How “Speed Factories” Help Companies Adapt to Capricious Consumers
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Operations Jul 3, 2018

How Speed Fac­to­ries” Help Com­pa­nies Adapt to Capri­cious Consumers

For cer­tain trendy prod­ucts, these local but expen­sive plants can be a smart investment.

Speed factories bring products to market quickly.

Lisa Röper

Based on the research of

Robert Boute

Stephen M. Disney

Jan A. Van Mieghem

When Adi­das launched its Adi­das Made for New York City shoe, or AM4NYC, it depart­ed from its nor­mal pro­duc­tion process in a cou­ple ways. Unlike most ath­let­ic shoes, which are designed to be worn any­where, this mod­el is opti­mized for run­ners in the Big Apple. And unlike the vast major­i­ty of Adi­das footwear, AM4NYC is pro­duced in the U.S., not overseas. 

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The shoes are made domes­ti­cal­ly at what is known as a speed fac­to­ry,” a local-mar­ket facil­i­ty designed to quick­ly pump out prod­ucts with short­er life cycles and less pre­dictable demand, like appar­el sport­ed by Kendall Jen­ner or LeBron James that sud­den­ly becomes a must-have item. Speed fac­to­ries are a grow­ing trend among con­sumer-goods busi­ness­es, and one Jan Van Mieghem, pro­fes­sor of man­age­r­i­al eco­nom­ics and oper­a­tions at Kel­logg, has been researching. 

More com­pa­nies are focused on local­iza­tion now, with cus­tom-made prod­ucts for very small local mar­kets,” Van Mieghem says. Speed fac­to­ries offer fast turn­around to meet demand in such mar­kets, but they often have high­er pro­duc­tion costs. 

Van Mieghem explores the return on invest­ment in speed fac­to­ries in a study with col­lab­o­ra­tors Robert Boute of Vler­ick Busi­ness School and Stephen Dis­ney of Cardiff Busi­ness School. They found that even tiny, quick-turn­around pro­duc­tion facil­i­ties can indeed be worth­while, despite their cost, and are best used as part of a port­fo­lio of on- and off­shore production. 

The Need for Speed 

Sev­er­al fac­tors have moti­vat­ed con­sumer-focused busi­ness­es to invest in speed factories. 

For one, retail cus­tomers today expect more imme­di­ate grat­i­fi­ca­tion, with ever-faster deliv­ery times. 

This is espe­cial­ly true in e-com­merce,” Van Mieghem says. Ama­zon and fast-fash­ion trends mean that com­pa­nies have had to increase their speed from prod­uct design to deliv­er­ing that prod­uct to cus­tomers. If things must hap­pen in days or weeks rather than months, you can’t be doing that from some­where in Asia.” 

Con­sumers expect greater cus­tomiza­tion, too — like the AM4NYC — which is also dif­fi­cult to han­dle quick­ly from off­shore, because pro­duc­ers there may not under­stand local mar­ket needs or be able to respond to fast-chang­ing spec­i­fi­ca­tions as quick­ly as a local facility. 

Addi­tion­al­ly, off­shore labor and facil­i­ties costs are ris­ing, while increased automa­tion in Europe and the U.S. is reduc­ing the impact of labor costs. This has yield­ed greater focus on domes­tic pro­duc­tion — often in the form of reshoring at least a por­tion of manufacturing. 

Enter speed fac­to­ries. Still, such facil­i­ties rep­re­sent just a tiny sliv­er of pro­duc­tion. For exam­ple, Adi­das only has speed fac­to­ries in Ger­many and Atlanta. (The Ger­man com­pa­ny refers to them as Speed­Fac­to­ries.) Of the three hun­dred mil­lion ath­let­ic shoes the com­pa­ny pro­duces annu­al­ly, these fac­to­ries account for only about one-third of 1 per­cent. Like its rival Nike, Adi­das main­tains the vast major­i­ty of its pro­duc­tion in Asia. 

Yet the researchers found that such small, flex­i­ble, local facil­i­ties can pay off for com­pa­nies invest­ing in them. 

A Mat­ter of Demand 

A major rea­son why Adi­das and oth­er busi­ness­es allo­cate such a small per­cent­age of pro­duc­tion to an onshore, quick-turn­around facil­i­ty is root­ed in demand fore­cast­ing — specif­i­cal­ly, the uncer­tain­ty of demand for some products. 

If exact long-term demand is known — for exam­ple, how many of a cer­tain Adi­das sneak­er will be pur­chased week­ly for the next two months — then it is not a prob­lem if it takes those full two months to pro­duce the shoes in China. 

It’s smart to sat­is­fy base demand with off­shore pro­duc­tion and address fluc­tu­at­ing demand with speed factories.”

If you’re con­fi­dent in that kind of fore­cast,” Van Mieghem says, then there’s no rea­son to pro­duce quickly.” 

But if there is unpre­dictabil­i­ty in the fore­cast, fast pro­duc­tion becomes more important. 

If the mar­ket is more capri­cious, such as when every­one wants the sneak­ers some celebri­ty wore yes­ter­day and then wants a dif­fer­ent shoe next week,” Van Mieghem says, then you’ll have a very hard time pre­dict­ing demand and mak­ing every­thing fast enough in Asia to meet that demand.” 

He notes that meet­ing unpre­dictable demand also requires main­tain­ing large safe­ty stocks” of prod­ucts, which may need to be sig­nif­i­cant­ly dis­count­ed if they don’t sell. 

Speed fac­to­ries, then, are meant for high­ly unpre­dictable demand of poten­tial­ly high-val­ue prod­ucts, reduc­ing risk and waste from long lead times. 

Off­shore, Onshore, and Dual Sourcing 

The researchers want­ed to under­stand how com­pa­nies that have the option to use speed fac­to­ries can opti­mize how much they pro­duce domes­ti­cal­ly ver­sus off­shore.

So they cre­at­ed a mod­el with vary­ing lev­els of prod­uct demand, sup­ply-chain costs, inven­to­ry ser­vice lev­els, pro­duc­tion meth­ods, and oth­er vari­ables, with a focus on when cer­tain types of pro­duc­tion — all off­shore, all reshored, or some com­bi­na­tion — would lead to high­er profits. 

Under some cir­cum­stances, the mod­el showed the val­ue of includ­ing speed fac­to­ries in a business’s pro­duc­tion port­fo­lio — or what could be con­sid­ered dual sourc­ing” with both on- and off­shore production. 

There’s base demand — or demand that’s always there — and fluc­tu­at­ing demand on top of that,” Van Mieghem says. We show that it’s smart to sat­is­fy base demand with off­shore pro­duc­tion and address fluc­tu­at­ing demand with speed factories.” 

Speed fac­to­ries are par­tic­u­lar­ly effec­tive for high-end prod­ucts that gen­er­ate sud­den demand. 

It’s for the sneak­ers that cost hun­dreds of dol­lars,” Van Mieghem says. If you’re able to bring the lat­est and great­est prod­uct to mar­ket quick­ly, you don’t have to dis­count and can com­mand a top-dol­lar price. It also makes cus­tomers more loy­al to your brand; they will buy your next prod­uct too.” 

The study also has impli­ca­tions for fore­cast­ing more gen­er­al­ly. Specif­i­cal­ly, most pre­vi­ous research on pro­duc­tion and fore­cast­ing assumes that demand will remain rel­a­tive­ly sta­ble — what’s known as sta­tion­ary” demand. 

There are nice for­mu­las for sta­tion­ary demand,” Van Mieghem says. That’s what we teach in our MBA class­es. But there’s increas­ing evi­dence for non­sta­tion­ary demand,’ or the kind that has no stan­dard for­mu­la to help ana­lyze its impact on sup­ply-chain oper­at­ing performance.” 

This research points to the need to incor­po­rate an under­stand­ing of non­sta­tion­ary demand into com­pa­ny pro­jec­tions. Indeed, there is evi­dence that non­sta­tion­ary demand is asso­ci­at­ed with up to 80 per­cent of con­sumer goods, accord­ing to Van Mieghem. The authors also find that speed fac­to­ries become sub­stan­tial­ly more valu­able under non­sta­tion­ary demand, a fac­tor that con­ven­tion­al sta­tion­ary mod­els would miss. 

Are Speed Fac­to­ries a Worth­while Investment? 

How do you know if a speed fac­to­ry is a worth­while invest­ment for your business? 

Exec­u­tives need to look at how well they can fore­cast demand,” Van Mieghem says. How much con­fi­dence do they have in their fore­cast? How much would busi­ness improve if they only had to fore­cast a week in advance instead of eight weeks? If short­er-term fore­cast­ing won’t make a dif­fer­ence, then local pro­duc­tion may not improve competitiveness.” 

Sim­i­lar­ly, unless a speed fac­to­ry improves time to mar­ket sig­nif­i­cant­ly over off­shore pro­duc­tion, extra invest­ment in such would be unwarranted. 

Of course, the high­er poten­tial invest­ment in a speed fac­to­ry has to be jus­ti­fied. But heed Van Mieghem’s cau­tion­ary advice here: If you’re look­ing only at the labor-cost dif­fer­en­tial, you may be mak­ing the wrong deci­sion. The high­er costs of a speed fac­to­ry may still be worth it when you con­sid­er total cost,” includ­ing capac­i­ty and inven­to­ry costs. 

Final­ly, it is impor­tant to mon­i­tor the best mix of prod­ucts to assign to a speed factory. 

Some­times you may decide to make pro­duc­tion of cer­tain prod­ucts local,” Van Mieghem says. But over time, as demand for them becomes more sta­ble, it may make sense to move them off­shore. It’s about main­tain­ing the flex­i­bil­i­ty to bring cer­tain prod­ucts in and move oth­ers out of a speed fac­to­ry as needed.” 

Featured Faculty

Jan A. Van Mieghem

Harold L. Stuart Distinguished Professor of Managerial Economics, Professor of Operations

About the Writer

Sachin Waikar is a freelance writer based in Evanston, Illinois.

About the Research

Boute, Robert N., Stephen M. Disney, and Jan Van Mieghem. 2018. “Dual Sourcing and Smoothing Under Non-Stationary Demand Time Series: Re-Shoring with SpeedFactories.” Working paper.

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