Optimize existing operations or transfer production? Build the business case
Production transfers can bring significant cost savings and customer service improvements, but when is it better to optimize your existing manufacturing operations? Here’s how to decide.
Production transfers can offer opportunities for cost savings and customer service improvements, but in some cases optimizing your current plant and manufacturing operations can bring greater return. Particularly now, as the COVID-19 pandemic has forced companies to look more closely look at their supply chain, operations, cost structure, and margin, many companies are asking an important question: Is our footprint as competitive as it can be to support our clients?Is our footprint as competitive as it can be to support our clients?
Identify key drivers of a production transfer
What’s prompting you to consider a production transfer? Ongoing competitiveness and profit improvement are always important drivers. You may face difficulties finding skilled labor or operate in a high-cost environment. Perhaps customers or competitors are pushing you. Or you might need to gain greater synergies among strategic acquisitions or portfolio investments. Perhaps you’re pushing against the walls of your building as new business stretches current capacity to the limits. The reasons and inflection points abound — be clear about what’s driving your decision.
Prepare a sound business case, with clearly understood risks and opportunities
There’s no one-size-fits-all business case for a production transfer, but what does apply across the board is the need to go through the exercise of building one. Production transfers can require significant investments, some of them not immediately apparent, and you need to ensure a sound basis for your decision. The payback period may take longer than usual since your pricing needs to remain competitive, and customers will try to capture some of these cost savings. And don’t forget to be clear about what success will look like for the business when you’re done.
There’s no one-size-fits-all business case for a production transfer.
Most companies prepare a business case around the best-possible scenario to make the numbers work. But the best-possible scenario doesn’t always occur. Be sure also to document risks to the business case. These include, but aren’t limited to, freight and tariff costs, supply chain challenges, equipment delays, customer givebacks. What are your mitigating strategies for each risk? Document those as well. You want to be prepared for risks and challenges since no transfer aligns perfectly with the business case.
Determine how much improvement can be gained from optimizing your existing manufacturing operation
Your business case should include a comparison of two base cases:
- Your existing operations with no changes
- Your existing operations optimized with new technology and processes
Business leaders are often surprised to discover how much cost they can drive out of current production. Your analysis must be sound, and that requires a deep understanding of existing operations.
This understanding begins with a detailed grasp of how your products are made. You don’t want to move a production line only to realize there’s another product made on it that you didn’t create a plan for or a subprocess you didn’t account for that feeds into the line.
Manufacturing processes, materials, labor functions, shipping efficiencies, and constraints — you need to know exactly what’s happening. Only then can you identify potential opportunities for optimization and make an informed decision about how or whether to maintain your current footprint.
The possibilities for optimization are many, from realigning equipment and improving planning and inventory management processes to introducing automation and outsourcing specific tasks. What Industry 4.0 technologies can you leverage to improve operational efficiency and avoid top supply chain risks?
Perform a rigorous cost-benefit analysis
A careful cost-benefit analysis is key when making optimize versus transfer decisions. Sometimes the opportunity you believe awaits may not, upon closer look, deliver the results you expect. A production transfer might save labor costs, for example, but once you factor in additional freight and packing, the business case might weaken. Freight often changes the transfer versus optimize equation. Could you redesign your product so that it packs more tightly in a container? Like tariffs, freight isn’t your value-add, and it’s out of your control, so what can you do to mitigate the risk of steep cost increases?
Consider your supply chain as well. If key suppliers are located within a day’s drive and you move to Mexico or China, suddenly you must find alternate suppliers or plan for considerably higher shipping costs.
When weighing a consolidation or production transfer, companies frequently forget to factor in the costs of inventory space for safety stock during the transition, both raw material inventory and finished goods.
Also keep in mind that customers can drive a production transfer, and they can pull the brake on a planned move. If clients invest resources in your move, your subsequent top-line pricing will change, which might tip the business case.
You’ll want to take factors like these into account before you leap. An upfront assessment to determine how much you can optimize your existing operation against the real costs and benefits of a production transfer is critical.
Enlist experts
A thorough assessment requires input and expertise from a range of functional areas. Whether that expertise is internal or external, your resources need to possess the requisite experience, both in breadth and depth.
If you’re weighing a production transfer across borders, do you also have local expertise? How competitive is the local labor market? Are there local customs that would impact production during particular times of the year? Do your equipment suppliers offer technical support in the region? What are the rules and regulations you’ll need to comply with? The costs of running afoul of local laws can be high — fines, penalties, regulatory action, and reputation. Without a complete picture, companies considering a production transfer within or to another country can easily overlook major cost drivers in their analyses.
Whether the answer is to optimize your existing operation or transfer production, due diligence is key to a smart decision — and to remaining competitive.
As always, if you have any questions about how to evaluate whether a production transfer is the right move for your company, give us a call.
