Optimising capacity utilisation to real demand is difficult enough during a normal economic cycle. But if companies do not have the right flexibility to respond during a deep recession, even the existence of the organisation is put at serious risk.
Matching the use of production capacity to real demand is difficult enough during a normal economic cycle. But if companies do not have the right flexibility to adjust their production capacity during a deep recession and its aftermath, the very existence of the organisation can be at serious risk.
Given the slow recovery from recession and continuously volatile markets, what options do global manufacturing companies have to align production capacity, reduce rixed costs significantly and achieve all of this with a balanced level of input without putting the total business at risk?
Our report, 'Catch your breath in the crisis: concepts for flexible capacity adjustments across global production networks,' explores how manufacturing companies are using back-shoring, in-sourcing and detailed economic analysis to respond to the challenge of adjusting production capacity to meet uncertain demand.
Many manufacturing companies have established global production networks, achieving an optimised cost base through relocation such as off-shoring and outsourcing. While production sites in Asia have been used mainly to serve local demand in that region, Eastern European and Mexican production sites have delivered the lowest ‘landed cost’ for products destined for markets in Western Europe and North America respectively.
At the same time, many companies have made their domestic production sites competitive through productivity improvement programmes. Some have outsourced those parts of the manufacturing process with low value added content. These sub-processes were outsourced to external suppliers to create space for high value processes, capitalise on economies of scale and the extensive know-how of suppliers whilst reducing the working capital needs of the business and converting fixed / indirect costs into direct costs at the same time.
During times of economic crisis, production capacity needs to be adjusted extremely fast in line with the changes in demand. In the short term, flexible working practices can be used to overcome initial fixed cost challenges, but back-shoring and insourcing, horizontal or vertical consolidation, must be given serious consideration. At the same time, both the speed of implementation and the potential risk associated with action need to be taken into account, since not all relocations can be initiated quickly nor are always delivered successfully.
In the medium term, ensuring flexibility across the global production network is crucial, in order to minimise one time effects of future changes and to offset against risks still to emerge – currency shifts, employment cost changes, transport costs, fiscal changes. Achieving this needs a performance-orientated approach, coupled with intelligent organisation of production sites and processes, to allow products and components to be moved seamlessly and cost-effectively between the company’s internal and external production and supplier network.
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