Every company today faces an identical challenge: increase revenues while reducing costs, and with limited resources. Market pressures and the need to assure future growth are forcing companies to find cost reductions of up to 30%. Against this background, it is easy to get carried away by the cost and market potential in eastern Europe and Asia. But companies often fail to take into account the significant risks and challenges associated with such transfers.
A recent study by PA Consulting, in co-operation with the association of German engineers, VDI Nachrichten, shows that although such migrations can deliver significant cost savings and additional market share, many companies are often dissatisfied with their move. Based on the study, 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; and
- assuring the highest product expertise through know-how transfer and managing local cultural differences.
So how can companies 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, together with timely implementation and risk management. Companies using this approach have typically achieved savings exceeding 15% and a high level of quality.
A clear strategy
When considering a move to, or a production set-up in, a low-cost economy, companies have to think about the right strategy. What is the main objective: cost reduction and/or market growth?
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 all the relevant cost- and risk factors, including all product target costs (logistics, duties, taxes, sourcing), reduced productivity and all staff costs, not only workers.
Having the right business case in place and selecting the best partner in the target country are only the first steps. Two more crucial ones are professional project management and know-how transfer.
PA’s survey on migration, and our experience, have demonstrated a number of requirements. These include excellent project management skills linked with robust early warning systems for risk management, sufficient resources with the required competence assigned to the transfer project team and early wide-ranging communication with staff, receiving plant and clients.
Many companies also underestimate the need to develop the receiving site before and after the actual transfer. A third of companies in PA’s survey stated that cultural differences between sites had a negative impact, especially on quality and performance. Therefore, migrating businesses must ensure the receiving site team is involved early and is aware of all the issues associated with not achieving customer requirements.
The technical and product know-how can be achieved through the wide ranging transfer of skills between the sending and receiving site. This involves staff from the sending site supporting production start, permanent transfer of experienced management and key expertise and the training of staff from the receiving site throughout the transfer process.
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. Team working, such as self-managed 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.
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;
- and 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’.
