FocusGlobally Advantaged   Manufacturing Winning in the Downturn and Beyond
The Boston Consulting Group (BCG) is a global manage-ment consulting firm and the world’s leading advisor onbusiness strat...
Globally Advantaged                      Manufacturing                         Winning in the Downturn and BeyondO        ...
ing and continue to play a critical                River Delta than in the inland prov-           tradeoffs among differen...
Exhibit 2. BCG’s Analytical Model Quantifies the Cost Tradeoffs of Different Locations                                    ...
from China to the United States or        Supply-chain-management capabili-           port zones make it an excellentWeste...
Building a Globally                                that would be economically infeasi-           This strategy isn’t witho...
overhead owing to a higher-than-av-       in areas such as Thailand, Brazil, and     global leader in small, precision ele...
best-known cluster, but it’s just one     competition and industrial-policy         signs, superior local reputations asex...
Exhibit 5. The Value of Clusters Extends Beyond Factory Walls                       Example of the value of a cluster loca...
rather than importing complex, auto-      ers. An automotive company brought       term investment in the supplier base.ma...
ables production and inventory  Asking the Right Questions                                                     coordinatio...
About the Authors                      Acknowledgments                           For Further ContactArindam Bhattacharya i...
For a complete list of BCG publications and information about how to obtain copies, please visit our Web site atwww.bcg.co...
Abu Dhabi      Cologne        Lisbon        New Delhi       StockholmAmsterdam      Copenhagen     London        New Jerse...
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  1. 1. FocusGlobally Advantaged Manufacturing Winning in the Downturn and Beyond
  2. 2. The Boston Consulting Group (BCG) is a global manage-ment consulting firm and the world’s leading advisor onbusiness strategy. We partner with clients in all sectorsand regions to identify their highest-value opportunities,address their most critical challenges, and transform theirbusinesses. Our customized approach combines deep in­sight into the dynamics of companies and markets withclose collaboration at all levels of the client organization.This ensures that our clients achieve sustainable compet­itive advantage, build more capable organizations, andsecure lasting results. Founded in 1963, BCG is a privatecompany with 66 offices in 38 countries. For more infor-mation, please visit www.bcg.com.
  3. 3. Globally Advantaged Manufacturing Winning in the Downturn and BeyondO ver the last decade Add to this whipsawing volatility keep in mind, however, that deci- and a half, a historic (which shows no sign of abating) an- sions about where to manufacture combination of falling other critical dimension: the explo- should be driven by more than just trade barriers, low en- sive growth of RDE markets. In 1990, cost. For companies seeking a strate- ergy and transporta- RDEs contributed only 25 percent to gic edge over the competition, the fartion costs, new access to plentiful la- global GDP, compared with 51 per- more complex—and critical—ques-bor, and relative currency stability cent for the G7 industrialized na- tions are where to manufacture whatled to a massive shift of sourcing and tions. The RDE share grew to 42 per- products and how to set up a global-manufacturing from high-cost devel- cent in 2007 and is projected to ly advantaged production network.oped countries to China, India, and overtake that of the G7 by 2009 (al-other rapidly developing economies though it remains to be seen how the Choosing the Right(RDEs). From 1997 through 2007, the global downturn will affect these Locationsvalue of goods made or sourced over- projections). Moreover, RDE demandseas grew more than 9 percent per for goods and services has surged Companies whose RDE strategiesyear on average, from $5.3 trillion to over the last decade. India and China succeed over the long haul make sus-$12.6 trillion. alone have about 2.5 billion consum- tained commitments to a small num- ers—a huge potential market with ber of choices and relationships.But in 2007, the tide seemed to be growing amounts of disposable in- They systematically rebalance pro-turning. The media began warning come. For many products, RDE de- duction among locations instead ofof rising oil prices, higher trans- mand already outstrips that of more doing so in an irregular manner.portation costs, strengthening RDE developed markets in terms of vol- They recognize that ongoing volatil-currencies, rapid increases in RDE ume. Given the price sensitivity of ity, changing demand, and shiftingwages, and, in some cases, labor RDE markets, products often must cost dynamics will affect their choic-shortages. At the same time, many be designed and manufactured local- es of what products to makegovernments in developed countries ly to meet the necessary price points. where—and for what markets. Whenwere seeking to limit outsourcing MNCs that want to access these RDE making decisions about where to setto protect local jobs. There was talk markets will be in a stronger compet- up their global operations, compa-of big multinational corporations itive position if they have a local nies must weigh the tradeoffs of(MNCs) pulling back from RDE- manufacturing presence. Once built, each location, taking three thingsbased sourcing and manufacturing. RDE plants can serve both local and into consideration: factor costs, sup-Then the global financial crisis hit in global demand. ply chain constraints, and the rela-mid-2008. Amid plummeting oil and tive strengths and weaknesses of dif-transportation costs, RDE currencies Because of these factors and ongoing ferent RDEs.began rapidly depreciating. Sudden- labor-cost savings, few MNCs can af-ly, RDEs were cost competitive ford to turn their backs on RDE- Factor Costs. Low labor costs fueledagain. based production. It is important to the shift to RDE-based manufactur-Globally Advantaged Manufacturing 1
  4. 4. ing and continue to play a critical River Delta than in the inland prov- tradeoffs among different locationsrole, despite wage increases in some inces. But productivity has grown, and the impact of changing cost fac-areas. According to our analysis, the too—especially in the industrial clus- tors or locations. (See Exhibit 2.) Forhuge labor-cost differential between ters that attract highly skilled work- example, our model shows that aRDEs (where salaries ranged from ers. In the less developed countries U.S.-based engineering company$0.50 to $9 per hour in 2008) and de- of India, Vietnam, and some areas of could produce small aluminum cast-veloped countries (with salaries from Mexico, wage rates are lower than ings more cheaply in China but that$15 to $45 per hour) is unlikely to those in China’s industrial areas, but Mexico would be more cost-effectivechange much in absolute terms in the labor savings are offset by lower for large iron castings because trans-the short to medium term. Except for productivity rates, supply chain con- portation costs would be lower. (Seeproducts that have minimal labor straints, and infrastructure challeng- Exhibit 3.) The cost difference be-content or are very bulky and costly es. Companies must consider these tween the two locations was soto ship, manufacturing still costs far tradeoffs when deciding where to small, however, that a relatively mi-less in RDEs than it does in the Unit- manufacture. nor increase in China’s wage rateed States or Europe, even when and its exchange rate against the dol-transportation costs are high and Other factor costs such as transporta- lar would make Mexico the less cost-RDE currencies are strong. (See Ex- tion, tariffs, materials, currency ex- ly choice for either type of casting.hibit 1.) change rates, and energy vary from location to location and must also be Supply Chain Constraints. TheLabor costs vary widely by region. considered. Because of the complex- global supply chain is another criti-Although average wages in China ity involved in measuring this wide cal factor in making RDE-based pro-grew by more than 150 percent from range of factors and their ongoing duction decisions. Longer shipping1999 through 2006, they’re far higher volatility, BCG has developed an ana- times add cost, risk, and variability toin industrial areas such as the Pearl lytical model that quantifies the cost delivery schedules. Shipping goods Exhibit 1. Costs Have Risen, but RDEs Remain Very Competitive U.S. manufacturing Chinese manufacturing Transportation costs Indexed costs affect domestic 3% shipments, too 103 Indexed costs 100 100 100 18 Indirect costs 18 11% 80 2 3 Transportation 80 79 71 3 Import tax 22 22 Machining 3 11 Indirect costs 60 60 10 6 Transportation 4 20 20 Direct labor 17 Machining 16 40 40 6 Direct labor 4 19 Materials 17 18 components 16 Materials 20 20 components 20 21 Raw materials 18 19 Raw materials 0 0 Early 2007 Mid-2008 Early 2007 Mid-2008 Other costs are rising Ocean shipping is No change in costs in the United States, too a minor element Increase in costs Source: BCG experience.2 The Boston Consulting Group
  5. 5. Exhibit 2. BCG’s Analytical Model Quantifies the Cost Tradeoffs of Different Locations Output Country factors ◊ Wage rates Outputs (illustrative) ◊ Productivity Scenarios ◊ Transportation costs Trends in Country cost ◊ Transportation times “If input X, Y, and Z go up by K%, factor costs comparison ◊ Tariffs how does that affect product costs and decisions about location?” 10 50 5 Product factors ◊ Dimensions 0 0 ◊ Weight ◊ Labor content ◊ Material inputs Sensitivity analysis Cost structure analysis “What happens if input X floats 40 Other factors between ◊ Foreign exchange –Y% and +Z%?” 20 ◊ Cluster effects 0 ◊ Risk factors Source: BCG analysis. Exhibit 3. Lower Shipping Costs from Mexico Offset Labor Savings in China for Some Products Machined iron castings Machined aluminum castings 11% Costs ($) Costs ($) 30 –6% 30 27.72 25.01 21.11 19.88 20 20 10 10 0 0 China Mexico China Mexico Manufacturing Manufacturing location location Freight1 Overhead Indirect labor Direct labor Materials Source: BCG case experience. 1 Based on a destination in the United States.Globally Advantaged Manufacturing 3
  6. 6. from China to the United States or Supply-chain-management capabili- port zones make it an excellentWestern Europe can take as long as ties are also critical. Without the abil- choice for long-term investments infour weeks, on top of production ity to control variability, track inven- manufacturing. India has been lesstime. When product design and de- tory levels, and monitor capacity attractive than China for global man-mand are stable, a two-month lag utilization across networks, an RDE ufacturers because of its smaller do-time between order and delivery can production strategy will end up cost- mestic market, less developed infra-be planned for and has less of an im- ing more and delivering less. At their structure, and more restrictive laborpact. But in industries in which styles laws. But things are changing, andchange quickly or demand is unpre- Proximity to developed more MNCs are setting up produc-dictable—such as the fashion busi- tion facilities in India—especially for markets is a keyness—long supply chains are a ma- manufacturing electronics, automo-jor disadvantage. Although airfreight advantage that results biles, and pharmaceuticals.can shorten cycle times, it is expen- in lower costs andsive and can largely negate labor sav- Unlike China, however, India’s man-ings. Shorter supply chains yield greater flexibility. ufacturing tends to be skill intensivegreater flexibility. rather than labor intensive. The lead- worst, supply chain failures can drive ing example is Bharat Forge, theProximity also makes it easier to vicious cycles of stockouts and world’s largest manufacturer of auto-communicate with key buyers. The missed sales, inventory pileups, mobile forgings, which has investeddistance and time zone differences deep discounting, high carrying costs, heavily in technology and a highlybetween Asia and the United States and inevitable write-offs. Supply educated workforce. India turns outor Europe can make staying in chain variability can quickly erode an estimated 400,000 engineers pertouch—whether by phone or in per- margins. year, second only to China, and has ason—a challenge. Moreover, for prac- large English-speaking population.tical reasons, certain products are The Strengths and Weaknesses of But India’s infrastructure is morebetter sourced closer to the end user. RDEs. RDEs vary greatly in the ad- problematic. Poor roads, crowdedSuch products include heavy or vantages they offer global manufac- ports, regular power shortages, andbulky items that are costly to trans- turers. Things to consider include in- subpar airports undermine its role inport; foods, plants, and other perish- frastructure, taxes, labor policies, the emerging global economy. Turn-ables that can’t withstand long tran- regulations, currency strength, and around times at India’s ports aresit times; products with very short exchange rates—all of which can af- sluggish compared with Hong Kong’slife cycles or highly volatile demand, fect the ease of doing business and extreme efficiency. The one excep-such as fashion and high-tech goods; the bottom line. Also critical is the tion is India’s strong telecommunica-and higher-margin or customized RDE growth rate. Countries with tions backbone, which has trans-products made in smaller volume. large or emerging domestic markets formed the country’s business are attractive targets because pro- landscape.In fact, in global business, proximity duction facilities can serve both localto developed markets is a key advan- and foreign customers. Other RDEs with lower costs thantage that results in lower transporta- China are emerging as viable manu-tion costs, easier communications, For much of the last decade, China facturing locations, but shortcomingsshorter supply chains, and greater was the default location for many in infrastructure can create obstacles.flexibility. Mexico and Eastern Eu- MNCs setting up manufacturing in For instance, a U.S. toy manufacturerrope border the United States and RDEs. Besides having low-cost inputs found that labor and other costs wereWestern Europe, respectively, and such as labor and materials, China lower in Vietnam than in China. Buthave far lower labor costs than those has the world’s largest domestic mar- Vietnam’s poor roads, capacity-con-of developed economies—albeit ket, with 1.3 billion consumers. strained ports, inflexible labor, rela-double to triple those in China. Still, Moreover, a fast-developing infra- tively high inflation, and frequent la-the advantages of proximity can off- structure, favorable labor policies, bor strikes made it less desirableset the higher wages. and the tax benefits of its special ex- than China for production facilities.4 The Boston Consulting Group
  7. 7. Building a Globally that would be economically infeasi- This strategy isn’t without challeng-Advantaged Network ble in higher-cost countries, or con- es, however. When RDE-based opera- tinue making and selling products tions are carbon copies of theirRDE-based production offers a range profitably when margins shrink. For home-country operations, cost sav-of potential advantages such as low- more than a decade, RDE-based ings may be limited. Consider the fol-er product costs, access to new mar- manufacturing was virtually a no- lowing case in point. After bench-kets, and the ability to better serve brainer owing to low-cost labor, ener- marking a group of automotiveexisting markets. But reaping all of gy, and transportation. In that golden plants set up by MNCs in China, wethese benefits takes time. In our ex- period, even a poorly executed strat- observed two things about theperience, most companies go egy could deliver savings. Most plants—that many were more costlythrough an evolution as they seek to MNCs shifted at least some portion than their home-country counter-find and deliver the right mix of of their manufacturing to take ad- parts and that performance variedprice, products, quality, variety, time- vantage of the lower costs. widely among the plants. (See Exhib-liness, flexibility, customization, and it 4.) These differences in cost andservice for specific markets in differ- In industries in which fashion trends, performance were largely the resultent parts of the world. This evolution technical obsolescence, or patent ex- of how the plants were built and run,takes them through three distinct piry can quickly turn winning prod- not their location. Instead of leverag-stages: cost arbitrage, local advan- ucts into losing ones, RDE operations ing China’s inherent cost advantages,tage, and global integration. create new opportunities to lengthen the plants were often clones of product life cycles. For instance, home-country operations, with high-Stage 1: Cost Arbitrage. In the first pharmaceutical companies can pro- ly paid expatriate managers, high-stage, cost arbitrage allows compa- duce off-patent drugs and generics at cost suppliers, expensive automationnies to increase their profit margins, low-cost RDE plants to extend prod- that negated the labor cost savings,differentiate their products in ways uct profitability. and excessive allocation of global Exhibit 4. The RDE Plants of Some Multinational Corporations Cost More Than Their Home-Country Plants Cost of Chinese plants as a percentage of home-country plants 140 120 ! Home-country-plant cost level 100 80 60 40 20 0 German German Austrian French German German Italian French North supplier supplier supplier OEM supplier supplier supplier supplier American supplier German North European European German North North German French OEM American OEM OEM supplier American American supplier supplier supplier supplier supplier Above 100 percent 100 percent Below 100 percent Sources: Company interviews; BCG analysis.Globally Advantaged Manufacturing 5
  8. 8. overhead owing to a higher-than-av- in areas such as Thailand, Brazil, and global leader in small, precision elec-erage employee head count. As a re- India—where Toyota could leverage tric motors, invested heavily in mod-sult, these plants did not generate the advantages of industry clusters. ernization and automation through-the expected cost savings. Moreover, the plants were designed out the early 1990s. Although the to be lean and to take advantage of company’s sales grew at double-digitStage 2: Local Advantage. In the the lower cost of capital—the Indian rates during those years, its earningssecond stage, MNCs that are commit- plant, for instance, cost 40 percent remained flat. In the second half ofted to making a long-term invest- the 1990s, its earnings quadrupled asment in RDE-based production begin Greater savings can be the company harvested the benefitsto see that even greater savings can of its capital investments. Superscal- realized by capitalizingbe realized by capitalizing on the ing usually requires a fairly high lev-specific advantages that each RDE on the specific el of capital investment. Even so, theoffers. These MNCs begin operating advantages that each cost of equipment, land, facilities,more like local companies, adapting and services in RDEs is low enoughnew ways of thinking and working RDE offers. that companies can make these in-that are better suited to the new en- vestments and still deliver an enor-vironment—without giving up their less than comparable Western mous quantity of low-cost, high-qual-best practices from home. plants—by using local materials, less ity products. automation, and local equipmentA good example is Toyota’s produc- where possible. Finally, Toyota made LG Electronics uses this strategy fortion network for manufacturing its the decision to use local managers its microwave ovens and air condi-international multipurpose vehicles and suppliers to further localize op- tioners, building large-scale plants in(IMVs), designed specifically for cost- erations. Mexico, China, Eastern Europe, andsensitive RDE customers. Toyota set other RDEs to serve regional de-up manufacturing and assembly Like Toyota, companies that gain a mand. The plants provide such aplants in key RDE markets such as strategic advantage by successfully scale advantage that the companyIndia, Indonesia, and Thailand, and adapting to local conditions do four can offer more features and a wider“complete knock-down” (CKD) plants things: leverage scale, exploit the range of products at a lower pricein South Africa, the Philippines, and power of industry clusters, rethink than its competitors.South America. The CKD plants re- the balance between labor and capi-ceive so-called knock-down kits with tal, and set up lean, localized opera- Opting for a number of small-scaleeverything needed to assemble an tions. operations is another way to leverageIMV, but they are cheaper to set up the lower costs of RDEs for global ad-and maintain because they don’t use Leveraging Scale. The cost advantages vantage. Because plants cost less toexpensive automation. They are sup- of RDEs allow companies to use build in developing economies, com-plied by a network of other RDE- scale—both large and small—to their panies can reduce their minimumbased plants that make engines, strategic advantage. One way to keep scale requirements by half or moregearboxes, and other key parts. The costs low for greater global competi- and still have a profitable operation.result is an RDE-based manufactur- tiveness is to build scale—and even And lower minimum scale offers dif-ing ecosystem that designs, manufac- superscale—by consolidating produc- ferent strategic advantages. Compa-tures, and assembles vehicles for lo- tion facilities. In so doing, companies nies can not only diversify operatingcal markets. are able to create products on a mas- risk across more locations while still sive, world-leading level and increase keeping costs low, but they can alsoToyota exploited scale by aggregat- capacity still more with relative ease, have more specialized plants, whiching demand across RDEs into a few at relatively low cost. can often deliver higher quality andstrategically located assembly plants greater margins.and setting up single large-scale Superscaling depends on low laborplants for engines and gearboxes. costs, but it’s not always just a labor- Exploiting the Power of Industry Clus-These larger plants were established for-capital swap. Johnson Electric, a ters. Silicon Valley is the world’s6 The Boston Consulting Group
  9. 9. best-known cluster, but it’s just one competition and industrial-policy signs, superior local reputations asexample of a general and well-docu- choices. employers, and strong systems formented phenomenon: industrial de- developing people and suppliers,velopment happens in clusters or Cluster dynamics have critical impli- companies can outrun rising costs.ecosystems of interrelated compa- cations for RDE-based manufactur-nies, suppliers, and service provid- ing. Because of clusters, regional ca- To leverage the power of clusters, aers. Clusters can grow as a result of pabilities develop unevenly. To gain company must carefully evaluate thepublic policy or the concerted effort position it can reasonably hope toof one or more companies trying to Industry clusters establish, given its size and resources.increase supply sources. One small high-tech manufacturer should be a deliberately chose a strong positionWhen a cluster takes off, it becomes critical component in a relatively weak existing clusterself-sustaining. A city or region may of any global to ensure its ability to attract talentbecome known as a prime location and negotiate better contracts withfor a particular industry on the basis manufacturing strategy. suppliers. By contrast, a larger com-of access to resources, talent, or mar- pany may be able to achieve a man-kets. That reputation attracts more an advantage, companies must lo- ufacturing advantage in a larger clus-people and companies, which in turn cate their plants in the right cluster ter or by independently seeding abuilds and reinforces the cluster. But and build a strong position. Even new cluster.clusters can also wither. For instance, though land and labor cost more,southern California’s share of the clusters give companies access to Evolving industry dynamics have leftglobal aircraft and avionics industries scale and experience. Moreover, by high-cost locations in different partshas been declining since the 1970s, building supplier relationships and of the world with no supplier base, soalthough the region still retains some trust, companies can reduce coordi- that companies in those areas haveaviation-related industries. nation costs and increase reliability. little choice but to manufacture in LG, for instance, creates captive sup- RDEs. Garments and toys are madeWhile the importance of clusters is plier parks—effectively walled clus- largely in Asia. Hard disk drives andwell established in the business press ters—and then replicates those sup- semiconductor production have alsoand industrial-development policy, ply bases from one megaplant to shifted almost entirely to Asia. Gener-not all companies have been able to another, building on past learning ally, the movement of knowledge-leverage them successfully. Yet clus- and relationships. LG manages its based industries such as research andters should be a critical component suppliers’ enterprise resource plan- services tends to lag behind manufac-of any global manufacturing strategy. ning (ERP) systems and tightly inte- turing—but eventually, it will follow.Industries and clusters are forming grates their shared production proc- Companies that don’t pursue RDE-very quickly, reflecting the rapid esses. based production may find them-pace of development in emerging selves trapped in a lengthy, rear-economies. In the main coastal prov- Because of cluster effects, locations guard struggle as talent and knowl-inces of China, for instance, hun- that appear to be getting more ex- edge flow to new centers of gravity.dreds of industry ecosystems have pensive may actually be gettingtaken hold in the last decade. Hyun- more effective for companies with Rethinking the Balance Between Labordai’s choice of Chennai, India, for advantaged positions. (See Exhibit and Capital. In RDEs, labor is a lower-producing small cars for global mar- 5.) While country-level statistics cost alternative to capital. Instead ofkets reflects the emergence of that show that productivity is increasing replicating their home-countrycity as a hub for automobile produc- overall in major RDEs, location- and plants, experienced companies capi-tion. Not all of these clusters will cluster-specific productivity is racing talize on this advantage by redesign-achieve world-class positions. Some ahead of wages even though wages ing their products and manufactur-will attain sustainable scale; others tend to be higher in growing clusters ing processes to reduce automationwill plateau and then shrink as in- than in general RDE markets. With and increase labor. This lowers capi-dustries consolidate in response to smart management and work de- tal investment significantly. For in-Globally Advantaged Manufacturing 7
  10. 10. Exhibit 5. The Value of Clusters Extends Beyond Factory Walls Example of the value of a cluster location versus an isolated assembly plant Indexed cost 100.0 2.0 2.0 100 4.0 2.0 1.2 2.0 86.8 80 ◊ Scale from network-level sourcing and common processes 60 ◊ Lean assets, processes, and networks ◊ Flexible production reduces the impact of logistics and currency costs 40 ◊ Value of options for future response ◊ Experience curve effects through sharing of best practices 20 ◊ Greater access to managerial and production talent 0 Initial costs Lean and Supplier Access without cluster just in price to talent time competition Scale Freight and Joint Total costs with foreign- experience cluster benefits exchange risk mitigation Source: BCG analysis.stance, an automaker with produc- much as 35 percent compared with make a wider variety of productstion facilities in China realized major similar plants in Europe, without sac- much more cheaply than if they hadsavings by rigorously “manualizing” rificing global standards for quality to retool and reprogram robots oror semiautomating its noncritical and safety. The plant reduced outlays equipment. Many manufacturersauto-manufacturing processes such for fixed assets by replacing equip- start out thinking that they’ll makeas glue application and wheel mount- ment less often, using machines with their most standardized products ining. Similarly, a European automaker less exacting specifications, decreas- low-cost countries. Then they realizethat built a new plant in Romania ing automation, leasing more equip- that even bigger savings can be hadwas able to keep capital investment ment, and cutting tooling costs by 50 by producing “high-touch,” custom-low by sharply decreasing the level to 60 percent compared with its ized products because labor is so in-of automation. Rather than using plants in Europe and the United expensive.1,000 robots for welding and other States. Built with local materials totasks, the plant uses just one robot to save on construction costs, the plant Disposable plants are the ultimateinstall windshields—and 2,000 work- also uses less space—Indian build- example of flexible manufacturing.ers to do everything else. The cars ings are lower because they don’t As much by necessity as by design,take twice as many man-hours to as- need ducts for heating or air condi- many capital-constrained RDE-basedsemble as similar cars in Western Eu- tioning and roofs don’t need to with- companies build short-lived, dispos-rope but cost less to make because stand heavy snowfall. able plants—labor-intensive, dedicat-labor rates are considerably lower. ed facilities for temporary mass pro- Besides cutting costs, reducing capi- duction. Plants that are set up in thisAnd consider another example. A tal assets also increases flexibility. way can provide a relatively quick,global automaker recently designed Because people are far more flexible low-risk entry to fast-moving mar-a new plant in India to reduce its up- than equipment, manufacturers can kets. With disposable factories, com-front investment in fixed assets by as do shorter production runs and panies source equipment locally8 The Boston Consulting Group
  11. 11. rather than importing complex, auto- ers. An automotive company brought term investment in the supplier base.mated systems. The factories are sim- in an expatriate manager to build These companies accept that com-ple to operate and maintain, ex- world-class dealerships in India— petitors will benefit from the suppli-tremely lean when it comes to carbon copies of their dealerships at ers’ increased capabilities but arecapital, and relatively inexpensive to home. Customers loved the ambi- willing to accept the tradeoff.repurpose. By contrast, when a state- ance of these dealerships but balkedof-the-art, capital-intensive plant be- at the high prices. Unlike its more Stage 3: Global Integration. In thecomes obsolete, the company must third and most mature stage, compa-either carry it or write it off—at a In the third stage, nies integrate their RDE-based plantsmuch higher cost. into global manufacturing networks, companies integrate going well beyond simple cost arbi-Setting Up Lean, Localized Operations. their RDE-based trage or local advantage. This strate-Although costs in RDEs are lower plants into global gy combines the best of the develop-overall than costs in developed coun- ing and the developed worlds: thetries, the basic lean-manufacturing manufacturing networks. cost advantages, flexibility, and ambi-principle of cutting out wasted time, tious workforce of RDEs, and theeffort, and materials still applies—a successful competitors, the automak- marketing capabilities, sophisticatedfact that many companies lose sight er never aligned its business model technology, and management depthof in their rush to get RDE plants up with the realities of price-sensitive of developed countries. These globaland running. Optimal cycle times, markets, low dealer margins, and networks serve a full range of cus-buffer stocks, and approaches to high real-estate costs. tomers—from RDE-based customersquality and “make it right the first to high-end ones in developed mar-time” may be different in a plant in Extending lean principles to the sup- kets—by offering a variety of prod-China or India than one in Germany ply base is another key aspect of lo- ucts with different features and priceor the United States, but the princi- calizing operations. Many companies points. Companies that reach thisples and mindset should be the look strictly at cost when choosing stage have worked through the chal-same. Instead of replicating lean- RDE-based suppliers, focusing on lenges of how to achieve a sustain-plant designs from their high-cost lo- how competitive one bid is com- able competitive advantage throughcations, however, companies should pared with another. This approach RDE-based manufacturing. (See theadapt their lean approach to local assumes that all suppliers are equal- sidebar “Asking the Right Ques-conditions. This often means making ly competent, which is rarely the tions.”)counterintuitive decisions. For in- case—maturity levels can vary wide-stance, given the high turnover of ly. To build a strong local supplier India’s Bharat Forge has a globallyemployees in many RDE locations base, MNCs may need to think in integrated network strategy that pro-and the low cost of training people, it terms of developing their suppliers, vides a high degree of flexibility. Themay be less expensive to simplify or not just selecting them. For instance, company serves its customers in Eu-“de-skill” tasks and build a pipeline a well-known consumer-goods com- rope and the United States from atof replacement workers and supervi- pany had quality problems with the least two plants—one in a low-costsors than to recruit experienced em- products it was manufacturing in location and the other in a higher-ployees and import costly expatri- China. Instead of installing costly cost location close to customers—ates as managers. Another common quality-testing equipment, the com- and can rebalance capacity by shift-practice in RDEs is to use a mix of pany set up a team to focus on im- ing products and production stepspermanent and contract labor to proving the supplier’s operating ca- between the plants. When a prod-keep labor costs low and provide pabilities and reducing the quality uct’s profit margins drop as a resultmore flexibility—especially when ex- problems over time. Moreover, some of competitive pressures, Bharatport demand fluctuates. global manufacturers have as many Forge can migrate production from as two development specialists for high-cost plants to low-cost ones,Some MNCs are slower to learn the every buyer in their offshore-pro- which helps the company maintainimportance of localization than oth- curement groups—clearly a long- its margins.Globally Advantaged Manufacturing 9
  12. 12. ables production and inventory Asking the Right Questions coordination. To achieve a sustainable competi- ◊◊ Do we have the right capabilities, T tive advantage through RDE-based metrics, and accountabilities— manufacturing, companies should and do our suppliers have them he low costs and falling trade ask themselves six questions: as well? barriers of the last decade made RDE-based sourcing ◊◊ Are we managing for competitive ◊◊ Are our legacy assets and mind- and manufacturing an easy decision. advantage—or chasing costs to sets holding us back? For a brief window of time, even an the bottom? ill-conceived strategy could deliver ◊◊ Do we have a globally advan- savings. That window is closing, but ◊◊ Are we leveraging local capabili- taged production network? ties to the fullest? heading home is not the answer. In most industries, a strong presence in ◊◊ Are our RDE plants and supply RDEs is becoming more important chains lean? than ever as markets develop and clusters of talent, suppliers, and com- petitors take off and shape the fu-A global manufacturer of power standard, “as built” products for ture. But the era of labor costs as theequipment uses another form of this most market segments, the Europe- primary driver of RDE-based manu-strategy. Three large-scale plants in an and U.S. plants customize the facturing is coming to an end. In-different parts of Asia account for products for specialized, high-end stead, companies should seek toabout 85 percent of the company’s users. To make this strategy work, build globally advantaged manufac-total labor hours. High-cost locations the company globally sources most turing networks that combine theclose to customers in Europe and components and standardizes pro- best of the developed and develop-the United States account for the duction processes to assure consis- ing worlds—and confer a truly sus-rest. While the Asian plants produce tent quality. A single ERP system en- tainable competitive edge.10 The Boston Consulting Group
  13. 13. About the Authors Acknowledgments For Further ContactArindam Bhattacharya is a The authors would like to BCG’s Operations practice and Glob-partner and managing director thank their colleagues Karthik al Advantage Initiative jointly spon-in the New Delhi office of The Balasubramaniam, William Collis, sored this report. If you would likeBoston Consulting Group. You Richards Gilbert, Frieda Hsu, and to discuss the issues in this report,may contact him by e-mail at Kim Wee Koh for their contributions please contact one of the authors.bhattacharya.arindam@bcg.com. to this report. They would also like to thank Martha Craumer for her For inquiries about the Global Ad-Jim Hemerling is a senior partner help in writing the report and vantage Initiative, please contact oneand managing director in the Katherine Andrews, Gary Callahan, of its global leaders: Arindam Bhat-firm’s San Francisco office. You Kim Friedman, and Sharon Slodki tacharya, Jim Hemerling, or Berndmay contact him by e-mail at for their contributions to its editing, Waltermann.hemerling.jim@bcg.com. design, and production.Benjamin Pinney is a principalin BCG’s Shanghai office. Youmay contact him by e-mail atpinney.benjamin@bcg.com.Harold L. Sirkin is a senior partnerand managing director in thefirm’s Chicago office and theglobal leader of BCG’s Operationspractice. You may contact him by e-mail at hal.ops@bcg.com.Bernd Waltermann is a seniorpartner and managing directorin the firm’s Singapore office.You may contact him by e-mailat waltermann.bernd@bcg.com.Globally Advantaged Manufacturing 11
  14. 14. For a complete list of BCG publications and information about how to obtain copies, please visit our Web site atwww.bcg.com/publications.To receive future publications in electronic form about this topic or others, please visit our subscription Web site atwww.bcg.com/subscribe.© The Boston Consulting Group, Inc. 2009. All rights reserved.6/09
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