A new model for understanding how multinationals can gain a competitive edge from their manufacturing networks has been created as a result of a recent study by Professor Arnoud De Meyer, Director of Cambridge Judge Business School and Professor Ann Vereecke and Professor Roland Van Dierdonck of the Vlerick Leuven Gent Management School in Belgium
The study shows that there are four different types of factory, two of which contribute knowledge and innovation to the network of other factories in the Group. In their study they surveyed managers at eight European multinationals in 1995-1996 and then revisited them ten years later. This enabled the authors to establish a framework for understanding how companies can gain competitive advantage from the way in which they design their production networks, built around plants that are knowledge-seeking as well as those that focus on their immediate production needs.
As expected, Professor De Meyer and his co-authors found that the firms in this study had redesigned their manufacturing networks. Some had more plants in emerging markets and fewer in the West. This much is not surprising. But what is new is the finding that cheap labour is not the determining factor in the location of plants.
In the ten years under study, the number of plants run by the eight companies combined had increased from 59 to 82. There had been changes: for example, 18 plants had been closed and 40 had been acquired or developed in Greenfield projects.
The main driving factor for the location of 52 of them was closeness to market. The cost of labour was the major driver for only eight plants.
Overall, the most persistent factors driving decisions about location were market proximity and access to skills and know-how.
Professor De Meyer and Professor Vereecke are not surprised that know-how is a determining factor: they believe that some factories can become engines of knowledge throughout the entire network.
Typically, such plants are open to new ideas from other factories and in turn spread new knowledge to others in their network.
Professor De Meyer and Professor Vereecke have created a useful model which can help managers navigate their way around the complex issue of production network design.
There are four types of plant in their model. The first two are similar: they are ‘isolated’ and ‘receiver’ factories, both of which stay focused on their immediate production needs and have little time for interaction with other plants. As a consequence, they are relatively closed to new ideas or innovations from others and don’t spread new ideas elsewhere.
Receiver factories do get some innovations from other factories, but the process is driven by an external source. For instance, they may need help because they are under-performing, they cannot keep up with technological change or they are supervised by a bigger plant.
But overall, these two types of plant don’t generate new ideas. This is not necessarily a bad thing. If you make aluminium cans, for example, then such plants are useful.
Without any distractions, the managers and staff (who never leave to visit other plants) keep their minds focused on the task of production.
The next group of factories in the model are labelled ‘hosting network players’ and ‘active network players’. To a greater or lesser degree, they encourage visits from other plants and are actively involved in spreading new knowledge around their network.
They are often located near their HQ: being near the centre may naturally stimulate a factory into developing new thinking and testing out new ideas. Many of them help their R&D departments.
Active networkers differ from hosting ones in the sense that they do the networking more intensely.
The design of the production network, therefore, is about more than cost: it can deliver serious competitive advantage by maximising the flow of innovation from one plant to another.
The research bears this out as many of the companies under study have retained a greater proportion of their networkers in comparison to their isolated or receiver plants.
The key point for the senior manager is to get the balance right between isolated and receiver plants, useful for entering new markets (and tapping into new ideas too), and networkers, essential engines of new ideas for processes and manufacturing capability.
The type of goods a company makes will in large part determine the design: food manufacturers need factories to be close to market, for example; chemical plants need to be near sources of ideas and new thinking.
But once you have gone past these sector-or-company-related factors, smart companies will ensure they have the right balance of plants in their network.
Professor De Meyer recommends that companies map-out and evaluate the effectiveness of their production networks at least once a year:
They can measure the flows of information and people moving between plants. They then need to ask themselves two questions: Is this the type of network that gives us a competitive advantage? If not where do we want to be? And secondly, what actions do we need to take to adjust our network?”
For instance, there could be a situation whereby an isolated plant starts to evolve into a networker. By undergoing a regular evaluation, the board can decide whether to encourage this or reverse the process.
In an intriguing twist, Professor De Meyer believes there are some lessons too for factories in richer nations who expect or fear that their plants will eventually be off-shored or outsourced. If they develop the ability to network and thereby receive and deliver new knowledge they will become more valuable to the company. So, threatened plants should plan and build their networking skills and their openness to new ideas.
The Indian firm Tata’s decision to keep its recently acquired Jaguar and Land Rover plants in the UK is to do with their value as potential networkers, says Professor De Meyer. ‘Yes, it is about buying a brand and entry to a market. But from a manufacturing standpoint it is also about buying potential top-level network players.’
However, if the UK plants fail to integrate with Tata they may be closed down in the future, adds Professor De Meyer:
The risk is that they might want to keep information to themselves. My message to them is that they will gain much more by releasing as much information as possible to the Tata network and also by absorbing as much as they can from Tata, thereby becoming a truly integrated networking player.”
Most managers recognise the importance of generating innovation in terms of products, processes and business models. This research reveals, however, the crucial part played by certain factories in driving innovation and provides companies with a useful way of examining their own decisions in how they manage and re-configure their production networks to their best advantage.