Shutting a factory.
A real life situation – you have a profitable factory established for many years in a low growth mature market – in this case, Australia. You also want to grow your business in fast developing Asia. An option is to shut the established factory, build a new factory in Thailand and supply the mature market from the new factory. Is this a good supply chain strategy?
This is currently happening within a European owned white goods business. Jason Furness considers it in the December 2013 edition of Australian Manufacturers’ Monthly at http://www.manmonthly.com.au/latest-magazine.
The challenge is that the analysis of options is done, not by supply chain professionals, but by accountants using standard cost accounting procedures. Most likely the analysis is confined to considering factory costs rather than the total cost of all supply chains. So, there can easily be a biased result. This situation is similar to arguments over the past twenty years about cheaper manufacturing in China, but the result being warehouses full of finished goods in America.
With the white goods manufacturer, its Australian factory is very adaptable and capable of quickly changing its production plan to meet changes in consumer demand, therefore finished goods inventory is low. Without a domestic factory, the sales department will have to forecast, most likely at SKU level, for at least twelve months into the future (how accurate will that be?) and negotiate capacity availability against all other countries being supplied from the factory in Thailand.
Changes to forecasts will have to be accommodated into the region demand plan that is input to the S&OP. The lead time for this process, plus delivery lead time, means the new factory cannot be responsive to changes in the mature Australian market, with subsequent loss of its sales and market share.
A different measure
Cash flow is the critical measure of business viability, For the options analysis, a cash flow model is required, which identifies the total cost picture under a number of supply chain scenarios. Linked to the model is the working capital requirement – the money required to buy, make and sell items; also the cash-to-cash cycle days calculation. This reworks the working capital calculation to identify the time it takes for cash invested in inputs to flow back into the organisation from the sale of products.
The objective of this process is to identify the option that maximises cash flow. Investing in new markets is often a long and expensive undertaking before profits are realised, so the new factory will be a drain on cash. This will have to come from somewhere and if the Australian business is not generating a healthy cash flow, then head office must allocate the required investment.
However, the decision has been made to shut the Australian factory. Based on the experience of another white goods manufacturer which did the same thing a few years ago, lead times will increase, inventory will increase and money spent on expanding warehouse space; but sales will decrease as the company fights a market share battle with competitors on an equal basis, with all companies importing products.