Agile Manufacturing: from an economy of scale to an economy of scope
“The definition of insanity is always doing the same thing, but expecting different results”
Albert Einstein
In the last few years many manufacturing companies are facing a tough crisis that is putting them under pressure. On the one hand, the Covid-19 pandemic has substantially blocked the production lines both for the prevention measures adopted to limit the spread of the virus and for the problems of supplying raw materials and components in general. Additionally, the current international instability is making the situation even worse with an increase in inflation and rising prices of energy resources never seen before. According to the OECD, the Organization for Economic Cooperation and Development, in September 2022 inflation reached a record figure of 10.5% in OECD countries while energy costs have been skyrocketing. As a result, companies are faced with important choices if they want to survive and remain competitive in the global market.
However, crises also mean opportunities for those who know how to seize them.
Reshoring
Among these opportunities, reshoring, i.e. the choice of reallocating production sites in the countries of origin, is certainly one of them. In fact, globalization has encouraged companies to build or move their factories in developing countries to take advantage of new emerging markets and especially low labor cost. Bringing manufacturing back home means not only shortening and bringing the supply chain closer, making it more resilient to macroeconomic phenomena, but above all it means a substantial paradigm shift in the production approach.
The relocation of activities and companies has been an important strategic issue in developed economies in recent decades. However, today reshoring is arousing increasing interest since more and more activities of returning to their country of origin (backshoring) or to a neighboring country (nearshoring) within OECD countries are reported.
According to the paper “Reshoring: Myth or Reality?” the phenomenon had already begun a few years ago for multiple reasons: the cost advantage of emerging economies was increasingly diminishing, the need to have production both close to the main markets and centers of innovation and the protection of Intellectual Property are all enabling factors for reshoring.
Some predict that reshoring will become a key trend for years to come, while the more skepticals point out that the number of companies that are bringing businesses back home is still rather limited. Also in the same study, it is stated that there is no certainty that reshoring will lead to an increase in jobs: rather, reshoring involves additional capital investments in the country of origin but also in neighboring countries. Due to these extra investments, for example in robotics and automation, the expectation is that relocated manufacturing will only create a limited number of additional jobs and that these jobs will be increasingly highly skilled.
INDUSTRY 4.0
The same conclusion is reported in a more recent publication by Professor Klaus Schwab, chairman and founder of the World Economic Forum. In his book “The fourth industrial revolution”, he explained how the data confirm this trend: greater technological investments but not a proportional increase in the workforce.
In November 2011, the German government had launched the Industrie 4.0 high-tech initiative, with the aim of revitalizing the manufacturing sector particularly affected by the financial crisis of 2006. Industrie 4.0 is based on the use of a series of technologies, mostly digital, to increase the flexibility and productivity of manufacturing systems, while improving quality and reducing associated costs at the same time. A trend that the pandemic data has helped to accelerate. In the report “COVID-19 and Technology Adoption in Small and Medium-Sized Enterprises: The Impact and the Way Forward” published by the Word Economic Forum in December 2021, the growing interest of SMEs in the adoption of new technologies is highlighted. Also in the same report the growing cost of raw materials and the problems associated with their procurement has been also highlighted.
Among the main barriers in the adoption of new technologies, financial constraints are mentioned in the first place, caused by the scarcity of resources to invest in innovation. In second place, the lack of skilled labor capable of using technologies is cited, while other obstacles include infrastructural barriers, availability of digital technologies and lack of support from management.
What’s next?
The scenarios described so far only lead to one conclusion: developed countries must regain possession of the manufacturing know-how evidently neglected due to globalization, focusing on producing better, faster and at lower costs. Indeed, relocation essentially means a competitive advantage in terms of labor costs, as it is clearly not possible to pay workers the same wages and keep goods at very low prices in developed countries. Bringing manufacturing back home would mean either significantly raising prices for the end user, or reducing workers’ wages.
Agile Manufacturing Systems
However, there is a third way: developing agile manufacturing systems. An agile manufacturing system is capable of reconfiguring itself quickly according to the production mix and market demands, with high-level autonomy. Such a system would employ less direct labor (therefore less recurring costs), but greater use of highly skilled workers in the design and implementation of agile systems. An agile manufacturing system is also able to produce higher quality goods, by virtue of the high repetitiveness of the process guaranteed by technology, in particular by automation, in less time and with an extremely high level of customization. Produce better, with fewer resources.
In the book “Agile Manufacturing: strategies for an adaptive, resilient and sustainable manufacturing” the 3 pillars of an agile manufacturing system are presented:
1. design modularity and reconfigurability — this implies the design of modular and flexible products and production systems, for example through simultaneous engineering, product platforms and the implementation of smart setups
2. design of lean and robust systems: agile manufacturing is based on Lean Manufacturing principles and tools to minimize waste, as well as on methodologies for improving process capabilities such as Six Sigma
3. use of automation and 4.0 technologies: automation and digitalization are the founding technologies of manufacturing agility. Thanks to automation, it is possible to improve efficiency, quality and reduce production costs, while digitalization helps to improve the exchange of information and real-time analysis, thus make the system more flexible and resilient.
These 3 pillars must be built on solid foundations, consisting of an innovative approach when it comes to introducing new solutions, approaches and methodologies. However, there can be no innovation without a culture of change, which requires the ability to face and manage risks and seize opportunities from external (socio-political) and internal (organizational) changes.
Finally, agility certainly requires an innovative approach and consequently a series of both hard and soft skills will have to be implemented and properly managed.
Agility will require a vision and methodological guidance that only strong and cohesive leadership can provide.
