The High-Performance

Manufacturing
Organization

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The High-Performance
Manufacturing
Organization

Frank Lesmeister, Daniel Spindelndreier, and Michael Zinser

June

AT A GLANCE
Performance improvement eorts tend to focus on the operational aspects of
manufacturing. But organizational issuesmatrix structures with multiple interfaces, proliferating roles and responsibilities, a structure that is no longer aligned
with strategycan also be a major obstacle to quality, flexibility, speed, cost
eectiveness, and competitive advantage.
S S
A companys manufacturing strategy must be aligned with and support the overall
corporate strategy. These strategic considerations will drive decisions about how
best to set up manufacturing operations.
C R S
Companies must make design decisions at both the corporate and the plant levels.
Key considerations include whether to centralize control, whether to integrate
related functions, and what the roles and responsibilities of plants should be.
M T
Each organization design choice involves tradeos that can aect cost, product
quality, cycle times, and service levels. Many of these drawbacks can be oset.

T H-P M O

OST MANUFACTURERS HAVE COME to accept that change is a constant.

Increasingly global operations, evolving production networks, mergers and
acquisitionsall contribute to a growing complexity that can extract a high cost if it
is not actively managed. But improvement eorts tend to focus on the operational
aspects of manufacturing, such as production processes, the shop floor, and logistics. Oen overlooked is the high cost of organizational complexity: the matrix
structures with multiple interfaces, the proliferating roles and responsibilities, the
many management layers that have built up over the years, and an organization
structure that is no longer aligned with a companys manufacturing strategy. These
issues are oen at the root of performance problems. Ignoring them can be a major
obstacle to quality, flexibility, speed, cost eectiveness, and competitive advantage.
No single solution will fit all manufacturing organizations. A companys industry,
markets, customers, products, internal capabilities, competitive position, and overall
strategy will inform any decisionsand there will always be tradeos. But an
eective manufacturing organization requires three things: an optimal organization
structure; a skilled, engaged workforce; and supporting systems and governance.
(See the sidebar The Importance of People and Governance.)

This report focuses on organizational best practices and outlines three essential
steps for building a high-performance manufacturing organization: start with
strategy, choose the right structure, and manage the tradeos. It also oers guidelines for determining the best choices for a companys manufacturing organization.

The Optimal Organization Design

Most companies wrestle with how best to organize their manufacturing operations
at both the corporate and the plant levels. Typical questions at the corporate level
include: Should we centralize manufacturing responsibility and decision making or
give regional and local plants greater autonomy? Should decisions that aect
product divisions be made globally or locally? How can we make sure that process
and technology standards are implemented across business units and globally? To
what extent should engineering, maintenance, quality, asset management, and
other functions be integrated into the manufacturing organization? How do we
minimize overhead among similar plants with similar products?
At the plant level, critical questions include: What responsibilities should be given
to plant managers? Which plant activities should be centrally coordinated? How
should plants be organized below the plant manager level?

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THE IMPORTANCE OF PEOPLE AND GOVERNANCE

Achieving a high level of manufacturing performance requires a skilled,
engaged workforce and governance
systems that drive and sustain
excellence.
Management leadership and visibility
help to create a culture of trust,
cooperation, learning, and continuous
improvement. Having the right people
in the right roles at the right time is
also critical. Given the global shortages of skilled labor, this requires
strategic workforce planninga type
of planning that involves defining
needed jobs and skills, estimating
likely hiring and attrition rates, and
addressing any gaps that must be
filled. Companies should also make
an ongoing commitment to recruitment and training, and define roles to
clarify individual and shared responsibilities. (See the exhibit Companies

Should Define Individual and Shared

Responsibilities.)
Oen, manufacturing organizations
have too many of the wrong types of
skills or people. But when it comes to
trimming the organization, most
companies focus more on reducing
their workforce than on streamlining
their management ranks. Delayering these organizations can help
flatten the reporting pyramid and
increase spans of control, which
lowers costs and improves eciency
and eectiveness. Delayering is more
than just a restructuring or costcutting exercise. It also leads to
improved management performance
and accountability, more ecient
decision making, and greater job
satisfaction. Knowledge, cultural
changes, and corporate values also
spread throughout the organization

To answer these questions, The Boston Consulting Group analyzed organization

structures in a wide range of industries. Our goal was to determine which factors
drive manufacturing performance and to identify overall best practices in organization design. Our analysis revealed the optimal setup for specific industries based on
strategic business drivers, and we created organizational guidelines to point companies in the right direction.

Start with Strategy

A companys manufacturing strategy must be aligned with and support the overall
corporate strategy. These strategic considerations will drive decisions about how
best to set up manufacturing operations. (See Exhibit 1.) To this end, we believe the
manufacturing strategy must consider the following three factors: economics,
markets and customers, and technologies and skills.

Economics. How critical are scale, scope, eciency, utilization rates, complexity,
labor, and other cost drivers that aect overall manufacturing economics? The
importance of these factors will vary by industry and company. For instance,
scale is typically integral to companies in the automotive, chemical, metal, and
fast-moving consumer-goods industries. The chemical and metal industries also

T H-P M O

THE IMPORTANCE OF PEOPLE AND GOVERNANCE

CONTINUED

more quickly and easily because there

are fewer layers of management.
Finally, the right incentives are
important to encourage the right
behavior. In addition to cost or quality

performance, for instance, plant

managers could be rewarded for such
factors as service levels, the health
and safety of their people, sharing of
best practices, and compliance with
production standards.

Companies Should Define Individual and Shared Responsibilities

Example: site manager and line manager
Site manager

Line manager

Organizational parameters

Direct or dotted-line
reporting; plant ownership
and structure

Manufacturing team
structures; task
allocation

Leadership behavior

Go Gemba! Kaizen
initiatives; collaboration
among manufacturingrelated functions and
headquarters; best-practice
sharing across plants
and business units

Go Gemba! Kaizen
initiatives; cross-line
collaboration; guidance
and development of
foremen and teams on
shop oor

Accountabilities

Individual: improve overall

nancials by lowering costs
and reducing working
capital; improve quality,
service levels, sta engagement and capabilities,
health and safety

Individual: line performance; sustainable

implementation of
standards; crosstraining and competence development of
sta; engagement and
satisfaction of line sta

Shared: secure, reliable

product delivery for
customers and component
supply

Shared: timely product

delivery

Metrics and targets

First-pass yield; on-time

delivery; cycle/throughput
time; accident levels; COG;1
working capital/inventory;
direct/indirect costs; CAPEX

Overall equipment
eectiveness;
changeover times;
quality; direct/indirect
costs

Decision rights

Owns: execution of manufacturing strategy at plant;

personnel decisions;
improvement initiatives;
high-level planning (e.g.,
Kanban, segmentation);
inventory levels

Owns: optimization of
operating processes;
enforcement of
standards; leanmanufacturing tools;
line stoppages;
personnel decisions
on shop oor

Can veto: investments

Influences: manufacturing
strategy; supplier selection

Can veto: line

personnel decisions
Influences: investments;
inventory levels

Sources: BCG approach; BCG project experience.

1
COG refers to manufacturing costs only (costs of marketing and sales are not included).

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E | Strategic Drivers Aect Organizational Choices

Strategic drivers
High economies
of scale

Organization design
Global setup

Economics

High economies
of scope
High significance
of asset utilization

Global setup

Markets and
customers

Plant roles and

responsibilities

Standardized production system

with integrated industrial
engineering

Lead plants or centers of

excellence; if one product
per plant, independent plants

Standardized production system

with integrated industrial
engineering

Lead plants or centers of

excellence

Integrated planning and scheduling Lead plants or centers of

to balance demand volatility and
excellence
control global volumes
Standardized production system
with integrated industrial
engineering and management of
assets and maintenance

High impact of
personnel costs

Technologies
and skills

Organizational choices
Degree of
functional integration

High level of standardization

with integrated industrial
engineering

Lead plants

Standardized production
system with integrated
industrial engineering and
standardized assets with
asset management

Lead plants

High degree of
complexity

Global setup

High importance
of proximity to
customer
High number of
region-specific
products

Regional or local setup

Independent plants close

to customer

Regional or local setup

Independent plants

High number of
customer-specific
products

Customer-oriented setup
on global or regional/
local level

Lead plants or centers of

excellence
Centers of excellence

Highly skilled
engineering and
production
workforce required
High importance
of production
know-how

Global setup

Standardized production
system with integrated
industrial engineering

Lead plants or centers of

excellence

Source: BCG analysis.

tend to seek economies of scope, so that multiple products can share common
premanufacturing steps. Standardized processes are critical to companies
seeking scale and scope. For companies in asset-intensive industries such as the
automotive, pharmaceutical, and building materials industries, asset utilization
is a key consideration. When high asset utilization and economies of scale are
required, manufacturing is best set up as a centralized corporate function.

Markets and Customers. How important is it to be close to end-user markets and

to have products that are customized for specific regions or customers? For
instance, automotive suppliers, as well as companies making engineered products or specialized chemicals and metals, all oer a large number of customized
products. For companies in the building materials industry, proximity to custom-

T H-P M O

ers is critical. A regional or local manufacturing organization tends to be more

eective than a global one for these types of companies.

Technologies and Skills. How important are specialized engineering skills, technologies, or production capabilities? Companies that make customized products, such
as those companies noted above, require specialized processes and technologies
that are oen specific to individual plants. As a result, centralized control and
sharing of best practices is less important to their manufacturing operations.

Choose the Right Structure

To help determine the best setup for your company, look at how dierent industries
typically organize their manufacturing operations. As shown in Exhibit 2, certain
factors are more important in some industries than in others and lead to dierent
organization setups.
The key strategic drivers that we discussed aboveeconomics, markets and customers, and technologies and skillsaect structural choices in three critical areas:
organization design, degree of functional integration, and plant roles and responsibilities. Lets look at each of these areas more closely.
Organization Design. Companies must decide whether manufacturing decisions
such as product allocations or capital outlaysshould be made on a global, regional, or local level, and whether manufacturing should be set up as a centralized
corporate function or as a part of each business unit. (For illustrations of decisions
that should be made at the corporate level and at the plant level, see Exhibits 3

E | Industry Characteristics Drive Manufacturing Decisions

Consumer goods

Automotive

Organization
design Centralized Decentralized
Functional
integration Low
High
Plant roles

Organization
design Centralized Decentralized
Functional
integration Low
High
Plant roles

Standalone
Durables

Building materials

Network

FMCG

Chemicals/pharmaceuticals
Organization
design Centralized Decentralized
Functional
integration Low
High
Plant roles

Plant roles
Standalone

OEM

Network

Pharmaceuticals

Network

Standalone

Engineered products
Organization
design Centralized Decentralized
Functional
integration Low
High

Metals and mining

Organization
design Centralized Decentralized
Functional
integration Low
High
Plant roles

Standalone

Chemicals

Network

Standalone
Metals

Source: BCG analysis.

Note: FMCG = fast-moving consumer goods; OEM = original equipment manufacturer.

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Network

Supplier

Plant roles
Standalone

Organization
design Centralized Decentralized
Functional
integration Low
High

Mining

Network

and 4.) As a general rule of thumb, a global organization makes sense if scale or
standardization are major cost drivers, specialized production capabilities are
needed, or the manufacturing strategy has a major impact on the overall business
strategy.
Our research shows a trend across industries toward creating a global manufacturing organization with centralized decision making for products, technologies, and
processes. Beyond the potential scale eects, this approach makes it easier to share
best practices and speeds up performance improvementscritical benefits in
todays fast-changing, fiercely competitive global economy. But this solution isnt
always the right choice. For instance, companies that must create dierent products
for dierent markets will usually find that a regional or local organization allows
them to better focus onand respond more quickly tothe needs and requirements of local customers.
Degree of Functional Integration. Decisions about whether to integrate related
functionssuch as production control, planning and scheduling, IT, quality, maintenance, engineering, and asset managementwithin the manufacturing organization
can have a major impact on operations. Integration can lead to fewer interfaces,
better communication, faster decision making, and greater synergy. Companies in
asset-intensive industries, for instance, can achieve higher levels of utilization by

E | Three Types of Organizational Decisions Should Be Made at the Corporate Level

Functional
Organization
design

Hybrid
Board

Board
Mfg.

Mfg. BU A BU B BU C

BU A BU B BU C

Mfg.

Planning and
scheduling

Degree of
functional
integration

Production
controlling

Divisional
Board

Procurement

Maintenance
management

Independent plants

Mfg.

BU A

BU B

BU C

Mfg.

Mfg.

Mfg.

Mfg.

Logistics
(in- and outbound)

Industrial
engineering

Asset
management

Quality

IT

Plant network
Products

Processes

Lead plants

Plant roles and

responsibilities

Source: BCG analysis.

Note: Mfg. = manufacturing; BU = business unit.

T H-P M O

E | Two Types of Organizational Decisions Should Be Made at the Plant Level

Value streamprocess bundling
Organization
design

Workshopsactivity bundling
Mfg.

Mfg.
WS 1

VS 1

WS 2

WS 3

VS 2

Production controlling

Degree of
functional
integration

Maintenance

Planning and scheduling

Quality

IT

Source: BCG analysis.

Note: Mfg. = manufacturing; VS = value stream; WS = workshop.

integrating maintenance, asset management, planning, and scheduling. As a result,

manufacturing operations have less downtime, greater asset productivity, more
balanced utilization across the plant network, and fewer bottlenecks along the supply
chain. Similarly, an integrated engineering unit can identify new performance levers,
promote production standards, and encourage the sharing of best practices. Integrating quality functions is usually more eective at the plant level, where total quality
management (TQM) can engage workers in continuous improvement eorts. Lean
initiativeswith their total-productive-maintenance (TPM) approachalso show the
power of integrating maintenance activities at the plant level.
Plant Roles and Responsibilities. Decisions about how to set up plants and
allocate production are also critical to overall manufacturing performance. When
cross-plant material flows are absentsuch as when the product portfolio is varied
or highly customized to specific regionsthere will be limited cross-plant synergies.
In these cases, plants can be run independently, steered by centrally defined
performance metrics. But when materials flow across plants and knowledge and
standards are shared, a plant network with dedicated roles for each plant is the
optimal setup. For instance, if specific production skills are critical, make certain
plants lead plants or centers of excellence for particular processes or capabilities in
order to concentrate this knowledge, set standards, and share best practices.
Manufacturers can also get more from their production networks by matching asset
characteristics with the needs of specific products and customers. For instance,
some plants are designed to produce a small number of products at high volume
for greater economies of scale. Others are designed for flexibility, with short changeover and ramp-up times that are best suited for products with volatile or unpredictable demand. By defining plant roles, consolidating products with similar character-

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WS 4

istics, and exploring ways to reallocate products across the network, companies can
achieve greater cost savings, flexibility, and eciency.

Managing the Tradeoffs

Each design choice involves tradeos that can aect cost, product quality, cycle
times, and service levels. Companies with a decentralized or divisional manufacturing organization, for instance, typically have a harder time sharing best practices
and can lose synergies. A centralized coordinating function can oset these drawbacks by sharing best practices across the company and creating consistent standards and metrics. In this way, a divisional setup with concentrated knowledge of
certain products or regions can coexist with unified standards and a high degree of
sharing best practices across the company. A divisional manufacturing setup can
also greatly complicate interactions with a centralized R&D unit and hamper
design-to-cost eorts. Companies can oset these drawbacksand sharply reduce
production costs over timeby defining manufacturing requirements early in the
manufacturing process through better communication.

Each design choice

involves tradeos
that can aect cost,
product quality,
cycle times, and
service levels.

Some companies take more of an out-of-the-box approach to managing tradeos. A

microchip manufacturer with enormous cost pressures, for instance, had stringent
requirements for quality and process reliability. Moreover, because its business was
asset intensive, asset productivity and scale were critical. To meet these challenges,
the company made all its manufacturing plants identical, down to the smallest
detail, so that each one makes the same products in the same waya rather
extreme approach to central governance. As a result, the company can diagnose
and fix problems quickly, and it can rapidly implement improvements. Its plant
network is also extremely flexibleproduction can be shied as needs, volume, or
economic conditions change, and any bottlenecks are short-lived.
Another example of an out-of-the-box approach to managing a tradeo: An automobile manufacturer with a global production network wanted to avoid the excessive overhead and backlogs that can result from having headquarters steer the
plants and implement global standards inflexibly. The company decided to establish regional mother plants that support local projects, train sta, set up employee exchange programs, and manage five-year performance road maps. Headquarters can now focus on the bigger picturedeveloping major change programs that
the mother plants can implement.
Each company must decide which tradeos to make based on its individual situation,
markets, competitive environment, and industry benchmarks. Moreover, a companys
organizational choices require the right people and skills to be truly powerful.

-, increasingly complex global environment, companies

must rethink not just their manufacturing operations but also their manufacturing organizations. The high-performance organization is lean, flexible, and strategically aligned. The right organization design, an engaged workforce, and eective
governance systems result in sustained manufacturing excellenceand a powerful
source of competitive advantage.

T H-P M O

About the Authors

Frank Lesmeister is a principal in the Dsseldorf oce of The Boston Consulting Group and a
topic expert for manufacturing. You may contact him by e-mail at lesmeister.frank@bcg.com.
Daniel Spindelndreier is a partner and managing director in the firms Dsseldorf oce and
coleader of BCGs manufacturing topic. You may contact him by e-mail at spindelndreier.daniel@
bcg.com.
Michael Zinser is a partner and managing director in the firms Chicago oce and coleader of
BCGs manufacturing topic. You may contact him by e-mail at zinser.michael@bcg.com.

Acknowledgments
The authors would like to thank Katherine Andrews, Gary Callahan, Martha Craumer, Angela
DiBattista, and Pamela Gilfond for their contributions to the writing, editing, design, and production of this report.

For Further Contact

If you would like to discuss this report, please contact one of the authors.

T B C G

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The Boston Consulting Group, Inc. 2011. All rights reserved.
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