Manufacturers of all types seek the same holy grail: the strategy that delivers products at the lowest possible total landed cost. In search of that goal, over the past few years companies all over the world have relocated facilities, outsourced production to low-cost countries, invested in automation, consolidated plants, or fundamentally redefined relationships with suppliers.
Establishing the cheapest manufacturing footprint becomes infinitely more elusive when basic assumptions change fast and furiously, as they have in the past year. Redesigning the footprint can be the biggest and most important transformation a manufacturer can undertake. Yet too many managers choose the footprint by using only a single set of future cost and demand assumptions. Any manufacturing footprint exposes companies to risks, such as changes in local and global demand, currency exchange rates, labor and transportation costs, or even trade regulation. A wrong bet can transform what should be a competitive advantage into a mess of underutilized or high-cost assets.
In our experience, the missing ingredient in many manufacturing-strategy decisions is a careful consideration of the value of flexibility. Companies that build it into their manufacturing presence can respond more nimbly to changing conditions and outperform competitors with less flexible footprints. As the current economic turmoil illustrates, the greater the level of uncertainty, the greater the value of flexibility. This is not surprising; real-options theory maintains that flexibility is more important when volatility is more intense. To capture this value and gain the best position for responding to future economic changes, all companies should integrate flexibility into their manufacturing-footprint or sourcing decisions.