Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

3.1.1b Design Options for Global Production Networks

Intended learning outcomes: Explain design options for global production networks. Describe some company cases.

Continuation from previous subsection (3.1.1)

The portfolio in Figure is based on an idea in [AbNu08]. It shows, in addition to the two classical designs (the two sectors in the one-dimensional space in Figure, namely centralized or decentralized production), two possible mixed designs. The four possible designs lie in four sectors in a two-dimensional space, spanned by the dimensions that correspond to the two (conflicting) groups of features.

Fig.        Features of and design options for production networks.

The sector P1 describes the centralized production for the global market. This option is advantageous where economies of scale or economies of scope are strong and, in addition, when there are advantages to having well-established part­ner­ships for the added value of the various production levels. In this way, there is a greater possibility to main­tain consistent pro­cess quality, which is important mainly for vali­dation of produc­tion processes (keyword: GMP, Good Manu­facturing Practices). Here it is not essential whether added value occurs within a company or across companies. Distribu­tion takes place from the location that manufactures the last pro­duction level, or last operation. Required for this is, in any case, high value density as well as high customer tolerance time and low vulnerability of the (only) supply chain. The products tend to be standard products. Some examples here are electronic components, liquid crystal displays (LCD), consumer electronics, chemicals and pharma­ceuti­cals, fine chemicals, giant aircraft, standard machines, and standard facilities.

The intermediate sector P2 describes the in-part centralized production for the local market. If semifinished items are produced centrally, and if the last value added steps are performed at decentralized locations, important econo­mies of scale or scope can be exploited while at the same time having proximity to market. Examples here are strategies for local end production for all consumer goods, such as, for example, “late customization” or “postponement” (here see Section 1.3.3).

The intermediate sector P3 describes the in-part decentralized production for the global market. If the same components and/or end products are manufactured at different locations, and if at various production levels they can be moved to different locations and distributed globally, this brings advantages in the case of volatile demand as well as for a supply chain that is vulnerable to disruptions, in that the capacities in the network are utilized more evenly or can even substitute for one another. This makes sense, however, only for standard products with high value density and sufficient customer tolerance with regard to delivery times, such as, for example, for components or end products in the automotive industry, perishable foodstuffs, or important raw materials (such as steel).

There are, of course, mixed forms of production networks that lie between these four main designs. This is particularly the case when the characteristics are not significantly pronounced on the abscissa or ordinate of Figure

Company Cases: When features for designing production networks change, it is appropriate to consider changing the production networks. However, the financial investments required often quickly set limits to changeability.

For example, the production costs of cement are on the rise today, due to rising costs of both energy and CO2 emissions (see the discussion of the triple bottom line in Section 3.3). As a consequence, value density increases, so that centralized production becomes more and more an option (i.e., option P3 instead of the traditional option P4). But that requires new cement works and additional logistics infrastructure for supply of raw materials and distri­bution of the cement. As an example, Holcim, a Swiss-based cement manu­facturer opened its new production plant in Ste. Genevieve, Missouri, in 2009, with its own port and loading facilities on the Mississippi. Production cost and thus value density increased, as the new plant is aimed to reduce CO2 emissions significantly. At the same time, the waterway network allows transportation to ten of the twenty largest cities in the USA at lower cost than before. Thus, a more centralized pro­duction concept became possible.

Increased demand volatility makes it necessary to produce two engine variants at each of two locations (option P3) instead of producing only one of the variants at each (option P1). Although this entails considerable investments for equipment, the result is much better use of the capacities. As an example, Daimler, a Germany based car manufacturer, produces its four and six cylinder engines in the USA as well as in Germany. The benefit of the flexibility to cope with volatile demand is greater than the cost for double toolsets and facilities as well as for transportation of some of the finished engines between the USA and Germany.

Increased necessity for economies of scale, due to massive competition, forced Hilti, a Liechtenstein-based manufacturer, to centralize the produc­tion of drilling machines, despite its “the construction site is the point-of-sales”-driven sales strategy. Today, each drilling machine type is produced at exactly one site (option P1). Here, each site holds specific technology competences. Different fastening consumables, however, continue to be produced in different factories, close to the local markets (option P4). Still, semi-finished items that need expensive or important technologies are produced centrally (option P2).

Course section 3.1: Subsections and their intended learning outcomes

  • 3.1.2b Design Options for Global Distribution Networks

    Intended learning outcomes: Explain design options for global distribution networks. Describe some company cases.

  • 3.1.3 Network Structure for Decentralized Distribution

    Intended learning outcomes: Disclose the distribution network structure and describe decision variables in its design. Present features such as available time for shopping, and simultaneously, capacity of an available means of transport of the customer, as well as the required geographical catchment area.

  • 3.1.3b Design Options for Retail Networks

    Intended learning outcomes: For decentralized distribution, explain the portfolio for designing retail networks retail networks.

  • 3.1.4 Centralized Service Versus Decentralized Service

    Intended learning outcomes: Differentiate between centralized service and decentralized service. Present features such as the mobility cost ratio of the service, the degree of customer involvement in bringing and picking up the service object, as well as the need for repeated transfer of the service object.