Divide & Conquer: Decentralized manufacturing could be the saviour for both employment and commercial real estate

Out with scale, in with volume - and how decentralization doubles down to develop profitability and more prosperity than ever

Have we reached peak manufacturing efficiency? If we’re brutally honest, there’s only been a handful of true leaps in progress over recent years. There was obviously the industrial revolution and the production line; industrialised automated manufacturing methods; and more recently robotics and AI integration.

But there could be another opportunity that exists; instead of a large centralised manufacturing system whereby all of the above is contained under one roof, perhaps the future is better served by a more decentralised approach. In simple terms - close the big national factory down, and distribute the work through many smaller manufacturing shops operating nationwide on a local level.

I accept there will be a little conceptual inertia pushing back against this argument. For the past 200 or so years, pursuits have been made to minimize the amount of human contact required in manufacturing overall, and for good reasons:

1. For efficiency. Automated solutions don’t need to sleep; they don’t fatigue, and they can even be designed in such a manner to rarely require consumables or maintenance. They work in harmony, and do not have the contend with the dynamism of human emotions.

2. For safety and liability. Ultimately, if no humans are involved, no humans can get hurt; if no humans are hurt, there's no risk of lawsuits that threaten the bottom line of the manufacturing business.

3. For profit. Often, margins are thin enough from a highly leveraged capital investment, and they don't need to be reduced any further than absolutely necessary. Automated approaches can retain waste to barely conceivable levels, even operating at vast scale.

I’m continuously in awe of many of the automated solutions, but the elephant in the room with them is the cost - they’re typically ludicrously expensive; and many machines are bespoke to the products also.

A trend in the market over the past few years has resulted in a compounding issue occuring - whereby the assets required to house such manufacturing are sharply rising in capital value and rental value; along with the costs of utilities, insurance and local taxes to support their continued operation.

It must be considered that constraints can often come with operating out of a singular site; many companies find you can only extend so many times before an entire relocation is required in order to scale.

So, what's the answer?

Well, broadly speaking - it's an about turn, full circle, back to where they started - close the large manufacturing facility, and open multiple smaller ones.

The difference being, is that scale comes from the volume of facilities rather than the output of a singular production facility. I foresee a world where decentralized manufacturing will be the future, whereby localized facilities can exist to serve the existing customer base through small-scale batch manufacturing far more suited to the modern world and its requirements than the existing. But it begs a question - why this approach? Why can't we double down and push for even more scale?

Scale comes with its intrinsic difficulties. Often, the problems become exponential. A factorial increase in manufacturing size often means a significant amount of investment, which can not always be proportional or realistic within the scope of what's being produced, or the increase in production output.

For instance, doubling the manufacturing area on the factory floor is fine; but that could also require significant updates to the utilities, facilities, and infrastructure. It could result in uprated connections to the mains electric, and you may find the local grid infrastructure does not always have the capacity to serve your ambitions.

If there is a requirement for heating or cooling that becomes exponentially more difficult with a much larger space. Should that space be then segregated? How is it segregated? Is there a need for disparity between those spaces - in temperature, humidity, pressure, cleanliness, hygiene, or otherwise? If so, it needs to be sufficiently insulated between the two spaces to accommodate each. Is that going to require a larger HVAC system? Does that produce a lot of noise? What about dust? Will filtration be required? How will protect your employees from that increased risk factor? Is there pollution bleeding into the local community?

You get the point - scale seemed great until the mitigation works exceeded the costs of the extra manufacturing equipment. There's also an increased amount of scrutiny amongst private equity firms, and you must be willing to operate at a scale that makes sense for their investment targets as much as it does for your business ambitions. If the two do not align, you could be incredibly stuck with what's available to you. You may be producing something great - you want to make more of it, and your customers may want to buy it from you - but there’s too many second and third order effects.

So if scale isn’t the answer, what’s the argument for the decentralized approach?

Well, firstly - There’s employment:

In a new world where AI will inevitably replace many of the white-collar professions, there will be a large cohort of people perfectly capable of providing some form of economic output; but must accept that will involve retraining in new industries which do not necessarily leverage their existing skill set to a full degree.

Although the costs of labor may be decreasing, the cost of automation and robotics (especially the more advanced applications), will remain relatively expensive for the time being - until such scale operates to bring prices down.

So if the robotics are too expensive, and there’s likely going to be some cheaper labour, a decentralized approach makes perfect use of this scenario. Multiple local manufacturing facilities will facilitate creation of a significant amount of jobs within local communities. Manufacturing skills can develop to eventually create equivalence in terms of output and quality - and also has the benefit of some of those intrinsic human traits that can sometimes just put a little extra finesse into the manufacturing process.

Secondly - There’s the agility and local prosperity:

There will never be a time when a customer wants to wait longer for their products. If anything, the modern pressure is to reduce the friction between ordering and delivering.

Smaller facilities will be able to serve customers faster. Supplies can be sourced from local businesses. Transport, logistics, storage and distribution costs nearly disappear.

Performance metrics will be assessed just like any other previous approach. Except with decentralization, there is a possibility for employees to be incentivized through targets, profit share, or other such ways. This system intrinsically develops profitability and prosperity for the wider community - delivering a far more effective service for all consumers; in addition to maintaining (and even improving) the scalability of the output from the manufacturers overall.

The batch manufacturing methods will additionally reduce waste and other intrinsic benefits which come as a result of operating a smaller facility overall.

Thirdly - There’s a drastic reduction in nearly all overheads:

There’s typically few large sites in local areas, but plenty of commercial real estate for smaller ones. Hybrid and remote working has freed a lot of commercial space which could easily be repurposed for industrial use. A plentiful supply ensures a lower rental or capital cost to acquire a facility.

And of course, these facilities are smaller - with less requirement for excessive power or other infrastructure. A gentler print on the local economy from production side effects or pollutants, and can easily be purchased as turnkey solutions if needed. Equipment is not as specialist; and smaller machines are cheaper to buy, easier to repair, and there’s a greater safety of continuity. If one manufacturing facility needs to be closed for maintenance - the workload can temporarily be spread amongst the other local facilities whilst repairs are carried out.

That’s a good start, but it could be better:

Finally - The holy grail of production. Not only eliminating operational overheads altogether, but actually monetizing them.

There could certainly exist a time whereby licensing agreements could ensure that manufacturing could operate out of existing facilities and other businesses.

For instance, car parts could be manufactured in the back of service centers of dealerships. Medical devices could be made in-house in hospitals.

• Many existing businesses have the spaces themselves already, and they simply have to allocate a portion of it towards manufacturing.

• Meanwhile, the original manufacturers simply license their staff, intellectual property, manufacturing expertise, and equipment to the business to exist and operate out of their own premises.

• Parts could even be produced on-demand, ensuring that no inventory needs to be held. Additive manufacturing and CNC machining have made this a very realistic and achievable premise.

The franchisee model could also exist in perfect harmony with a decentralized manufacturing setup, which is a business model that has served titans of some industries - if you need convincing, look at the fast food industry. McDonald's operates an extremely successful model whereby their products are manufactured, prepared and sold globally by teams from all types of backgrounds - and with no variation in size, appearance, taste, or otherwise.

Nearly sounds too good to be true, doesn’t it?

It should be stated that this solution is not a universal one; and it’s applicability will ultimately depend on the business, the product, the skillset of the staff available, and the availability and distribution network it requires.

Centralised manufacturing may absolutely be the correct procedure in some cases. For some businesses, a decentralized approach would invite more risk of security or increase cost from having a multiplicative effect for complex systems. Such examples would be data centers or defense weapons manufacturers - ensuring sufficient security protocols for many, many sites would largely be prohibitive as a practice; and it would be far safer to ensure all assets are contained under one roof space.

However, this does highlight that in doing a decentralized approach for those that can facilitate the shift, will ensure that larger industrial units can be allocated in the appropriate areas for such businesses with a centralized requirement; and as a result less pressure is put on certain districts of the existing infrastructure as it serves less larger businesses in any one area.

The biggest challenge in the decentralized approach is the increased staff management and support structure that would inevitably need to exist. However, one could regard this as a relatively minor inconvenience in return for the significant cost saving that comes from passing much of operational overhead onto a third party and even monetising it.

This problem is simple enough to solve though - extra bodies, and implementation software SOPs, monitoring and quality control are all problems which have been tackled numerous times by businesses with alot of success.

This is a problem which is an easier problem to solve than magically attempting to find a few extra terawatts of energy in a grid infrastructure that is already creaking at the seams; or attempting to magic out additional area from sites which are already overdeveloped as they are.

This may not be perfect, but it's a suggestion of how manufacturing can return as an industry that is desirable, economic, profitable, and worthwhile for white-collar workers. It leverages their development, intelligence, and nurtures and values the qualities unique to human beings.

This solution may not be the silver bullet, but it could just be the start of a golden era for manufacturing.

TH