Colocation Still Matters: Conformance Quality and the Interdependence of R&D and Manufacturing in the Pharmaceutical Industry

Abstract

This study investigates the conformance quality benefits of colocating manufacturing with research and development (R&D) activities. Findings from a panel data set of U.S.-based pharmaceutical plants over a 13-year period reveal that colocation of manufacturing and R&D relates to better conformance quality, on average, across the entire sample. We find that these benefits of colocation persist throughout the time period we study (1994–2007), which is surprising, given the rapid development of information and communication technologies during that time. These benefits are particularly enhanced for manufacturing plants operating with processes that involve a high level of tacit process knowledge and that belong to large firms. Our findings highlight the importance of matching organizational design with process and firm characteristics in settings involving knowledge interdependence. They also highlight the continued value of physical proximity through geographical colocation between manufacturing and R&D activities to achieve desired quality outcomes. This paper was accepted by Serguei Netessine, operations management.