1 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

2 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 Overview

3 Major changes (continued)  The proliferation of higher value, lower-weight products  The effects of exchange rates on traditional supply chain strategies Overview - 2

4 These trends point to some new types of strategies ã Decentralized plants based on regional markets ã Locations based on infrastructure issues such as work force capabilities ã Smaller plants with customization capabilities ã Extra plants and capacity to build flexibility for exchange rate risks ãGlobally coordinated systems with multiple movements ãA global product life cycle We will present some arguments for all of these strategies Overview - 3

5 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 Agenda

6 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

7 Top-level concepts External Environment Internal Strengths Strategy R&D Marketing Finance Operations Logistics Functions Facilities Technology etc. Transportation Planning etc. Decisions

8 Traditional approaches to supply chain strategy emphasize a number of issues  Scale  Logistics  Focus  Global flexibility and access  Access to R&D

9 Geographic network  Focus on customer demand zones  Include production economics  Look at flows from raw materials to customers Suppliers Plants Distri- bution Centers Customers

10 Scale analysis COST VOLUME Technology 2 Technology 1 Subcontract

11 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

12 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

13 Stage 1 Stage 2 Customer fixed costs variable costs fixed costs variable costs taxes Why Separate?  Scale  Capacity  Tax Laws  Focus  Relative Technological Complexity Approach  Cross sectional analysis  Tax analysis  Model of variable costs  Detailed analysis of actual fixed costs Solution:  Move "light" products to tax havens  Better focus facilities by product group

14 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

15 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

16 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

17 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

18 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

19 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

20 Exchange rate model

21 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."

22 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

23 Background: Polaroid’s Camera Manufacturing Network in 1995 Norwood MA Vale of Leven Scotland Russia India (planned) Shanghai China Design & Devel.Materials Manufacturing Mfg. Eng. (Size  Capacity)

24 These concepts lead to a new approach to strategic planning for supply chains Business and Operations Strategy Supply Chain Strategy Location Strategy Supply Chain Modeling Strengths Global Market Industry Life Cycle Production Technologies Logistics Costs Competitive Environment Internal Constraints Supplier Industries Political and Market Issues Infrastructure Issues Factor Costs

25 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

26 Summary 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