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The High-Performance

Manufacturing
Organization
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The High-Performance
Manufacturing
Organization

Frank Lesmeister, Daniel Spindelndreier, and Michael Zinser

June
AT A GLANCE

Performance improvement eorts tend to focus on the operational aspects of


manufacturing. But organizational issuesmatrix structures with multiple inter-
faces, proliferating roles and responsibilities, a structure that is no longer aligned
with strategycan also be a major obstacle to quality, flexibility, speed, cost
eectiveness, and competitive advantage.

S S
A companys 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 tradeos that can aect cost, product
quality, cycle times, and service levels. Many of these drawbacks can be oset.

T H-P M O
M OST MANUFACTURERS HAVE COME to accept that change is a constant.
Increasingly global operations, evolving production networks, mergers and
acquisitionsall contribute to a growing complexity that can extract a high cost if it
is not actively managed. But improvement eorts 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 matrix
structures 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 companys manufacturing strategy. These
issues are oen at the root of performance problems. Ignoring them can be a major
obstacle to quality, flexibility, speed, cost eectiveness, and competitive advantage.

No single solution will fit all manufacturing organizations. A companys industry,


markets, customers, products, internal capabilities, competitive position, and overall
strategy will inform any decisionsand there will always be tradeos. But an
eective 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 tradeos. It also oers guide-
lines for determining the best choices for a companys manufacturing organization.

The Optimal Organization Design


Most 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 aect
product 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?

T B C G
THE IMPORTANCE OF PEOPLE AND GOVERNANCE

Achieving a high level of manufactur- Should Define Individual and Shared


ing performance requires a skilled, Responsibilities.)
engaged workforce and governance
systems that drive and sustain Oen, manufacturing organizations
excellence. have too many of the wrong types of
skills or people. But when it comes to
Management leadership and visibility trimming the organization, most
help to create a culture of trust, companies focus more on reducing
cooperation, learning, and continuous their workforce than on streamlining
improvement. Having the right people their management ranks. Delayer-
in the right roles at the right time is ing these organizations can help
also critical. Given the global short- flatten the reporting pyramid and
ages of skilled labor, this requires increase spans of control, which
strategic workforce planninga type lowers costs and improves eciency
of planning that involves defining and eectiveness. Delayering is more
needed jobs and skills, estimating than just a restructuring or cost-
likely hiring and attrition rates, and cutting exercise. It also leads to
addressing any gaps that must be improved management performance
filled. Companies should also make and accountability, more ecient
an ongoing commitment to recruit- decision making, and greater job
ment and training, and define roles to satisfaction. Knowledge, cultural
clarify individual and shared responsi- changes, and corporate values also
bilities. (See the exhibit Companies spread throughout the organization

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 Strategy


A companys 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. (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, eciency, utilization rates, complexity,
labor, and other cost drivers that aect 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

T H-P M O
THE IMPORTANCE OF PEOPLE AND GOVERNANCE
CONTINUED

more quickly and easily because there performance, for instance, plant
are fewer layers of management. managers could be rewarded for such
factors as service levels, the health
Finally, the right incentives are and safety of their people, sharing of
important to encourage the right best practices, and compliance with
behavior. In addition to cost or quality production standards.

Companies Should Define Individual and Shared Responsibilities


Example: site manager and line manager

Site manager Line manager


Organizational parameters Direct or dotted-line Manufacturing team
reporting; plant ownership structures; task
and structure allocation

Leadership behavior Go Gemba! Kaizen Go Gemba! Kaizen


initiatives; collaboration initiatives; cross-line
among manufacturing- collaboration; guidance
related functions and and development of
headquarters; best-practice foremen and teams on
sharing across plants shop oor
and business units

Accountabilities Individual: improve overall Individual: line perfor-


nancials by lowering costs mance; sustainable
and reducing working implementation of
capital; improve quality, standards; cross-
service levels, sta engage- training and compe-
ment and capabilities, tence development of
health and safety sta; engagement and
satisfaction of line sta
Shared: secure, reliable
product delivery for Shared: timely product
customers and component delivery
supply

Metrics and targets First-pass yield; on-time Overall equipment


delivery; cycle/throughput eectiveness;
time; accident levels; COG;1 changeover times;
working capital/inventory; quality; direct/indirect
direct/indirect costs; CAPEX costs

Decision rights Owns: execution of manu- Owns: optimization of


facturing strategy at plant; operating processes;
personnel decisions; enforcement of
improvement initiatives; standards; lean-
high-level planning (e.g., manufacturing tools;
Kanban, segmentation); line stoppages;
inventory levels personnel decisions
on shop oor
Can veto: investments
Can veto: line
Influences: manufacturing personnel decisions
strategy; supplier selection
Influences: investments;
inventory levels

Sources: BCG approach; BCG project experience.


1
COG refers to manufacturing costs only (costs of marketing and sales are not included).

T B C G
E | Strategic Drivers Aect Organizational Choices
Organizational choices
Degree of Plant roles and
Strategic drivers Organization design
functional integration responsibilities

High economies Global setup Standardized production system Lead plants or centers of
of scale with integrated industrial excellence; if one product
engineering per plant, independent plants
High economies Standardized production system Lead plants or centers of
of scope with integrated industrial excellence
engineering
High significance Global setup Integrated planning and scheduling Lead plants or centers of
of asset utilization to balance demand volatility and excellence
Economics

control global volumes


Standardized production system
with integrated industrial
engineering and management of
assets and maintenance
High impact of High level of standardization Lead plants
personnel costs with integrated industrial
engineering
High degree of Global setup Standardized production Lead plants
complexity system with integrated
industrial engineering and
standardized assets with
asset management
High importance Regional or local setup Independent plants close
of proximity to to customer
Markets and

customer
customers

High number of Regional or local setup Independent plants


region-specific
products
High number of Customer-oriented setup Lead plants or centers of
customer-specific on global or regional/ excellence
products local level
Highly skilled Centers of excellence
Technologies

engineering and
and skills

production
workforce required
High importance Global setup Standardized production Lead plants or centers of
of production system with integrated excellence
know-how industrial engineering

Source: BCG analysis.

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 the
automotive, 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 and


to 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 oer a large number of customized
products. For companies in the building materials industry, proximity to custom-

T H-P M O
ers is critical. A regional or local manufacturing organization tends to be more
eective 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, such
as 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 Structure


To help determine the best setup for your company, look at how dierent 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 dierent
organization setups.

The key strategic drivers that we discussed aboveeconomics, markets and cus-
tomers, and technologies and skillsaect structural choices in three critical areas:
organization design, degree of functional integration, and plant roles and responsi-
bilities. Lets look at each of these areas more closely.

Organization Design. Companies must decide whether manufacturing decisions


such as product allocations or capital outlaysshould 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

E | Industry Characteristics Drive Manufacturing Decisions

Consumer goods Automotive Building materials


Organization Organization Organization
design Centralized Decentralized design Centralized Decentralized design Centralized Decentralized
Functional Functional Functional
integration Low High integration Low High integration Low High
Plant roles Plant roles Plant roles
Standalone Network Standalone Network Standalone Network
Durables FMCG OEM Supplier

Chemicals/pharmaceuticals Engineered products Metals and mining


Organization Organization Organization
design Centralized Decentralized design Centralized Decentralized design Centralized Decentralized
Functional Functional Functional
integration Low High integration Low High integration Low High
Plant roles Plant roles Plant roles
Standalone Network Standalone Network Standalone Network
Pharmaceuticals Chemicals Metals Mining

Source: BCG analysis.


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

T B C G
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 eects, this approach makes it easier to share
best practices and speeds up performance improvementscritical benefits in
todays fast-changing, fiercely competitive global economy. But this solution isnt
always the right choice. For instance, companies that must create dierent products
for dierent markets will usually find that a regional or local organization allows
them to better focus onand respond more quickly tothe needs and require-
ments of local customers.

Degree of Functional Integration. Decisions about whether to integrate related


functionssuch as production control, planning and scheduling, IT, quality, mainte-
nance, engineering, and asset managementwithin 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

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

Functional Hybrid Divisional


Organization Board Board Board
design
Mfg. BU A BU B BU C Mfg. BU A BU B BU C BU A BU B BU C
Mfg. Mfg. Mfg. Mfg. Mfg. Mfg.

Planning and Procurement Logistics Quality


scheduling (in- and outbound)

Degree of
functional
integration Production Maintenance Industrial Asset IT
controlling management engineering management

Independent plants Plant network


Products Processes Lead plants
Plant roles and
responsibilities

Source: BCG analysis.


Note: Mfg. = manufacturing; BU = business unit.

T H-P M O
E | Two Types of Organizational Decisions Should Be Made at the Plant Level

Value streamprocess bundling Workshopsactivity bundling

Mfg. Mfg.
Organization
design WS 1 WS 2 WS 3 WS 4
VS 1
VS 2

Production controlling Planning and scheduling

Degree of
functional
integration Maintenance Quality IT

Source: BCG analysis.


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

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 eective at the plant level, where total quality
management (TQM) can engage workers in continuous improvement eorts. Lean
initiativeswith their total-productive-maintenance (TPM) approachalso 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 absentsuch as when the product portfolio is varied
or highly customized to specific regionsthere 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 certain
plants 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-

T B C G
istics, and exploring ways to reallocate products across the network, companies can
achieve greater cost savings, flexibility, and eciency.

Managing the Tradeoffs


Each design choice involves tradeos that can aect 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 oset 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 eorts. Companies can oset these drawbacksand sharply reduce
production costs over timeby defining manufacturing requirements early in the
manufacturing process through better communication.

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


microchip manufacturer with enormous cost pressures, for instance, had stringent
requirements for quality and process reliability. Moreover, because its business was
Each design choice asset intensive, asset productivity and scale were critical. To meet these challenges,
involves tradeos the company made all its manufacturing plants identical, down to the smallest
that can aect cost, detail, so that each one makes the same products in the same waya rather
product quality, extreme approach to central governance. As a result, the company can diagnose
cycle times, and and fix problems quickly, and it can rapidly implement improvements. Its plant
service levels. network is also extremely flexibleproduction 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 tradeo: 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, set up employ-
ee exchange programs, and manage five-year performance road maps. Headquar-
ters can now focus on the bigger picturedeveloping major change programs that
the mother plants can implement.

Each company must decide which tradeos to make based on its individual situation,
markets, competitive environment, and industry benchmarks. Moreover, a companys
organizational choices require the right people and skills to be truly powerful.

I -, increasingly complex global environment, companies


must 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 eective
governance systems result in sustained manufacturing excellenceand a powerful
source of competitive advantage.

T H-P M O
About the Authors
Frank Lesmeister is a principal in the Dsseldorf oce of The Boston Consulting Group and a
topic expert for manufacturing. You may contact him by e-mail at lesmeister.frank@bcg.com.

Daniel Spindelndreier is a partner and managing director in the firms Dsseldorf oce and
coleader of BCGs manufacturing topic. You may contact him by e-mail at spindelndreier.daniel@
bcg.com.

Michael Zinser is a partner and managing director in the firms Chicago oce and coleader of
BCGs manufacturing topic. You may contact him by e-mail at zinser.michael@bcg.com.

Acknowledgments
The 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 Contact


If you would like to discuss this report, please contact one of the authors.

T B C G
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The Boston Consulting Group, Inc. 2011. All rights reserved.


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