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and regions to identify their highest-value opportunities,
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secure lasting results. Founded in 1963, BCG is a private
company with 66 offices in 38 countries. For more infor-
mation, please visit www.bcg.com.
3. Globally Advantaged
Manufacturing
Winning in the Downturn and Beyond
O
ver the last decade Add to this whipsawing volatility keep in mind, however, that deci-
and a half, a historic (which shows no sign of abating) an- sions about where to manufacture
combination of falling other critical dimension: the explo- should be driven by more than just
trade barriers, low en- sive growth of RDE markets. In 1990, cost. For companies seeking a strate-
ergy and transporta- RDEs contributed only 25 percent to gic edge over the competition, the far
tion costs, new access to plentiful la- global GDP, compared with 51 per- more complex—and critical—ques-
bor, and relative currency stability cent for the G7 industrialized na- tions are where to manufacture what
led to a massive shift of sourcing and tions. The RDE share grew to 42 per- products and how to set up a global-
manufacturing from high-cost devel- cent in 2007 and is projected to ly advantaged production network.
oped countries to China, India, and overtake that of the G7 by 2009 (al-
other rapidly developing economies though it remains to be seen how the Choosing the Right
(RDEs). From 1997 through 2007, the global downturn will affect these Locations
value of goods made or sourced over- projections). Moreover, RDE demand
seas grew more than 9 percent per for goods and services has surged Companies whose RDE strategies
year on average, from $5.3 trillion to over the last decade. India and China succeed over the long haul make sus-
$12.6 trillion. alone have about 2.5 billion consum- tained commitments to a small num-
ers—a huge potential market with ber of choices and relationships.
But in 2007, the tide seemed to be growing amounts of disposable in- They systematically rebalance pro-
turning. The media began warning come. For many products, RDE de- duction among locations instead of
of rising oil prices, higher trans- mand already outstrips that of more doing so in an irregular manner.
portation costs, strengthening RDE developed markets in terms of vol- They recognize that ongoing volatil-
currencies, rapid increases in RDE ume. Given the price sensitivity of ity, changing demand, and shifting
wages, and, in some cases, labor RDE markets, products often must cost dynamics will affect their choic-
shortages. At the same time, many be designed and manufactured local- es of what products to make
governments in developed countries ly to meet the necessary price points. where—and for what markets. When
were seeking to limit outsourcing MNCs that want to access these RDE making decisions about where to set
to protect local jobs. There was talk markets will be in a stronger compet- up their global operations, compa-
of big multinational corporations itive position if they have a local nies must weigh the tradeoffs of
(MNCs) pulling back from RDE- manufacturing presence. Once built, each location, taking three things
based sourcing and manufacturing. RDE plants can serve both local and into consideration: factor costs, sup-
Then the global financial crisis hit in global demand. ply chain constraints, and the rela-
mid-2008. Amid plummeting oil and tive strengths and weaknesses of dif-
transportation costs, RDE currencies Because of these factors and ongoing ferent RDEs.
began rapidly depreciating. Sudden- labor-cost savings, few MNCs can af-
ly, RDEs were cost competitive ford to turn their backs on RDE- Factor Costs. Low labor costs fueled
again. based production. It is important to the shift to RDE-based manufactur-
Globally Advantaged Manufacturing 1
4. ing and continue to play a critical River Delta than in the inland prov- tradeoffs among different locations
role, despite wage increases in some inces. But productivity has grown, and the impact of changing cost fac-
areas. According to our analysis, the too—especially in the industrial clus- tors or locations. (See Exhibit 2.) For
huge labor-cost differential between ters that attract highly skilled work- example, our model shows that a
RDEs (where salaries ranged from ers. In the less developed countries U.S.-based engineering company
$0.50 to $9 per hour in 2008) and de- of India, Vietnam, and some areas of could produce small aluminum cast-
veloped countries (with salaries from Mexico, wage rates are lower than ings more cheaply in China but that
$15 to $45 per hour) is unlikely to those in China’s industrial areas, but Mexico would be more cost-effective
change much in absolute terms in the labor savings are offset by lower for large iron castings because trans-
the short to medium term. Except for productivity rates, supply chain con- portation costs would be lower. (See
products that have minimal labor straints, and infrastructure challeng- Exhibit 3.) The cost difference be-
content or are very bulky and costly es. Companies must consider these tween the two locations was so
to ship, manufacturing still costs far tradeoffs when deciding where to small, however, that a relatively mi-
less in RDEs than it does in the Unit- manufacture. nor increase in China’s wage rate
ed States or Europe, even when and its exchange rate against the dol-
transportation costs are high and Other factor costs such as transporta- lar would make Mexico the less cost-
RDE currencies are strong. (See Ex- tion, tariffs, materials, currency ex- ly choice for either type of casting.
hibit 1.) change rates, and energy vary from
location to location and must also be Supply Chain Constraints. The
Labor costs vary widely by region. considered. Because of the complex- global supply chain is another criti-
Although average wages in China ity involved in measuring this wide cal factor in making RDE-based pro-
grew by more than 150 percent from range of factors and their ongoing duction decisions. Longer shipping
1999 through 2006, they’re far higher volatility, BCG has developed an ana- times add cost, risk, and variability to
in industrial areas such as the Pearl lytical model that quantifies the cost delivery schedules. Shipping goods
Exhibit 1. Costs Have Risen, but RDEs Remain Very Competitive
U.S. manufacturing Chinese manufacturing
Transportation costs
Indexed costs affect domestic
3% shipments, too
103 Indexed costs
100
100 100
18 Indirect costs
18
11%
80 2 3 Transportation 80 79
71 3 Import tax
22 22 Machining 3 11 Indirect costs
60 60 10 6 Transportation
4
20 20 Direct labor 17 Machining
16
40 40 6 Direct labor
4
19 Materials 17
18 components 16 Materials
20 20 components
20 21 Raw materials 18 19 Raw materials
0 0
Early 2007 Mid-2008 Early 2007 Mid-2008
Other costs are rising Ocean shipping is
No change in costs in the United States, too a minor element
Increase in costs
Source: BCG experience.
2 The Boston Consulting Group
5. Exhibit 2. BCG’s Analytical Model Quantifies the Cost Tradeoffs of Different Locations
Output
Country factors
◊ Wage rates Outputs (illustrative)
◊ Productivity Scenarios
◊ Transportation costs Trends in Country cost
◊ Transportation times “If input X, Y, and Z go up by K%, factor costs comparison
◊ Tariffs how does that affect product costs
and decisions about location?” 10 50
5
Product factors
◊ Dimensions 0 0
◊ Weight
◊ Labor content
◊ Material inputs Sensitivity analysis Cost structure analysis
“What happens if input X floats 40
Other factors between
◊ Foreign exchange –Y% and +Z%?” 20
◊ Cluster effects
0
◊ Risk factors
Source: BCG analysis.
Exhibit 3. Lower Shipping Costs from Mexico Offset Labor Savings in China
for Some Products
Machined iron castings Machined aluminum castings
11%
Costs ($) Costs ($)
30 –6% 30
27.72
25.01
21.11
19.88
20 20
10 10
0 0
China Mexico China Mexico
Manufacturing Manufacturing
location location
Freight1 Overhead Indirect labor Direct labor Materials
Source: BCG case experience.
1
Based on a destination in the United States.
Globally Advantaged Manufacturing 3
6. from China to the United States or Supply-chain-management capabili- port zones make it an excellent
Western Europe can take as long as ties are also critical. Without the abil- choice for long-term investments in
four weeks, on top of production ity to control variability, track inven- manufacturing. India has been less
time. When product design and de- tory levels, and monitor capacity attractive than China for global man-
mand are stable, a two-month lag utilization across networks, an RDE ufacturers because of its smaller do-
time between order and delivery can production strategy will end up cost- mestic market, less developed infra-
be planned for and has less of an im- ing more and delivering less. At their structure, and more restrictive labor
pact. But in industries in which styles laws. But things are changing, and
change quickly or demand is unpre- Proximity to developed more MNCs are setting up produc-
dictable—such as the fashion busi- tion facilities in India—especially for
markets is a key
ness—long supply chains are a ma- manufacturing electronics, automo-
jor disadvantage. Although airfreight advantage that results biles, and pharmaceuticals.
can shorten cycle times, it is expen- in lower costs and
sive and can largely negate labor sav- Unlike China, however, India’s man-
ings. Shorter supply chains yield greater flexibility. ufacturing tends to be skill intensive
greater flexibility. rather than labor intensive. The lead-
worst, supply chain failures can drive ing example is Bharat Forge, the
Proximity also makes it easier to vicious cycles of stockouts and world’s largest manufacturer of auto-
communicate with key buyers. The missed sales, inventory pileups, mobile forgings, which has invested
distance and time zone differences deep discounting, high carrying costs, heavily in technology and a highly
between Asia and the United States and inevitable write-offs. Supply educated workforce. India turns out
or Europe can make staying in chain variability can quickly erode an estimated 400,000 engineers per
touch—whether by phone or in per- margins. year, second only to China, and has a
son—a challenge. Moreover, for prac- large English-speaking population.
tical reasons, certain products are The Strengths and Weaknesses of But India’s infrastructure is more
better sourced closer to the end user. RDEs. RDEs vary greatly in the ad- problematic. Poor roads, crowded
Such products include heavy or vantages they offer global manufac- ports, regular power shortages, and
bulky items that are costly to trans- turers. Things to consider include in- subpar airports undermine its role in
port; foods, plants, and other perish- frastructure, taxes, labor policies, the emerging global economy. Turn-
ables that can’t withstand long tran- regulations, currency strength, and around times at India’s ports are
sit times; products with very short exchange rates—all of which can af- sluggish compared with Hong Kong’s
life cycles or highly volatile demand, fect the ease of doing business and extreme efficiency. The one excep-
such as fashion and high-tech goods; the bottom line. Also critical is the tion is India’s strong telecommunica-
and higher-margin or customized RDE growth rate. Countries with tions backbone, which has trans-
products made in smaller volume. large or emerging domestic markets formed the country’s business
are attractive targets because pro- landscape.
In fact, in global business, proximity duction facilities can serve both local
to developed markets is a key advan- and foreign customers. Other RDEs with lower costs than
tage that results in lower transporta- China are emerging as viable manu-
tion costs, easier communications, For much of the last decade, China facturing locations, but shortcomings
shorter supply chains, and greater was the default location for many in infrastructure can create obstacles.
flexibility. Mexico and Eastern Eu- MNCs setting up manufacturing in For instance, a U.S. toy manufacturer
rope border the United States and RDEs. Besides having low-cost inputs found that labor and other costs were
Western Europe, respectively, and such as labor and materials, China lower in Vietnam than in China. But
have far lower labor costs than those has the world’s largest domestic mar- Vietnam’s poor roads, capacity-con-
of developed economies—albeit ket, with 1.3 billion consumers. strained ports, inflexible labor, rela-
double to triple those in China. Still, Moreover, a fast-developing infra- tively high inflation, and frequent la-
the advantages of proximity can off- structure, favorable labor policies, bor strikes made it less desirable
set the higher wages. and the tax benefits of its special ex- than China for production facilities.
4 The Boston Consulting Group
7. Building a Globally that would be economically infeasi- This strategy isn’t without challeng-
Advantaged Network ble in higher-cost countries, or con- es, however. When RDE-based opera-
tinue making and selling products tions are carbon copies of their
RDE-based production offers a range profitably when margins shrink. For home-country operations, cost sav-
of potential advantages such as low- more than a decade, RDE-based ings may be limited. Consider the fol-
er product costs, access to new mar- manufacturing was virtually a no- lowing case in point. After bench-
kets, and the ability to better serve brainer owing to low-cost labor, ener- marking a group of automotive
existing markets. But reaping all of gy, and transportation. In that golden plants set up by MNCs in China, we
these benefits takes time. In our ex- period, even a poorly executed strat- observed two things about the
perience, most companies go egy could deliver savings. Most plants—that many were more costly
through an evolution as they seek to MNCs shifted at least some portion than their home-country counter-
find and deliver the right mix of of their manufacturing to take ad- parts and that performance varied
price, products, quality, variety, time- vantage of the lower costs. widely among the plants. (See Exhib-
liness, flexibility, customization, and it 4.) These differences in cost and
service for specific markets in differ- In industries in which fashion trends, performance were largely the result
ent parts of the world. This evolution technical obsolescence, or patent ex- of how the plants were built and run,
takes them through three distinct piry can quickly turn winning prod- not their location. Instead of leverag-
stages: cost arbitrage, local advan- ucts into losing ones, RDE operations ing China’s inherent cost advantages,
tage, and global integration. create new opportunities to lengthen the plants were often clones of
product life cycles. For instance, home-country operations, with high-
Stage 1: Cost Arbitrage. In the first pharmaceutical companies can pro- ly paid expatriate managers, high-
stage, cost arbitrage allows compa- duce off-patent drugs and generics at cost suppliers, expensive automation
nies to increase their profit margins, low-cost RDE plants to extend prod- that negated the labor cost savings,
differentiate their products in ways uct profitability. and excessive allocation of global
Exhibit 4. The RDE Plants of Some Multinational Corporations Cost More Than Their
Home-Country Plants
Cost of Chinese plants as a
percentage of home-country plants
140
120 !
Home-country-plant cost level
100
80
60
40
20
0
German German Austrian French German German Italian French North
supplier supplier supplier OEM supplier supplier supplier supplier American
supplier
German North European European German North North German French
OEM American OEM OEM supplier American American supplier supplier
supplier supplier supplier
Above 100 percent 100 percent Below 100 percent
Sources: Company interviews; BCG analysis.
Globally Advantaged Manufacturing 5
8. overhead owing to a higher-than-av- in areas such as Thailand, Brazil, and global leader in small, precision elec-
erage employee head count. As a re- India—where Toyota could leverage tric motors, invested heavily in mod-
sult, these plants did not generate the advantages of industry clusters. ernization and automation through-
the expected cost savings. Moreover, the plants were designed out the early 1990s. Although the
to be lean and to take advantage of company’s sales grew at double-digit
Stage 2: Local Advantage. In the the lower cost of capital—the Indian rates during those years, its earnings
second stage, MNCs that are commit- plant, for instance, cost 40 percent remained flat. In the second half of
ted to making a long-term invest- the 1990s, its earnings quadrupled as
ment in RDE-based production begin Greater savings can be the company harvested the benefits
to see that even greater savings can of its capital investments. Superscal-
realized by capitalizing
be realized by capitalizing on the ing usually requires a fairly high lev-
specific advantages that each RDE on the specific el of capital investment. Even so, the
offers. These MNCs begin operating advantages that each cost of equipment, land, facilities,
more like local companies, adapting and services in RDEs is low enough
new ways of thinking and working RDE offers. that companies can make these in-
that are better suited to the new en- vestments and still deliver an enor-
vironment—without giving up their less than comparable Western mous quantity of low-cost, high-qual-
best practices from home. plants—by using local materials, less ity products.
automation, and local equipment
A good example is Toyota’s produc- where possible. Finally, Toyota made LG Electronics uses this strategy for
tion network for manufacturing its the decision to use local managers its microwave ovens and air condi-
international multipurpose vehicles and suppliers to further localize op- tioners, building large-scale plants in
(IMVs), designed specifically for cost- erations. Mexico, China, Eastern Europe, and
sensitive RDE customers. Toyota set other RDEs to serve regional de-
up manufacturing and assembly Like Toyota, companies that gain a mand. The plants provide such a
plants in key RDE markets such as strategic advantage by successfully scale advantage that the company
India, Indonesia, and Thailand, and adapting to local conditions do four can offer more features and a wider
“complete knock-down” (CKD) plants things: leverage scale, exploit the range of products at a lower price
in South Africa, the Philippines, and power of industry clusters, rethink than its competitors.
South America. The CKD plants re- the balance between labor and capi-
ceive so-called knock-down kits with tal, and set up lean, localized opera- Opting for a number of small-scale
everything needed to assemble an tions. operations is another way to leverage
IMV, but they are cheaper to set up the lower costs of RDEs for global ad-
and maintain because they don’t use Leveraging Scale. The cost advantages vantage. Because plants cost less to
expensive automation. They are sup- of RDEs allow companies to use build in developing economies, com-
plied by a network of other RDE- scale—both large and small—to their panies can reduce their minimum
based plants that make engines, strategic advantage. One way to keep scale requirements by half or more
gearboxes, and other key parts. The costs low for greater global competi- and still have a profitable operation.
result is an RDE-based manufactur- tiveness is to build scale—and even And lower minimum scale offers dif-
ing ecosystem that designs, manufac- superscale—by consolidating produc- ferent strategic advantages. Compa-
tures, and assembles vehicles for lo- tion facilities. In so doing, companies nies can not only diversify operating
cal markets. are able to create products on a mas- risk across more locations while still
sive, world-leading level and increase keeping costs low, but they can also
Toyota exploited scale by aggregat- capacity still more with relative ease, have more specialized plants, which
ing demand across RDEs into a few at relatively low cost. can often deliver higher quality and
strategically located assembly plants greater margins.
and setting up single large-scale Superscaling depends on low labor
plants for engines and gearboxes. costs, but it’s not always just a labor- Exploiting the Power of Industry Clus-
These larger plants were established for-capital swap. Johnson Electric, a ters. Silicon Valley is the world’s
6 The Boston Consulting Group
9. best-known cluster, but it’s just one competition and industrial-policy signs, superior local reputations as
example of a general and well-docu- choices. employers, and strong systems for
mented phenomenon: industrial de- developing people and suppliers,
velopment happens in clusters or Cluster dynamics have critical impli- companies can outrun rising costs.
ecosystems of interrelated compa- cations for RDE-based manufactur-
nies, suppliers, and service provid- ing. Because of clusters, regional ca- To leverage the power of clusters, a
ers. Clusters can grow as a result of pabilities develop unevenly. To gain company must carefully evaluate the
public policy or the concerted effort position it can reasonably hope to
of one or more companies trying to Industry clusters establish, given its size and resources.
increase supply sources. One small high-tech manufacturer
should be a
deliberately chose a strong position
When a cluster takes off, it becomes critical component in a relatively weak existing cluster
self-sustaining. A city or region may of any global to ensure its ability to attract talent
become known as a prime location and negotiate better contracts with
for a particular industry on the basis manufacturing strategy. suppliers. By contrast, a larger com-
of access to resources, talent, or mar- pany may be able to achieve a man-
kets. That reputation attracts more an advantage, companies must lo- ufacturing advantage in a larger clus-
people and companies, which in turn cate their plants in the right cluster ter or by independently seeding a
builds and reinforces the cluster. But and build a strong position. Even new cluster.
clusters can also wither. For instance, though land and labor cost more,
southern California’s share of the clusters give companies access to Evolving industry dynamics have left
global aircraft and avionics industries scale and experience. Moreover, by high-cost locations in different parts
has been declining since the 1970s, building supplier relationships and of the world with no supplier base, so
although the region still retains some trust, companies can reduce coordi- that companies in those areas have
aviation-related industries. nation costs and increase reliability. little choice but to manufacture in
LG, for instance, creates captive sup- RDEs. Garments and toys are made
While the importance of clusters is plier parks—effectively walled clus- largely in Asia. Hard disk drives and
well established in the business press ters—and then replicates those sup- semiconductor production have also
and industrial-development policy, ply bases from one megaplant to shifted almost entirely to Asia. Gener-
not all companies have been able to another, building on past learning ally, the movement of knowledge-
leverage them successfully. Yet clus- and relationships. LG manages its based industries such as research and
ters should be a critical component suppliers’ enterprise resource plan- services tends to lag behind manufac-
of any global manufacturing strategy. ning (ERP) systems and tightly inte- turing—but eventually, it will follow.
Industries and clusters are forming grates their shared production proc- Companies that don’t pursue RDE-
very quickly, reflecting the rapid esses. based production may find them-
pace of development in emerging selves trapped in a lengthy, rear-
economies. In the main coastal prov- Because of cluster effects, locations guard struggle as talent and knowl-
inces of China, for instance, hun- that appear to be getting more ex- edge flow to new centers of gravity.
dreds of industry ecosystems have pensive may actually be getting
taken hold in the last decade. Hyun- more effective for companies with Rethinking the Balance Between Labor
dai’s choice of Chennai, India, for advantaged positions. (See Exhibit and Capital. In RDEs, labor is a lower-
producing small cars for global mar- 5.) While country-level statistics cost alternative to capital. Instead of
kets reflects the emergence of that show that productivity is increasing replicating their home-country
city as a hub for automobile produc- overall in major RDEs, location- and plants, experienced companies capi-
tion. Not all of these clusters will cluster-specific productivity is racing talize on this advantage by redesign-
achieve world-class positions. Some ahead of wages even though wages ing their products and manufactur-
will attain sustainable scale; others tend to be higher in growing clusters ing processes to reduce automation
will plateau and then shrink as in- than in general RDE markets. With and increase labor. This lowers capi-
dustries consolidate in response to smart management and work de- tal investment significantly. For in-
Globally Advantaged Manufacturing 7
10. Exhibit 5. The Value of Clusters Extends Beyond Factory Walls
Example of the value of a cluster location versus
an isolated assembly plant
Indexed cost
100.0 2.0 2.0
100 4.0
2.0 1.2 2.0 86.8
80
◊ Scale from network-level sourcing
and common processes
60 ◊ Lean assets, processes, and
networks
◊ Flexible production reduces the
impact of logistics and currency costs
40 ◊ Value of options for future response
◊ Experience curve effects through
sharing of best practices
20 ◊ Greater access to managerial and
production talent
0
Initial costs Lean and Supplier Access
without cluster just in price to talent
time competition
Scale Freight and Joint Total costs with
foreign- experience cluster benefits
exchange
risk mitigation
Source: BCG analysis.
stance, an automaker with produc- much as 35 percent compared with make a wider variety of products
tion facilities in China realized major similar plants in Europe, without sac- much more cheaply than if they had
savings by rigorously “manualizing” rificing global standards for quality to retool and reprogram robots or
or semiautomating its noncritical and safety. The plant reduced outlays equipment. Many manufacturers
auto-manufacturing processes such for fixed assets by replacing equip- start out thinking that they’ll make
as glue application and wheel mount- ment less often, using machines with their most standardized products in
ing. Similarly, a European automaker less exacting specifications, decreas- low-cost countries. Then they realize
that built a new plant in Romania ing automation, leasing more equip- that even bigger savings can be had
was able to keep capital investment ment, and cutting tooling costs by 50 by producing “high-touch,” custom-
low by sharply decreasing the level to 60 percent compared with its ized products because labor is so in-
of automation. Rather than using plants in Europe and the United expensive.
1,000 robots for welding and other States. Built with local materials to
tasks, the plant uses just one robot to save on construction costs, the plant Disposable plants are the ultimate
install windshields—and 2,000 work- also uses less space—Indian build- example of flexible manufacturing.
ers to do everything else. The cars ings are lower because they don’t As much by necessity as by design,
take twice as many man-hours to as- need ducts for heating or air condi- many capital-constrained RDE-based
semble as similar cars in Western Eu- tioning and roofs don’t need to with- companies build short-lived, dispos-
rope but cost less to make because stand heavy snowfall. able plants—labor-intensive, dedicat-
labor rates are considerably lower. ed facilities for temporary mass pro-
Besides cutting costs, reducing capi- duction. Plants that are set up in this
And consider another example. A tal assets also increases flexibility. way can provide a relatively quick,
global automaker recently designed Because people are far more flexible low-risk entry to fast-moving mar-
a new plant in India to reduce its up- than equipment, manufacturers can kets. With disposable factories, com-
front investment in fixed assets by as do shorter production runs and panies source equipment locally
8 The Boston Consulting Group
11. rather than importing complex, auto- ers. An automotive company brought term investment in the supplier base.
mated systems. The factories are sim- in an expatriate manager to build These companies accept that com-
ple to operate and maintain, ex- world-class dealerships in India— petitors will benefit from the suppli-
tremely lean when it comes to carbon copies of their dealerships at ers’ increased capabilities but are
capital, and relatively inexpensive to home. Customers loved the ambi- willing to accept the tradeoff.
repurpose. By contrast, when a state- ance of these dealerships but balked
of-the-art, capital-intensive plant be- at the high prices. Unlike its more Stage 3: Global Integration. In the
comes obsolete, the company must third and most mature stage, compa-
either carry it or write it off—at a In the third stage, nies integrate their RDE-based plants
much higher cost. into global manufacturing networks,
companies integrate
going well beyond simple cost arbi-
Setting Up Lean, Localized Operations. their RDE-based trage or local advantage. This strate-
Although costs in RDEs are lower plants into global gy combines the best of the develop-
overall than costs in developed coun- ing and the developed worlds: the
tries, the basic lean-manufacturing manufacturing networks. cost advantages, flexibility, and ambi-
principle of cutting out wasted time, tious workforce of RDEs, and the
effort, and materials still applies—a successful competitors, the automak- marketing capabilities, sophisticated
fact that many companies lose sight er never aligned its business model technology, and management depth
of in their rush to get RDE plants up with the realities of price-sensitive of developed countries. These global
and running. Optimal cycle times, markets, low dealer margins, and networks serve a full range of cus-
buffer stocks, and approaches to high real-estate costs. tomers—from RDE-based customers
quality and “make it right the first to high-end ones in developed mar-
time” may be different in a plant in Extending lean principles to the sup- kets—by offering a variety of prod-
China or India than one in Germany ply base is another key aspect of lo- ucts with different features and price
or the United States, but the princi- calizing operations. Many companies points. Companies that reach this
ples and mindset should be the look strictly at cost when choosing stage have worked through the chal-
same. Instead of replicating lean- RDE-based suppliers, focusing on lenges of how to achieve a sustain-
plant designs from their high-cost lo- how competitive one bid is com- able competitive advantage through
cations, however, companies should pared with another. This approach RDE-based manufacturing. (See the
adapt their lean approach to local assumes that all suppliers are equal- sidebar “Asking the Right Ques-
conditions. This often means making ly competent, which is rarely the tions.”)
counterintuitive decisions. For in- case—maturity levels can vary wide-
stance, given the high turnover of ly. To build a strong local supplier India’s Bharat Forge has a globally
employees in many RDE locations base, MNCs may need to think in integrated network strategy that pro-
and the low cost of training people, it terms of developing their suppliers, vides a high degree of flexibility. The
may be less expensive to simplify or not just selecting them. For instance, company serves its customers in Eu-
“de-skill” tasks and build a pipeline a well-known consumer-goods com- rope and the United States from at
of replacement workers and supervi- pany had quality problems with the least two plants—one in a low-cost
sors than to recruit experienced em- products it was manufacturing in location and the other in a higher-
ployees and import costly expatri- China. Instead of installing costly cost location close to customers—
ates as managers. Another common quality-testing equipment, the com- and can rebalance capacity by shift-
practice in RDEs is to use a mix of pany set up a team to focus on im- ing products and production steps
permanent and contract labor to proving the supplier’s operating ca- between the plants. When a prod-
keep labor costs low and provide pabilities and reducing the quality uct’s profit margins drop as a result
more flexibility—especially when ex- problems over time. Moreover, some of competitive pressures, Bharat
port demand fluctuates. global manufacturers have as many Forge can migrate production from
as two development specialists for high-cost plants to low-cost ones,
Some MNCs are slower to learn the every buyer in their offshore-pro- which helps the company maintain
importance of localization than oth- curement groups—clearly a long- its margins.
Globally Advantaged Manufacturing 9
12. ables production and inventory
Asking the Right Questions coordination.
To achieve a sustainable competi- ◊◊ Do we have the right capabilities,
T
tive advantage through RDE-based metrics, and accountabilities—
manufacturing, companies should and do our suppliers have them he low costs and falling trade
ask themselves six questions: as well? barriers of the last decade
made RDE-based sourcing
◊◊ Are we managing for competitive ◊◊ Are our legacy assets and mind- and manufacturing an easy decision.
advantage—or chasing costs to sets holding us back? For a brief window of time, even an
the bottom?
ill-conceived strategy could deliver
◊◊ Do we have a globally advan- savings. That window is closing, but
◊◊ Are we leveraging local capabili- taged production network?
ties to the fullest? heading home is not the answer. In
most industries, a strong presence in
◊◊ Are our RDE plants and supply RDEs is becoming more important
chains lean? than ever as markets develop and
clusters of talent, suppliers, and com-
petitors take off and shape the fu-
A global manufacturer of power standard, “as built” products for ture. But the era of labor costs as the
equipment uses another form of this most market segments, the Europe- primary driver of RDE-based manu-
strategy. Three large-scale plants in an and U.S. plants customize the facturing is coming to an end. In-
different parts of Asia account for products for specialized, high-end stead, companies should seek to
about 85 percent of the company’s users. To make this strategy work, build globally advantaged manufac-
total labor hours. High-cost locations the company globally sources most turing networks that combine the
close to customers in Europe and components and standardizes pro- best of the developed and develop-
the United States account for the duction processes to assure consis- ing worlds—and confer a truly sus-
rest. While the Asian plants produce tent quality. A single ERP system en- tainable competitive edge.
10 The Boston Consulting Group
13. About the Authors Acknowledgments For Further Contact
Arindam Bhattacharya is a The authors would like to BCG’s Operations practice and Glob-
partner and managing director thank their colleagues Karthik al Advantage Initiative jointly spon-
in the New Delhi office of The Balasubramaniam, William Collis, sored this report. If you would like
Boston Consulting Group. You Richards Gilbert, Frieda Hsu, and to discuss the issues in this report,
may contact him by e-mail at Kim Wee Koh for their contributions please contact one of the authors.
bhattacharya.arindam@bcg.com. to this report. They would also like
to thank Martha Craumer for her For inquiries about the Global Ad-
Jim Hemerling is a senior partner help in writing the report and vantage Initiative, please contact one
and managing director in the Katherine Andrews, Gary Callahan, of its global leaders: Arindam Bhat-
firm’s San Francisco office. You Kim Friedman, and Sharon Slodki tacharya, Jim Hemerling, or Bernd
may contact him by e-mail at for their contributions to its editing, Waltermann.
hemerling.jim@bcg.com. design, and production.
Benjamin Pinney is a principal
in BCG’s Shanghai office. You
may contact him by e-mail at
pinney.benjamin@bcg.com.
Harold L. Sirkin is a senior partner
and managing director in the
firm’s Chicago office and the
global leader of BCG’s Operations
practice. You may contact him by e-
mail at hal.ops@bcg.com.
Bernd Waltermann is a senior
partner and managing director
in the firm’s Singapore office.
You may contact him by e-mail
at waltermann.bernd@bcg.com.
Globally Advantaged Manufacturing 11
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