Optimizing the Production Network: When Which Interventions Make Sense

The production networks of most medium-sized companies have evolved over time. What may have been sensible and efficient years ago often no longer serves its purpose in an era of volatile demand, fluctuating customer orders, and short product life cycles. For example, if one plant is operating at full capacity while others are underutilized, alarm bells should be ringing in the executive suite. Christian Zeller and Max Stehr explain what companies can do in such situations, when certain measures make sense, and how the production footprint becomes a competitive advantage.

The good news: Determining whether your production network needs to be adjusted does not require complex analyses.

Four typical signs clearly indicate a need for action:

1. Persistent under- or overcapacity:
   If individual sites are constantly overburdened and compensating for systemic weaknesses, the network has a structural problem rather than an operational one.
   
   
2. Significant cost differences:
   If unit costs for an identical product vary greatly between comparable plants, this may be due to misaligned site roles, inefficient scaling, or the fact that the network has grown historically without following a clear strategic logic.
   
   
3. Declining delivery reliability:
   If customers receive their goods late or not at all despite sufficient capacity, the problem is usually not volume but distribution, control, and network design.
   
   
4. High coordination effort:
   Even if everything works formally, but the network is de facto becoming increasingly expensive, complex, and slow, the production network should be fundamentally rethought.

However, blind actionism does not help. Before management takes concrete operational or structural measures, the goal should be clearly defined.

Every optimization needs a goal

To ensure that optimization does not merely involve implementing individual measures that have little effect on the overall system, strategic guidelines are needed. A target vision provides these.

This should, among other things, answer the following questions:

• What role will production play in the business model in the future?
• Where is customer proximity crucial, and where is cost leadership crucial?
• Which locations create which strategic value?
• How dynamic is the market, and how much flexibility is required?

Roles for the various locations can be derived from the target vision. While flagship or specialized plants, for example, possess a high level of technological depth, high-volume plants focus on efficiency and economies of scale, and customer-proximity production sites excel with rapid response times. Tasks, technologies, and volumes should be distributed in such a way that complexity remains as low as possible and investments are made in the right places.

Optimization in Four Stages
Depending on the starting point and urgency, the target vision is implemented through different levels of intervention, which vary in terms of impact, risk, implementation time, and organizational complexity.

Stage 1: Operational optimization of the production system
The first stage of intervention aims to improve performance within the existing footprint, as the challenges are primarily operational in nature. This includes, among other things, lean and productivity programs, the optimization of staffing and shift models, and automation.

Stage 2: On-site capacity and structural changes

In this stage, physical structures are modified, but the production network itself remains intact. Substantial improvements can often be achieved through the restructuring or reorganization of production lines, as well as the relocation of machinery within a single site.

Stage 3: Cross-site production reallocation

The third stage shifts the focus from the individual plant to the entire production network. To this end, production volumes are redistributed among existing sites by relocating machines, lines, or entire value streams, or by consolidating similar technologies at a single site. The number and geographic location of the plants remain unchanged.

Stage 4: Structural Transformation

This stage marks the maximum level of intervention. Measures such as complete plant relocations, site closures, or the establishment of new production sites typically have significant economic impacts but are also associated with high costs and risks.

In practice, the optimization of production networks rarely fails due to the underlying strategy, but rather due to an inadequately managed escalation. Consequently, the corresponding interventions are often poorly scaled, initiated too early or too late, or transition and duplication costs are underestimated.

As a general rule: The deeper the intervention, the greater the demands on project management, communication, and change management.

Those who wish to evaluate their own production network in a structured manner and determine the appropriate level of intervention should not consider operational, capacity, and structural options in isolation. Our white paper on production network optimization provides an in-depth overview of the approach, levels of intervention, and typical management implications.