Every company today faces an identical challenge: increase revenues while simultaneously reducing costs, and with limited resources. Present market pressures and the need to assure future growth are forcing companies to find cost reductions of up to 30 per cent. Against this background, it is easy for them to get carried away by the cost and market potential in Eastern Europe and Asia. The business case for production set-up or relocation often looks irresistible.
Many companies have built production facilities or migrated to low-cost countries - all attracted by labour, overhead, and infrastructure costs that are a fraction of those in the West (see Figure 1 in PDF file, linked on the right), by a rapidly developing skills base, and by fastgrowing markets enhanced by China’s entry into the World Trade Organisation and Eastern European nations’ entry into the EU. However, companies often fail to take account of the significant risks and challenges associated with such transfers.
A recent study by PA Consulting, in co-operation with VDI Nachrichten, shows that although such migrations can definitely deliver significant cost savings and generate additional market share, many companies are often dissatisfied with their migration.* (see footnote). Based on the study, and a large number of relocation projects into Eastern Europe, the Far East, and South America, we believe that problems typically lie in one of three areas:
- Developing a clear strategy and an adequate business case
- Managing the set-up or transfer with professional project management
- Assuring highest product expertise through know-how transfer and managing local cultural differences.
We found that organisations that ignored these factors encountered serious problems (see Figure 2 in PDF file, linked at the top right of this page). One in three exceeded the planned budget or time schedule significantly. Half of them experienced unexpected quality problems or significant disruption to production during and after their move.
So how can organisations achieve the maximum potential from offshore manufacturing - or at least do much better than currently?
The answer lies in the rigorous execution and management of these complex projects. In combination with a focus on timely implementation and pro-active risk management, this can result in improvements, which often exceed the stated targets, and certainly exceed results we see today. Companies using this approach have typically achieved savings exceeding 15 per cent and a high level of quality. This article considers some of the best practice learned.
When considering a move or a production set-up to a low-cost economy, enterprises have to think about the right strategy. What is the main objective for production set-up or migration: cost reduction and/or market growth? The strategic decision must be based on an ambitious but realistic business case which sets out clear targets for the transfer while considering the optimal mix of product, location, market, and local suppliers and partners. Establishing a reliable business case requires a knowledge of the target countries, experience with transfer, and the competence to evaluate the risks. Such capabilities will allow organisations to analyse and evaluate correctly all the relevant cost and risk factors. These include:
- Salary of all staff, not only workers. Although shop floor workers in migration countries are often much less expensive than in Europe, managers and professional people are usually much closer to European salary structures.
- Possible initial loss of productivity or efficiency. Although salary costs are lower, very often the level of productivity is much lower. For example, China's present productivity (2005) is only two-thirds of Germany's. Therefore, allowances for efficiency losses have to be included.
- On-site support. Additional support is needed for training and ramp-up, but also for translation, travel expenses, and higher salaries for expatriates. Additionally, the time for support must not be underestimated. Depending on the existing technical and management competence of the partner, on-site support must very often be guaranteed for many years to achieve the targeted outcome in cost and quality.
- Product target costs. The full benefit of the transfer can be achieved only if a business resources most of its material and component supply to local suppliers. However, when calculating realistic product costs, businesses considering migration must also assess the availability of local materials and suppliers, tax regulations, import duties, and local manufacturing competence. Very often businesses also neglect to consider the cost of transportation and warehousing in the business case, but these can have a significant impact.
- Partner and supplier selection. Specific technical know-how is required to judge whether the local suppliers and materials really meet the business's quality targets and how much time and cost it will take to develop local material and component suppliers. Technical and commercial evaluations are crucial for the success of a future co-operation.
Managing the transfer professionally
Having the right and realistic business case in place and selecting the best partner in the target country are only the first steps to a successful migration. Two more crucial steps - which your business can influence - will deliver the full benefit of a transfer. They are professional project management and know-how transfer.
PA’s survey on migration, and our extensive experience, have demonstrated the following requirements for a successful implementation phase:
- Excellent project management skills with robust early warning systems for risk management
- Sufficient resources with the required competence assigned to the transfer project team
- Early, wide-ranging engagement and communication with staff, receiving plant, and clients
- Linkage of technical and project management skills, to avoid isolated approaches and 'island' solutions
- Recognition and understanding of the cultural differences of the receiving site.
The planning and implementation phase of the production set-up or transfer is determined by knowing, understanding, and managing potential risks. This is often where external support can add most value as it brings a ready understanding of the risks. All risks need to be actively managed and regularly reviewed. Depending on the quality and level of experience of the transfer team, new risks that come up during the process can be anticipated and appropriate counter-measures can be taken.
Assuring the highest product expertise
Many companies underestimate and therefore neglect the need to develop the receiving site before and after the actual transfer.
The development needs to be done on three different levels:
- Understanding and managing the cultural difference
- Assuring the highest product expertise
- Implementing lean manufacturing and supply chain principles.
One-third of the companies in PA's survey stated that the cultural differences between the involved sites had a negative impact, especially on quality and performance. Therefore, migrating businesses must make sure that the receiving site team is involved early and is clearly aware of all the issues associated with not achieving customer requirements. They must make programme management visible. An early and focused approach to cultural management, combined with establishing a neutral and cross-location project management function, will help to understand and overcome cultural differences.
The technical and product know-how can be achieved by a mix of the following measures:
- Support of production start by employees from sending site
- Training of staff from receiving site at sending site
- Transfer of experienced management and experts to receiving site
- Use of temporary staff
- Establishment of a competence centre.
The skills transfer and training should start at a very early stage and extend right through the process. In particular, the core staff of the receiving site should be trained at the sending site to learn the ‘original’ manufacturing processes. Once they see and understand the manufacturing processes, they will know what is being asked and can act as mediator to the rest of the local staff of the receiving plant. Early actions are also necessary to identify and retain the key staff from the sending unit to support the transfer and the production ramp-up phase thereafter.
In order to harvest the full benefit of the low-cost environment, companies must not tolerate efficiency deficits. Instead, they should establish excellent processes adhering to lean management principles.
Lean manufacturing and supply chain principles are becoming part of doing business in developed countries, but the approaches and techniques are new to many low-cost countries. It is essential to put in place lean processes such as pull planning, kanbans, and Six Sigma quality once the new production facility is up and running. This should be supported with training and development for the local management team. Team working, such as selfmanaged teams, should also be implemented. This is an area where many low-cost countries have particular difficulty, because they are more used to hierarchical management structures. In their case, it is better to implement the team approach slowly, gradually taking decision-making away from the management team so that the cultural challenges are minimised.
Once the latest approaches and processes to manufacturing are implemented, the low-cost factory needs to focus on continuous improvement activities, linked to the targets that have been agreed.
Minimum pain, maximum gain
Building production sites or moving manufacturing to low-cost countries can deliver significant benefits for your business - but only if the following are true:
- Your business case is well thought out in advance
- You manage the risks during the project
- You adopt an excellent manufacturing approach in the new location.
By including these aspects in your programme, you will “take away the pain and maximise the gain.”
Case study
Siemens China - establishing a new factory for electric switchgear in Wuxi
The Siemens Power Transition & Distribution division, Medium Voltage, supplies mid-voltage components and switchgear to the Asian market.
In order to ensure a competitive price and delivery capability, Siemens decided to establish additional capacity, by reproducing several of the production lines from its Frankfurt and Berlin factories.
PA Consulting Group was asked to:
- Review the existing project plan
- Explore options to accelerate the site build, knowledge transfer, and production efficiency in Wuxi
- Generate a management plan which would set out target concepts and the planned implementation approach
- Support the detailed planning of the project.
Creating the management plan for implementation
In the first phase the joint PA/Siemens team reviewed the existing plan to identify gaps, analyse the critical path, and launch any critical activities. The second phase created a new management plan. The key milestones, business case, and budget were reviewed and confirmed, and the project risks investigated and evaluated. The requirements regarding infrastructure, equipment, processes, IT, and staff from test to full production capacity were identified and documented. Together with Siemens specialists, PA was able to suggest scenarios that would compress the planned time schedule by modifying production technologies and advancing the process and knowledge transfer.
In fact, the scenario finally agreed reduced the project’s planned time schedule by six months.
The management plan documented all planned high-level activities, and served as an implementation guideline, providing a central view, and a decision support tool for the stakeholders. In parallel, PA developed detailed activity plans for each workstream for the first six months of the project.
Benefits for Siemens Power Transition & Distribution
PA provided best-practice project management methods and tools that enabled Siemens to plan and monitor the progress of the site construction process, the staff training, procurement, and the installation and efficient running of equipment. The knowledge transfer that took place between PA and the Siemens team, along with the visibility and the acquired management buy-in and commitment, enabled Siemens to implement its plans successfully, ahead of schedule, and with a saving estimated at €1 MM.
* Footnote
The yellow brick road to low-cost economies - success factors for migrations, PA Consulting Group, in co-operation with VDI Nachrichten, 2004. The study considered companies headquartered in Germany.
To view a PDF of this article including diagrams, please click here
