report on high performing mfg. _ bcg.pdf

8/18/2019 Report on high performing mfg. _ BCG.pdf

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The High-PerformanceManufacturingOrganization


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The High-PerformanceManufacturingOrganization

Frank Lesmeister, Daniel Spindelndreier, and Michael Zinser

June


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T H-P M O

Performance improvement eff orts tend to focus on the operational aspects of

manufacturing. But organizational issues—matrix structures with multiple inter-

faces, proliferating roles and responsibilities, a structure that is no longer aligned

with strategy—can also be a major obstacle to quality, flexibility, speed, cost

eff ectiveness, and competitive advantage.

S S

A company’s manufacturing strategy must be aligned with and support the overall

corporate strategy. These strategic considerations will drive decisions about how

best to set up manufacturing operations.

C R S

Companies must make design decisions at both the corporate and the plant levels.

Key considerations include whether to centralize control, whether to integrate

related functions, and what the roles and responsibilities of plants should be.

M T

Each organization design choice involves tradeoff s that can aff ect cost, productquality, cycle times, and service levels. Many of these drawbacks can be off set.

AT A GLANCE


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T B C G

MOST MANUFACTURERS HAVE COME to accept that change is a constant.Increasingly global operations, evolving production networks, mergers andacquisitions—all contribute to a growing complexity that can extract a high cost if it

is not actively managed. But improvement eff orts tend to focus on the operational

aspects of manufacturing, such as production processes, the shop floor, and logis-

tics. Oen overlooked is the high cost of organizational complexity: the matrixstructures with multiple interfaces, the proliferating roles and responsibilities, the

many management layers that have built up over the years, and an organization

structure that is no longer aligned with a company’s manufacturing strategy. These

issues are oen at the root of performance problems. Ignoring them can be a major

obstacle to quality, flexibility, speed, cost eff ectiveness, and competitive advantage.

No single solution will fit all manufacturing organizations. A company’s industry,

markets, customers, products, internal capabilities, competitive position, and overall

strategy will inform any decisions—and there will always be tradeoff s. But an

eff ective manufacturing organization requires three things: an optimal organization

structure; a skilled, engaged workforce; and supporting systems and governance.

(See the sidebar “The Importance of People and Governance.”)

This report focuses on organizational best practices and outlines three essential

steps for building a high-performance manufacturing organization: start with

strategy, choose the right structure, and manage the tradeoff s. It also off ers guide-

lines for determining the best choices for a company’s manufacturing organization.

The Optimal Organization DesignMost companies wrestle with how best to organize their manufacturing operations

at both the corporate and the plant levels. Typical questions at the corporate level

include: Should we centralize manufacturing responsibility and decision making or

give regional and local plants greater autonomy? Should decisions that a ff ectproduct 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 centrally coordinated? How

should plants be organized below the plant manager level?


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T H-P M O

Achieving a high level of manufactur-

ing performance requires a skilled,

engaged workforce and governance

systems that drive and sustain

excellence.

Management leadership and visibility

help to create a culture of trust,

cooperation, learning, and continuous

improvement. Having the right people

in the right roles at the right time is

also critical. Given the global short-ages of skilled labor, this requires

strategic workforce planning—a type

of planning that involves defining

needed jobs and skills, estimating

likely hiring and attrition rates, and

addressing any gaps that must be

filled. Companies should also make

an ongoing commitment to recruit-

ment and training, and define roles to

clarify individual and shared responsi-

bilities. (See the exhibit “Companies

Should Define Individual and Shared

Responsibilities.”)

Oen, manufacturing organizations

have too many of the wrong types of

skills or people. But when it comes to

trimming the organization, most

companies focus more on reducing

their workforce than on streamlining

their management ranks. “Delayer-

ing” these organizations can help

flatten the reporting pyramid andincrease spans of control, which

lowers costs and improves effi ciency

and eff ectiveness. Delayering is more

than just a restructuring or cost-

cutting exercise. It also leads to

improved management performance

and accountability, more effi cient

decision making, and greater job

satisfaction. Knowledge, cultural

changes, and corporate values also

spread throughout the organization

THE IMPORTANCE OF PEOPLE AND GOVERNANCE

To answer these questions, The Boston Consulting Group 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 organiza-

tion design. Our analysis revealed the optimal setup for specific industries based on

strategic business drivers, and we created organizational guidelines to point compa-

nies in the right direction.

Start with StrategyA company’s manufacturing strategy must be aligned with and support the overall

corporate strategy. These strategic considerations will drive decisions about howbest to set up manufacturing operations. (See Exhibit 1.) To this end, we believe the

manufacturing strategy must consider the following three factors: economics,

markets and customers, and technologies and skills.

Economics.• How critical are scale, scope, effi ciency, utilization rates, complexity,labor, and other cost drivers that a ff ect overall manufacturing economics? 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


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T B C G

more quickly and easily because there

are fewer layers of management.

Finally, the right incentives are

important to encourage the right

behavior. In addition to cost or quality

performance, for instance, plant

managers could be rewarded for such

factors as service levels, the health

and safety of their people, sharing of

best practices, and compliance with

production standards.

Site manager Line manager

Accountabilities

Metrics and targets

Organizational parameters

Decision rights

Leadership behavior

Direct or dotted-linereporting; plant ownershipand structure

“Go Gemba!” Kaizeninitiatives; collaborationamong manufacturing-related functions andheadquarters; best-practicesharing across plantsand business units

Individual: improve overallfinancials by lowering costsand reducing workingcapital; improve quality,service levels, staff engage-

ment and capabilities,health and safety Shared: secure, reliableproduct delivery forcustomers and componentsupply

First-pass yield; on-timedelivery; cycle/throughputtime; accident levels; COG;1

working capital/inventory;direct/indirect costs; CAPEX

Owns: execution of manu-facturing strategy at plant;personnel decisions;improvement initiatives;

high-level planning (e.g.,Kanban, segmentation);inventory levels Can veto: investments Influences: manufacturingstrategy; supplier selection

Manufacturing teamstructures; taskallocation

“Go Gemba!” Kaizeninitiatives; cross-linecollaboration; guidanceand development offoremen and teams onshop floor

Individual: line perfor-mance; sustainableimplementation of standards; cross-training and compe-

tence development ofstaff; engagement andsatisfaction of line staff Shared: timely productdelivery

Overall equipmenteffectiveness;changeover times;quality; direct/indirectcosts

Owns: optimization ofoperating processes;enforcement ofstandards; lean-

manufacturing tools;line stoppages;personnel decisionson shop floor Can veto: linepersonnel decisions Influences: investments;inventory levels

Sources: BCG approach; BCG project experience.1COG refers to manufacturing costs only (costs of marketing and sales are not included).

Companies Should Define Individual and Shared ResponsibilitiesExample: site manager and line manager

THE IMPORTANCE OF PEOPLE AND GOVERNANCECONTINUED


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T H-P M O

tend to seek economies of scope, so that multiple products can share common

premanufacturing steps. Standardized processes are critical to companies

seeking scale and scope. For companies in asset-intensive industries such as theautomotive, 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.• How important is it to be close to end-user markets andto have products that are customized for specific regions or customers? For

instance, automotive suppliers, as well as companies making engineered prod-

ucts or specialized chemicals and metals, all off er a large number of customized

products. For companies in the building materials industry, proximity to custom-

Strategic drivers

High economiesof scale

Organizational choices

High economiesof scope

High significanceof asset utilization

High impact of personnel costs

High degree of complexity

High importanceof proximity tocustomer

High number ofregion-specificproducts

High number of customer-specific

products

High importanceof productionknow-how

Highly skilledengineering andproductionworkforce required

• Global setup

• Global setup

• Global setup

• Global setup

• Regional or local setup

• Regional or local setup

• Customer-oriented setup on global or regional/

local level

• Standardized production system with integrated industrial engineering

• Lead plants or centers of excellence; if one product per plant, independent plants

• Lead plants or centers of excellence


• Lead plants

• Lead plants

• Independent plants close to customer

• Independent plants


• Centers of excellence



• Integrated planning and schedulingto balance demand volatility andcontrol global volumes

• High level of standardization with integrated industrial engineering

• Standardized production system with integrated industrial engineering and standardized assets with asset management


• Standardized production system with integrated industrial

engineering and management ofassets and maintenance

Plant roles and

responsibilities

Degree of

functional integrationOrganization design

E c o n o m i c s

M a r k e t s a n d

c u s t o m e r s

T e c h n o l o g i e s

a n d s k i l l s

Source: BCG analysis.

E | Strategic Drivers Aff ect Organizational Choices


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T B C G

ers is critical. A regional or local manufacturing organization tends to be more

eff ective than a global one for these types of companies.

Technologies and Skills.• How important are specialized engineering skills, technolo-gies, or production capabilities? Companies that make customized products, suchas those companies noted above, require specialized processes and technologies

that are oen specific to individual plants. As a result, centralized control and

sharing of best practices is less important to their manufacturing operations.

Choose the Right StructureTo help determine the best setup for your company, look at how diff erent industries

typically organize their manufacturing operations. As shown in Exhibit 2, certain

factors are more important in some industries than in others and lead to diff erent

organization setups.

The key strategic drivers that we discussed above—economics, markets and cus-

tomers, and technologies and skills—a ff ect structural choices in three critical areas:

organization design, degree of functional integration, and plant roles and responsi-

bilities. Let’s look at each of these areas more closely.

Organization Design. Companies must decide whether manufacturing decisions—

such as product allocations or capital outlays—should be made on a global, region-

al, or local level, and whether manufacturing should be set up as a centralized

corporate function or as a part of each business unit. (For illustrations of decisions

that should be made at the corporate level and at the plant level, see Exhibits 3

Organizationdesign

Functionalintegration

Plant roles

DecentralizedCentralized

Low High

Standalone Network

Durables FMCG

Consumer goods

Organizationdesign


Plant roles


Low High

Standalone Network

OEM Supplier

Automotive

Organizationdesign


Plant roles


Low High

Standalone Network

Building materials

Organizationdesign


Plant roles


Low High

Standalone Network

Pharmaceuticals Chemicals

Chemicals/pharmaceuticals

Metals Mining

Organizationdesign


Plant roles


Low High

Standalone Network

Engineered products

Organizationdesign


Plant roles


Low High

Standalone Network

Metals and mining

Source: BCG analysis.Note: FMCG = fast-moving consumer goods; OEM = original equipment manufacturer.

E | Industry Characteristics Drive Manufacturing Decisions


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T H-P M O

and 4.) As a general rule of thumb, a global organization makes sense if scale or

standardization are major cost drivers, specialized production capabilities are

needed, or the manufacturing strategy has a major impact on the overall business

strategy.

Our research shows a trend across industries toward creating a global manufactur-

ing organization with centralized decision making for products, technologies, and

processes. Beyond the potential scale eff ects, this approach makes it easier to share

best practices and speeds up performance improvements—critical benefits in

today’s fast-changing, fiercely competitive global economy. But this solution isn’t

always the right choice. For instance, companies that must create diff erent products

for diff erent markets will usually find that a regional or local organization allows

them to better focus on—and respond more quickly to—the needs and require-

ments of local customers.

Degree of Functional Integration. Decisions about whether to integrate relatedfunctions—such as production control, planning and scheduling, IT, quality, mainte-

nance, engineering, and asset management—within the manufacturing organization

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, for instance, can achieve higher levels of utilization by

Independent plants

Lead plantsProducts Processes

Plant network

Planning andscheduling

Procurement Logistics(in- and outbound)

Quality

Productioncontrolling

Maintenancemanagement

Industrialengineering

Assetmanagement

IT

Organizationdesign

Degree of functionalintegration

Plant roles andresponsibilities

Board

BU A BU B BU CMfg.

Hybrid DivisionalFunctional

Board

Mfg. BU A

Mfg.

BU B

Mfg.

BU C

Mfg.

Board

BU A

Mfg.

BU B

Mfg.

BU C

Mfg.

Source: BCG analysis.Note: Mfg. = manufacturing; BU = business unit.

E | Three Types of Organizational Decisions Should Be Made at the Corporate Level


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T B C G

integrating maintenance, asset management, planning, and scheduling. As a result,

manufacturing operations have 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. Integrat-

ing quality functions is usually more eff ective at the plant level, where total qualitymanagement (TQM) can engage workers in continuous improvement eff orts. Lean

initiatives—with their total-productive-maintenance (TPM) approach—also show the

power of integrating maintenance activities at the plant level.

Plant Roles and Responsibilities. Decisions about how to set up plants and

allocate production are also critical to overall manufacturing performance. When

cross-plant material flows are absent—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, make certainplants lead plants or centers of excellence for particular processes or capabilities in

order to concentrate this knowledge, set standards, and share best practices.

Manufacturers can also get more from their production networks by matching asset

characteristics 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 change-

over and ramp-up times that are best suited for products with volatile or unpredict-

able demand. By defining plant roles, consolidating products with similar character-

Planning and scheduling

Quality

Production controlling

Maintenance IT

Organizationdesign

Degree of functionalintegration

Workshops—activity bundlingValue stream—process bundling

Mfg.

VS 1

VS 2

Mfg.

WS 1 WS 2 WS 3 WS 4

Source: BCG analysis.Note: Mfg. = manufacturing; VS = value stream; WS = workshop.

E | Two Types of Organizational Decisions Should Be Made at the Plant Level


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T H-P M O

istics, and exploring ways to reallocate products across the network, companies can

achieve greater cost savings, flexibility, and effi ciency.

Managing the TradeoffsEach design choice involves tradeoff s that can a ff ect cost, product quality, cycle

times, and service levels. Companies with a decentralized or divisional manufactur-

ing organization, for instance, typically have a harder time sharing best practices

and can lose synergies. A centralized coordinating function can off set these draw-

backs by sharing best practices across the company and creating consistent stan-

dards 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 can

also greatly complicate interactions with a centralized R&D unit and hamper

design-to-cost eff orts. Companies can off set these drawbacks—and sharply reduce

production costs over time—by defining manufacturing requirements early in themanufacturing process through better communication.

Some companies take more of an out-of-the-box approach to managing tradeoff s. A

microchip manufacturer with enormous cost pressures, for instance, had stringent

requirements for quality and process reliability. Moreover, 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 that each one makes the same products in the same way—a rather

extreme approach to central governance. As a result, the company can diagnose

and fix problems quickly, and it can rapidly implement improvements. Its plant

network is also extremely flexible—production can be shied as needs, volume, or

economic conditions change, and any bottlenecks are short-lived.

Another example of an out-of-the-box approach to managing a tradeoff : An auto-

mobile manufacturer with a global production network wanted to avoid the exces-

sive overhead and backlogs that can result from having headquarters steer the

plants and implement global standards inflexibly. The company decided to estab-

lish regional “mother plants” that support local projects, train sta ff , set up employ-

ee exchange programs, and manage five-year performance road maps. Headquar-

ters can now focus on the bigger picture—developing major change programs that

the mother plants can implement.

Each company must decide which tradeoff s to make based on its individual situation,

markets, competitive environment, and industry benchmarks. Moreover, a company’sorganizational choices require the right people and skills to be truly powerful.

I ’ -, increasingly complex global environment, companiesmust rethink not just their manufacturing operations but also their manufactur-ing organizations. The high-performance organization is lean, flexible, and strategi-

cally aligned. The right organization design, an engaged workforce, and eff ective

governance systems result in sustained manufacturing excellence—and a powerful

source of competitive advantage.

Each design choice

involves tradeoff s

that can aff ect cost,

product quality,

cycle times, andservice levels.


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T B C G

About the AuthorsFrank Lesmeister is a principal in the Düsseldorf offi ce of The Boston Consulting Group and a

topic expert for manufacturing. You may contact him by e-mail at [email protected].

Daniel Spindelndreier is a partner and managing director in the firm’s Düsseldorf offi ce andcoleader of BCG’s manufacturing topic. You may contact him by e-mail at spindelndreier.daniel@

bcg.com.

Michael Zinser is a partner and managing director in the firm’s Chicago offi ce and coleader of

BCG’s manufacturing topic. You may contact him by e-mail at [email protected].

AcknowledgmentsThe authors would like to thank Katherine Andrews, Gary Callahan, Martha Craumer, Angela

DiBattista, and Pamela Gilfond for their contributions to the writing, editing, design, and produc-

tion of this report.

For Further ContactIf you would like to discuss this report , please contact one of the authors.


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For a complete list of BCG publications and information about how to obtain copies, please visit our website at

www.bcg.com/publications.

To receive future publications in electronic form about this topic or others, please visit our subscription website at

www.bcg.com/subscribe.

© The Boston Consulting Group, Inc. 2011. All rights reserved.

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