Manufacturing?s New Deal Demands ?Lean Portfolios?

?Any color is fine as long as it?s black.?

That was Henry Ford?s take on how consumer demands affected model T manufacturing: They didn?t.
A relic of the long-gone days of total market control, Ford?s one-size-fits-all standard is now a prescription for disaster — and so are the real estate strategies that supported it. Consider these examples of manufacturing?s new wave:

Levi Strauss? popular ?Personal Pair? jeans shatter the standardized manufacturing mold. In 20 North American stores, touch-screen terminals send customer measurements to a central computer, which generates a digital pattern and then transmits it to a Levi?s factory in Tennessee. Three weeks later, the store receives the jeans, priced higher for customization. Levi?s also realizes a major real estate savings: Manufacturing 10,000 immediately shipped orders of different size, not 10,000 orders of the same size, substantially slashes warehouse/distribution space needs.
A Dutch-based dress-manufacturing operation floats on a ship in international waters. It?s based nowhere and everywhere, moving as market demands and labor costs dictate.
Many leading manufacturers like Bennenton, Microsoft, Nike and Sun Microsystems control almost no manufacturing space. Instead, their popular products are manufactured by shifting joint-venture partners and suppliers.

?Bennenton is a good example of a hollow company,? says Deborah Kops, managing director of Price Waterhouse?s Real Estate Industry Services Group. ?Its role is almost entirely direction and deployment.?

At fast-growing Sun, ?95 percent of the product we ship in any quarter is less than a year old,? says CEO Scott McNealy. ?We?re continually reinventing the product line, the market, the technologies. That creates big growth opportunities, but also huge transitions.?

The Rise of the Lean Portfolio

One huge transition is the breakup of a long-time duo — real estate assets and manufacturing, once as synonymous as Liz Taylor and divorce lawyers. If the market demanded X units of production, that meant you needed X amount of manufacturing space to deliver the goods. No ands, ifs or buts.

Now, though, and, if and but have showed up in spades, with Jenny Craig and Kate Moss in tow.
Lean portfolios are manufacturing?s idea whose time has come. Innovative strategies are dramatically cutting manufacturing portfolios while boosting speed and cost-effectiveness.

In fact, lean portfolios obliterate many conventional notions about what manufacturing real estate is. It?s no longer a fixed entity, clearly defined by owned and leased land and buildings.

That radical rethinking is finely limned in Manufacturing and the Lean Portfolio, a recently published research report from the Atlanta-based International Development Research Council (IDRC), the world?s preeminent association of corporate real estate executives. (SS is IDRC?s official publication.)

Today?s lean portfolios take in ?a whole system of loosely linked, continuously evolving workplaces

must be continuously shaped and reshaped,? write IDRC report co-authors Franklin Becker, director of Cornell?s International Workplace Studies Program, and Michael Joroff, research and special programs director of MIT?s School of Architecture and Planning.
Lean portfolios, they say, must supply ?just-in-time space, potentially available for use on demand.? And that manufacturing space often encompasses many organizations, not one, even existing in cyberspace.

The 777?s Online Creation

That definition may sound fuzzy. But the case study of the Boeing 777?s birth gives concrete form to manufacturing?s brave new world.
The 777 was designed by an electronic sprawl: 250 worldwide, cross-functional teams, including suppliers and customers, linked through computer-aided-design (CAD) software. Manufacturing the 777 also united a far-flung cast of thousands. Components and subassemblies were manufactured by a global alliance even including some of Boeing?s direct competitors.

The networks physically interconnected only in final 777 assembly inside a Boeing facility.

That diffusion stretches the bounds of manufacturing portfolios beyond conventional recognition. But consider Boeing?s benefits: Product development time was substantially cut, as were real estate costs. Had Boeing gone it alone, centralizing the mammoth process, it would?ve paid through a 777-size nose for the required real estate.

Today?s real estate portfolios are also defined by what?s not there. For example, one of the most important pieces of Schneider Trucking?s portfolio exists only inside its trucks: The firm has equipped its entire fleet with global positioning equipment. That facilitates maximum routing efficiency, and eliminates the need for many maintenance facilities and break-bulk terminals.

Wanted: New Real Estate Skills

Such changes have totally rewritten the rules for manufacturing real estate. Once, a huge real estate portfolio was the mark of a manufacturing powerhouse, creating a formidable competitive entry barrier. Now, a fat portfolio can be a corporate albatross, inhibiting quick response to fast-changing demands.

?If they had it to do over, large corporations probably wouldn?t have built all these massive infrastructures,? says John Bramley, general manager of finance with British Petroleum Exploration.

Manufacturing?s once predictable world took the first hard hit from a vastly changed business environment that still baffles linear projection. Fierce, technology-charged global competition suddenly nullified the ?gentlemen?s agreements? that had governed market turf. Product life cycles startlingly collapsed, while skill demands steadily increased. Finally, consumer tastes mutated substantially, demanding constantly reinvented customized products.

Those changes demand a totally new real estate skill set, IDRC?s report emphasizes. Real estate managers must now be experts in the intricacies of the entire manufacturing process.

At many firms like Boeing, that process is a very broad, interdependent system linked by sophisticated information technology. Likewise, the range of players involved in real estate decisions has substantially expanded. Vital portfolio elements may now come from non-traditional parties like trucking and air express firms or internal information technology (IT) arms, which provide links for cyberspace collaboration.

The Integration Imperative

For real estate managers, the formidable task is to put those complicated manufacturing networks together, IDRC?s report insists: ?All these systems still depend on places that are linked in some way. [Real estate managers] often become integrators rather than conventional providers, [supplying] integrated workplace strategy.?

Says high-profile business consultant Stephen Goldman, founder and CEO of The Agility Forum, ?There are a whole host of questions that manufacturing real estate managers need to answer if they?re going to be peer members of strategic planning teams.
?What is the physical space that you must occupy? Do you own or rent? Do you lease long-term or short-term? Does it have to be a single physical space, or can it be distributed? What?s the best mix of centralized and distributed space? Do you use your space for other firms? operations??

Answering those questions requires new measurements, IDRC?s report contends. Portfolio performance must be ?defined not so much by financial performance or cost but by the value added to producing goods and services that generate revenue.?
A case in point is Eastman Kodak, which determines which real estate services should remain in-house by looking at ?the relationship of that activity to the core business,? Becker and Joroff report. ?High-value? services are handled through alliances, while ?low-value? services are outsourced.

Managerial Challenges

Lean portfolios also demand new managerial skills. Manufacturing?s traditionally tight oversight is impossible in today?s dispersed environments.

?Management has not historically been comfortable with people being out of sight. If you disperse an organization, you need to build in a connectivity and an ability to manage,? says Mark White, information systems consultant with Arthur Andersen Consulting.
In addition, lean portfolios present new challenges in finding sites with the right worker skills (see accompanying ?Skills Gap Scrambles Manufacturing Location Strategies?).

For example, the use of information technology has upped skill levels for warehouse operations. ?Such a [warehouse] requires a better educated staff more likely to see themselves as trained professionals than landlocked stevedores, and likely to expect a work environment closer to a simple, efficient office than a huge closet with shelves,? says IDRC?s report.

Some problems persist, though, in manufacturing?s new age. Chief among them is the struggle to optimally integrate the functions supporting a unified workplace platform — IT, logistics, transport, and real estate, which have long worked independently. That struggle is so widespread that it?s coalesced into a broad-scale push for ?corporate infrastructure integration.?

Like most of manufacturing?s supporting players, real estate is playing catch-up in codifying its response to radically new demands. In fact, prior to IDRC?s report, there had been almost no research on real estate?s role in new wave manufacturing, Becker and Joroff note.

The Lean Portfolio belatedly gets that ball rolling, but it?s tracking a very fast-moving target.

?Volatility and constant change are the new givens,? says Edward Hess, managing partner with Arthur Andersen?s Real Estate Capital Markets Group. ?This is clearly a time of fundamental questioning of business practices

will permanently alter how real estate is managed.?

U.S. Federal Reserve Chairman Alan Greenspan, whose every utterance pricks up most businessmen?s ears infinitely higher than any political or corporate leader, offers a broader view. ?Economic growth is being conceptualized,? he told a U.S. Senate committee. ?Ideas are substituting for physical matter in creating value-adding products.?

As IDRC?s research underscores, real estate can only keep pace by continually providing its own value-adding ideas.