PRODUCTION STRATEGY

DESIGN OF PRODUCTION SYSTEMS

TU-22.1113/1115

Eero Eloranta
13.09.2006

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The elements of a strategy in

a networked business

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 Business model –
elements and underlying factors

• Value offering
• Customer value
• Revenue model
• Network
• Positioning

• Brand
• Scale
• Markets, culture, laws
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Networks and positioning -

alternative positions for corporate focus

Comp. Mkt. & After

Design Mfg Sales LogisticsDistrib.
mfg. branding mkt.

STRATEGIC CHOICES?

Go upstream ! Go horizontal ! Go downstream !

Go upstream and downstream !

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 Networks and positioning -
Extremes
Comp. Mkt. & After
Design Mfg Sales LogisticsDistrib.
mfg. branding mkt.

Two extreme examples:

Comp. Mkt. & After

Modus Link (OBM): mfg.
Design Mfg Sales
branding
Logistics
Distrib.
mkt.

Comp. Mkt. & After

Virgin (Brander): mfg.
Design Mfg Sales
branding
Logistics
Distrib.
mkt.

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Product & service model

Integration with
The consumers

New
applications
Product
platform
Distribution channel, brand

Core product
Integration
Compatibility

Systems
Modularity

Usability

Softare
Service

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 Component
outsourcing
Own parts production
and assembly Supplier collaboration,
System suppliers
Product vs.
service production

Separate service Service business to

and product biz support product mfg

Services supported
by product biz
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Objectives of production
• Rule of thumb: cost, quality, delivery

• Longer version: simultaneous achievement of

Productivity (value added/cost, pcs/person, etc.)
Customer service (e.g. availability, responsiveness)
Responsiveness (OFLT, OTD)
Controllability (lead time, program change time, DOS)
Capital efficiency (DOS, utilisation)
Flexibility (excess resources)
Agility (flexible responsiveness)
Leverage to high margin and revenue (profit, cost, EBIT)
Quality (FFR, PPM, yield)

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 Competitive choices according to
Treacy and Wiersma (1993)

Product
leadership

Operational Customer
excellence intimacy

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Moore’s business life cycle and production

Product Customer Operational

leadership intimacy excellence

Availability Agility Cost

Quality
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Source of the illustration; Wikipedia

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The three basic competitive games

Exploration game
–Early market
–Product leadership strategy

Agility game
–Tornado, early maturity
–Customer intimacy strategy

Commodity game
–Mature markets
–Operational efficiency strategy

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Exploration game
Imperative: Ensure reliable delivery in spite of uncertainty in
technology and demand
Life cycle: Early market
Strategy: Product leadership
Business: Any technology push based value domain, or new value
domains in existing businesses
Elements: Reliable product delivery in spite of immature products
Sourcing under uncertainty, purchasing under risk
Production, sourcing and distribution flexibility
Key business processes run concurrently
New product developmet process
Delivery process
Organic delivery process is a must
Note: Exploration game is the nightmare of a production professional
- yet, pricing is value rather than cost based in this game!

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Agility game
Imperative: Create the fastest response E2E MTO / ATO model –
customization incl.
Life cycle: Tornado, main stream
Strategy: Customer intimacy
Business: Customized products, channel partner promotions, OEM
driven variants
Elements: Shortest OFLT capability – including customized products
Use & leverage channel visibility with true E2E management
capability
Capability to steer volumes and margins on-line
Customer value thresholds needed
Note: Strategic intent to gain the reputation of the preferred supplier

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Commodity game
Imperative: Extend cost efficiency leadership
Life cycle: Main stream, maturity
Strategy: Operational efficiency
Business: Mass distribution, e.g. Asian markets, daily consumables, PC
(SOHO, small offices and homes)
Elements: Low cost, ready-to-use, partner acknowledged products
Shared planning / risk / revenue sharing btw producer and
channel partners
Direct distribution from factories to consumers
Full trucks or at least full pallets to points-of-sale
Scale matters
OFLT is not that important, OTD is!
Note: Min E2E cost = flawless execution of mass production & mass
distribution!

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Production in global economics?
• BUSINESSES AND PRODUCTS?
Global vs. local
Ramp-ups & ramp downs
Oulu, Finland
• PLANT FOCUS? Tampere, Finland
Salo, Finland
Division by product / technology Espoo, Finland / geography?

Camberley, UK Copenhagen, Denmark

• SUPPLIERS? Beijing, China Tokyo, Japan
San Diego, California Fort Worth, Texas Bochum, Germany
global vs. local Dongguan, China
Osaka, Japan

Melbourne, Florida Masan, South-Korea

• AFTER MARKETS? Hong Kong
Taipei, Taiwan

Reverse logistics
• IT SUPPORT? Singapore

Transaction processing backbone?

Value adding applications? Sydney, Australia

• MULTICULTURAL ENVIRONMENT
Unified vs. regional processes
Social cultures, business cultures, time zones
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Labor cost including social costs (EUR / hour)

27.5
Germany 22.3
Sweden
Finland
20
France
18.8
USA 18.5
UK 14.8
Ireland 11.4
Italy 9.7
Taiwan 5.3
Korea 5.1
Hungary 5
Czech rep. 1 3.6
Poland 3.4
Mexico 2.6
Malaysia 2.3
Estonia 2.2
Latvia 2
Lithuania 1.6
Slovak rep. 3
China
Russia
1.3
Romania
1
Bulgaria
0.8
0.6
0 5 10 15 20 25 30

Source: Ari Kurikka, Nokia Networks, 2004 / Brean Murray, 2002

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 Global structural change:industrial production development

Real change over previous year, %

Source: Technology Industries of Finland 2003 / Consensus Economics, August 2003

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Strategic manufacturing choices

TARGET ATTRIBUTES

Product technology Mechanics, electronics, software; standardisation

Sales volumes Per product family, product
Process technology Scale, flexibility, interchangeability, interconnections
Capacity Nature, amount, timing, type
Facilities Size, location, specialisation
Vertical integration Direction, extent, balance
Vendors Number, structure, relationships, procedures, sharing
New products Personal, customised, segmented, modified, std.
Human resources Selection, compensation, competences, security
Quality Defect prevention, monitoring, intervention
Systems De- / centralisation, autonomy, ambition level
Organisation Structure, control & rewarding system, staffing

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Source: Hayes & Wheelwright

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Alternatives for production strategy

EXTERNALLY NEUTRAL EXTERNALLY SUPPORTIVE

Achieve parity with Pursue a manufacturing

competitors based competitive
advantage

INTERNALLY NEUTRAL INTERNALLY SUPPORTIVE

Minimise manufacturing’s Provide credible support to

negative potential business strategy

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Source: Hayes & Wheelwright

Neutral production strategies

INTERNALLY NEUTRAL • Role of outside experts dominant

Minimise manufacturing’s • Internal, detailed management control
negative potential systems for monitoring
• Reactive mode

EXTERNALLY NEUTRAL • Industry practice followed

• Investment horizon covers one
Achieve parity with business cycle
competitors • Capital investment primary means to
catch competition

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Source: Hayes & Wheelwright

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 Supportive production strategies
INTERNALLY • Investments for consistency with the
SUPPORTIVE business strategy
• Manufacturing strategy is formulated
Provide credible and pursued
support to business • Long term trends and development
strategy addressed systematically

EXTERNALLY • Anticipate the potential of new

SUPPORTIVE manufacturing practices
• Manufacturing involved in major mkt
Pursue a manufacturing and eng. decisions (& v.v.)
based competitive • Long range program to acquire
advantage capabilities in advance of needs

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Source: Hayes & Wheelwright

Case Elcoteq SE
• 1984 Lohja Microelectronics founded to support Lohja Corporation's
electroluminescent display development production in Lohja
• 1990 Lohja Microelectronics unit was incorporated as Elcoteq Oy Ab
• 1991 Management Buy-Out
• 1992 Pilot production started in Tallinn, Estonia
• 1993 AS Elcoteq Tallinn established as a legal entity in Estonia
Printeq-Piirilevyt Oy (Printed Circuit Board production) establ.
• 1994 Oy Jorvas Partners Ab acquired near Helsinki, Finland
- ABB Industry's electronics assembly factory acquired in Helsinki
• 1995 New Gunnarla plant in Lohja, Finland started production
- New Printeq factory started production in Salo, Finland
• 1996 Jorvas factory closed
- Capacity in Tallinn nearly tripled
- Phone Repair Center started in Tallinn
• 1997 First GSM phone EMS box-build project in EMS ind. with /// in
Tallinn
- Elcoteq Deutschland GmbH established
- Expansion of the Tallinn factory
- Pilot production in St. Petersburg, Russia
- Listing on the Helsinki Stock Exchange
• 1998 Printeq operation was sold
- New Technology Services Unit was set up
- Elcoteq acquired ABB Transmit PCB operations in Vaasa,
- Elcoteq acquired Kone Elevator’s electronics ops. in Hyvinkää
- Purchase office was established in Tokyo, Japan
- New plant was built in Pécs, Hungary
- Building of a new plant started in Monterrey, Mexico
- Elcoteq & Elektrobit sign co-operation on product and tech. dvlp
• 1999 Mexican plant in Monterrey started operation
- Purchase of Dongguan plant in China
- Elcoteq Denmark was established
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• 2000 Acq. of Stephan Elektronik Überlingen (D), incl. ops. in Ch, Pl
- Acquistion on NDP's plant in Pécs, Hungary
- Elcoteq Beijing Electronics was established in China
- Building of second Elcoteq plant started in Tallinn
- Elcoteq decided to build a new plant in Wroclaw, Pl
• 2001 Elcoteq divided its business into three BAs: Terminal
Products, Communications Network Equipment and
Industrial Electronics
- Acquisition of ABB electronics unit in Switzerland
- Elcoteq decides to merge Helsinki and Lohja plants
- Elcoteq acquires mechanical engineering unit of
Adtranz. Ch
- Elcoteq decided to build new plant in Beijing, China
• 2002 Elcoteq and Aspocomp established technology
development company Imbera Electronics Oy
- Elcoteq aqcuired three-fourths of the Benefon R&D Center
into Elcoteq's wholly-owned subsidiary Elcoteq Design Center Oy
- Refined strategy was announced in August
- Elcoteq acquired IBM's 70% ownership of GKI in Cn
• 2003 Acquisition of NPI services company NPRC, Inc., USA
- Elcoteq aqcuired Marconi's electronics mfg.Offenburg
- Acquisition of 20 percent of ISIS surface mounting
- Elcoteq and Cellon enter into cooperation agreement
- Elcoteq to acquire the mfg operations of Tellabs, Fin
• 2004 Divestment of Industrial Electronics business area
- Decision to build a new plant in St. Petersburg, Russia
- Elcoteq decided to open mfg operations in Ind, Bra
- Elcoteq opened an international office in Zug, Ch
- Elcoteq started manufacturing operations in Manaus
- Elcoteq acquired a mfg facility from Thomson, Juarez, Mx
• 2005 Plant inauguration in Bangalore, India
- Geographical Area Europe’s head office in Budapest
- Elcoteq celebrated 10th anniversary of the Gunnarla plant, Lohja
- Elcoteq converted into a European Company (Societas
Europaea, SE)
- Plant inauguration in St. Petersburg, Russia

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 Case Vaisala Oyj
The first actual delivery of Vaisala radiosondes to MIT in
1936. This radiosonde model was complete with pressure,
temperature and humidity measurement
In the 1940's prof. Väisälä established a company called
Mittari Oy and manufacturing facilities for radiosonde
systems
In the 1950's a modern manufacturing plant was relocated in Vantaa
and radiosondes were tested further
The world's first fully transistorized radiosonde, the Vaisala
was introduced to the market in the mid-1960's
Radiosonde production at Vaisala in the 1960's.

The Vaisala CORA Automatic Sounding System was

introduced in the early ’70’s

The HUMICAP® Humidity Sensor was developed in the

1970's, when the possibility of combining thin-film technology
and capacitive measurements was studied
The Vaisala RS80-radiosonde (4th generation), which
utilizes the HUMICAP® sensor, was launched in the
1980's.

1985 acquired Tycho Technologies Inc. of USA, manufacturer of upper air windprofiler
1995 the sold Vaisala Technologies Inc. (VTI) to Breed Technologies Inc. (silicon capacitive sensors for the car ind.)
1999 acquired AIR Inc. of USA (upper air observation systems
1999 acquired Handar Inc. of USA (meteorological and hydrological equipment)
2000 the Group acquired Dimension SA of France (lightning detection, thundersorm forecasting)
2000 the Group acquired Jenoptik Impulsphysik GmbH of Germany (airport weather stations, optical sensors)
2001 acquired the Meteorological Systems Unit of Radian International LLC of USA
2002 acquired Global Atmospherics Corporation of Tucson, Arizona, USA (lightning detection)
2005 acquired
Mfg_strategy_060913 CLH
/ © Eero Inc./ of
Eloranta 23 Minneapolis, Minnesota, USA (airport weather stations)
2005 the acquired Sigmet Corporation of Westford, Massachusetts, USA (weather radars)

Case Nortel
Nortel Networks, the Canadian telecommunications equipment giant, began its corporate life in
1895 making equipment for traditional phone companies in Canada, a few years after Alexander
Graham Bell invented the telephone. Originally, part of Bell Telephone, it morphed into Northern
Telecom, and finally Nortel. The company remade itself as an Internet company in the 1990’s.
…
Major changes began at Nortel when John Roth took office in 1997 as the company's president and
chief executive officer. He saw that the marketplace of communications was shifting from
telephone technology to the Internet. The trick was figuring out how to speed up the process of
getting new products and services into the market so Nortel could keep ahead of the fast-paced
Web world. In the past, it often took as long as five years to complete a research and development
project.

…Nortel was dramatically restructured. Forums were created where nominated employess from
every level gathered to help make the company more in tune with the wireless and optical
marketplace. Nortel moved to outsourcing much of its production, resulting in the closure of 18 of
the company's 24 plants.
Nortel's growth was in part based on acquisitions. It went on frequent buying sprees, often using its
own stock to make acquisitions. In 2000 alone, it bought 11 companies for a total of $19.7 BUSD
CBC News Online | June 27, 2006

Paris, September 1, 2006 - Alcatel (Paris: CGEP.PA and NYSE: ALA) announced today that it has signed a non-
binding Memorandum of Understanding with Nortel to acquire its UMTS radio access business (UTRAN) and
related assets for USD 320 million. This is a key step in Alcatel's strategy to further strengthen its UMTS market
position, and thus
Mfg_strategy_060913 expand
/ © Eero Eloranta /its
24 global leadership in broadband access.

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