Executive operating costs or was it ‘we do

Executive
Summary

 

Having set a strong global footprint in the medical
manufacturing industry, what made Kiwi Medical pause and re-think their
operations, which led them to off-shore rather implement a right-shore
strategy? – is it their weary market shares, was it the ungovernable operating
costs or was it ‘we do it all’ nature? Whatsoever it may be, I strongly believe
that Kiwi’s lack of pace in globalization in their manufacturing network has
led them to deteriorate.

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In-order to reach the set expectations of reducing operating
costs by min 3% per year for over a 5-year period and reverse their eroding
market share to level up the profits, Kiwi’ leadership leaned on offshoring.
They’ve realized that they need to snap up their competitors and ultimately
become more flexible.

 

Having a pyramid of issues ranging from maintaining
their quality to providing faster delivery options to its potential customers,
the right-sourcing team had to decide on the following factors that can
possibly be a hit or miss:

·       Choosing
where to run its operations?

·       Expand
its capacity to enhance flexibility and competitiveness.

·       Re-organize
transportation modes and methods

·       Select
a reliable 3PL service provider in addition to selecting a resourceful
freight-forwarder.

 

The following case analysis aims to understand the
problems Kiwi is facing and there by implement alternatives and facilitate Kiwi
in right-shoring.

Brief
Background

Born
in the late 1960’s in a highly unstable/ underdeveloped market, Kiwi leveraged
with its technical expertise.  Its strong
roots in R&D helped them to be lead the medical appliance industry. By 2009
Kiwi medical Ltd reached NZ 1.5 Billion towards their market capitalization, sales
grew at a pace of 19%/ year (2005-2009). 
Their product innovation was of top-notch quality but in-spite of having
a customer base in 120 countries they always lagged in setting up a global
footprint. Having about 46% of sales in NA-region, 33% in Europe and 13% in
Asia-Pacific. To buttress this vigorous growth, they developed a 500-person sales
& marketing, distribution teams, and had also set up direct sales offices
in NZ, Australia, China, India, Scandinavia, U.S and U.K. Intention to maintain
the market-expansion they opened 2 D.C in Canada and Japan and were focused on
building relationships with distributors worldwide but in my opinion, they just
acted late in the game. Their operating costs were seemingly high, although one
could possibly reduce operating costs by investing in technology /automation of
day-to-day business functions and mostly by outsourcing. Kiwi had a “We do it
all” nature. This along with the rivals who embraced globalization had led Kiwi
realize its misses. There still exists a demand for respiratory care in-fact it
is set to rise by 3-5%, but Kiwi isn’t doing well, it had a downfall from
25-17.5% in 4 years plus the market share was falling to 2%. Kiwi’s rivals have
shifted their production to low-cost labor countries like Vietnam and
Indonesia. China is now producing low-cost lower grade technology appliances
which are depositing more pressure on Kiwi.

§  Kiwi’s burning issues:

Ø  How to increase market share?

Ø  How to set a global footprint? – 4 of 5 rivals have
set up operations in low labor countries.

Ø  How to reduce operating costs and implement faster
delivery slots?

Ø  How to maintain value propositions

Analysis
and Alternatives:

I – Choice
of country:

For
Kiwi who never ventured into off-shore, selecting the right place to set-up
overseas manufacturing was a challenge. They came up with a mix of qualitative
and quantitative factors such as: Labor costs and expertise, Permits, Taxes,
Strike-rate, Set-up costs, Duty & Customs, Transportation cost and
lead-times, Health-Safety-Environment, corruption. The team had 4 countries to
choose from: China, Indonesia, Mexico & Slovakia.

China:

China
by-far has always been a go-to option for outsourcing and offshoring this can
be mainly due to its sweeping population and low-labor costs. In-addition their
tax rates are low, and the Chinese govt. provides subsidiary energy. Since the
industrial revolution, China has been transformed form a agrarian society to an
Industrial powerhouse.  The average GDP
has exceeded 10% for the past 20 years.

There
is however a need to focus on the factors Kiwi had set-up, China provides good
labor skill, reasonable transportation costs to Asia but the costs to Europe
and U.S are high and medium, one cannot ignore the market base in Europe and
the U.S which amounts to 76% this could result in deteriorating the lead-times.
Although the global competitiveness is high, one cannot ignore the political
barriers and corruption.

Indonesia:

Touted as Asia’s next big
opportunity, Indonesia looks to be a promising country with the lowest hourly
compensation, but the skill level is borderline acceptable which can be a
negative considering Kiwi is obsessed with proving quality products to its
customers. Being mainly dependent on maritime transportation system,
un-reliable and expensive transportation is a growing bottleneck to Indonesia.

The cost of moving goods
is high due to lack of infrastructure, regulations. Kiwi here is trying to
short its lead-times, but due to inefficient in the transportation network the
lead times to ship to the U.S and Europe are relatively high. Corruption may be
the lowest in this country however the World Bank and International Finance
Corporation ranked Indonesia at 166th position for ease of business.
One must deal with construction permits averaging upto 158 days with 13
procedurals, enormous cost associated with setting up electricity, also the
trading across the borders takes a significant amount of time for clearance.

Slovakia:

Slovakia is a high-income
country, sitting at the heart of Europe it maybe a good country to select
considering the 33% sales in Europe. The transportation costs seem relatively
better than China and Indonesia. Being a high-income earning country, the
hourly compensation is relatively very high amongst the other comparable countries,
Also the corruption is the highest standing at a 4.5 according to corruption
index.

Mexico:

Mexico has been branded
for its drug cartels and violence localized to certain communities but that may
be changing. Mexico is now trending to be the biggest rival to many emerging
market economies. With a relatively low labor cost in comparison to Slovakia,
Mexico also offers a high-level labor skill, with good lead times. The export
duty rates are free (Nz, Europe). Considering the highest sales in U.S, Mexico
could be a better option, however registration a property takes 74 days while
in comparison to OCED countries it takes 26 days. Trading across boarders can
be time taking at times due to the free-trade zones and lucrative trade
business.

II – Choice
of Site:

China:

Coastal Investment vs Interior-city Investment:

China has about 34 major
and 2000 minor ports, Guangdong has 7 ports. Guangdong’s Guangzhou is a huge
transportation hub. Guangdong has advanced water and road transportation. Also,
a lot of multinational companies have invested in their service industry while
in comparison Chongqing is turning into trading powerhouses due to relatively
lower compensation.

Indonesia:

Coastal Investment vs Interior-city Investment:

Indonesia a SE-Asian nation
-being the world’s largest island country, it can be assumed that coastal
investment is possibly a better option. Surabaya and Jakarta have been
attracting foreign investors and business. These cities boast to be able to
support impeccable international trade and seem to have a capability to
establish a stable distribution network.

Slovakia:

Coastal Investment vs Interior-city Investment:

Since gaining
independence from Czech Republic, Slovakia has adapted modernization and
attracted some foreign trade. If Kiwi were to set up their unit here Bratislava
seems a good option considering they support port operations and are adapting
new technologies, however Kosice is an industry hub hosting U.S Steel plant
(U.S Steel Kosice) operations. Construction permits can take upto 286 days.
There are about 20 corporate tax payments to make which take about 200
man-hours to complete in an average.

Mexico:

Coastal Investment vs Interior-city Investment:

Since the inception of
border industrialization or Maquiladora Program, offshore to Mexico has seen a
significant amount of increase. Interior cities like Saltillo and Guadalajara
claim to offer similar benefits in promoting easier connection to the U.S
Ports. Considering coastal regions like Juarez and Tijuana, as mentioned
earlier violence although is present is only localized to certain communities,
Juarez has seen a lot of it and it still considered one of the dangerous cities
in the world, with highest homicide and violence rate. Tijuana is one of fast
growing cities in Mexico, and is a hub for many multinational conglomerate
companies. San-Diego is called its sister city making Tijuana-San-Diego an
international metropolitan conurbation, having mere 20-mile distance it’s the
closest border shared with the Port of San-Diego.

III – Mode
of Entry:

 

In-order to expand their
operations, Kiwi being risk averse in nature must choose between Subcontract
method, Shelter operations and Wholly-owned subsidiaries.

Subcontracting:   It
is easy and fast to implement, and would be entirely managed by the
sub-contractor. Here choosing the right sub-contractor plays a key role. This
helps in minimizing the investment costs, however Kiwi would have to provide
specialized equipment and ensure its being delivered on time. The disadvantages
on this method however is loss of control and reliability which are key to
Kiwi.

 

Shelter-Options:
Shelter
service provider helps in setting up the business and manages legal and
administration related works. Kiwi can still enjoy reduced initial investments
and can maintain control of its technology and production processes.

1.    
Shelter
service provider facilitates with tax services, accounting and helps in
procuring licenses and permits and customs clearance.

2.    
Handles
local employment and HR services like payroll, Performance monitoring along
with legal help.

3.    
Helps
in sourcing raw-materials and warehouse management.

Wholly-Owned Subsidiary:

This
mode of entry provides higher stability and maximum control and eventually
helps in reducing the operating costs, however this requires a lot of
ground-work and research into the area of operation. Kiwi would have to find a
site for operations, construct the facility and perform all its operations.
Basically, they would be a parent company. Kiwi will still hold all of its
subsidiary stock. Sometimes this type of vertical integration can be very
useful if the ultimate goal is to provide large-scale operations, require adept
technological support and to create long-term relationships.

IV –
Logistics Support:

 

With offshore comes
greater responsibility in choosing the right logistics service provider, who
can seamlessly even help in freight-forwarding. One need to look at the pricing
for inbound-outbound services, credibility, safety-record, Reputation and
customer service and also flexibility (freight-forwarding). Kiwi could
initially start-up with DHL if the periodic-evaluations meets the requirement,
else inviting bids from UPSD,FXFD or other 3PL’s might be very helpful in
comparing rates, quality, reliability, flexibility and mainly trust.

Recommendations:

I – Choice
of country: Mexico

Performing weighted
analysis as shown in Exhibit a and b, comparative analysis of both quality and
quantity have been considered according to the 10 factors that Kiwi has set. I
have assigned weights summing to ‘1’ and rated the countries on comparison from
Table:2 (given in case). From my spreadsheet analysis, I’d go with Mexico
mainly due to the close proximities the country shares with U.S and as known
Kiwi holds ~46% sales in the U.S. Kiwi can now make faster lead-times and also
focus more on the NA market, can possibly enter Canadian market as well
considering it has already set up a D.C

II – Choice
of Site: Tijuana

Kiwi has never ventured
into offshoring, for a company who is risk-averse this is relatively a big
decision. Tijuana is a large manufacturing hub; a lot of firms have set up
operation here. performing weighted analysis (Exhibit c), I believe Tijuana is
best option for Kiwi to set up its operations. Tijuana has lesser crime rate, adapts
simplified logistics. Also, the closest port is San-Diego with only 20 miles
distance moving goods can be faster, cheaper and reliable.

III – Mode
of Entry: Shelter initially aiming towards Wholly-Subsidiary

There seems to be a
serious tradeoff between risk-aversion and short-term cost savings. For a
company like Kiwi who is in it with both feet, but is also risk-averse, I
believe selecting a shelter option initially is a safer bet they could have a
shelter service contract for 3to5-year period and depending on the sales and
output they can venture ultimately to Wholly-subsidiary.

IV – Logistics Support:

Requiring robust logistic
capacity-Kiwi has been building relationship with DHL, but I believe it is
equally important to invite bids from UPSD, FXFD. DHL might be vigorous in EU,
Asia regions UPSD, FXFD have a great base in NA.

Current
Status of Case Initiative:

 

With the advent of
globalization, came a plethora of opportunities for developing countries to
emerge as a strong market. The main aim of globalization was to expand business
horizons and be able to participate in business in a global level. The four
largest emerging economies are the BRICS countries (Brazil, Russia, India,
China and South-Africa (added in 2014)). Although China would still want to
call itself as an emerging market, the labor costs are shifting gears implying
that China may not be an emerging market anymore.

Although China is still
attracting a lot of business it is evident that business just don’t rely on
cheap labor or reaching mass-markets, it is important to gauge the expansion
capabilities, quality, corruption and language barriers. China’s coastal area
has led to a dramatic increase while offshoring near Central China could be a
disadvantage with ocean freight due to increased lead time issues.

On the other hand, Mexico
might not hold great reputation but sure is upping its game. U.S imports are
the highest, every established company would want their business flourish in
the U.S. For companies targeting NA-Region Mexico is the real deal.

Mexico has become a
strong base for establishing manufacturing operations. Its trade politics
credit to its huge advantage. Although there re challenges like corruption and
culture differences, the advantages make Mexico more suitable for trading. The
advent of Maquiladora or Boarder Industrialization Program increased the scope
for globalization in Mexico. The NAFTA also played an major role in pushing
Mexico to greater heights.

Though there was
recession in the 2000’s, The U.S – Mexico trade was still going strong and so,
Mexico became an important source for FDI.

A company who wants to
establish their unit in Mexico can operate under Shelter service providers, who
already are licensed under Maquiladora, so there is no hassle in involving
accounting or legal personnel.

Conclusion:

 

Business is ever
evolving, and so are the trade-policies. In the Kiwi case, after performing the
weighted analysis and analyzing Kiwi’s keen interest in NA-region with a
risk-averse nature, I recommend that Kiwi should act fast and implement a
Manufacturing base in Mexico-Tijuana (considering Tijuana proximity and
reputation in Manufacturing) under Shelter mode of entry at least for initial
3-5 years under a Maquiladora system, after which I think considering Kiwi’s
intention of long-term relationship nature- they can opt for Wholly Subsidiary.

I also believe that they
should continue using DHL’s services until they find an optimal price match
with reliability and trust. They can still use DHL for their EU and Asia region
while FXFD/UPSD could be used for customers in the NA-Region.

By adapting this, they
could still maintain a competitive edge over their rivals and may resolve their
burning issues and ultimately improvise their market share and maintain their
value propositions.

 

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