Manufacturers rethinking their operational footprint often consider only a single set of cost, profitability, and demand assumptions. McKinsey’s client experience shows what’s missing: a careful assessment of the value of operational flexibility. Flexibility can take a variety of forms—the ability to adjust production volumes efficiently, to change the production mix among different products or models, to move production from one location to another, or to reconfigure the timing of production, for example. Such strategies help companies respond to changes in local demand, currency levels, labor rates, tariffs, taxes, transportation costs, and so forth.

Consider the example of a heavy-equipment manufacturer trying to decide between two potential manufacturing strategies involving moves such as building new plants in developing countries and reallocating the product mix and capacity of existing plants. As the exhibit shows, the company’s original analysis of options A and B—without taking flexibility into account—suggested that option B made the most sense, given its higher net present value and lower unit costs (shown on the exhibit’s vertical axis and calculated within an 80 percent confidence interval). When the analysis factored in the increased risk from currency exposure and transportation costs, however, option A emerged as the better bet.

To learn more about the value of operational flexibility, read “Reducing risk in your manufacturing footprint” (April 2009).