To be or not to be (a manufacturer)

Why manufacture at all?  There are many companies which have built highly succesful businesses without getting their hands dirty with manufacturing, and that includes highly technical companies like Apple who subcontract IPhone manufacture or clothing giants like Nike.   So perhaps we should start with a reason why NOT to be a manufacturer:

Being a manufacturer does not necessarily give you a lower cost base.   On the contrary,  many manufacturers have suffered by being obliged to keep volume in their factories, while smaller and nimbler rivals can quickly source production to lower cost alternatives as global economics, exchange rates, changing technologies and emerging new low cost suppliers change the dynamics of the market.  All of the great distribution companies such as Nike, Carrefour, Walmart have proven that it is not (always) necessary to be a manufacturer to achieve low cost.

 

Four reasons to be a manufacturer

1. Product Technology or Manufacturing Technology for the Product is a key competitive advantage.

It may be necessary to be a manufacturer where the knowledge of how to manufacture is a barrier to entry to new competitors, and where only a few manufacturers have this knowledge.   Examples might be machinery or equipment manufacturers,  aerospace companies, integrated circuit  or bearing manufacturers.  To keep this knowledge in house is a way of preventing competitors from easily getting access to the technology of the product itself or how to make it.  This sort of business will require investment in research and development for  products and processes to maintain the competitive advantage of their facilities.

2.Investment in Manufacturing Facility is a Substantial Barrier to Entry

A chemical plant is a typical example where it is not often easy for anyone to setup a manufacturing plant owing to the investment and administrative approvals that are required.  If this is coupled with high transport costs for the product, then it can enable companies to benefit from a local monopoly situation.  Long term business forecasting and capacity management will be crucial for this type of business.

3.Substantial investment in product tooling is required

Similar to above, if production in a product requires substantial investment in tooling, then it may limit the number of players in a market to a restricted number of manufacturers who over the years have built up tooling in their range of products.   This is one of the key factors behind the structure of the automotive industry, where the vehicles manufacturers own a large part of the tooling required to produce their vehicles.  It could however be argued that it is not necessary to be a manufacturer in this case, and to own and control use of the tooling would be sufficient.

4.Logistics and Make to order business model

There are many businesses whose primary purpose  is to provide a local manufacturing service: a machining shop which holds bar stock and can provide turned parts to local customers in 24 hours.    Or an electronics contract manufacturer producing prototypes and small batches to local designers.  This sort of business will live or die by quality and service.

Focus on Manufacturing Or Divest

It is important that every business asks itself the question “Why am I manufacturing” in order to align their manufacturing strategy with the company’s strategic goals.  If a manufacturing unit is no longer an asset to a business, then it is necessary to re-focus manufacturing activities or consider complete divestment of the manufacturing plant.

 

 

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