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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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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
1 Manufacturing Engineering Department, UNED University, Madrid, Spain
2 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.
1 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.
2 Miguel Mediavilla1, Ander Errasti2
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. 3
“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 off-
shores 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”.
4 Miguel Mediavilla1, Ander Errasti2
3 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. 5
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.
5 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
6 Miguel Mediavilla1, Ander Errasti2
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.
6 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. 7
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