the high-performance manufacturing organization...each organization design choice involves tradeoﬀ...

The High-Performance Manufacturing Organization

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The High-Performance Manufacturing Organization

Frank Lesmeister, Daniel Spindelndreier, and Michael Zinser

June

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Performance improvement eff orts tend to focus on the operational aspects of manufacturing. But organizational issues—matrix structures with multiple inter-faces, proliferating roles and responsibilities, a structure that is no longer aligned with strategy—can also be a major obstacle to quality, fl exibility, speed, cost eff ectiveness, and competitive advantage.

S SA company’s 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 SCompanies 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 TEach organization design choice involves tradeoff s that can aff ect cost, product quality, cycle times, and service levels. Many of these drawbacks can be off set.

AT A GLANCE

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MOST MANUFACTURERS HAVE COME to accept that change is a constant. Increasingly global operations, evolving production networks, mergers and

acquisitions—all contribute to a growing complexity that can extract a high cost if it is not actively managed. But improvement eff orts tend to focus on the operational aspects of manufacturing, such as production processes, the shop fl oor, and logis-tics. O en 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 company’s manufacturing strategy. These issues are o en at the root of performance problems. Ignoring them can be a major obstacle to quality, fl exibility, speed, cost eff ectiveness, and competitive advantage.

No single solution will fi t all manufacturing organizations. A company’s industry, markets, customers, products, internal capabilities, competitive position, and overall strategy will inform any decisions—and there will always be tradeoff s. But an eff ective 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 tradeoff s. It also off ers guide-lines for determining the best choices for a company’s manufacturing organization.

The Optimal Organization DesignMost 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 aff ect 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?

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Achieving a high level of manufactur-ing performance requires a skilled, engaged workforce and governance systems that drive and sustain excellence.

Management leadership and visibility help to create a culture of trust, cooperation, learning, and continuous improvement. Having the right people in the right roles at the right time is also critical. Given the global short-ages of skilled labor, this requires strategic workforce planning—a type of planning that involves defi ning needed jobs and skills, estimating likely hiring and attrition rates, and addressing any gaps that must be fi lled. Companies should also make an ongoing commitment to recruit-ment and training, and defi ne roles to clarify individual and shared responsi-bilities. (See the exhibit “Companies

Should Defi ne Individual and Shared Responsibilities.”)

O en, manufacturing organizations have too many of the wrong types of skills or people. But when it comes to trimming the organization, most companies focus more on reducing their workforce than on streamlining their management ranks. “Delayer-ing” these organizations can help fl atten the reporting pyramid and increase spans of control, which lowers costs and improves effi ciency and eff ectiveness. Delayering is more than just a restructuring or cost-cutting exercise. It also leads to improved management performance and accountability, more effi cient decision making, and greater job satisfaction. Knowledge, cultural changes, and corporate values also spread throughout the organization

THE IMPORTANCE OF PEOPLE AND GOVERNANCE

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 specifi c industries based on strategic business drivers, and we created organizational guidelines to point compa-nies in the right direction.

Start with StrategyA company’s 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, effi ciency, utilization rates, complexity, labor, and other cost drivers that aff ect 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

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more quickly and easily because there are fewer layers of management.

Finally, the right incentives are important to encourage the right behavior. In addition to cost or quality

performance, for instance, plant managers could be rewarded for such factors as service levels, the health and safety of their people, sharing of best practices, and compliance with production standards.

Site manager Line manager

Accountabilities

Metrics and targets

Organizational parameters

Decision rights

Leadership behavior

Direct or dotted-line reporting; plant ownership and structure

“Go Gemba!” Kaizen initiatives; collaboration among manufacturing-related functions and headquarters; best-practice sharing across plantsand business units

Individual: improve overall financials by lowering costs and reducing working capital; improve quality, service levels, staff engage-ment and capabilities,health and safety Shared: secure, reliable product delivery for customers and componentsupply

First-pass yield; on-time delivery; cycle/throughput time; accident levels; COG;1

working capital/inventory; direct/indirect costs; CAPEX

Owns: execution of manu-facturing strategy at plant; personnel decisions;improvement initiatives; high-level planning (e.g., Kanban, segmentation);inventory levels Can veto: investments Influences: manufacturing strategy; supplier selection

Manufacturing team structures; task allocation

“Go Gemba!” Kaizen initiatives; cross-line collaboration; guidanceand development of foremen and teams on shop floor

Individual: line perfor-mance; sustainable implementation ofstandards; cross-training and compe-tence development of staff; engagement and satisfaction of line staff Shared: timely product delivery

Overall equipmenteffectiveness; changeover times; quality; direct/indirect costs

Owns: optimization of operating processes; enforcement of standards; lean-manufacturing tools; line stoppages; personnel decisions on shop floor Can veto: line personnel decisions Influences: investments; inventory levels

Sources: BCG approach; BCG project experience.1COG refers to manufacturing costs only (costs of marketing and sales are not included).

Companies Should Defi ne Individual and Shared ResponsibilitiesExample: site manager and line manager

THE IMPORTANCE OF PEOPLE AND GOVERNANCE CONTINUED

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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 specifi c regions or customers? For instance, automotive suppliers, as well as companies making engineered prod-ucts or specialized chemicals and metals, all off er a large number of customized products. For companies in the building materials industry, proximity to custom-

Strategic drivers

High economiesof scale

Organizational choices

High economiesof scope

High significanceof asset utilization

High impact ofpersonnel costs

High degree ofcomplexity

High importance of proximity to customerHigh number of region-specificproducts

High number ofcustomer-specificproducts

High importanceof productionknow-how

Highly skilledengineering andproduction workforce required

• Global setup

• Global setup

• Global setup

• Global setup

• Regional or local setup

• Regional or local setup

• Customer-oriented setup on global or regional/ local level

• Standardized production system with integrated industrial engineering

• Lead plants or centers of excellence; if one product per plant, independent plants

• Lead plants or centers of excellence


• Lead plants

• Lead plants

• Independent plants close to customer

• Independent plants


• Centers of excellence



• Integrated planning and scheduling to balance demand volatility and control global volumes

• High level of standardization with integrated industrial engineering

• Standardized production system with integrated industrial engineering and standardized assets with asset management


• Standardized production system with integrated industrial engineering and management of assets and maintenance

Plant roles andresponsibilities

Degree offunctional integrationOrganization design

Econ

omic

sM

arke

ts a

ndcu

stom

ers

Tech

nolo

gies

and

skill

s

Source: BCG analysis.

E | Strategic Drivers Aff ect Organizational Choices

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ers is critical. A regional or local manufacturing organization tends to be more eff ective 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 o en specifi c to individual plants. As a result, centralized control and sharing of best practices is less important to their manufacturing operations.

Choose the Right StructureTo help determine the best setup for your company, look at how diff erent 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 diff erent organization setups.

The key strategic drivers that we discussed above—economics, markets and cus-tomers, and technologies and skills—aff ect structural choices in three critical areas: organization design, degree of functional integration, and plant roles and responsi-bilities. Let’s look at each of these areas more closely.

Organization Design. Companies must decide whether manufacturing decisions—such as product allocations or capital outlays—should 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

Organizationdesign

Functionalintegration

Plant roles

DecentralizedCentralized

Low High

Standalone Network

Durables FMCG

Consumer goods

Organizationdesign


Plant roles


Low High

Standalone Network

OEM Supplier

Automotive

Organizationdesign


Plant roles


Low High

Standalone Network

Building materials

Organizationdesign


Plant roles


Low High

Standalone Network

Pharmaceuticals Chemicals

Chemicals/pharmaceuticals

Metals Mining

Organizationdesign


Plant roles


Low High

Standalone Network

Engineered products

Organizationdesign


Plant roles


Low High

Standalone Network

Metals and mining

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

E | Industry Characteristics Drive Manufacturing Decisions

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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 eff ects, this approach makes it easier to share best practices and speeds up performance improvements—critical benefi ts in today’s fast-changing, fi ercely competitive global economy. But this solution isn’t always the right choice. For instance, companies that must create diff erent products for diff erent markets will usually fi nd that a regional or local organization allows them to better focus on—and respond more quickly to—the needs and require-ments of local customers.

Degree of Functional Integration. Decisions about whether to integrate related functions—such as production control, planning and scheduling, IT, quality, mainte-nance, engineering, and asset management—within 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

Independent plants

Lead plantsProducts Processes

Plant network

Planning andscheduling

Procurement Logistics(in- and outbound)

Quality

Productioncontrolling

Maintenancemanagement

Industrialengineering

Assetmanagement

IT

Organizationdesign

Degree offunctionalintegration

Plant roles andresponsibilities

Board

BU A BU B BU CMfg.

Hybrid DivisionalFunctional

BoardMfg. BU A

Mfg.BU BMfg.

BU CMfg.

BoardBU AMfg.

BU BMfg.

BU CMfg.

Source: BCG analysis.Note: Mfg. = manufacturing; BU = business unit.

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

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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 eff ective at the plant level, where total quality management (TQM) can engage workers in continuous improvement eff orts. Lean initiatives—with their total-productive-maintenance (TPM) approach—also 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 fl ows are absent—such as when the product portfolio is varied or highly customized to specifi c regions—there will be limited cross-plant synergies. In these cases, plants can be run independently, steered by centrally defi ned performance metrics. But when materials fl ow across plants and knowledge and standards are shared, a plant network with dedicated roles for each plant is the optimal setup. For instance, if specifi c 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 specifi c 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 fl exibility, with short change-over and ramp-up times that are best suited for products with volatile or unpredict-able demand. By defi ning plant roles, consolidating products with similar character-

Planning and scheduling

Quality

Production controlling

Maintenance IT

Organizationdesign

Degree offunctionalintegration

Workshops—activity bundlingValue stream—process bundling

Mfg.

VS 1VS 2

Mfg.

WS 1 WS 2 WS 3 WS 4

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

E | Two Types of Organizational Decisions Should Be Made at the Plant Level

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istics, and exploring ways to reallocate products across the network, companies can achieve greater cost savings, fl exibility, and effi ciency.

Managing the TradeoffsEach design choice involves tradeoff s that can aff ect 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 off set 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 unifi ed 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 eff orts. Companies can off set these drawbacks—and sharply reduce production costs over time—by defi ning manufacturing requirements early in the manufacturing process through better communication.

Some companies take more of an out-of-the-box approach to managing tradeoff s. A microchip manufacturer with enormous cost pressures, for instance, had stringent requirements for quality and process reliability. Moreover, because its business was asset intensive, asset productivity and scale were critical. To meet these challenges, the company made all its manufacturing plants identical, down to the smallest detail, so that each one makes the same products in the same way—a rather extreme approach to central governance. As a result, the company can diagnose and fi x problems quickly, and it can rapidly implement improvements. Its plant network is also extremely fl exible—production can be shi ed 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 tradeoff : 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 infl exibly. The company decided to estab-lish regional “mother plants” that support local projects, train staff , set up employ-ee exchange programs, and manage fi ve-year performance road maps. Headquar-ters can now focus on the bigger picture—developing major change programs that the mother plants can implement.

Each company must decide which tradeoff s to make based on its individual situation, markets, competitive environment, and industry benchmarks. Moreover, a company’s 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, fl exible, and strategi-cally aligned. The right organization design, an engaged workforce, and eff ective governance systems result in sustained manufacturing excellence—and a powerful source of competitive advantage.

Each design choice involves tradeoff s

that can aff ect cost, product quality, cycle times, and

service levels.

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About the AuthorsFrank Lesmeister is a principal in the Düsseldorf offi ce of The Boston Consulting Group and a topic expert for manufacturing. You may contact him by e-mail at [email protected].

Daniel Spindelndreier is a partner and managing director in the fi rm’s Düsseldorf offi ce and coleader of BCG’s manufacturing topic. You may contact him by e-mail at [email protected].

Michael Zinser is a partner and managing director in the fi rm’s Chicago offi ce and coleader of BCG’s manufacturing topic. You may contact him by e-mail at [email protected].

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

For a complete list of BCG publications and information about how to obtain copies, please visit our website at www.bcg.com/publications.

To receive future publications in electronic form about this topic or others, please visit our subscription website at www.bcg.com/subscribe.

© The Boston Consulting Group, Inc. 2011. All rights reserved.6/11

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the high-performance manufacturing organization...each organization design choice involves tradeoﬀ...

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