Operational Consolidation -- Three Factors to Consider

Operational Consolidation -- Three Factors to Consider

Expansion to historically low-cost countries should be pursued only for revenue-enhancing reasons.

During the Great Recession, operations executives learned to do more with less -- far more with far less. Positions were redefined, tasks were consolidated and organizational learning was improved. In general, those who survived -- and more importantly, thrived -- during the upturn learned to better manage and improve processes. As a result, there is a new trend to consolidate operations, thus further extracting profitability from improved efficiencies.

As operations executives look to consolidate operations, they must consider a multitude of factors. Usually these decisions include at least two facilities and the selection of the best for consolidation, but sometimes an additional choice is added: geography that is not currently occupied by any of the company’s facilities.

This might mean an area of the United States where the firm doesn’t currently operate or a country external to central operations where advantages might be had. Given recent shifts in workforce economics in Third World countries, doing so purely for wage-rate savings is futile. However, if this alternative allows for market penetration or market-share gains, then it should be considered.

Expansion to historically low-cost countries should be pursued only for revenue-enhancing reasons. Profitability likely will not be enhanced simply by moving operations to low-cost countries, since “total cost of acquisition” should be considered. This, by most measures, will actually increase in these off-shoring scenarios.

The three factors to consider in consolidation are:

Total Cost of Operations for the Facility Lifetime

Consider the total cost of operations, including utilities, taxes (net, after short-term economic-development incentives are exhausted) and other facility-related costs. The ability to expand the physical plant as well as improve internal infrastructure within existing facilities should be considered.

Workforce Options

Operations managers must consider the tenure and talent pipeline of both blue- and white-collar staff at the facilities being evaluated for consolidation. While the availability of a ready-to-work labor force should be considered, operations management also should examine available workforce development firms (for-profit and not-for-profit) that can assist in ramping up additional staff to handle increased capacity needs.

Beyond staff capabilities, staff flexibility should also be considered. Relationships with organized labor bargaining units should be evaluated, as should existing contractual responsibilities.

Support-of-Mission Organizational Presence

Oftentimes, operations management views local and regional economic- and industrial- development organizations as necessary evils. The manufacturing firms support these organizations out of a sense of civic duty. However, some of these entities have evolved in the changing economic climate to embrace their role as supporters of the operational mission.

Recently, supply chain localization projects have netted significant results for organizations that otherwise might find advantage in relocation. Despite higher labor rates, unions and other cost-prohibitive structures (such as environmental protection requirements), some areas (such as the northeastern United States) have become more attractive to manufacturing firms for consolidating operations because the manufacturing ecosystem has been developed and matured. This has been done largely by partnerships between regional economic development organizations and their respective “anchor” large footprint manufacturing firms.

This creates an ecosystem in which suppliers localize their operations to the anchor manufacturers and in turn find other (and sometimes larger) customer bases within close proximity. This ecosystem structure, where available, typically is a decisive factor in site selection and operational consolidation.

When considering consolidation of operations, first look for best-in-class support of mission (SoM) organizations in the target geographies. Then, consider workforce and facility costs to optimize performance. Only in cases of market expansion should operations executives consider labor rate, as it yields unsustainable competitive advantage.

Jason Piatt is president of Praestar Technology Corp., a provider of consulting and training services to manufacturers in the Mid-Atlantic region specializing in lean, Six Sigma & strategy formation.

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