Relocating a factory
Dr. Valerian Laval
General Manager: Expert in Factory Optimization and Relocation
Relocating a factory can be a challenging project with a high degree of uncertainty and ambiguity. This article summarizes best practices based Lean Six Sigma methodology and on lessons learned during factory relocations in the Americas, Europe and China. Terminology is explained at the end of the article. So the article has three sections:
a.????Best practices and work packages in relocation projects
b.????Lessons learned from prior factory relocation projects
c.??? Explanation of terminology underlined (in alphabetic order)
a.??????Best practices and work packages in relocation projects
The work packages will be presented in logical order. But because of the high level of flexibility required in such projects, it is often not efficient to manage the work packages strictly in this order with waterfall methodology. Instead, the critical path methodology often proves to be better for managing multiple work packages simultaneously and hereby saves time. Agile methodology can also help iterate results to the best possible outcome. Saying this a relocation project normally contains the following work packages:
b. Lessons learned from prior factory relocations
Each work package bears its own chances and risks. To illustrate how the best practices were developed, I will share some lessons learned from 15+ years of factory relocation in the Americas, Europe, and China.
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Team Building: A team relied too much on local hiring which later turned out not to have enough "group pedigree" in the ramp-up team to reach the relocation targets. It was underestimated how much experience it takes to build up a factory matching the high quality and efficiency standards in the group. This caused severe difficulties ramping up.
-> Learning: A ramp-up team and temporary replacements at the sending entity should be arranged one year ahead.
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Site selection/analysis: A factory was located near existing competitors without doing a detailed site selection analysis. Unfortunately, the labor availability and costs changed dramatically since the competitors arrived. Due to a severe skill shortage, most employees had to be recruited from competitors increasing operating costs and recruiting time dramatically.
-> Learning: Site selection analysis is important
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Site selection/incentives: It takes effort for companies to bring a higher level of value added to a region or to build up a new industrial cluster. Some governments appreciate this effort of first movers generously by providing express authorizations and providing exceptional incentive packages. These incentives can go way beyond your own factory but also included public infrastructure needed. I observe this generosity especially in countries outside the EU, inside the EU incentives are much stricter regulated.
-> Learning: First movers can profit from special first-mover advantages.
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Site selection/region: The site was selected in an agricultural region. A colleague summarized "Yesterday the operators dug out potatoes with their hands, what do you expect". Also, all engineers had to be transferred from bigger cities within the country. This led to a shortage of low efficiency and a slow ramp-up.
Site selection/region: The factory site was selected in a very well-developed region next to hi-tech companies and development centers. It was difficult to compete with these companies in the job market with regard to compensation and status. This led to unexpectedly high labor costs and a slow ramp-up.
-> Learning: Position your factory slightly above the industrial standard of the area. This means putting an average factory neither in a purely agricultural area nor in?a high-tech area.
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Site selection / Profitability: New competitors arrived, expanded production volumes, and quickly increased the pressure for price reductions. It became very difficult to maintain profitability which challenged the going concern of the factory.
-> Learning: If your production depends on manual labor and you have no strong technological advantage left, it is never too early to focus on profitability.
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Site inspection: One site inspection was not done properly against the defined layout requirements. It turned out the ground could not carry the heavy factory and millions of € was lost as extreme piling efforts became necessary. Also, the time-to-market was postponed for more than one year.
-> Learning: Site inspection must cover all physical layout requirements.
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?c.??????Explanation of terminology (in alphabetic order)
Agile project management works by breaking down projects into smaller, more manageable components, called iterations or sprints, which are completed in a set amount of time. Each iteration includes planning, design, development, testing, and review, with regular communication and feedback between team members and stakeholders.
Authorizations to build and operate a factory in Europe include planning permission, environmental permits, building permits, health and safety permits, and business permits. Depending on the complexity of the project and the cooperation of the relevant authorities obtaining can take between 5 days and exceed one year. In Germany, Tesla for example had to wait 843 days to obtain a building permit for the Gigafactory in Grünheide.
Business case simulations work best for site selection when the factor costs and volumes are separated, allowing more accurate analysis of the impact of the different factor prices in the different locations, especially labor, utilities, and taxes.
Commissioning involves integrating and testing multiple systems and components as a whole, to ensure they work together properly and meet the required standards and specifications for a new factory ramp-up.
Continuity refers to the seamless transition from the construction phase to the operational phase of a factory. It is helpful for people in the project to build a factory to stay responsible in line positions in that factory once it becomes operational because they bring a continuity of knowledge and experience that can facilitate the smooth transition of the factory from construction to operations.
Critical path methodology is a project management method that focuses on identifying the longest sequence of dependent activities and determining the shortest possible time to complete a project. The critical path is the sequence of tasks that cannot be delayed without delaying the project's overall completion time.
ERP (Enterprise Resource Planning) is a type of software that helps manage various aspects of a business, including accounting, inventory, and human resources. Harmonizing ERP across a group of companies can improve efficiency, collaboration, and data accuracy while reducing duplication of effort and costs.
Financial layout of a factory describes a comprehensive analysis of all financial aspects related to the facility, including Opex (operating expenses) and Capex (capital expenses), while considering the expected production volumes and local factor costs, as well as available incentives at a specific location. A clearly analyzed financial layout is the necessary basis for a business plan.
Group pedigree refers to the collective experience, which may be used as a measure of capability, expertise, or success in a particular field or industry.
Harmonized layout within a group of companies allows for efficient coordination, standardization, and integration of operations, leading to cost savings, knowledge transfer, scalability, and risk mitigation.
Incentives typically fall into three primary categories. The first category involves "in-kind incentives," which may include provisions such as the development of industrial parks. The second category consists of "tax incentives," which provide tax relief or exemptions. Finally, the third category encompasses "cash incentives," which are often considered the most appealing and often range from 1% to 40% of the capital expenditure (CAPEX) based on legal regulations and negotiation circumstances.
Lean Six Sigma is a methodology that combines the principles of Lean management and Six Sigma to achieve process improvement and quality excellence. It aims to eliminate waste, reduce process variation, and enhance overall efficiency and customer satisfaction. By integrating Lean tools for waste reduction and Six Sigma's data-driven approach, Lean Six Sigma enables organizations to achieve optimal performance and deliver high-quality products or services.
Layout refers here to the physical arrangement of resources such as equipment, machinery, people, and materials within the factory as well as to the design of processes, organization charts, work instructions, and Enterprise Resource Planning (ERP) systems within an organization. This broader definition of layout includes the optimization of not only physical arrangements, but also the flow of information, resources, and activities within an organization to achieve maximum efficiency and effectiveness.
MoU or memorandum of understanding is a non-binding agreement between two or more parties that outlines the terms and expectations of a proposed project or business relationship, and it should be signed to demonstrate the parties' commitment to the agreement and establish a framework for further negotiations and collaboration.
Objectives for building a new factory may include increasing production capacity, improving efficiency, reducing costs, expanding market share, or introducing new products to the market, and it's important to agree on them between management and project team transparently to ensure clarity, alignment, and commitment to achieving project success.
Organizational layout refers to the design and structure of an organization, including the creation of organizational charts, work descriptions, job descriptions, and other governance documents. Such documentation helps to ensure clarity, consistency, and compliance with regulations and best practices.
Physical layout of a factory involves the design and organization of the physical space required for efficient and safe production, including the requirements of land, utilities, buildings, and the selection and allocation of machines needed for optimal production.
Price pressure caused by competitors entering the market refers to the downward force on prices that occurs when new entrants increase the supply of goods or services, leading to greater competition and price-based differentiation among market players.
Profitability: With respect to differentiation during site selection the profitability is mainly influenced by differences in operating expenses (OPEX), capital expenditures (CAPEX), and incentives. OPEX refers to the ongoing costs of running the business, such as salaries, utilities, and taxes. CAPEX refers to the costs of purchasing long-term assets, such as land and buildings. Incentives are financial or other benefits provided to a company to encourage specific behaviors or outcomes, such as tax credits or subsidies.
Ramping up refers to the process of gradually increasing the production capacity and output of a new or existing factory to meet the desired level of demand, by optimizing and scaling up the production processes, systems, and resources over time.
RACI methodology is a matrix-based approach to clarify roles and responsibilities in a project or process by defining who is Responsible, Accountable, Consulted, and Informed. RACI provides clear communication, improves decision-making, increases efficiency, promotes collaboration, and reduces the risk of errors or delays.
Relocating a factory in this article refers to building a new factory at a new location and transferring operations from existing factories to the new factory in order to increase production volumes.
Risks are potential events or circumstances that can negatively affect an organization, and identifying them involves a systematic process of assessing the likelihood and impact of potential risks and developing mitigation strategies to minimize their impact and protect the organization's objectives, assets, and reputation.
Scoring model is a structured decision-making tool used to evaluate and compare different site options in the first phase, based on differentiation factors such as access to labor, transportation, utilities, taxes, and government incentives.
Skill shortage workers in Europe refers to a mismatch between employer demands and available workforce, which has resulted in around 2.3 million job vacancies being unfilled, with expected worsening due to demographic and technological changes. Unemployment rates under 5% can indicate a skill shortage risk which should be further analyzed during site selection.
Site selection process: An effective site selection process combines the quantitative business plan with the qualitative SWOT analysis, ensuring a comprehensive assessment of potential locations.
Site inspection is a physical examination of a location or property to assess its condition, suitability, and compliance with defined requirements. The main differences relate to costs (acquisition, site preparation, access to utilities) and time-to-market (time needed for authorizations and site preparation) and risks (esp. natural risks).
Sprints are short, iterative cycles of work in agile project management that help to prioritize tasks, maintain focus, and achieve project goals through incremental progress and feedback.
Temporary ramp-up team is a group of experienced personnel from other factories brought in to help start up a new factory or production line, to train local staff, and ensure that best practices and standards are upheld. The team normally includes the head of production, head of engineering, head of quality, and respective shift leaders. As the onboarding process can take 1-2 years temporary replacements in the sending factories should be organized one year ahead to ensure no interruption in production in the sending factories.
Time-to-market: The duration from site selection until the factory is fully operational and producing goods for sale. With respect to differentiation during site selection, differences in duration between potential sites are mainly due to the different availability of skilled labor and/or difficulties in obtaining the necessary authorizations.
Waterfall methodology is a sequential, linear approach to managing projects that follow a fixed plan and relies on strict control of the project timeline, resources, and scope.
What lessons have you learned doing factory relocations?