Multinational companies continue to transfer significant portions of their productive capacity to plants outside their countries of origin because of the increasing global competition and the necessity of closing the gap between companies and foreign markets. This phenomenon increases logistic complexity, cost reduction and “spillover effect”, which are benefits that “spill” to host countries. However, there is a variety of roles performed by the foreign plants. In a classic article published in the Harvard Business Review, a specialty literature focused in spreading best practices in management to executives, Kasra Ferdows explains that plants possess functions in addition to their main activity – to produce in order to meet demand. According to Ferdows, operation managers should respond to two questions in order to understand the possible roles of each of their plants:
- What is the primary strategic reason for the factory´s location?
- What is the scope of its current activities?
According to the author, the combination of the possible answers generates a typology described by the author:
- Offshore: an offshore factory is established to produce specific low cost-items. Investments in technical and managerial resources are minimum and very little development or engineering occurs at the site. Local managers rarely choose key suppliers. Outbound logistics are simple and beyond the control of the managers of the plants.
- Source: The primary purpose of this kind of plant is low-cost production but its strategic role is broader than that of an offshore factory. Its managers have greater authority over procurement, selection of suppliers, production planning, process changes, outbound logistics, and product-customization. Source factories tend to be located in places where production costs are relatively low, infrastructure is relatively developed, and a skilled workforce is available.
- Server: A server factory supplies specific national or regional In general it provides a way to overcome tariff barriers and to reduce taxes, logistics costs or exposure to foreign exchange fluctuations. A server plant has very limited authority and, as a consequence, makes only minor modifications in products.
- Contributor: this kind of factory also serves a specific national or regional market, but its responsibilities extend to product and process engineering as well as to the development and choice of suppliers. A contributor factory also has authority over procurement decisions and participates in the choice of key suppliers for the company. It has also authority over procurement decisions and participates in the choice of key suppliers for the company.
- Outpost: The primary role of an outpost factory is to collect information. Such facilities are placed in areas where advanced suppliers, competitors, research, laboratories, or customers are located. Because every factory obviously must make products and have markets to serve, virtually all outpost factories have a secondary strategic role-as a server or an offshore, for example.
- Lead: Plants of this nature creates new processes, products and technologies for the entire company. This type of factory taps into local skills and technologies not only to collect data for headquarters but also to transform the knowledge into useful products and processes for all enterprise. Many of its employees stay in direct contact with end customers, machinery suppliers, research laboratories and other centers of knowledge.
Figure 1 presents the six categories of plants and compares their key competences and strategic roles.
Figure 1: Types of foreign plants(source: Ferdows)
It is important to highlight that high level manufacturers obtain competitive advantage through the improvement of the strategic roles of their international factories. Another feature that deserves to be mentioned is the double role exerted by some plants. For example, a factory can be a server in a particular region and an offshore for specific components. This ambidexterity presents some benefits such as the creation of an operational hedge against fluctuations in exchange rate and the development of entry barriers against competitors in a specific market.
Evolution of species
Like living organisms, plants and factories evolve with time to change profiles. There are events that impact companies that can be either internal (acquisitions and changes in product mix) or external (changes in regulation, changes in pricing policies, government incentives and disincentives, trade blocs, or growth of local markets). Such events assign different roles to their plants over time and the changes lead to vertical movements (improving the strategic contribution of the plant) or horizontal ones (like the change from source to contributor).
Ferdows proposes the routes described in Figure 2 for the evolution of plants. It is interesting to note that the author does not suggest changes in the horizontal base of the chain, i.e., if offshore, outpost or server plants do not move vertically, they should be closed or sold.
Figure 2: Routes to the development of plants (source: Ferdows)
Article´s Final question: Which would be the impact of new technologies in the evolution of the roles of the plants?
Making the Most of Foreign Factories. Kasra Ferdows, Harvard Business Review, Reprint 97204