Why locating design and manufacturing together matters

One of the tenets of the industrial age was that activities could be separated and specialized. Researchers researched, engineers engineered, managers managed, and workers worked. The parts didn’t need a lot of communications between them. In fact, the old saying about product design was it was “throw over the transom” between departments [for those of you who don’t know the expression, the transom is the window over a door — the saying means you didn’t even have to open the door to pass the design along]. As advances in technology moved along, it became earlier to break up product design from production. This created the idea of an international division of labor that mimicked the company’s division of labor. Production was moved to low labor cost locations. Advanced nations would specialize in research, design and other higher value-added activities.
However, it never completely worked that way in reality. As Gary Pisano and Willy Shih of the Harvard Business School [and many others] pointed out, those higher valued-added activities have followed production offshore (see earlier postings). Turns out that the linkages between production and other parts of the value chain are stronger that we thought. For example, I have mentioned numerous times before that companies which make the product have strong service value (resulting in a fusion of goods and services). A recent article in The Atlantic (“The Insourcing Boom”) succinctly describes one of the linkages:

GE is rediscovering that how you run the factory is a technology in and of itself. Your factory is really a laboratory–and the R&D that can happen there, if you pay attention, is worth a lot more to the bottom line than the cost savings of cheap labor in someone else’s factory.

The article gives a clear example from GE’s GeoSpring water heater of how this works:

The GeoSpring suffered from an advanced-technology version of “IKEA Syndrome.” It was so hard to assemble that no one in the big room wanted to make it. Instead they redesigned it. The team eliminated 1 out of every 5 parts. It cut the cost of the materials by 25 percent. It eliminated the tangle of tubing that couldn’t be easily welded. By considering the workers who would have to put the water heater together–in fact, by having those workers right at the table, looking at the design as it was drawn–the team cut the work hours necessary to assemble the water heater from 10 hours in China to two hours in Louisville.
. . .
So a funny thing happened to the GeoSpring on the way from the cheap Chinese factory to the expensive Kentucky factory: The material cost went down. The labor required to make it went down. The quality went up. Even the energy efficiency went up.
GE wasn’t just able to hold the retail sticker to the “China price.” It beat that price by nearly 20 percent. The China-made GeoSpring retailed for $1,599. The Louisville-made GeoSpring retails for $1,299.
Time-to-market has also improved, greatly. It used to take five weeks to get the GeoSpring water heaters from the factory to U.S. retailers–four weeks on the boat from China and one week dockside to clear customs. Today, the water heaters–and the dishwashers and refrigerators–move straight from the manufacturing buildings to Appliance Park’s warehouse out back, from which they can be delivered to Lowe’s and Home Depot. Total time from factory to warehouse: 30 minutes.

As the I-Cubed Economy develops we are seeing an interesting phenomenon: linkages are becoming tighter and more important. While it is possible to have engineer and production workers half a globe away, it is better to have them next door. The same, I would guess, can be said for many parts of the production process. As a result, expect to see a new economic landscape emerge – very different from that we have lived with in the past.

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