changing business environment. The term capabilities emphasises the key role of strategic management in appropriately adapting, integrating and reconfiguring internal and external organisational skills, resources and functional competences to match the requirements of a changing environment”.

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Research Question and Objectives

The literature review confirmed that, while some attention has been given to the roles of plants within a network of manufacturing facilities [2][3][25], the Ferdows model developed [2][3] has few evidences of empirical testing beyond case research [4] and therefore could be enriched by insights from empirical research [1][26].

Furthermore it is clear that more research is needed to understand how to coordinate the operations of individual production units within a manufacturing network [27][28]. How to achieve an overall network performance greater than the sum of it parts is not well understood [24] in a highly dynamic economical context and a global competitive playground [1]. More specifically, models and techniques to aid practitioners formulating and developing operations strategy [5] when facing a restructuring of an existing network [4] to renew competences and capabilities of factories are needed [23][24].

This paper will cover the empirical application of the Ferdows’ model and extends its application to define how to upgrade a plant strategic role acting within a global operations network by weakness-based identification, i.e. far beyond the solely analysis of the current strategic role.

4

Framework proposal for assessing/upgrading factory roles

If the factory competences are not enforced in order to get an upgraded strategic role, usually the less successful plans may disappear from the map due to competitive pressure to reduce costs and concentrate the production volume in a smaller number of plants [31]. Therefore companies should redesign and reconfigure the supply chain multisite network – either from a global (network) or partial (production unit) initiative: 1) Top-down approach: companies are forced to rationalise and restructure their operations network in order to adapt themselves to changing circumstantial conditions and develop different operational capabilities, i.e. enhancing their competitive advantage to respond to consumers’ needs. To address these challenges will involve decisions that will determine which manufacturing capabilities/competences to retain, which new capabilities/competences to develop and which manufacturing activities to outsource to suppliers. 2) Bottom-up approach: factories are forced to develop their competences in order to upgrade their strategic role and not disappear from the company’s global operations network.

The operations redesign is considered to be accomplished on three levels from a strategic contingency perspective [32]: 1) Supply chain environment, 2) Operations strategy and 3) Performance. The supply chain competency of a nation is understood and defined as the nation’s ability to sustain top class supply chain management practices, institutions and infrastructure, from a supply chain operations and logistics perspective [33]. A documented review of the competitive priorities related to the operations strategy and performance when executing an operations network redesign is documented by Gobbo [34], who summarised it in the following key performance indicators (KPI) of operations strategy: Cost (C), Quality (Q), speed (S), flexibility (F), innovation (I) and reliability (R) - which could be later utilised as a measure base

Framework for assessing the current strategic factory role and deploying an upgrading roadmap: An empirical study within a global operations network.

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for the improvement cycles. Focusing the framework to cover these KPI (extending them by e.g. Motivation (M)) the authors of this paper assess the performance of the plant and link it with the identification of an actual strategic role: the framework is composed by five main pillars, which are composed by methods and tools (Figure 1).

The 5 lean thinking principles and their value stream [35][36] approach are the main basis for the framework creation.

Fig. 1. Framework structure: pillars, methods and tools

The framework has been created under consideration of the Management System transferability abroad -regardless of the cultural differences-, as the development of the management is based on the general logic [37]. Particular management systems are often associated with “Best practices� and are applicable across nations [38][39].

Nevertheless a contingency approach is needed [40], where a good fit (strategy, policy and practices with the context) will lead to good performance. Some authors assert that Management Systems are neither rejected nor accepted but hybridized with the locally used management systems [38][41][42] and the degree is determined by local circumstances, as e.g. culture, attitude and ethics of employees, education and training, unions, locally used management practices, communication difficulties, economic considerations and, industry and sector [43]. If the local circumstances [43] and the Management System are taken into account, the strategic plant role evaluation and formulation could aid fitting the environment, operations strategy, practices and performance to be achieved, as well as the necessary roadmap to do so.

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Case Study: Data Collection and Theory Testing

The study case is developed on a worldwide operating white goods corporation dedicated to the design, production and distribution, which posted above 8 billion Euros in 2009 and is one of the global leading companies in the sector. The company has over 40 factories operating in Europe, the USA, Latin America and Asia, with a workforce numbering with approx. 40,000 people. The framework has been implemented in 34 plants (7 countries) since the beginning of 2007 and evaluated in

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2008 and 2009 by on-site reviews (by at least 2 people) based on a questionnaire. The final result and score has been extensively checked with a Delphi panel (Factory Management Team, Headquarters) to reinforce the validity of the results [44][45].

The questionnaire has 400 questions (max. 1000 points as evaluation and 200 points per pillar) regarding how many and in which grade of extension have been implemented the mentioned methods and tools. Questions are scored on this range (based on defined application scope): (no plan), 1 (plan), 2 (pilot area), 3 (>50% scope), 4 (whole scope). Based on this individual scoring, the following clustering of factories is proposed (results from 2009): A (>850 points): 12 factories; B (700 to 850 points): 12 factories; C (below 700): 10 factories.

Framework classification and Ferdows’ model: (factory role has been concluded from the Delphi panels) except by one lead factory classified as A, the rest of A factories were originally established in LCC as offshore and later source factories. It is observed that some of the highest scoring plants are starting to become contributor plants –their score has meanwhile improved. Two of these factories have lead factory competences for limited topics (the highest scoring methods). Mostly all B factories are located in HCC and include all but one of the lead factories. The assessment of lead factories has considerably improved from 2008 to 2009 but is not best-in-class yet. C factories are mostly new established off-shore or source factories. Few C factories in HCC are contributor plants, which anyhow are currently under severe competitiveness and productivity programmes (working packages based on the lowest scoring pillars of the framework).

External review of the framework: the highest scoring A factory in 2009 was also externally awarded with the Japanese Award for TPM Excellence (category A). The direct quantitative savings in materials, labour costs and overhead linked to the framework implementation counted approx. for 3%-points of the annual Ebit (acc. to IFRS balancing) in the period 2007-2009. Other indirect benefits (e.g. flexibility, motivation) have been recognised by the Delphi panel.

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Conclusions and Limitations

The main conclusions related to the aim of the paper are: 1) The proposed framework serves as a first analysis tool for assessing the strategic plant role. 2) The framework assessment prioritises the improvement aspects, which later could impact on the factory role upgrade 3) It has proven that the implementation of the framework helps improving the economical performance of each plant, independently from the studied country. 4) The framework evaluation questionnaire could be transformed from an implementation questionnaire (how many methods/tools and how wide) to a maturity grade questionnaire (how good) to have better performance assessment. 5) The framework could be extended or more specific on other specific topics from the value chain that also influence the strategic factory role, as e.g. product/process innovation, product management, strategic supplier management, flexibility toward different regions. 6) The framework does not explicitly consider the original contribution of the lead factories, which could score lower on several questions due to the lack of experience with new topics. The rest of the factories profit themselves therefore from the experiences in the lead factories.

Framework for assessing the current strategic factory role and deploying an upgrading roadmap: An empirical study within a global operations network.

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