This long article published by Deloitte University Press identifies how selecting the wrong location for production can affect future competitiveness. It identifies that the traditional way of thinking about where to locate production capability is driven by two main factors, which it calls market-to-plant ratio (MPR) and value density. Put simply, this relates to the extent to which production costs are greater than logistics costs, or vice versa.
But Timberlake et al (2013) argue that there is a third factor, often neglected or not understood, namely ‘learning mode’. Learning mode refers to “the manner in which knowledge about the production process is transferred from R&D to the factory floor”. They argue that there are two kinds of mode – “learning-before-doing” and “learning-by-doing”. In the former mode, the production process is well understood and the execution of changes to this process are relatively straightforward. Hence co-locating R&D with production is not essential. But with the learning-by-doing mode, R&D is conducted largely on a trial and error basis on the factory floor, hence their co-location becomes necessary.
The article has three operations insights designed to illustrate these ideas. The first relates to the optoelectronics industry. They cite a number of studies that demonstrated that U.S. companies in this sector that off-shored production failed to develop next generation integrated optoelectronic devices – because this required ‘learning-by-doing’. The two other insights they provide are in the wind turbine industry and glass-making industry.