Focused factories

1 Focused factories

The idea behind the focused factory is simple: by limiting the range and mix of products manufactured in a single location the company can achieve considerable economies of scale. Typically the nationally ori- ented business will have ‘local-for-local’ production, meaning that each country’s factory will produce the full range of products for sale in that country. On the other hand the global business will treat the world market as one market and will rationalize its production so that the remaining factories produce fewer products in volumes capable of sat- isfying perhaps the entire market.

One company that has moved in this direction is Mars. Their policy has been to simultaneously rationalize production capacity by seeking to manage demand as a whole on at least a regional level and to con- centrate production by category, factory by factory. Hence their M&Ms for sale in Moscow are likely to have been produced in the United States. In a similar fashion, Heinz produce tomato ketchup for all of Europe from just three plants and will switch production depend- ing upon how local costs and demand conditions vary against exchange rate fluctuations. A further example is provided by Procter & Gamble who manufacture their successful product Pringles in just two plants to meet worldwide demand.

Such strategies can be expected to become widespread as ‘global thinking’ becomes dominant. However, a number of crucial logistics trade-offs may be overlooked in what might possibly be a too-hasty search for low-cost producer status through greater economies of scale. The most obvious trade-off is the effect on transport costs and delivery lead times. The costs of shipping products, often of relatively low value, across greater dis-

7MANAGING THE GLOBAL PIPELINE

tances may erode some or all of the production cost saving. Similarly the longer lead times involved may need to be countered by local stock holding, again possibly offsetting the production cost advantage.

Further problems of focused production may be encountered where the need for local packs exist, e.g. with labelling in different languages or even different brand names and packages for the same product. This problem might be overcome by ‘postponing’ the final packaging until closer to the point of sale.

Another issue is that created by customers ordering a variety of products from the same company on a single order but which are now produced in a number of focused factories in different locations. The solution here may be some type of transhipment or cross-dock opera- tion where flows of goods from diverse localities and origins are merged for onward delivery to the customer.

Finally, what will be the impact on production flexibility of the trend towards focused factories where volume and economies of scale rule the day? Whilst these goals are not necessarily mutually incompatible it may be that organizations that put low-cost production at the top of their list of priorities may be at risk in markets where responsiveness and the ability to provide ‘variety’ are key success factors.

In response to these issues a number of companies are questioning decisions that previously were thought sound. For example, Sony used to manufacture their digital cameras and camcorders in China, attracted by the lower labour costs. However, they came to recognize that because life cycles were so short for these products, it was better to bring the assembly back to Japan where the product design took place and, indeed, where most of the components originated. Other high-tech companies are also looking again at their offshore production and sourcing strategies for this same reason. Typically less than 10 per cent of a high-tech company’s costs are direct labour. Hence the decision to source offshore, simply to save on labour costs, makes little sense if penalties are incurred elsewhere in the supply chain.

All in all it would appear that the total logistics impact of focused production will be complex and significant. To ensure that decisions are taken which are not sub-optimal it will become even more important to undertake detailed analysis based upon total system modelling and sim- ulation prior to making commitments that may later be regretted.

L O G I S T I C S A N D S U P P LY C H A I N M A N A G E M E N T

■ Centralized logistics at Lever Europe ■

Lever, part of the global corporation Unilever, manufacture and market a wide range of soaps, detergents and cleaners. As part of a drive to imple- ment a European strategy for manufacturing and the supply chain they created a centralized manufacturing and supply chain management struc- ture – Lever Europe. A key part of this strategy involved a rationalization of other production facilities from a total of 16 across western Europe to 11. The remaining facilities became ‘focused factories’, each one concentrat- ing on certain product families. So, for example, most bar soaps for Europe are now made at Port Sunlight in England; Mannheim in Germany makes all the Dove soap products, not just for Europe but for much of the rest of the world; France focuses on machine dishwasher products and so on.

Because national markets are now supplied from many different European sources they have retained distribution facilities in each country to act as a local consolidation centre for final delivery to customers.

Whilst some significant production cost savings have been achieved, a certain amount of flexibility has been lost. There is still a high level of varia- tion in requirement by individual market. Many countries sell the same product but under different brand names; the languages are different hence the need for local packs; sometimes too the formulations differ.

A further problem is that as retailers become more demanding in the delivery service they require and as the trend towards just-in-time delivery continues, the loss of flexibility becomes a problem. Even though manufac- turing economies of scale are welcome, it has to be recognized that the achievement of these cost benefits may be more than offset by the loss of flexibility and responsiveness in the supply chain as a whole.