“Coping with the forces affecting an international manufacturing network: a plant perspective“

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Master thesis

“Coping with the forces affecting an

international manufacturing network: a

plant perspective“

Supply Chain Management

University of Groningen, Faculty of Economics and Business Department of Operations

15th_{of July 2019}

Author: Steef Dobbe Student Number: S3508137 Email: s.h.dobbe@student.rug.nl

Supervisor: C. Xiao Co-assessor: J.T. van der Vaart

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ABSTRACT

Purpose: This research addresses the shifting drivers and forces that are experienced by a

lead manufacturing plant within an international manufacturing network (IMN). The main purpose of this research is to explore how plant management and personnel have responded and accommodated these network changes and influences.

Design / Methodology / approach: The data was collected by using an exploratory case

study research. Interviewees consisted of industrial cost analysts, supply chain managers, general managers and senior project leaders. Information is derived from interviews, observations and archival documents.

Findings: This research provided insight on the forces affecting an IMN and the plant level

responses for coping with them. The main forces are changing customer demands, shorter lead time, developing low-wage countries, rising import duties and increased transport costs. These forces are influencing the business to create a flexible network of strategic plants. In the plants attempts to cope with the forces it specialized in key-modules, insourced new products that aligned with the business strategy, designed flexible automated lines and developed valuable knowledge sharing capabilities.

Research limitations / implications: Due to the lack of available companies, resources and

the explorative nature of this research some of the more abstract topics cannot be completely generalized for plants in other industries. However, this leaves opportunity for further research about the interactions between a manufacturing plant and its IMN.

Originality: This paper provides a better insight in the plant interactions and decisions to

accommodate the forces affecting the location of manufacturing activities within an IMN. Research about the network influences on locations for manufacturing activities and the related plant development is rather scarce in the field of international manufacturing and reshoring activities. Previous research has primarily focussed on the different plant roles within a network but not about their interaction with a changing IMN.

Keywords: Off- and reshoring decisions, plant role, plant management, international

manufacturing networks, network design.

Paper type: Explorative single case study

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1. INTRODUCTION

At present, it is common that products and components are produced and delivered across multiple countries using extensive manufacturing networks. The era of globalization and international competition reshaped global manufacturing networks and consequently altered the organization of industries (Gereffi & Fernandez-Stark, 2011). Multinational enterprises (MNEs) now do not only purchase materials and products from suppliers in various countries but have also moved their own production abroad. Globalization and economic developments caused an transformation in manufacturing networks and increased the fragmentation of production (Gereffi & Lee, 2012; Lee & Yi, 2018; Stentoft, Mikkelsen, Jensen, & Rajkumar, 2018). MNEs now have manufacturing plants spread across different countries and operate vast global distribution networks. These networks and the plants within are similarly subject to the forces related to globalization. Forces which drive top management of MNEs to consider the configuration of their current global manufacturing network, as well as the value of individual plants within the network (Cheng, Farooq, & Johansen, 2015; Ellram, Tate, & Petersen, 2013; Tate, Ellram, Schoenherr, & Petersen, 2014).

Global manufacturing networks are subject to a variety of external and internal forces affecting their configuration. Currently, markets are becoming more volatile because of changing customer demands, increasing requests for customized products and shorter lead time (Bozarth, Warsing, Flynn, & Flynn, 2009; Brennan et al., 2015; Fratocchi et al., 2016). Furthermore, innovative technologies, politics, managerial corrections and developments in host countries direct firms to partially or completely relocate foreign manufacturing activities (Barbieri, Elia, Fratocchi, & Golini, 2019; Di Mauro, Fratocchi, Orzes, & Sartor, 2018; Gray, Skowronski, Esenduran, & Johnny Rungtusanatham, 2013). These global forces affect the design of global manufacturing networks and the value of the manufacturing plants within it (Cheng & Farooq, 2018). Now, locations of plants and manufacturing activities are reconsidered because of these global forces (Barbieri et al., 2019; Dachs, Kinkel, Jäger, & Palčič, 2019). Global manufacturing networks and the plants within have to be transformed to cope with these forces affecting the benefits of their current network design.

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5 of change that affect the network (Cheng & Farooq, 2018; Cheng, Farooq, et al., 2015; Feldmann, Olhager, Fleet, & Shi, 2013). Feldmann et al. (2013) state that it is essential to understand the network transformations and their relations interacting with the network constructs. When the global forces are reshaping the network a plant with higher strategic value has a better chance of surviving and evolving with the network to achieve the newly desired network configuration (Szwejczewski, Sweeney, & Cousens, 2016; Vereecke, Dierdonck, & De Meyer, 2006). However, a limited amount of studies explored the plant-level responses to the forces affecting the IMN in order to remain valuable to the network. Cheng et al., (2015) therefore designated this as a future research avenue for exploring the accommodating behaviour of plants and their evolution in context of a changing IMN. Thus, this study aims to explore the forces affecting plants in an IMN and how the plant responded to them. Moreover, it will provide further understanding about the allocation decisions of manufacturing activities (Cheng, Farooq, & Johansen, 2011; Cheng, Farooq, et al., 2015; Szász et al., 2019). This paper addresses this gap in literature by answering the following research question:

“How does a manufacturing plant cope with the global forces affecting an IMN?” In order to analyse the factors influencing the configuration of an MNE’s manufacturing network this research uses the approach of Ketokivi, Turkulainen, Seppälä, Rouvinen, & Ali-Yrkkö (2017). This model is applied because it uses three distinct perspectives which help to evaluate the multiple factors affecting the network in a structured way. The research itself is qualitative in nature and uses semi-structured interviews at a lead manufacturing plant that has survived within an IMN for 70 years. It aims at contributing to existing literature by investigating the developments of a manufacturing plant and better understand how a single plant in an IMN copes with the global forces affecting the IMN. This research elaborates on small amount of existing literature and allows for an increased understanding on how location, manufacturing activities, site competencies and plants roles affected a MNEs manufacturing choices. These insights enables MNEs to better understand the impacts of the plant-level responses on the IMN.

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2. THEORETICAL BACKGROUND

2.1. Manufacturing networks

‘A manufacturing network is generally defined as a coordinated aggregation (network) of intra-firm plants/factories located at different places’ (Cheng & Farooq, 2018, p.15). Besides plants this network also includes suppliers, customers and all transportation between these nodes (Olhager, Pashaei, & Sternberg, 2015). This makes changes to an international network structure a complex matter with a lot of interconnected elements. Nevertheless, the design of a manufacturing network is critical for the competitiveness of a firm and needs to be altered with time to cope with the global forces affecting the network (Feldmann et al., 2013; Olhager et al., 2015; Szwejczewski et al., 2016). Therefore, the decisions that shape the design of this network are crucial for maintaining its competitiveness. These decisions can be characterised in two categories: configuration and coordination (Cheng et al., 2011; Szwejczewski et al., 2016).

Firstly, the configuration decisions in essence indicate an allocation of tasks and resources to a plant at a certain location (Meijboom & Vos, 2003). This includes the allocation of specific products and the level of automation at each location. These decisions are primarily driven by location characteristics. Since, the 1990s, the configuration of global manufacturing networks has become a crucial task for MNEs, in their search to integrate the benefits of locations such as low-cost labour (Brennan et al., 2015). Locational factors such as the local cost of manual work can influence the amount of automated processes and consequently the specific product allocation of a plant (Bals, Daum, & Tate, 2015a). In practice Olhager et al. (2015) has also found that the configuration not only includes structural elements (location and capacity) but also human elements. This can refer to a plant climate for innovation and labour flexibility among employees (Oke, 2013). Together these elements emphasize the complexity of this topic area in the configuration of a global manufacturing network (Olhager et al., 2015).

Secondly, the coordination of manufacturing networks is related to management of the network and the integration of facilities and activities in order to achieve the firms strategic objectives (Cheng et al., 2011; Meijboom & Vos, 2003). It can be thought of as the

infrastructural processes that link activities between plants which is a complicated web of relations with each other and with related elements that corporate managers must take into account (Colotla, Shi, & Gregory, 2003; Lampel & Bhalla, 2011). One plant may be

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7 coordinating the amount of infrastructural processes between plants can change over time through for example increased customization levels and product variety (Bozarth et al., 2009; Rudberg & Olhager, 2003; Szwejczewski et al., 2016). Optimizing the coordination of manufacturing activities between plants in a IMN could increase the MNEs flexibility and ability cope with the global forces affecting the manufacturing network (Rudberg & Olhager, 2003).

2.2. Factors that influence the design of manufacturing networks

In order to better analyse the various factors that affect a manufacturing network design and their respective plants this research uses the model developed by Ketokivi et al. (2017). This model is used because it takes into account the multiple factors affecting the IMN and their location of manufacturing activities in a structured way. Furthermore, by using the method this research aims to contribute to the results of Ketokivi et al. (2017) about the new forms that manufacturing takes in modern economies. This model uses three distinct approaches, identified from extensive literature on the geography of economic activities, to analyse the manufacturing location drivers and decisions of a firm (Ketokivi et al., 2017). The three approaches are respectively: the locational perspective, organizational perspective and temporal perspective.

2.2.1. The factors informed by locational perspective

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8 These are some of the main elements influencing the location decisions of an international manufacturing network (summarized in table 1). However, locational factors are subject to change and the configuration of an MNEs international manufacturing network is not static (Brennan et al., 2015; Tate et al., 2014). From a plant perspective it is preferable to keep production local but studies like Stratton & Warburton (2006) highlight that businesses are continuously motivated to offshore production if it can reduce costs. Therefore, locational developments such as increased wages, obsolete technologies and declining market demand can affect a plants previous location advantage in a manufacturing network (Barbieri et al., 2019; Kinkel & Maloca, 2009). The changing locational factors and their relative value affects the allocation decisions of the network and the plant needs to respond to this in order to keep its locational value.

Table 1 Location advantages

Motivation Author

Lower costs of labour Jensen & Pedersen, 2011; Nassimbeni, 2006 Cheaper resources Jensen & Pedersen, 2011; Nassimbeni, 2006 Access to products Lewin et al., 2009; Cheng et al., 2011

Access to technologies Lewin et al., 2009; Hannibal & Knight, 2018 Access to knowledge Lewin et al., 2009; Hannibal & Knight, 2018 Cost reduction Stratton & Warburton, 2006

Development of foreign sales activities Nassimbeni, 2006; Shi & Gregory, 1998 Proximity to market Nassimbeni, 2006; Shi & Gregory, 1998

2.2.2. The factors informed by organizational perspective

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9 Consequently, within a manufacturing network the plants have different roles that influence the MNEs network design decisions in terms of configuration as well as coordination (Szwejczewski et al., 2016; Vereecke & Van Dierdonck, 2002). These different plant roles can be used by the MNE to assess the characteristics and value each plant adds to the manufacturing network. Based on these plant aspects an MNE can then decide how the network can change effectively to respond to the forces affecting the IMN (Ferdows, Vereecke, & De Meyer, 2016; Szwejczewski et al., 2016). Assessing the role and value of plants is complex and comes with a multitude of related aspects like: plant size, location drivers, the products produced in each plant and the tasks performed in the R&D facility (Cheng, Johansen, & Hu, 2015; Ketokivi & Ali-Yrkkö, 2009). To better distinguish the roles of plants Ferdows model (1997) categorizes them based on two aspects: strategic location advantages and site competence. Locational advantages have been previously discussed but not the level and importance of site competence. The competency of a single plant can be measured by the activities related to the development/improvement of products and processes and the management of suppliers, customers and other external stakeholders (Ferdows, 1997; Ferdows et al., 2016). When a plant increases its competence level it can adopt an extended role within a network as seen in Figure 1 (Feldmann et al., 2013). A plant can increase its competence level (including technical capabilities) to respond to new market requirements with for example flexible product design and processes (Ortega Jimenez, Machuca, Garrido-Vega, & Filippini, 2015; Swink et al., 2007). This research will use the plant perspective to better highlight the relation between competence and the plants ability to respond to the forces affecting the IMN.

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10 2.2.3. The factors informed by temporal perspective

The third and final perspective focuses on time. This is a dimension that the various

theoretical frameworks of international manufacturing locations rarely focus on although it impacts both the locational and organisational factors of the network (Ancarani, Di Mauro, Fratocchi, Orzes, & Sartor, 2015; Ketokivi et al., 2017). The temporal approach uses time as a central variable and examines time related issues that affect IMN such as demand patterns, industry dynamics, lead time, and time-based competition (Blackburn, 2012; Blackhurst, Craighead, Elkins, & Handfield, 2005; Ketokivi et al., 2017). In terms of demand patterns and industry dynamics for example, the specific industry setting influences the location of

manufacturing activities. MNEs in highly competitive industries with rapid technological change and high levels of outsourced standardized activities are more prone to relocating manufacturing activities over time (Mudambi & Venzin, 2010). These firms relocate their manufacturing activities to respond to the fluctuating market demands and make use of new technologies (Brennan et al., 2015; Mudambi & Venzin, 2010). More time related factors affecting the IMN are the aspects of lead-time and time based competition. This relates to global industry forces that pressure an IMN to respond faster to customers, have faster

development of new products and services and faster movement of products through a supply chain (Blackburn, 2012). These forces consequently require an IMN to have a well-designed plant network with smooth coordination.

The plants are also subject to these temporal factors that are affecting the IMN. The

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11 In brief, the locational perspective focuses on finding the locational factors that attracts

manufacturing investments (Ketokivi et al., 2017). This includes factors such as labour cost, access to technology and developed infrastructure (Fratocchi et al., 2016; Olhager et al., 2015) Secondly, the organizational perspective refers to understanding the structure of a firms manufacturing network in terms of interdependencies and different plant roles (Ketokivi et al., 2017). Finally, the temporal perspective focuses on time. The time variable affects location drivers of manufacturing activities with aspects such as lead times, demand patterns, and industry dynamics (Ketokivi et al., 2017).

3. METHODOLOGY

This chapter will discuss the methodology of this research. Firstly, the research design is presented, followed by the research context. Secondly, the data collection process is explained and finally the data analysis for the results is described.

3.1. Research design

The aim of this research is to gain an in-depth understanding of the forces a manufacturing plant can experience within a global network and the responses of plant to cope with them. As stated earlier, there is little literature on the interaction between individual plants and their related manufacturing network (Cheng et al., 2011; Cheng, Farooq, et al., 2015). Likewise, the literature on current offshoring and reshoring drivers is relatively new, meaning that there is still little understanding about the motivations and factors that currently influence an international manufacturing network (Arlbjørn & Mikkelsen, 2014; Dachs et al., 2019). An inductive in-depth case study will provide an in-depth understanding of the plants responses to international network forces as it allows for the collection of data from multiple sources (Blumberg, Cooper, & Schindler, 2014).

Because of the limited time and the availability of willing companies, this qualitative research uses a convenience sampling strategy. This means that the company is chosen based on its accessibility which represents the willingness of the company to cooperate and their

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12 3.2. Research context

The context of this research is the consumer electronics manufacturing industry. This type of industry is dynamic due to frequent changes to the technologies used, product specifications, regulations, quality, and functional requirements which lead to continuous alterations in the amount of pressure exerted (Hall, 2000; Luzzini & Ronchi, 2011). The manufacturing industry has faced global developments in recent years for example with the expanding international networks, political pressures and climate enforced regulations (Kinkel & Maloca, 2009; Stanczyk, Cataldo, Blome, & Busse, 2015).

The locational drivers, various plant roles and competencies in the international network are important factors for the MNEs allocation decisions. The selected case comes from a large Dutch company (>2000 employees locally) which is active on a global scale. For

confidentiality purposes the business will be referred to as Technizzo. Furthermore, the researched Technizzo plant is a manufacturing plant located in a developed country which is part of the industry that manufactures products meant for personal care. This plant has managed to stay within the network for over 70 years and evolved into a lead plant. The company itself has produced over 200 different types of products and closed over 60

manufacturing plants in their IMN over the last 8 years. Additionally, it has been expanding its business into a new type of market focused on *confidential* products. Together, the downsizing of the network, increase in product categories and entering of a market with new requirements make the context useful to research. It will provide insight about the forces that influence the international manufacturing network as well as the responses of plants to cope with them.

3.3. Data collection:

The overall goal of this study is to explore and understand the various global forces that influence international manufacturing networks and how their manufacturing plants coped with them. This data will foremost be based on historical and retrospective data which will be collected through semi-structured interviews and archival documents.

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13 includes supply chain managers and senior project managers (an overview is presented in Table 2). All of the interviews were held in Dutch to prevent misunderstandings due to professional or technical language. The interviewees were chosen for their experience at the manufacturing plant and their accompanying functions because the functions of supply chain manager and industrial costs analysts were more relevant to interview than a line operator who has been working there for 1 year.

Prior to the interview, the participants were notified by email about the research purpose, the related overall topic and the confidentiality of their answers. To avoid that their answers would influence Technizzo’s image the interviewees were granted anonymity. The first 5 minutes of the interview included general questions about the background of the interviewee within the company. These interviews were done face-to-face which allowed for the

opportunity to gain in-depth information and insight. An interview protocol (Appendix 1) has been developed based on the literature from the theoretical section in order increase the reliability of the study and the comparability of the answers (Yin, 2009). The interview protocol was first pilot tested with the supply chain manager of the manufacturing plant in March and afterwards altered under the supervision of a professor from the department of Operations Management at the University of Groningen.

Table 2 Interviewees Age Function #Years of working experience #Years of experience in current function Duration of interview

#1 40-50 Supply Chain manager 10-20 3-6 60 min

#2 40-50

Manager Industrial Cost

Analysis 10-20 3-6 60 min

#3 30-40

Operational Material

Management 10-20 3-6 60 min

#4 50-60 Groups manager 30-40 7-9 60 min

#5 60-70 Senior project manager 30-40 12-15 60 min

#6 40-50 Supply Planning Manager 10-20 3-6 60 min

#7 40-50

Industrial Cost Analysis

Development 10-20 7-9 60 min

#8 30-40

Procurement Engineering

director 10-20 3-6 60 min

#9 50-60

Industrial Cost Analysis

Development 30-40 12-15 60 min

#10 50-60 Manager prototype shop 20-30 12-15 60 min

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14 3.4. Data analysis

The interview recordings were transcribed on the same day or within a few days after the interview. Following the transcription of the interviews, codes were added using the program Atlas.ti in order to aid the analysing process and increase data visibility. This analysis process was based on the iterative three step approach developed by Gioia, Corley, & Hamilton (2012). First, the data was divided into quotes of information that deemed relevant for this research. Each quote was looked into separately and to make sure no pattern was overlooked In Vivo codes were added to capture the essence of the quotes. For example the quote “Every manager always wants to have variable costs instead of fixed cost and as low as possible” was labelled as ‘offshoring driver’. This process was performed separately for each interview. Initially, this rough coding process produced a large amount of first-order codes.

Secondly, second-order concepts were created based on the combination of first-order codes that addressed the same subject. This process used the available literature and theory on IMNs and plant roles to look closer at the first order codes that were drawn from the data. The final step of the process was combining the second-order codes into aggregated dimensions. This consisted of looking closer at corresponding themes among the second order-codes. This also enabled the researcher to look into new literature that was not initially part of the research.

In order to perform an in-depth case analysis and develop a deep and clear understanding of the forces that influence an IMN and the location of manufacturing activities several factors were identified. Locational drivers that emerged from the analysis were: geopolitical changes, plant level of automation and location advantages. This in turn revealed the plant responses and strengths to accommodate these drivers and adapt to the network forces. Excerpts of the resulting coding tree are presented in Table 3 and appendix 2.

Table 3 Coding tree excerpt

First-order codes Second order

categories

Aggregated themes

“In Chinese culture the lower level workers will leave annually during Chinese new year. This is not only at our plants but our suppliers too making it a difficult period for production. Their commitment to the firm is lower”

Continuous improvement culture

Competitive plant culture

“If a plant has no structural competitiveness or value it has no

right of existence” Plant value in network

Create valuable network competencies

“We want to use common technology like moulding in such an advanced way that other companies would have to paint for”

Plant manufacturing competency

"You can wait until corporate management tells you to make a product or you prepare and be ready"

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“The new COO has been saying for 2 years that we should share our knowledge with other parts of the network. That is fine but then we ask what we will get in return”

Accumulated knowledge and competencies Knowledge sharing capabilities

“In the end, development, operations and production strengthened each other. When you see what happens in production, it also makes you stronger in development.

Development then sees more quickly where the problems are and how they can adjust. If you sit closer together you have more opportunity to do this”

Vertical integration

Insourcing

“We know the direction the business is going, so we really want to get products that match. We also know quality is important and we are excellent at it so we would like to take in products with high quality standards and that match the company portfolio in the long-term”

Business alignment

“Effective use of capacity is very important for a highly

automated plant” Plant level of automation

Locational driver

“The shipping route from China to the US includes 25% import

duties which is a substantial costs for a product that is €40” Geopolitical changes “The difference in wage used to be 1 to 20 but now it is 1 to 10

and decreasing” Locational advantages

“The business is entering a new market with high entry barriers because we fear the competition will eventually move beyond similar low-end to high-end products”

Market developments

Network re-design

“From my perspective the business wants copies of plants to effectively handle changes in the international environment. Flexibility on a macro-scale”

Flexible plant network

“In terms of diversity we actually wants less SKUs because it gives an enormous supply chain management burden.

Simultaneously if the customer requests it and we can generate a profit then we will do it”

Adaptability to

change _{Product and} process flexibility

“Our location will not relocate, but more our competences will expand to other products. We must remain competitive otherwise we have no right to exist”

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4. FINDINGS

In this researched case, the manufacturing plant is treated as a separate business within the manufacturing network of the firm. This means that the plant has to generally manage itself to cope with the forces affecting the IMN without much assistance from corporate management. Moreover, the global forces affecting the network have the plants within compete for their own survival. A senior procurement manager from the head-office highlights this perfectly by stating: “If a plant has no structural competitiveness or value it has no right of existence” (C8).

The findings include an analysis of the most frequently mentioned aspects of network

influencing factors and plant responses. Initially, the major forces influencing the location of manufacturing activities within an IMN are addressed. These different forces are linked to different perspectives and will be mentioned accordingly. Consequently, the plant

management responses towards the forces are highlighted.

4.1. Network forces affecting the MNEs allocation decisions

The interviewees agree that the biggest force for offshoring production is cost. “Every 6 months there is a discussion about moving production abroad and generally for the

traditional reason of costs” (C2). When location decisions are discussed, managers’ asses cost first. According to 3 interviewed industrial cost analysts (C2, C7 & C9) there are 3 stages for the cost calculations of allocations decisions: the manufacturing costs, conversion costs and shipment costs. This structure is followed to match the location drivers in the firms’ decision process and to better understand the factors that influence the location of manufacturing activities.

4.1.1. The costs associated with production locations

Manufacturing costs are the first and primary cost which include the required bill of

materials that have to be purchased in close proximity to the plant. “Our production sites in China and Indonesia are assembly plants which means that the components are made by other suppliers and then send to the plant where they are assembled, boxed and shipped” (C1). Because the Asian plant serves the local market and uses local suppliers it is more cost advantageous to buy the basic components than investing in machines to produce them on-site. In regards to manufacturing the less complex and basic products, the plant might be in danger of losing that activity to lower cost assembly plants in developing countries.

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17 quality. “There are 120 global suppliers for our products and in principle they are all raw materials that are processed on-site” (C1). It has been observed that this enables the plant to produce more customer specific orders and “an absolute benefit of this is the ability of price segmentation for different customers” (C6). From a locational perspective this suggests that the availability of raw materials and the plants processing capabilities give the plant

competitive value. It enables the plant to serve the market with customer specific products while maintaining cost advantages.

Secondly, the conversion cost which consist of manual (variable) labour cost, machines and overhead cost which are influencing factors from the locational and organisational

perspective. “Every manager always wants to have variable costs instead of fixed cost and as low as possible” (C9). The interviewee indicates that the wage gap of manual labour between emerging and developed countries is closing to the point where Technizzo is re-evaluating the previous offshored amount of production. “The difference in wage used to be 1 to 20 but now it is 1 to 10 and decreasing” (C9). Manufacturing abroad with low variable cost and

sequentially shipping products to another continent is seemingly no longer the most cost competitive process which is beneficial for the lead plant in the developed country.

However, Technizzo’s demand market is also volatile and the assembly plants are better at switching in production volumes. This implies that the offshore plant with low variable cost is more attractive for balancing between demand fluctuations. Nevertheless, the researched plant possesses a high level of automation and “effective use of capacity is very important for a highly automated plant” (C7). The previous plant manager described the automated plant as “an airplane and an airplane should be full” (C3) meaning that because it is expensive to operate it should be used to its full potential. This indicates that having excess capacity at the automated plant and the drive to fill it makes allocating manufacturing activities to a highly automated plan also preferable to realise a return on investment.

Finally, the shipment costs have become an increasingly important factor in the location cost price calculations due to new market demands and geopolitical influences. Big retailers such as Walmart demand products within a short time frame (C6, 9). If the products are

manufactured in Asia and it takes 6 weeks to arrive, Walmart apparently will not make shelf space available and Technizzo will not be allowed to sell products there for a whole year. “There is a distribution centre in America not because it is cheaper but because firstly, it weighs up against the sales we make of the retailer and secondly, we are closer to the

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18 big retailers, the plant networks are getting smaller because the remaining plants have to deliver (semi-)finished goods instead of parts.

Moreover, macro-flexibility is a term that has been coined several times during the interviews. Political issues are causing new locational and organisational factors that impact the network structure and plant processes (Company document). “The shipping route from China to the US includes 25% import duties which is a substantial costs for a product that is €40” (C9). To cope with the volatile geopolitical environment Technizzo requires the plants in their network to adopt flexible capacity to balance production among different countries. Originally, factors like import duties and proximity to market did not impact their cost calculations of a location as significantly. The pressure of being able to reliably deliver to the market within a certain time-frame, with customer specific products and affordable costs made shipment costs a factor that affects the firms’ location strategy from all three perspectives.

4.1.2. Market expansion

Technizzo has entered a new industry market and divested several business groups in the last 10 years influencing the network configuration and coordination (Archival documents). Now the business and plants are dealing with two dimensions of market expansion: i) increased demand for personalized products and ii) entering a new product market. “The business is entering a new market with high entry barriers because we fear the competition will eventually move beyond similar low-end products to high-end products” (C8, Archival documents).

Firstly, the global market demand for customized and personalized products expresses itself through the increasing complexity within the plant supply chain and operational processes. “In terms of diversity we actually wants less SKUs because it gives an enormous supply chain management burden. Simultaneously if the customer requests it and we can generate a profit then we will do it” (C10). Consequently, the supply planning manager is struggling with the increased product variety and market demand. “We used to sell only 1 variety of our products. In the meantime we sell 1 product with 60 varieties of colours, customized packaging and accessory which really impacts our production process and chain complexity” (C6)

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19 within the new company profile (and generated excellent profit margins) were transferred to the remaining plants (Archival documents; Company documents). The CEO stated that: “We want manufacturing plants that manufacture multiple products” (Company document). These factors have put new pressure on the plant to reshape their manufacturing activities and make strategic and operational choices to accommodate this business strategy.

4.2. Plant management responses to the global forces affecting the IMN Inside the plant there is no unanimous answer to the amount of influence the plant has when it comes to allocation decisions of manufacturing activities of corporate management. “You can make a case but that remains reserved for your own plant management” (C5). Nonetheless, several interviewees reveal the history and accommodating activities to deal with network forces and industry pressures such as offshoring. These findings provide insight on how the network and business forces influence the strategic and operational decisions of the plant.

4.2.1. Focusing on valuable and advanced competencies

Over time, the shift in manufacturing activities within the plant has been enormous.

Offshoring new products for the reason of reducing costs was an industrial trend in the 90s. “It has been 25 years since the first factory opened in Asia that was intended to manufacture basic products for the local market. When the Asian plant started manufacturing our more complex products there was panic” (C9). Afterwards Technizzo learned that intellectual property that was transferred to Asia was being lost. “Any knowledge you bring to Asia you will lose, that is why we were able to keep our production” (C4). The plant responded to the force of a cheaper production location by focusing on core key-modules and specializing in highly complex processes. This apparently made their component inimitable, added to the network value of the local plant and accommodated the businesses need for intellectual property protection. In addition, the plant tries to increase their network value by developing their own proficiency in existing processes “We want to use common technology like

moulding in such an advanced way that other companies would have to paint for” (C1). This implies that increasing the plant competence level while specializing in the key-components of the business can effectively secure production within a plant.

4.2.2. Insourcing as plant risk management

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20 become more sensitive to the network. “In times of crisis plants will try to take a hold of everything and oversell themselves to get it” (C10). However, the interviewees agree on the matter that you should know your own strengths and not falsify your performance data to accommodate the business requirements. “Another plant in the network overstated their competence level to adopt a new project. They were made publicly example of inside the network when they failed to deliver” (C11). To respond more effectively to new plant opportunities the plants industrial cost department continuously analyses the available

processes and products carefully for the added-value they bring to the company. “At one point we received a quotation for a component that was lower than our variable costs. Then you must stop immediately! ” (C9). This generally applies to the basic and non-critical

components from which no intellectual property will be lost.

Technizzo is also expanding their market to react to the forces that influence the market share of their current product ranges. ‘The emergence of new low-cost competitors, particularly in Asia, further underlines the importance of improvements in the product creation process’ (Archival document). The plant recognized their strength with on-site R&D, supply chain management and procurement and responded by tailoring their competence level accordingly to fit the new business needs. “You can wait until corporate management tells you to make a product or you can prepare and be ready” (C6). Using methods such as increasing efficiency to free-up capacity and hire/train personnel to acquire the business newly required skills and knowledge. Their efforts were recognized by the CEO who stated: “the Technizzo plant appeared to be a better place to consolidate and expand due to their core competencies and high efficiency level than the closed offshored plant” (Company document). The results suggest that the plants response accommodated the business need for customized and new products and consequently it was selected to adopt parts of production that corporate management relocated from the closed plants.

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21 things like that” (C2). Consequently, this happened and the plant got more autonomy which enables them to choose the products they will produce and which customers will be served. “We know the direction the business is going, so we really want to get products that match. We also know quality is important and we are excellent at it so we would like to take in products with high quality standards and that match the company portfolio in the long-term” (C11).

4.2.3. Develop knowledge sharing capabilities

Interviewees highlight the importance of competence levels because the plant itself has accumulated knowledge and skills for over 70 years making it a valuable production site. In order to create Technizzo’s flexible network it wants the plant to share their knowledge and experience: “The COO has been saying for 2 years that we should share our knowledge with other parts of the network. That is fine but then we ask what we will get in return” (C11). The plants response has two sides for sharing knowledge with the network: losing unique value and sharing value. Interestingly, the more practical employees (C5, C10) opt for more transparency and sharing the knowledge pool with other network plants to increase mutual benefits. However, the higher plant-level managers (C11 & C2) are worried about their reduced value within the network. The plant is responding to this internal pressure by

bargaining for equal compensation in forms of new product allocations and a budget for new automated lines.

Furthermore, the plant is part of an innovation network of local businesses which are

experiencing a severe lack of educated technical personnel. This location development could threaten the plants ability to maintain locational benefits of knowledge and competencies. “The Netherlands is traditionally a trade and services country and Germany is more

industrial for example. The perspective is different and that is why it is more attractive to be an engineer in Germany that it is in the Netherlands” (C2). To counter the local diminishing amount of technically educated personnel the plant responded by developing a partnership with the local university with the goal of increasing the amount technical courses and raise awareness about the local technical opportunities (Company documents). This active

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22 4.2.4. Create product and process flexibility

The Technizzo business has closed 75% of their global manufacturing sites since 2012 (Figure 2). As mentioned in section 4.1.1. the remaining plants need to be able to quickly react to developments in the global network (import duties), product designs and demand volumes. “From my perspective the business wants copies of plants to effectively handle changes in the international environment. Flexibility on a macro-scale” (C6). However, remaining flexible is challenging for the plant as the automated processes are operating at near 100% capacity to match the mentioned capacity efficiency.

Figure 2 Decreasing number of international manufacturing sites (source: archival documents)

The plant can respond with 2 sources of flexibility, one if which is due their organizational role with on-site research & development, supply chain management and procurement. “The triangle of designing a new product, the industrialization and production of a new product makes us unique within the network” (C2). In comparison, the assembly plants in the network often only assemble the different components from suppliers and other network plants. The researched plant has integrated most parts of its supply chain. This contributes to their ability to make rapid decisions in product design, procurement of materials and managing demand volumes. Together with their position within Europe it can serve the local market and provides relatively short lead time.

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23 4.2.5. Use culture as competitive plant value

Interestingly, most plant employees complement a great deal of their locational value to their plant culture. This is not a response to a specific factor affecting the network but they are personally convinced about the benefits of their non-hierarchical culture, company loyalty and drive for continuous improvement (C2, C5, C6, C7 & C10). Especially their company loyalty becomes apparent: “Soon I am leaving after 30 years together with 4 others who I have always worked with” (C5). Furthermore, their non-hierarchical culture together with on-site supply chain, R&D, industrialization, production and procurement together apparently makes it possible to faster solve problems and develop responsive actions to forces affecting the network (C2, C5 C6, C7 & C10). The business side of the plant does not share this cultural perspective. “There should be no emotion in business decisions” (C9). The procurement engineering director stated: “I do not see a reason why the quality of products from Asia or Eastern-Europe are of lesser quality than here” (C8).

The employee statements lack clear causal evidence but the recurring mentioning of its importance indicated the personal belief that the continuous improvement and loyalty makes them able to adapt, anticipate and evolve better in order to suit the business strategy and remain valuable and competitive. In comparison: “In Chinese culture the lower level workers will leave annually during Chinese new year. This is not only at our plants but our suppliers too making it a difficult period for production. Their commitment to the firm is lower.” (C3). Table 4 abstractly highlights the forces steering the manufacturing activities of the business.

Table 4 Forces for keeping and offshoring production

Forces keeping production local Forces for offshore production

 Accumulated valuable knowledge

 Manufactured products remain profitable  Cheaper automated production

 Maintaining intellectual property  Flexible automated processes

 Higher cultural rooted quality standards

 Assembly strategy  More variable costs  New company focus

 Cheaper manual production

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24

5. DISCUSSION

This research in mainly focused on the plant-level responses towards the forces affecting the IMN. Therefore more attention to given to the responses than the factors affecting the location of manufacturing activities.

5.1. Factors affecting the location of manufacturing activities Previous literature emphasized the lack of research on the understanding of relocation activities (Arlbjørn & Mikkelsen, 2014; Dachs et al., 2019). By analysing the findings the research contributes to a clearer understanding about this topic. The results suggest that the business relocated manufacturing activities because it wants to create flexible plants in

strategic countries to accommodate changing import duties, reduce transport cost and increase delivery reliability to big retailers. These results contribute to Ketokivi et al. (2017) and gives an indication of the new forms manufacturing is taking in modern economies. Furthermore, these responses of the IMN to the dynamic global forces are in line with previous literature as methods to stay competitive in a global market (Ellram et al., 2013; Tate et al., 2014).

Nevertheless, the literature underestimates the effects of import duties on the location of a MNEs manufacturing activities. The results imply that the dynamic nature of import duties affect the amount of manufacturing activities at a plant location. These results should be taken into account when considering location of manufacturing activities of an IMN.

The temporal factors affecting the design of Technizzo’s IMN are rooted in the growing need to react quickly to changes in market demand or new demands of key customers (Dachs et al., 2019). Technizzo therefore experienced the similar problems of having production activities spread over a long distance and several countries as described by Dachs et al., (2019). However, literature is limited on the methods IMNs use in reshaping their network to accommodate these factors. Technizzo is creating a network of strategic plants in existing strategic locations and creates distributions centres closer the big retailers. These results provide new insights to literature on designs modern international manufacturing network (Bals, Daum, & Tate, 2015b; Ketokivi et al., 2017).

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25 responses are discussed for their presence in literature, their effects and how it will impact the development of the plant in the network.

Valuable components and advanced competencies

A first intriguing result was the plant response of specializing in key-modules and advanced processes. The research indicated that this was historically done to prevent offshoring of production and it contributed to the plants network value as it accommodated the business desire to secure intellectual property. This corresponds with literature which state that intellectual property status tends to have this influence on the location of industry processes and products because sensitive intellectual property generates the highest levels of value (Cheng et al., 2011; Hannibal & Knight, 2018; Tate et al., 2014). Additionally, Mudambi & Venzin (2010) emphasize this specialization strategy on its contribution to a firms internal knowledge intensive activities. This strategy leaves standardized activities to other plants in accordance with the results.

Nevertheless, from a temporal and organisational perspective, the findings indicate that the unique intellectual property will be lost overtime and Technizzo eventually wants the same level of production to be shared with offshored plants. Cheng et al. (2011) highlights a similar conclusion from their case studies that matured products and processes tend to be transferred outwards to other existing plant in developing countries for low costs and market proximity. But, according to Cheng et al. (2011), the sharing plant can also keep developing and improving its process. From the results the plant appears significantly more advanced in manufacturing the complex components than their offshore network plants. This suggest that by the time the offshore plants have attained this production level the plant will have found another innovative factor to maintain its competitive value.

Insource relevant products and processes

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26 acquire more relevant products. These interdependencies and pressures should be taken into consideration when an MNE enters a new market or introduces new products.

The conscious decision to insource relevant and valuable products and processes was

identified in the analysis of the results. The new market entry of Technizzo is emphasized in literature as a shift to a market which is less sensitive to the industries of low-wage countries (Bernard & Jensen, 2007; Mudambi & Venzin, 2010). According to Bernard & Jensen (2007) a business responds to these industries by adjusting its product mix to become part of an industry that is more capital- and skill-intensive. Fortunately, the plants former response against offshoring already made their manufacturing activities more capital-and

skill-intensive. Now, the plant responds similarly to the new market and product mix by intending to further offshore or relocate their more basic production to insource more relevant, valuable and innovative products and processes. The plants ability to adopt new products together with the new market entry suggest additional organisational value for the plant (Vereecke & Van Dierdonck, 2002). Nevertheless, it has been observed in the research of Bozarth et al., (2009) that higher levels of internal manufacturing complexity will have a negative effect on

schedule attainment and unit manufacturing cost performance. In contribution to literature the results indicate that the plant should gradually and carefully select the types of insourced products and processes in order to cope with complexity to become the strategic flexible plant the MNE desires in their network design (Cheng & Farooq, 2018; Ketokivi et al., 2017).

Accumulating knowledge and capabilities

From an organisational perspective, Szász et al. (2019) highlight the importance of developing plant competences and taking up knowledge sending roles to contribute to the competitive advantage of an MNE as a whole and secure the future of a plant within a

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27 Global networks require global flexibility

‘Flexibility is seen as an inherent property of manufacturing systems that allows them to change within their own limitations (especially expected external changes)’(Ortega Jimenez et al., 2015, p.167). The findings imply that the plant response to forces of increased

customized demand and competitive innovative products matched their plant set-up with short distances between R&D, innovation and manufacturing (Kinkel & Maloca, 2009). Previous literature has examined the benefits of co-locating both production, R&D and supply chain (Ketokivi & Ali-Yrkkö, 2009). By observing the findings, it can be derived that combination of these departments indeed assists a plant in coping with the forces of new product

development and increased product variety. It contributes further to the papers Ketokivi & Ali-Yrkkö (2009) and Ketokivi et al. (2017) about the benefits of having R&D and

manufacturing on-site to handle the information intensity of product development, industrialisation and manufacturing.

However, the data also indicates that the high level automation and requirement of skilled labourers makes the plant expensive to operate. Swink et al. (2007) does emphasize the contribution of product flexibility-based capabilities to a plants competitive capabilities. Literature does however neglect the cost aspect of maintaining a plant with such capabilities (Swink et al., 2007). In order to validate the high level of automation the plant designed their automated lines to handle similar sized products. Even though the business is adopting a new product mix the plant should not exceed their product design dimensions to accommodate the businesses. Additionally, from a locational perspective having integrated most manufacturing activities at a single location contributes to the coordination efficiency in order to achieve the firms strategic objectives (Cheng et al., 2011; Meijboom & Vos, 2003). The data implies that the benefits of having such an expensive plant will weigh up against the costs it makes for Technizzo.

Company culture and innovation

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28 Oke (2013) on the benefits it creates for innovation and process flexibility and provides more insight in the notion of human elements from Olhager et al. (2015).

In terms of cultural quality standards Kinkel & Maloca (2009) express their views on the underestimated expenses for quality securing measures and quality control in offshored manufacturing plants. The findings state the high quality standards that are upheld at the researched plant. However, the different cultural perceptions are not as negligible as the business managers think. The different perceptions of quality and high fluctuations of qualified staff in the Asian plant can make it difficult to maintain the required quality and process standards (Dachs et al., 2019). This further highlights the locational and

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6. CONCLUSIONS

This research started by highlighting the complexity of design an international manufacturing network. Moreover, three approaches are used to structurally find and evaluate the factors which can influence the design. This led to interesting findings on how a plant interacts within a changing international manufacturing network and revealed new plant-level insights on the effects of manufacturing network designs.

Firstly, the obtained results show that manufacturing networks are decreasing in size but the complexity is increasing due to political issues, developing economies, changing customer demands and new product mixes. The main reason that the plant was able to cope with these forces is mainly due to its gradual accumulation of valuable competences and advanced processes. The plant strategy was to develop advanced processes and insource valuable products that aligned with the business strategy. Together with capital intensive processes (automation) it created the two sources of flexibility: vertically integrated departments and flexible automated lines which can be altered to handle similar sized products. Their competence was recognized and subsequently their plant has managed to survive the companies’ new focus and proved to be a valuable location in the new design of the MNEs manufacturing network.

Secondly, this paper identified a locational driver that is not directly related to previously known drivers. The interviewed operational employees of the plant remarked on a locational benefit from having a plant at a certain location in a developed country. The indirect cultural advantages such as cross-trained workers, quality standards, drive for innovation &

improvement and company loyalty influences the plants ability to adapt to network changes. This result should be considered when allocating manufacturing activities according to operational managers.

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30 6.1. Managerial implications

Besides contributing to the gap in literature, this research has made some important managerial implications.

One implication which is important for corporate management is to recognize that the plants in their network are part of an evolving ecosystem. The plants are able to develop their own competencies and responses towards forces affecting the network. Recognizing their potential for growth and adaptability to a changing network can help management make better

configuration and coordination decisions for redesigning their network.

Another implication is the effect of the choices that are made by plant management.

Specializing in key-modules and creating advanced processes contribute to the network value of the plant. It adds to the amount of intellectual property as well as their ability acquire new products from the business. Furthermore, because the specialization strategy attracts new products it is important to select products that match with the available processes. If the plant acquires new products that require additional machinery it could develop further internal complexity. This potentially increases the conversion costs and decreases efficiency of the plant.

Lastly, by shining light on the importance of local plant culture management is aware of the additional location benefits that a plant may have in the network. Corporate management can create a loyal and open plant culture in combination with on-site R&D, supply chain

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31 6.2. Limitations and Future Research

After discussing the theoretical contributions and managerial implications is important to highlight the limitations of this study.

First, this study uses a single exploratory case to study the effects of plant interactions in an international manufacturing network. The choice to conduct a single exploratory case study was based on the limited availability of willing companies, a small timeframe and unclear instructions at the start of the study. A multiple-case study required extensive resources and time beyond the means of a single student (Yin, 2009). When focusing on the ‘how’ objective of this study conducting this single case study research did provide valuable in-depth insights in the forces affecting a manufacturing plant. However, a single case is not sufficient to generalize the results of this research. Future research should be conducted using a multiple case study at different plants to compare results and provide more compelling arguments about the interactions between plants in context of a changing IMN.

Second, the case in particular can be described as a successful case since the plant has

managed to survive within the network for 70 years. But the amount of factors that influenced their survival was extensive and the research focused on the ones that were most frequently mentioned in the interviews and archival documents. It might be interesting to investigate factors such as tax advantages, plant embeddedness and corporate design strategies. This could provide a more elaborate overview and add more insights to literature about the location of manufacturing activities and the added value of plants.

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“Coping with the forces affecting an international manufacturing network: a plant perspective“

Master thesis