IKEA closes a seven-storey store 10
4. Future flexibility – because operations rarely change their location, any new location must be capable of being acceptable, not only under current circumstances, but also under possi-
ble future circumstances. The problem is that no one knows exactly what the future holds.
Nevertheless, especially in uncertain environments, any evaluation of alternative locations should include some kind of scenario planning that considers the robustness of each in cop- ing with a range of possible futures.
5. Risk factors – closely related to the concept of future flexibility, is the idea of evaluating the risk factors associated with possible locations. Long-term risks could include damaging changes in input factors such as exchange rates or labour costs, but can also include more fundamental security risks to staff or property.
Critical commentary
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Probably the most controversial issue in supply network design is that of outsourcing. In many instances, there has been fierce opposition to companies outsourcing some of their processes. Trade unions often point out that the only reason that outsourcing companies can do the job at lower cost is that they either reduce salaries, reduce working conditions, or both. Furthermore, they say, flexibility is only achieved by reducing job security. Employees who were once part of a large and secure corporation could find themselves as far less-secure employees of a less-benevolent employer with a philosophy of permanent cost cutting. Even some proponents of outsourcing are quick to point out the problems.There can be significant obstacles, including understandable resistance from staff who find themselves
‘outsourced’. Some companies have also been guilty of ‘outsourcing a problem’. In other words, having
failed to manage a process well themselves, they ship it out rather than face up to why the process was problematic in the first place. There is also evidence that, although long-term costs can be brought down when a process is outsourced, there may be an initial period when costs rise as both sides learn how to manage the new arrangement.
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The idea of widening the discussion of supply networks to include the ‘business ecosystem’ concept, described earlier, is also not without its critics. Some see it as simply another management ‘buzzword’, indistinguishable from the longer-established idea of the supply network. Other critics, who believe that the ecosystem metaphor is just a way for businesses to appear ‘green’, have criticised the use of the term ‘business ecosystem’ by commentators and firms. They claim that the metaphor is used to suggest that the commercial relationships, on which almost all supply networks are based, have developed and are run using ‘natural’ values and therefore should be left to operate free from societal or government interference.SUMMARY CHECKLIST
Is the operation fully aware of all its first- and second-tier suppliers’ and customers’ capabilities and requirements?
Are the capabilities of suppliers and requirements of customers understood in terms of all aspects of operations performance?
Does the operation have a view on how it would like to see its supply network develop over time, both in terms of scope and structure?
Have the benefits of reducing the number of individual suppliers been explored?
Are any parts of the supply network likely to become disintermediated, and have the implications of this been considered?
Does the operation have an approach to how it treats others in the supply network who might be both complementors and competitors?
Is the vertical integration/outsourcing issue always under review for possible benefits?
Is outsourcing (or bringing back in-house) evaluated in terms of all the operation’s performance objectives?
Is there a rational set of criteria used for deciding whether (or not) to outsource?
Is the optimum economy of scale for the different types of operation within the business periodically assessed?
Are the various strategies for timing changes in capacity always evaluated in terms of their advantages and disadvantages?
Are the fixed-cost breaks of capacity increase understood, and are they taken into account when increasing or decreasing capacity?
Is the relocation decision ever considered?
Have factors such as changes in demand or supply that may prompt relocation been considered?
If considering relocation, are alternative locations always evaluated against each other and against a ‘do nothing’ option?
Are sufficient location options being considered?
Do location evaluation criteria include capital, market, cost, flexibility and risk factors?
Case study: Aarens Electronic ■ 145
Just outside Rotterdam in the Netherlands, Francine Jansen, the Chief Operating Officer of Aarens Electronic (AE) was justifiably proud of what she described as ‘the most advanced machine of its type in the world, which will ena- ble us to achieve new standards of excellence for our prod- ucts requiring absolute cleanliness and precision’ and ‘a quantum leap in harnessing economies of scale, new tech- nology to provide the most advanced operation for years to come’. The Rotterdam operation was joining AE’s two existing operations in the Netherlands. It offered precision custom coating and laminating services to a wide range of customers, among the most important being Phanchem, to whom it supplied dry photoresist imaging films, a critical step in the manufacturing of microchips. Phanchem then processed the film further and sold it direct to microchip manufacturers
The Rotterdam operation
The decision to build the Rotterdam operation had been taken because the company believed that a new low-cost operation using ‘ultra-clean’ controlled environment tech- nology could secure a very large part of Phanchem’s future business – perhaps even an exclusive agreement to supply 100 per cent of its needs. When planning the new operation, three options were presented to AE’s Executive Committee:
1. Expand an existing site by building a new machine within existing site boundaries. This would provide around 12–13 million square metres (MSM) per year of addi- tional capacity and require around €19 million in capital expenditure.
2. Build a new facility alongside the existing plant. This new facility could accommodate additional capacity of around 15 MSM per year but, unlike option A, would also allow for future expansion. Initially, this would require around €22 million of capital.
3. Set up a totally new site with a much larger increment of capacity (probably around 25 MSM per year). This option would be more expensive – at least 30 million.
Francine Jansen and her team initially favoured option 2 but in discussion with the AE Executive Committee, opin- ion shifted towards the more radical option 3: ‘It may have been the highest-risk option but it held considerable poten- tial and it fitted with the AE Group philosophy of getting into high-tech specialised areas of business. So we went for it.’ (Francine Jansen) The option of a very large, ultra- clean, state-of-the-art facility also had a further advantage:
it could change the economics of the photoresist imaging industry. In fact, global demand and existing capacity did not immediately justify investing in such a large increase
in capacity. There was probably some over-capacity in the industry. But a large-capacity, ultra-clean operation could provide a level of quality at such low costs that, if there were over-capacity in the industry, it would not be AE’s capacity that would be lying idle.
Designing the new operation
During discussions on the design of the new operation, it became clear that there was one issue that was underlying all the team’s discussions – how flexible should the pro- cess be? Should the team assume that they were design- ing an operation that would be dedicated exclusively to the manufacture of photoresist imaging film, and ruthlessly cut out any technological options that would enable it to manufacture other products, or should they design a more general-purpose operation that was suitable for photore- sist imaging film, but could also make other products? It proved a difficult decision. The advantages of the more flexible option were obvious: ‘At least it would mean that there was no chance of me being stuck with an operation and no market for it to serve in a couple of years’ time.’
(Francine Jansen) But the advantages of a totally dedicated operation were less obvious, although there was a general agreement that both costs and quality could be superior in an operation dedicated to one product.
Eventually, the team decided to focus on a relatively non- exible focused and dedicated large machine. ‘You can’t imagine the agonies we went through when we de- cided not to make this a exible machine. any of us were not comfortable with saying “this is going to be a pho- toresist machine exclusively, and if the market goes away we’re in real trouble”. We had a lot of debate about that.
Eventually, we more or less reached a consensus for focus but it was certainly one of the toughest decisions we ever made.’ (Francine Jansen) The capital cost savings of a fo- cused facility and operating costs savings of up to 25 per cent were powerful arguments, as was the philosophy of total process dedication: ‘The key word for us was focus.
We wanted to be quite clear about what was needed to satisfy our customer in making this single type of product.
s well as providing significant cost savings to us, it made it a lot easier to identify the root causes of any problems because we would not have to worry about how it might affect other products. It’s all very clear. When the line was down we would not be generating revenue! It would also force us to understand our own performance. At our other operations, if a line goes down, the people can be shifted to other responsibilities. We don’t have other responsibil- ities here – we’re either making it or we’re not.’ (Francine Jansen)
Case study
Aarens Electronic
When the Rotterdam operation started producing, the team had tweaked the design to bring the capacity at start-up to 32 MSM per year. And notwithstanding some initial teething troubles it was, from the start, a technical and commercial success. Within six months a contract was signed with Phanchem to supply 100 per cent of Phan- chem’s needs for the next 10 years. Phanchem’s decision was based on the combination of manufacturing and busi- ness focus that the Rotterdam team had achieved, a point stressed by Francine Jansen: ‘Co-locating all necessary de- partments on the Rotterdam site was seen as particularly important. All the technical functions and the marketing and business functions are now on site.’
Developing the supply relationship
At the time of the start-up, product produced in Rotter- dam was shipped to Phanchem’s facility near Frankfurt, Germany, almost 500 km away. This distance caused a number of problems, including some damage in transit and delays in delivery. However, the relationship between AE and Phanchem remained sound, helped by the two compa- nies’ cooperation during the Rotterdam start-up. ‘We had worked closely with them during the design and construc- tion of the new otterdam facility. ore to the point, they saw that they would certainly achieve cost savings from the plant, with the promise of more savings to come as the plant moved down the learning curve.’ (Francine Jansen) The closeness of the relationship between the two compa- nies was a result of their staff working together. AE engi- neers were impressed by their customer’s willingness to help out while they worked on overcoming the start-up prob- lems. Similarly AE had helped Phanchem when it needed extra supplies at short notice. As Francine Jansen said,
‘partly because we worked together on various problems the relationship has grown stronger and stronger’.
In particular, the idea of a physically closer relationship between AE and Phanchem was explored. ‘During the ne- gotiations with Phanchem for our 100 per cent contract there had been some talk about co-location, but I don’t think anyone took it particularly seriously. Nevertheless, there was general agreement that it would be a good thing to do. After all, our success as Phanchem’s sole supplier of coated photoresist was tied in to their success as a player in the global market; what was good for Phanchem was good for AE.’ (Francine Jansen) Several options were discussed within and between the two companies. Phanchem had, in effect, to choose between four options:
1. Stay where they were near Frankfurt.
2. Relocate to the Netherlands (which would give eas- ier access to port facilities) but not too close to AE (an appropriate site was available 30 km from Rotterdam).
3. Locate to a currently vacant adjacent site across the road from AE’s Rotterdam plant.
4. Co-locate within an extension that could be specially built onto the AE plant at Rotterdam.
Evaluating the co-location options
Relatively early in the discussions between the two compa- nies, the option of ‘doing nothing’ by staying in Frankfurt was discounted. Phanchem wanted to sell its valuable site near Frankfurt. The advantages of some kind of move were significant. The option of Phanchem moving to a site 30 km from Rotterdam was considered but rejected because it had no advantages over locating even closer to the Rotterdam plant. Phanchem also strongly considered building and operating a facility across the road from the Rotterdam plant. But eventually the option of locating in a building attached to AE’s Rotterdam operation became the preferred option. Co-location would have a significant impact on Phanchem’s competitiveness by reducing its operating costs, enabling it to gain market share by offer- ing quality film at attractive prices, thus increasing volume for AE. The managers at the Rotterdam plant also looked forward to an even closer operational relationship with the customer: ‘Initially, there was some resistance in the team to having a customer on the same site as ourselves. No one in AE had ever done it before. The step from imag- ining our customer across the road to imagining them on the same site took some thinking about. It was a matter of getting used to the idea, taking one step at a time.’
(Francine Jansen)
The customer becomes a paying guest
However, when Francine and the Rotterdam managers presented their proposal for extending the plant to the AE board the proposal was not well received. ‘Leasing factory space to our customer seemed a long way from our core business. As one executive committee member said, “we are manufacturers; we aren’t in the real estate business”.
But we felt that it would be beneficial for both compa- nies.’ (Francine Jansen) And even when the proposal was eventually accepted, there was still concern over sharing a facility. In fact the Executive Committee insisted that the door between the two companies’ areas should be capable of being locked from both sides. Yet the construction and commissioning of the new facility for Phanchem was also a model of cooperation. Now, all visitors to the plant are shown the door that had to be ‘capable of being locked from both sides’ and asked how many times they think it has been locked. The answer, of course, is ‘never’.
Questions
1. What were the key structure and scope decisions taken by Aarens Electronic?
2. What were the risks involved in adopting a process design that was ‘totally dedicated’ to the one customer’s needs?
3. What were the advantages and disadvantages of each location option open to Phanchem, and why do you think it eventually chose to co-locate with AE?
Applying the principles
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Some of these exercises can be answered by reading the chapter. Others will require some general knowledge of business activity and some might require an element of investigation.
Model answers for the first two questions are available on the student companion website.
For model answers to the other questions in this section, please ask your tutor/lecturer.
1. Consider the music business as a supply network. How did music downloads and streaming affect artists’ sales? What implications did electronic music transmission have for record shops?
2. A data centre is ‘a facility composed of networked computers and storage that businesses or other organisations use to organise, process, store and disseminate large amounts of data.
A business typically relies heavily upon the applications, services and data contained within a data centre, making it a focal point and critical asset for everyday operations.’11 These facil- ities can contain network equipment, servers, data storage and back-up facilities, software applications for large companies, and more. Very few businesses (or people) do not rely on them. And determining their location is a crucial decision for those operations running them.
In fact, such businesses usually have a set method for choosing data centre location. Visit the websites of the types of businesses that run data centres (such as Intel, Cisco or SAP) and devise a set of criteria that could be used to evaluate potential sites.
3. A company that produces concrete paving slabs is introducing a new range of ‘textured’
non-slip products. To do this, it must invest in a new machine. Demand is forecast to be around 10,000 units per month for the first year and approximately 24,000 units per month after that. The machines that produce these products have a capacity of 10,000 units per month. They have a fixed cost of 20,000 per month and a variable cost of processing of 1 per unit. The company has forecast that they will be able to charge €4 per unit. It has been suggested that they would make higher profits if sales were restricted to 20,000 units per month in the second year. Is this true?
4. The Fast and Efficient (FAE) Transport Group is reviewing its fleet maintenance operations:
‘Our lease on our current maintenance and repair facilities site will expire in a year, and we need to decide how to operate in the future. Currently, we have the one site with five repair bays. This can cope with our fleet of 40 trucks. But demand is growing; and within two or three years we hope to be operating around 55–60 trucks, so we will have to choose a site (or sites) that allows for this increase. And that leads me to the next issue – should we stick to operating one central site, or should we plan to have two sites, one for the north and one for the south of our region?’
As far as FAE’s operations managers could forecast, the costs of having one or two sites would be as follows:
One site - fixed cost of establishing the site = 300,000; variable cost of servicing trucks
= 300,000 per truck per year.
Two sites – fixed cost of establishing the sites (for both) = 500,000; variable cost of servicing trucks = 10,000 per truck per year (they will be out of action for less time because sites would be closer).
At what level of demand (in terms of the number of trucks operated by the company) will the two-site proposal be cheaper?
5. Globalisation is very much a ‘mixed blessing’. There is little doubt that it has lifted millions out of poverty, but it has also led to the destruction of traditional cultures in developing countries and many jobs in the developed world. Draw up lists of what you see as the advan- tages and disadvantages of globalisation.