Summary lecture on
facilities and capacity
strategy
• Conclusions from American Connector, ITT,
Eli Lilly, Applichem, Australian Paper etc.
• An integrated approach
• New paradigms for the global environment
Conclusions from American
Connector, ITT, Eli Lilly,
Applichem, Australian Paper, etc
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Fit with strategy
Focus of plants
Scale and cost
Means of evaluation and plant roles
Technology transfer
Implications of change
Capacity imvestments
Traditional approaches to facilities
emphasize a number of issues
 Scale
 Logistics
 Focus
 Global flexibility and access
 Access to R&D
Product/Market-Process Focus
Mean of Focus
 Volume
 Product
 Market
 Process
Off
On
Example
Low Vol. High Vol.
Low Vol. High Vol.
Job
Batch
Line
Detroit
Saginaw
Lima
Job
Batch
Line
Detroit
Fremont
Lancaster
Mayesville
Geographic Network
 Focus on customer demand zones
 Include production economics
 Look at flows from raw materials to
customers
Suppliers
Plants
Distribution
Centers
Customers
Scale Analysis
Subcontract
Technology 1
Technology 2
COST
VOLUME
Logistics drivers
• Raw material access (e.g.wood products)
• Distributed production for heavy products
• Warehouses for commodities because of
transportation scale
• Customer service requirements
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
A suggested
approach
• Develop a strategy and appropriate means of
focus
• Using data, benchmarking and analysis of
technology, develop scale curves
• Identify major decision choices and service
requirements covering plant and process options
• Do the analysis
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
fixed costs
variable costs
fixed costs
variable costs
taxes
Stage 1
Stage 2
Why Separate?
Scale
Capacity
 Tax Laws
Customer
Approach
 Cross sectional analysis
 Tax analysis
 Model of variable costs
 Focus
Detailed analysis of actual fixed
 Relative Technological costs
Complexity
Solution:
 Move "light" products to tax havens
 Better focus facilities by product group
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
Traditional strategies
and trends (continued)
 Macro level trends
• Large, sophisticated overseas markets with local
needs
• Non-tariff barriers
• Regionalized trading economies

Variable factor costs
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
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."
The flexibility strategy can actually
decrease expected costs with increased
risk
range
cost
single plant
extra flexibility
risk factors
Exchange rate model
460
450
one plant
Cost
440
two plants
430
three plants
four plants
420
five plants
410
400
0
100
200
Total capacity
300
400
Four-stage approach to
strategy development
Strengths
Business and
Operations
Strategy
Global
Market
Crosssectional
Data
Production
Technologies
Supply Chain
Strategy and
Plant Scale
Location
Strategy
Supply Chain
Modeling
Infrastructural
Requirements
Logistics
Costs
Factor
Costs
Capacity
Factors
Competitive
Environment
Internal
Constraints
Supplier
Industries
Political
and Market
Issues
The validity of these 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
Background
Polaroid’s Camera Manufacturing Network
Russia
Norwood
MA
Vale of Leven
Scotland
Shanghai
China
India
(planned)
Manufacturing
Design & Devel.
(Size  Capacity)
Materials
Mfg. Eng.
Product development at Polaroid in
cameras further illustrates complexities
Why is this now important?
Current Environment
• Flat market
• Labor intensive assembly
Strategic Market Considerations
• Opening of new markets
• Anticipated growth area
• Trade & investment policies
favor locating plant in mkt.
US Mfg
Activity
Effective New Product Introduction
• Collocation of Design, Development,
and Manufacturing in US
• Development’s relationship with US
vendor base
Cost Pressures
•high factor costs in US
Summary
While traditional methods of analyzing scale,
logistics and focus are still crucial, a new
paradigm must emphasize some additional
issues.
 Decentralized and more sophisticated markets
 Lower-scale, but more advanced technologies
 Global product design and flow patterns
 Flexibility