In today’s global economy it has become an easy assumption that any successful strategic manufacturing agenda should involve off-shoring to low-cost nations. This decision seems to acquire even stronger validity when the low labour costs and the lower-cost countries are so close to the original Western manufacturing centres and markets, such as Eastern Europe. A good example seems to be the confectionery giant Cadbury Schweppes’ profitable Keynsham plant, set to close by 2010 and move its production mostly to Poland ‘as part of a wider cost reduction plan’ (BBC News October 2007) as well as a ‘move to realise millions in land value’ (www.tgwu.org.uk 2008)
But is off-shoring the only solution, or even the best solution? In this essay I will explore some of the decision-making processes leading to the above conclusion and its consequences, as well as those which suggest a completely different course of action and outcome, still ensuring competitiveness. I will conclude that, in this particular case study, there are arguably elements supporting both lines of action, though relocation may be the weakest plan, and that the best solution may therefore lie somewhere in between.
The trend to automatically favour off-shoring seems to be influenced by what has been described as the ‘rational model of organisational structure and culture’ (ABE, Peters and Waterman 1982). This model, stemming from classical and scientific management theories, bases its decision-making criteria on economies of scale, low costs and cheapness of product and production. Its decision-making processes are math-based and all targets are set in numerical terms; moreover, the organisations/structures it calculates are hierarchical and mostly merely factors of production. Its organisational behaviour tends to be ‘tall’, namely ‘many layers of management with a narrow span of control’ (ABE), hierarchic, rigid, departmentally organised under strict division of labour and bureaucratic (ABE); these characteristics have been referred to with the acronym THROB by the Association of Business Executives (Introduction to Organisations, p19).
It is easy to see how such a decision-making model influenced the decision to close the Keynsham factory and move its production to Poland. Although this plant has been ‘profitable and productive’ (www.tgwu.org.uk 2008), it could easily be argued that such move would automatically cut costs thanks to Poland’s lower-cost labour, thus easily ensuring competitiveness and the longevity of the manufacturer. Start-up costs and, at least initially, transportation costs would be offset by the significant financial gain from the sale of the 228 acre Keynsham greenfield; transportation costs could also be argued as low, based on the relatively short geographical distance between the UK and Poland. Moreover, the rational decision-making model could argue that its rigid THROB structure would minimise any risk accompanying an untrained, unknown labour base.
Qualitative and quantitative studies undertaken in Sweden in 2007 (Javaheri 2007) also seem to somewhat support the decision made by the Cadbury management. Small-size products with high, low-skilled labour content seem to be suitable to low-cost country sourcing, especially if the geographical distance to the main sales market, currently still the UK, is relatively small; it could also be argued that Poland may become geographically strategic if Cadbury were, as it is likely, to plan sales expansion throughout Europe.
A similar Swedish study also showed that, as long as product development was kept in the original Western country and regular visits and close control with the low-cost country were maintained, establishing production there seemed to be overall successful (Bäck, Mårten; Runemo, Staffan 2005).
However, as Peters and Waterman argue, the rational decision-making and its measurement of success, with emphasis on numerical analysis and cost reduction, is inherently biased. It fails to properly incorporate the risks of executions as well as other fluid variables; it therefore ‘largely overestimates the promise of manufacturing in low-cost countries’ (Kitschera, Obdeijn, Llgner, von Hochberg 2006).
First of all, even if the decision-making process were to remain heavily biased towards numerical analysis and cost reduction, it seems that too many labour variables may be neglected when off-shoring is chosen. Recent studies have shown that ‘inferior work practices and lack of experience’ in the lower-cost countries, as well as ‘the refusal of local partners and authorities to fully pass on expected labour cost savings, 75 percent of the so-called low-cost manufacturers were actually more expensive per unit produced than their Western counterparts’ (Kitschera, Obdeijn, Llgner, von Hochberg 2006).
Other overlooked labour costs may well be those of retraining Western managers to equip them to cope and operate effectively within the challenges of a foreign assignment. Besides their relocation costs and their basic training, such as in the local language, they would need to learn to manage different social and working cultures with different needs, aspirations, attitudes and communication style (Robbins 2002). Alternatively, employing middle managers locally may also pose uncalculated challenges: it has been shown that such skilled labour not only is in short supply, but can also demand unexpectedly high salaries and prove to be volatile workers who easily defect to the competition (Kitschera, Obdeijn, Llgner, von Hochberg 2006).
Further difficulties may arise from supply and infrastructure challenges; untested, unreliable suppliers, the potential pitfalls of an inferior transport infrastructure as well as uncalculated red tape could significantly increase the cost of relocation. The potential expense of overcoming these challenges must therefore be part of the decision-making process.
Thus, it becomes increasingly apparent that effective decision-making in this case would have to seriously consider the hidden potential of improving productivity in the original brownfield location (Keynsham). For this purpose, decision models which are typically math-based need to be accompanied by what Peter and Waterman define as ‘excellence models’ (Peters and Waterman 1982). These shift emphasis from mere price and cost to quality and value, new product development, innovation, creativity, labour skills, flexible and progressive management, motivating competition amongst plant sections or between national plants and, finally, long-term strategies rather than short terminism. This approach to decision-making would be better able to consider important factors otherwise overlooked, such as the ‘political give-and-take between management and unions in the brownfield location’, potentially leading to ‘increased working hours without concomitant salary hikes’ (Kitschera, Obdeijn, Llgner, von Hochberg 2006).
By introducing these new, quality and value-based factors into the decision process, the excellence model enables management to accept direct responsibility for losses in competitiveness instead of automatically blaming these on exogenous cost factors. This, in turn, introduces a new outlook on what can be done, opening up a new spectrum of opportunities and choices. The cost advantages of offshore locations are no longer seen as the only option; indeed, ‘strong, effective management of a skilled work force keeping innovative manufacturing process technology in tight control’ could be a far more advantageous solution (National Research Council 1992). Management begins to abandon the outdated, cost-driven business decision-making process and embraces better performance standards and lean production through learning and understanding global markets and competition; moreover, adding value for customers, thus decreasing the need to drive down production costs, may well be another ‘excellence’ factor that management needs to keep in mind.
Having highlighted the main advantages of both relocating and maintaining the original factory, one could conclude that either plan faces challenges and rewards, though one seems geared towards short-term rewards and the other can yield better long-term benefits. However, between the extremes of brownfield transformation and relocation lie many other options, and it has been proven that a mixed approach often yields the highest success (Kitschera, Obdeijn, Llgner, von Hochberg 2006). One option for Cadbury would therefore be a gradual approach with the objective to outsource only part of its production, namely the simplest and easiest to implement, whilst maintaining core and higher-skilled competencies in Keynsham; this way quality control would not be compromised from the outset and most of the labour and supply challenges highlighted above would be better faced and overcome. Though this mixed approach is still somewhat unchartered territory, examples of this have been found and studied in the aerospace industry as well as, in a smaller scale, by some manufacturers of agricultural equipment (Kitschera, Obdeijn, Llgner, von Hochberg 2006).
In conclusion, excellence models of decision-making seem to offer better choices and, in the case of the Cadbury Keynsham factory, they seem to highlight the benefit of brownfield transformation vs. relocation to Poland. Even if the large profit from the sale of its 228 acres may still tip the decision towards off-shoring production, by examining the issue of relocation versus transformation in a more open, broad-minded way, Cadbury could plan a more appropriate, even mixed manufacturing strategy which could include a gradual, partial relocation. Either way, an improved decision-making process could be an opportunity for Cadbury to revisit its management and manufacturing process and ultimately create a more lucrative, long-lasting outcome.
REFERENCES:
NATIONAL RESEARCH COUNCIL, Dispelling the manufacturing myth: American factories can compete in the Global Marketplace, National Academy Press, Washington, D.C. 1992, pp. 4-11.
BBC News October 2007. <URL:http://news.bbc.co.uk/2/hi/business/7025413.stm>
T&G WU 2008. <URL:http://www.tgwu.org.uk/Templates/Campaign.asp?Action=Display&NodeID=93856>
KITSCHERA, OBJEIJN, LLGNER, VON HOCHBERG, Relocate? Transform? Which option is Right? How to make smart decisions that will maximize manufacturing efficiencies. 2006.
<URL:http://www.strategy-business.com/resiliencereport/resilience/rr00037?pg=1
SHIRIN JAVAHERI, Low Cost Country Sourcing: An introduction for companies on the verge of starting their LCC sourcing initiatives, Research for the university of Handelshögskolan i Stockholm/Institutionen för marknadsföring och strategi, 2007.<URL http://www.uppsatser.se/om/central+costs/?startrecord=31>
MARTEN BACK, STAFFAN RUNEMO, Production in Low-Wage Countries, Research for the university of Högskolan i Jönköping/IHH, EMM (Entrepreneurskap, Marknadsföring, Management), 2005.
<URL:http://www.uppsatser.se/om/Staffan+Runemo/>
STEPHEN P. ROBBINS, Organizational Behaviour, Prentice Hall, Seventh Edition, 1996.pp. 10,11,12.
THOMAS J. PETERS AND ROBERT H. WATERMAN, In search of excellence: Lessons from America’s best-run companies, Harper & Row, New York, 1982, pp. 13-16, 45.
The Association of Business Executives, Organisationational Behaviour Manual, pp 18-20).