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Quantitative Data: Why Have Multiple Plants?

Similar to our use of the word “warehouse,” we are also going to use the term “plant” to broadly refer to locations where product is made or where it comes from. So a plant could be a manufacturing plant that produces raw material, components, or finished goods, or just does assembly. A plant could be owned by the firm, it could be a supplier, or it could be a third-party plant that makes products on behalf of the firm. These third-party plants are often called co-packers, co-manufacturers, or toll manufacturers (a term used for third-party manufacturers common in the chemical industry).

A plant can also contain multiple production lines. So, often we are determining not only the location of plants, but also the number and location of the production lines.

For companies that make products, the number and location of plants are important. For retailers and wholesalers however, the location of the suppliers is often beyond their scope of control.

Even for a firm that has only one product, the location of the plant can impact transportation costs and the ability to service customers. In some cases, the location of the plant is primarily driven by the need to have skills in the right place or the need to be next to the corporate headquarters. However, in most cases, there are choices for plant locations. An even more interesting choice is to determine whether you should locate multiple plants to make the same product—even when a single plant could easily handle all the demand.

When you have choices for where to put your plants or the option to have several plants, you must consider some of the same questions we did when locating warehouses. For example, factors that would drive you to have multiple plants making the same product include:

  • Service Levels—If you need your plants to be close to customers, this will drive the need for multiple plants making the same product. This becomes especially important if your business does not use warehouses. In this case, your plants face the customer and their location can drive service levels.
  • Transportation Costs—For producers of heavy or bulky products that easily fill up truckload capacities, you will want to be as close to your markets as possible. This may also drive the need for multiple warehouses.
  • Economies of Scale—As a counterbalance to the benefits of transportation, you also want to factor in the economies of scale within production. As mentioned previously, the more you make of a given product at a single location, the lower the production cost per unit. This is driven by a reduction in production line setup time and costs and the benefit of being able to create a more focused manufacturing process. So while it may be ideal to have many production locations to minimize transportation cost, economies of scale in manufacturing suggest that fewer plants will be better.
  • Taxes—In a global supply chain, it is often important to consider the tax implications of producing and distributing product from multiple or different locations.
  • Steps in the Production Process—In a production process with multiple steps, you may need to decide where you should do various activities. For example, it can often be a good strategy to make product in bulk at a low-cost plant, ship it in bulk to another plant closer to the market to complete the conversion to a finished good.

As with the warehouses, a plant can also represent many types of facilities. A plant may represent any of the following:

  • A Manufacturing or Assembly Site—This is a site that is owned by the firm that makes products. The products coming out of the plant could be raw materials, semifinished goods, or finished goods.
  • A Supplier—This is a location that is not owned by the firm but supplies product to the firm. The products could again be raw material, semifinished goods, or finished goods. In the majority of cases, you have no control over where your suppliers are located. You may, however, be able to pick which supplier you will purchase from.
  • Third-Party Manufacturing Site—This is a location similar to supplier plants, but these sites make product on behalf of the firm and are therefore treated more like the firms’ own plants than a raw material supplier. Many firms use third-party manufacturing sites because manufacturing may not be their core competency. Their competitive advantage comes from all other activities including the design, marketing, and/or final sale of the product. These third-party firms, typically called contract manufacturers, are widely used in the electronics industry. Other third-party firms, termed co-manufacturers, co-packers, or toll manufacturers, are used to simply supplement the capacity of the firm itself. These are quite common with consumer packaged goods like food and beverages or chemical companies.

As with warehouses, in practice, you will find many variations in terminology for plants and different types of manufacturing sites and suppliers serving roles similar to those mentioned previously.

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