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.
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.