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The High-PerformanceManufacturingOrganization
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leading advisor on business strategy. We partner
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For more information, please visit www.bcg.com.
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The High-PerformanceManufacturingOrganization
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, flexibility, speed, cost
eff ectiveness, and competitive advantage.
S S
A 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 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 tradeoff s that can aff ect cost, productquality, 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 andacquisitions—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 floor, and logis-
tics. Oen overlooked is the high cost of organizational complexity: the matrixstructures 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 oen at the root of performance problems. Ignoring them can be a major
obstacle to quality, flexibility, speed, cost eff ectiveness, and competitive advantage.
No single solution will fit 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 a ff ectproduct 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 defining
needed jobs and skills, estimating
likely hiring and attrition rates, and
addressing any gaps that must be
filled. Companies should also make
an ongoing commitment to recruit-
ment and training, and define roles to
clarify individual and shared responsi-
bilities. (See the exhibit “Companies
Should Define Individual and Shared
Responsibilities.”)
Oen, 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
flatten the reporting pyramid andincrease 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 specific 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 howbest 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 a ff 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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T B C G
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-linereporting; plant ownershipand structure
“Go Gemba!” Kaizeninitiatives; collaborationamong manufacturing-related functions andheadquarters; best-practicesharing across plantsand business units
Individual: improve overallfinancials by lowering costsand reducing workingcapital; improve quality,service levels, staff engage-
ment and capabilities,health and safety Shared: secure, reliableproduct delivery forcustomers and componentsupply
First-pass yield; on-timedelivery; cycle/throughputtime; 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: manufacturingstrategy; supplier selection
Manufacturing teamstructures; taskallocation
“Go Gemba!” Kaizeninitiatives; cross-linecollaboration; guidanceand development offoremen and teams onshop floor
Individual: line perfor-mance; sustainableimplementation of standards; cross-training and compe-
tence development ofstaff; engagement andsatisfaction of line staff Shared: timely productdelivery
Overall equipmenteffectiveness;changeover times;quality; direct/indirectcosts
Owns: optimization ofoperating processes;enforcement ofstandards; lean-
manufacturing tools;line stoppages;personnel decisionson shop floor Can veto: linepersonnel 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 Define Individual and Shared ResponsibilitiesExample: site manager and line manager
THE IMPORTANCE OF PEOPLE AND GOVERNANCECONTINUED
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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 theautomotive, 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 andto 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 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 of personnel costs
High degree of complexity
High importanceof proximity tocustomer
High number ofregion-specificproducts
High number of customer-specific
products
High importanceof productionknow-how
Highly skilledengineering andproductionworkforce 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 or centers of excellence
• Lead plants
• Lead plants
• Independent plants close to customer
• Independent plants
• Lead plants or centers of excellence
• Centers of excellence
• Lead plants or centers of excellence
• Standardized production system with integrated industrial engineering
• Integrated planning and schedulingto balance demand volatility andcontrol 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
• Standardized production system with integrated industrial
engineering and management ofassets and maintenance
Plant roles and
responsibilities
Degree of
functional integrationOrganization design
E c o n o m i c s
M a r k e t s a n d
c u s t o m e r s
T e c h n o l o g i e s
a n d s k i l l s
Source: BCG analysis.
E | Strategic Drivers Aff ect Organizational Choices
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T B C G
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, suchas 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 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—a ff 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
Functionalintegration
Plant roles
DecentralizedCentralized
Low High
Standalone Network
OEM Supplier
Automotive
Organizationdesign
Functionalintegration
Plant roles
DecentralizedCentralized
Low High
Standalone Network
Building materials
Organizationdesign
Functionalintegration
Plant roles
DecentralizedCentralized
Low High
Standalone Network
Pharmaceuticals Chemicals
Chemicals/pharmaceuticals
Metals Mining
Organizationdesign
Functionalintegration
Plant roles
DecentralizedCentralized
Low High
Standalone Network
Engineered products
Organizationdesign
Functionalintegration
Plant roles
DecentralizedCentralized
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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T H-P M O
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 benefits in
today’s fast-changing, fiercely 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 find 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 relatedfunctions—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 of functionalintegration
Plant roles andresponsibilities
Board
BU A BU B BU CMfg.
Hybrid DivisionalFunctional
Board
Mfg. BU A
Mfg.
BU B
Mfg.
BU C
Mfg.
Board
BU A
Mfg.
BU B
Mfg.
BU C
Mfg.
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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T B C G
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 qualitymanagement (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 flows are absent—such as when the product portfolio is varied
or highly customized to specific regions—there 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 certainplants 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-
Planning and scheduling
Quality
Production controlling
Maintenance IT
Organizationdesign
Degree of functionalintegration
Workshops—activity bundlingValue stream—process bundling
Mfg.
VS 1
VS 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, flexibility, and effi ciency.
Managing the TradeoffsEach design choice involves tradeoff s that can a ff 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 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 eff orts. Companies can off set these drawbacks—and sharply reduce
production costs over time—by defining manufacturing requirements early in themanufacturing 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 fix problems quickly, and it can rapidly implement improvements. Its plant
network is also extremely flexible—production 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 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 inflexibly. The company decided to estab-
lish regional “mother plants” that support local projects, train sta ff , set up employ-
ee exchange programs, and manage five-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’sorganizational choices require the right people and skills to be truly powerful.
I ’ -, increasingly complex global environment, companiesmust 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 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, andservice levels.
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T B C G
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 firm’s Düsseldorf offi ce andcoleader of BCG’s manufacturing topic. You may contact him by e-mail at spindelndreier.daniel@
bcg.com.
Michael Zinser is a partner and managing director in the firm’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.
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For a complete list of BCG publications and information about how to obtain copies, please visit our website at
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© The Boston Consulting Group, Inc. 2011. All rights reserved.
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