Location, location, location

Sometimes, it makes sense to spend more to conveniently locate capacity.

“How many drafts of a paper will he really write if he has to run all the way over to the library to print it out?”

This was the question I asked my wife as we dropped my eldest off at college last week and realized that he did not have his own printer. If we did not do something about it, he would have to walk two blocks to print something using university resources.

Trust me, I was not feeling bad for him. I, after all, walked uphill both ways in the snow to the library back in my college days. I was simply recognizing the essential fact that distance matters; I want him focused as much as possible on turning out great work instead of wondering if it is worth it to revise one more time. I think these things matter a lot.

It was probably the work we did on a recently published Deloitte Review article “Location, learning, and logistics: A framework for making capacity location decisions” that sensitized me to this issue. Separating the writing (development) of a paper from the ability to print (produce) it by such a distance couldn’t be good for the end product. In my view, which prevailed, ready access to the print/production function is well worth the additional investment.

Of course, we don’t always want to make such investments. We did not, after all, go out and buy the multifunction unit with copier and scanner. Separation of those tasks was justified, given the cost savings.

“Location, learning, and logistics” argues that managers need to understand the attributes of the products their companies offer in order to make sound decisions about where to locate production facilities. The article explores product and market attributes related to “learning mode” (i.e., learning-by-doing vs. learning-before-doing), relative market size, and value density in order to help managers think about when they need to expand location criteria from traditional factors such as labor costs, logistics, and local incentive. Sometimes (but not all the time), it makes sense to spend more to conveniently locate capacity. Sometimes, you need to buy a printer.

The article sparked some good discussions with my colleagues and with clients. Through those discussions, I have come to more deeply appreciate two important dimensions that we did not adequately address in the article. They apply as much to a manager’s choices as they do to my son’s printer.

Modularity refers to a need to consider offerings at the component level as well as the product level. The dorm printer provides a good example of this. Printer manufacturers have done a great job of adding features to their units; fax, copiers, scanners, duplex and photo printing, and wireless capabilities are all available. All of these features can add to the cost of the unit. Our task was to understand what problem we were trying to solve (basic printing) and then choose the printer with the right capacity to solve it. That meant emphasizing printing only (okay, we went with duplex printing to save paper) and leaving our son to seek more distant options for other functionality.

Similarly, managers have cause to understand each of the major components that make up their products. Different product components require different treatment from a capacity location perspective. When production is readily understood, stable, or easily described, it may be pushed away from R&D capabilities. When it is not, it might be well worth spending more to keep it close.

Evolution refers to the fact that needs change because markets are dynamic. Our son plans to major in mechanical engineering, but right now, he is mainly focused on core courses such as English and Psychology—more writing, less quant. As he transitions through his studies, we will likely be less concerned with printing resources and perhaps more concerned with other capabilities that may offer advantages for his studies (personal 3D printer, anyone?). Failure to recognize transition points in these needs could cause unwarranted expense and sub-optimal performance.

The managers we profile in our Deloitte Review article also face these issues. They need to understand when knowledge of a production process has progressed enough to advantageously move to new locations in order to take advantage of improved costs or market access. Diligence is warranted. Our article provides examples of firms making this choice at precisely the wrong moment, moving production far away just as the market-evolved need to bring it closer to home becomes critical for future product development.

Anyone with a college student in their life knows that the pursuit of a degree represents a colossal investment. We all want the students in our lives to have the opportunity to succeed, but choices have to be made. Our family needs to decide which investments are wise and which can be avoided. Managers face similar tradeoffs. Investments in capacity location are expensive and difficult to undo. Our goal in the article was to provide a framework for thinking about how a product’s attributes should influence the location of its productive capacity. I hope you read and find it useful in your work. As you do, keep in mind the importance of modularity and evolution to these types of decisions.

Good luck to all students for the new school year.

Read Location, learning, and logistics: A framework for making capacity location decisions.