Proximity to Manufacturing Improves R&D Efficiencies

New study investigates decisions to locate manufacturing operations in high-cost countries.

The decision to open a new manufacturing facility is never made lightly.

From the initial capital investment to the long-term logistical effects, there are a host of potential risks and rewards that come with choosing a manufacturing location. One major factor is the interdependence between a company’s operations, including not just production but also research and development (R&D).

According to a recent study, this interdependence is even more pronounced in the case of technologically demanding products. Conversely, the more standardized the production, the farther away from other operations a production facility can be moved, even on short notice.

“If the proximity of the market or product development are important aspects for a company, the products are most likely manufactured in the company’s home country, or at least very close to it,” said Timo Seppälä, a postdoctoral researcher from Aalto University and The Research Institute of the Finnish Economy (ETLA).

Seppälä and his colleagues analyzed 35 final assembly location decisions from the perspectives of strategy and economic policy. They found that the production of so-called “standard” products—i.e., those which can be manufactured almost anywhere—tended to follow an auction model, such that they were produced by the contract manufacturer with the most affordable price.

“Grocery stores’ own brands are good examples of consumer products that are very often produced with the auction model, and for which the price is really the only meaningful factor,” explained Seppälä.

 

R&D and Advanced Manufacturing

Turning to more technologically sophisticated examples, the researchers looked at two Finnish companies: Helkama, which makes bicycles under its subsidiary Helkama Velox, and Ponsse, which makes machinery for the forestry industry.

(Image courtesy of Helkama.)

(Image courtesy of Helkama.)

Helkama Velox’s Kaunotar model bicycle was initially manufactured in the Baltic region for a year before production moved to Indonesia under a partner company. According to the researchers, this off-shoring was possible because the Kaunotar is a standardized product.

In contrast, the company’s Jopo model is more customized, with a variety of possible colors and features. That’s why the company chose to manufacture the Jopo domestically.

“About half of Helkama’s production takes place abroad,” said Satu Helkama, CEO of the Helkama Emotor Oy. “We don’t invite producers for tender annually. Instead, we search for partners who meet our demands for both quality and security of supply. We manufacture special bicycles and all products in the Jopo family domestically. This way we can flexibly react to the demand for different color options for Jopo products with our own domestic production.”

(Image courtesy of Ponsse.)

(Image courtesy of Ponsse.)

For similar reasons, Ponsse elected to conduct manufacturing and product testing within the same facility in the Vieremä municipality of Finland. According to the researchers, this gives Ponsse a technological edge over its decentralized competitors by significantly shortening the company’s product development cycle.

“Many companies choose to manufacture their products in China, because everything is so affordable there,” Seppälä observed. “President Trump’s policy, on the other hand, aims at returning all production back to the United States. In the light of this research, however, things aren’t always so simple.”

For more information, you can read Seppälä and colleagues’ research, published under the title “Why locate manufacturing in a high-cost country? A case study of 35 production location decisions” in the Journal of Operations Management.