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Organizing for high-performance manufacturing

By Frank Lesmeister, Daniel Spindelendreier and Michael Zinser

Executive summary
In manufacturing, most improvement programs focus on shop-floor operations. Such optimization is critical, but in a world where everybody everywhere is competing for everything, organizational setup can block or pave the way for high-performance manufacturing. Figuring out your company’s strengths and weaknesses, choosing the right structure and making the right trade-offs can help you design the organization properly from the production plants right up to corporate headquarters.

For the past two years the one bright spot in the U.S. economy has been manufacturing. While the economy as a whole has languished, U.S. manufacturing has been expanding. As of this writing, the expansion has continued for 26 consecutive months, through September 2011, according to the Institute for Supply Management.

Mark J. Perry, professor of economics and finance at the University of Michigan, Flint, and a visiting scholar at the American Enterprise Institute in Washington, D.C., attributes the manufacturing sector’s strength to the “incredible, increasing productivity” of U.S. workers. “The average U.S. factory worker is responsible today for more than $180,000 in annual manufacturing output,” he noted in a Wall Street Journal article. The equivalent figure in 1972 was $60,000.

“The truth is that America still makes a lot of stuff, and we’re making more of it than ever before,” Perry wrote.

Professor Perry is right. Despite the explosive growth of China, and to a lesser degree India and Brazil, the United States is still a manufacturing powerhouse. While manufacturing remains in a slump or is slowing down elsewhere, even in Germany – which has been carrying the load for most of the Eurozone – U.S. manufacturing has been eking out steady gains month after month. Indeed, as several of our colleagues noted recently in their report, “Made in the USA, Again,” the United States is likely to experience a manufacturing renaissance over the next several years as the wage gap with China shrinks and certain states become some of the cheapest locations for manufacturing in the developed world.

That said, it is also true that not every industry and not every company is thriving. And U.S. factories don’t produce nearly as much of many products – such as apparel, toys, baby carriages, television sets, microwave ovens and even cruise ships – as they used to produce.

And while many companies continue to “lean” their operations and work hard to improve productivity, some – even in industries where U.S. companies remain globally competitive and are thriving – just can’t seem to put it all together the way their competitors do. They run in the pack, rather than lead, hanging on, rather than growing.

By now, most manufacturers realize that change is a constant. As described in the 2008 book Globality: Competing with Everyone from Everywhere for Everything, we live in an era where companies from Asia, Europe, Latin America, North America and even sub-Saharan Africa compete. They are competing not only for customers in the rapidly growing markets of Brazil, China and India, and competing for market share in the mature markets of North America and Western Europe, they’re also now competing for everything else, including energy, raw materials, capital, and even management and research and development talent.

But there are ways that companies can gain an edge. Studying the world’s most successful companies for many years shows that many of them share common characteristics that could be replicated elsewhere.

While most manufacturing optimization programs focus on shop-floor improvements and operational concerns, such as production processes, innovation, quality control and supply chain management, organizational factors can be critical to performance. This especially is true for those companies trying to keep pace with a growing global footprint.Getting the organization right can help make a company a pacesetter.

Getting the organization wrong – creating complex matrix structures with numerous interfaces, layers of redundant and inefficient management, and an organizational structure that seems divorced from strategy – can throw the proverbial monkey wrench into the works, affecting quality, flexibility, speed, cost effectiveness and competitive advantage. This can drain a company financially and short-circuit the productivity gains necessary for top performance.

Choosing the right structure

There is no one right way to create a top-performing manufacturing organization. Every company has to identify and evaluate its strategic drivers, such as its industry, markets, customers, products, internal capabilities, competitive position and overall strategy. This will be the basis for defining the right structure.

While top-performing companies within specific industries may have certain characteristics in common, which we can identify as best industry practices, every company will be different. And what’s best for one company may in fact differ significantly from the industry norm.

For example, in white goods, or heavy appliance manufacturing, scale is typically important. But if a company is a niche player that focuses on high-end products at premium prices, its strategic drivers will be different than a mass-market manufacturer, and its organization likely will look different as well.

Still, there are some general principles manufacturers should follow as they design and build out their organizations.

First, they need to recognize that the design needs to include all levels of the organization, from corporate headquarters to the individual plants. It is at this stage that companies must decide whether manufacturing decisions, such as product allocations or capital outlays, should be made on a global, regional or local level.

Typical questions at the corporate level include: Should we centralize manufacturing responsibility and decision making or give regional managers and local plants greater autonomy? Should decisions that affect product divisions be made globally or locally? How can we make sure that process and technology standards are implemented across business units and globally? To what extent should engineering, maintenance, quality, asset management and other functions be integrated into the manufacturing organization? How do we minimize overhead among similar plants with similar products?

At the plant level, critical questions include: What responsibilities should be given to plant managers? Which plant activities should be coordinated centrally? How should plants be organized below the plant manager level?

To answer these questions, we have analyzed organization structures in a wide range of industries. Our goal was to determine which factors drive manufacturing performance and to identify overall best practices in organization design. This research found that certain factors are more important in some industries than in others and thus call for different organization setups.

To help determine the best setup for your company, consider how various industries typically organize their manufacturing operations.

Take functional integration, for example. Decisions about whether to integrate related functions within the manufacturing organization – such as production control, planning and scheduling, information technology, quality control, maintenance, engineering and asset management – can have a major impact on operations.

Integration can lead to fewer interfaces, better communication, faster decision making and greater synergy. Companies in asset-intensive industries can achieve higher levels of utilization by integrating maintenance, asset management, planning and scheduling. This could result in less downtime, greater asset productivity, more balanced utilization across the plant network and fewer bottlenecks along the supply chain.

Similarly, an integrated engineering unit can identify new performance levers, promote production standards and encourage the sharing of best practices. Integrating quality functions usually is more effective at the plant level, where total quality management can engage workers in continuous improvement efforts. Lean initiatives also show the power of integrating maintenance activities at the plant level.

When there are few or no material flows among plants, such as when the product portfolio is varied or highly customized to specific regions, there will be limited cross-plant synergies. In these cases, plants can be run independently, steered by centrally defined performance metrics. But when materials flow across plants and knowledge and standards are shared, a plant network with dedicated roles for each plant is the optimal setup. For instance, if specific production skills are critical, certain plants should be made “lead plants” or centers of excellence for particular processes or capabilities in order to concentrate this knowledge, set standards and share best practices.

Manufacturers also can get more from their production networks by matching plant capabilities with the needs of specific products and customers. For instance, some plants are designed to produce a small number of products at high volume for greater economies of scale. Others are designed for flexibility, with short changeover and ramp-up times that are best suited for products with volatile or unpredictable demand. By defining plant roles, consolidating products with similar characteristics and exploring ways to reallocate products across the network, manufacturers can achieve greater cost savings, flexibility and efficiency.

Our research shows a trend across industries toward creating a global manufacturing organization with centralized decision making for products, technologies and processes. Beyond the potential for economies of scale, this approach makes it easier to share best practices and speeds up performance improvements, actions that are critical in today’s fast-changing, highly competitive global economy.

But this solution isn’t always the right choice. Companies that must create different products for different markets usually find that a regional or local organization allows them to better focus on, and respond more quickly to, the needs and requirements of local customers.

As a general rule of thumb, a global organization makes the most sense if scale or standardization are major cost drivers, specialized production capabilities are needed or the manufacturing strategy has a major impact on the company’s overall business strategy. Local decision making makes the most sense when products are tailored for the individual market.

Aligning structure with strategy

The second guiding principle is that the company carefully needs to align its structure with its strategy. If this is done, strategic considerations will drive most decisions about how to organize manufacturing operations. This may seem like common sense, and it is. But many companies conceive their strategy over here and their operational plans over there, and never the twain shall meet.

While there are many, the three most important strategic drivers are economics, markets and customers, and technology and skills.

Economics. Many, if not most, of a company’s decisions are driven by economics. How critical are scale, scope, efficiency, utilization rates, complexity, labor costs and other bottom-line issues that affect economic performance? The importance of these factors will vary by industry and company. For instance, scale is typically integral to companies in the automotive, chemical, metal and fast-moving consumer-goods industries. The chemical and metal industries also tend to seek economies of scope, so multiple products can share common pre-manufacturing steps. Standardized processes are critical to companies seeking scale and scope. For companies in asset-intensive industries, such as the automotive, pharmaceutical and building materials industries, asset utilization is a key consideration. When high asset utilization and economies of scale are required, manufacturing is best set up as a centralized corporate function.

Markets and customers. Of course, manufacturing at its heart is about customers and sales. How important is it to be close to end-user markets and to have products that are customized for specific regions or customers? For instance, automotive suppliers, as well as companies making engineered products or specialized chemicals and metals, all offer a large number of customized products. For companies in the building materials industry, proximity to customers is critical. A regional or local manufacturing organization tends to be more effective than a global one for these types of companies.

Technologies and skills. How important are specialized engineering skills, technologies or production capabilities? Companies that make customized products require specialized processes and technologies that often are specific to individual plants. As a result, centralized control and sharing of best practices is less important to their manufacturing operations.

Managing the trade-offs

In choosing a company’s structure, it’s important to remember that each design choice involves trade-offs that can affect cost, product quality, cycle times and service levels.

For example, companies with a decentralized or divisional manufacturing organization typically have a harder time sharing best practices and can lose synergies. A centralized coordinating function can offset these drawbacks by sharing best practices across the company and creating consistent standards and metrics. In this way, a divisional setup with concentrated knowledge of certain products or regions can coexist with unified standards and a high degree of sharing best practices across the company. A divisional manufacturing setup also can complicate interactions with a centralized research and development unit and hamper design-to-cost efforts. Companies can offset these drawbacks and sharply reduce production costs over time by defining manufacturing requirements early in the manufacturing process through better communication.

Some companies take more of an out-of-the-box approach to managing trade-offs. A microchip manufacturer with enormous cost pressures, for instance, had stringent requirements for quality and process reliability. Because its business was asset intensive, asset productivity and scale were critical. To meet these challenges, the company made all its manufacturing plants identical, down to the smallest detail, so each one would make the same products in the same way. As a result of this rather extreme approach to central governance, this company can diagnose and fix problems quickly and rapidly implement improvements. Its plant network is also extremely flexible. Production can be shifted as needs, volume or economic conditions change; bottlenecks are short-lived.

Another example of an out-of-the-box approach to managing a trade-off comes from an automobile manufacturer with a global production network. It wanted to avoid the excessive overhead, backlogs and inflexibility that can result from having headquarters steer the plants and implement global standards. The company decided to establish regional “mother plants” that support local projects, train staff, set up employee exchange programs and manage five-year performance road maps. Headquarters now can focus on the bigger picture of developing major change programs that the mother plants can implement.

Each company must decide which trade-offs to make based on its individual situation, markets, competitive environment and industry benchmarks.

People, skills and roles

A company’s organizational choices also require the right people and skills. High-level manufacturing performance requires a skilled, engaged workforce and governance systems that drive and sustain excellence. This, in turn, requires sophisticated workforce planning, the type of planning that identifies needed jobs and skills, anticipates hiring and attrition rates, and seamlessly fills the gaps when they arise. Such planning is especially important given the global shortages of skilled labor.

While many companies may be particularly strong in recruiting, training or getting the most out of their managers and employees, high-performance organizations view the staffing function strategically, aligning their business strategy with their “people” strategy. The best companies have plans for identifying, attracting, developing and retaining the right people with the right capabilities, both today and in the long term. At these organizations, the human resources function acts as a key adviser to management on both operational and strategic “people issues.”

High-performance organizations invest in employee development through training and by rotating people through roles and responsibilities. These experiences are a powerful motivational and retention tool that can trump compensation and other financial incentives. They also encourage collaboration and reduce the likelihood of parochial leadership behavior. By the time employees reach the top, they have a broad view of the organization.

Employees in high-performance organizations also have clearly defined roles that are assembled carefully to maximize efficiency. Clear roles remove the ambiguity that slows decision making, increase the probability of high performance and improve employee engagement. People understand what is expected of them and which decisions are theirs to make. When accountability is shared, employees understand when and with whom they need to collaborate.

Companies can achieve such clarity through “role charters,” which focus on responsibility, accountability and decision making rather than specific job duties. This enables employees at all levels to have an honest conversation about individual, collective and shared responsibilities. Role charters are not static; they need to be reviewed regularly to reflect changing strategic priorities.

Roles need to be staffed by the right people with the right skills. Depending on its needs, a company might require a sales chief who is a great closer and can excite the sales force. Or it might need a solid manager who can implement a new sales-management system. Or it might need a nuts-and-bolts techie who can explain the advantages of a complex new product to customers who are less tech-savvy.

In today’s fast-moving, increasingly complex global environment, companies must rethink not just their manufacturing operations but also their manufacturing organizations. The high-performance organization is lean, flexible and strategically aligned. The right organization design, an engaged workforce and effective governance systems result in sustained manufacturing excellence and a powerful source of competitive advantage.

While companies in specific industries may share certain organizational characteristics, there is no single right way to build a top-performing organization. Every company will be different.

So ask yourself some key questions: What are your company’s strengths and weaknesses? Are your products more or less identical in all markets, or does your company’s strategy call for customization? Is a single company unit responsible for research and development, or is the R&D function spread widely throughout your organization? If so, is this the right way to organize the function? Do you have the right people and skills in the management and professional pipeline? How critical are scale, utilization rates, labor costs, logistics and other economic factors to performance?

These and other such questions are all keys to organization. How you answer them will help you determine how your company should be organized for optimal performance.

Frank Lesmeister, a specialist in manufacturing, is a principal in Boston Consulting Group’s Düsseldorf, Germany, office. He holds a master’s degree in mechanical engineering and a doctoral degree from RWTH Aachen University and a master’s degree in business and economy from the University of Hagen. Prior to joining BCG in 2006, Lesmeister held academic posts at Aachen, including chair for quality management and metrology at the university’s Laboratory for Machine Tools.

Daniel Spindelndreier, based in Düsseldorf, Germany, is a Boston Consulting Group partner and co-leader of the company’s manufacturing practice. An industrial engineer, Spindelndreier is a graduate of the University of Siegen and the University of Portsmouth. He is a core member of BCG’s industrial goods and operations practices, where he is global co-leader on the topic of manufacturing. His areas of expertise include operational effectiveness, organization and strategy. He has been with BCG since 1998.

Michael Zinser, a partner and managing director of Boston Consulting Group’s Chicago office, is a core member of the company’s industrial goods and operations practice areas. Zinser also serves as leader of BCG’s manufacturing work in the Americas, co-leader of the company’s global manufacturing practice, and sits on the Global Operations Leadership Team. Zinser earned his undergraduate degree in finance at Notre Dame University and holds an MBA from the Stanford University Graduate School of Business. He is the co-author of the recent series of BCG reports, “Made in America, Again – Why Manufacturing Will Return to the U.S.” He joined BCG in 1997.

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