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Maintaining Market Leadership And Profit Margins Against An Influx Of Low-Cost International Competitors: Creating A Fundamentally New Operational Cost Structure THE CHALLENGE: One of the client’s business units had long been the leader in the home safety market. However, several competitors had recently moved manufacturing operations to a low-cost labor environment, generally located in China or Mexico. With the vast majority of its manufacturing occurring in the Midwest, their legacy cost structure was undermining its ability to price competitively and maintain its market leadership. Moreover, private equity investors were anxious to see margins grow and the value of their investment increase. Yet the Midwest facility was the anchor of the firm’s manufacturing prowess, and had close ties to the local community. The impetus for a plant move was obvious, but the implications of such a move were mired in a web of complexity and fears. THE PARTNERSHIP: Analysis: Working closely with client’s CEO and the management team, our team developed 3 viable scenarios against which significant analyses were conducted. The scenarios included 1) remaining in the Midwest and cutting costs as much as possible, 2) automating the facility so that labor cost was no longer a factor, and 3) moving the entire operation to a low-cost labor environment, likely to be in Mexico where the client maintained an assembly operation. Against each of the scenarios, the team developed detailed quantitative and qualitative analyses to understand the potential impact of each scenario upon the future of the business. Strategy: Our strategy was to transfer the operations to Mexico during the low demand period of the year. The 6 month project incorporated a number of check points and steps to ensure that service and quality would not be negatively impacted, including: duplicating capacity in Mexico, before lines were shut down in the U.S., closely monitoring the receiving Mexican organization’s capability to ensure the move was a “pull” versus a “push” of operations, and building up strategic raw and finished goods inventories. Execution: The cross functional, U.S./Mexican team worked closely together to ensure the existing Mexican facility would be ready for the operations transfer. The team then worked closely with plant leaders and shop-floor personnel in U.S. and Mexico to develop a comprehensive, detailed implementation work plan, beginning with categorization of all finished products based on process, volume, and complexity characteristics. Following this intensive process mapping and segmentation exercise, the team then identified the sequence of product moves as well as the necessary supporting organization. Thereafter, a detailed set of contingencies was developed to backfill unanticipated equipment, materials, and communications/HR issues that might arise during the transition. The team placed special emphasis on building cross-cultural trust and understanding between plant personnel. THE RESULTS: A phased implementation approach coupled with intensive planning enabled the client to complete the closing of the Midwest facility and the ramp-up of Mexico within 6 months. The team stayed on to ensure that the low cost facility quickly became one of the finest of its kind, which enabled a 45% increase in EBITDA and avoided a major capital expenditure on automation. In addition, the success of the Mexican operations was a major contributing factor to the company’s well-received IPO. |
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