Coloplast, an international company that specializes in developing, manufacturing, and marketing medical devices, implemented an off-shoring strategy in order to stay viable, competitive and keep in focus the dynamic market needs. Implementing this strategy has brought some issues that were unexpected for Coloplast. One of the issues was with the organizational structure. Coloplast’s off shoring involved moving operations to Hungary. They would be operating with Danish and Hungarian production plants, where production processes were not the same. Misunderstandings and miscommunication arose amongst employees and created managerial and operational challenges.
Another issue that arose was knowledge management and this became a problem since there was very limited documentation on inconsistencies in equipment operation as well as no proper standardization of systems in place.
The solution to these problems is to implement company wide processes that help standardize both Hungarian and Danish plants. Employee motivation and communication is another issue and this is attributable to the resistance to change which many employees face.
Coloplast didn’t look at these issues with offshoring as their costs were rising locally and they needed to mitigate that cost. Coloplast should expand to China where labour is even cheaper than Hungary. It is an offshoring move that must be looked at in order for Coloplast to maintain their economies of scale. The further reduction of costs with their experience from offshoring in Hungary allow Coloplast to enter the offshoring process to China with a greater understanding in all that it entails, and the possible pitfalls that can arise.
One of the issues faced was that of the interdependent relationship between the Danish and the Hungarians. There were operational assumptions and activities. Nobody factored in how significant the language barrier would be. It proved to be a significant enough factor that it warranted unexpected time and money to rectify the problems Coloplast faced. There was a lack of knowledge transfer from the Danish operators to the Hungarian operators and this resulted in operational inefficiencies. The other issue involved the human resource aspects such as limiting attrition rates, limiting social hardship, and transferring knowledge effectively.
Environmental and Root Cause Analysis
Certain trends shifted power towards the consumer in Coloplast’s industry. Although Coloplast saw the need to offshore or outsource, their decision was based on them trying to focus on their core business and to increase efficiency, the prime motive was to cut costs. They chose to offshore as this entailed lower cost and availability of skilling workers. They did not want to rely on third parties, and third parties lack the in house knowledge needed for Coloplast’s operation. Coloplast was seriously considering relocating to a low cost location for some time. They were in danger of certain factors such as reimbursement, policy changes, price pressures due to wholesaler concentration, and powerful insurance companies. They felt there were distinct advantages to off shoring as opposed to outsourcing as the competitive advantage of offshoring to Hungary as they developed a much better ecosystem for Coloplast’s business. This means there is better availability of skilled human resources in that region for specific types of tasks. Their establishment in Hungary was due to the significant savings in production costs, which were 20 percent less than Danish levels.
After they had factored in wage increases, Coloplast was convinced this offshore move would be financially advantageous in the long run. Building costs were 50% less in Hungary than Denmark. Cost considerations were an issue, but logistical considerations were weighed to be more important. The root cause factors lay in the rollout of the offshoring project. Large regional differences existed within Hungary in terms of wage and infrastructure. Coloplast was located on the attractive side of Hungary and other major companies were close by, which played a part in their decision to off shore. Although the relocation of operations involved mature product lines, the decentralized structure still made documenting planning and production systems difficult.
The operations at the Danish site were not standardized, thus making it harder to offshore to Hungary, who had their own operations. The Danish factories felt that their organized production was unique to each of them and couldn’t be replicated. There were no product manuals and they had to be created proper production techniques and equipment operation. This would then have to be translated to Hungarian, and this processes impact was not properly assessed. The transfer of knowledge and training that required human interaction was not properly addressed beforehand either.
Alternatives or Options
Expand in Europe. Many locations were scouted before Hungary was implemented, and there are several Eastern Bloc countries with low wage, and production costs. However, there is more risk in operating in one of these countries as the geopolitical implications in these countries can cause cost savings to be eroded. They can also see the feasibility in many countries such as Poland, Ireland, and the Czech Republic. They have already offshored and Coloplast felt that it could further improve incentives to strengthen transfer of knowledge in their next venture. The regional attraction was there with Hungary, and the cost savings did occur for Coloplast, thus making offshoring to another European country a feasible option. Europe has already lowered its offshoring walls following a global trend, and this could be attractive for Coloplast if the geographical distance to China were a concern.
Recommendation and Implementation
Relocate to China. Now that Coloplast has realized its deficiencies in their process with the offshoring to Hungary, they can mitigate these for the future in their relocation to China. The whole initial decision to offshore in the first place was to reduce cost. Hungary was less costly than Denmark, and China is less costly than Hungary. It makes business sense to relocate to China production wise, as the wages are significantly lower than the Danish and Hungarians. There are organizational challenges in this implementation in that the geographical distance between Denmark and China can amplify many of the scenarios that arose from their offshoring to Hungary. Their knowledge transfer must be coordinated well in advance with any offshore implementation. They must establish well-set corporate guidelines on how to relocate and manage production sites in advance of any physical offshoring move. Maintain a high level of information and communicate in a direct manner. Leave no interpretation, and build relationships. They must learn from the mistakes identified with their previous project.
They must also apply the best practices from Hungary and include the idiosyncrasies of the Chinese business environment. The environment is drastically different from the environment they operated in Denmark and Hungary. These differences must be identified, and transitioned, as to make the offshoring smooth and sufficient. They will need to start with having Danish representatives make a presence in China in their facilities. It is important in business relations in China to have a level of trust with their employers, and customers. Establish substantial resources while further fine-tuning internal decision making processes and procedures in order to integrate their production unit with headquarters and production in Denmark.
Monitor and Control
Representatives from Coloplast in Denmark can have all their operational efficiencies set and can ease the process of off shoring by starting out with some local Danish representatives ease in the process with their physical presence in China. Work in conjunction with the Chinese workers in order to have them gain their trust, and a more direct line of knowledge transfer. Having set guidelines and policies in procedures will leave out any room for misinterpretation, such as what occurred in Hungary. Key KPI’s can be set for the offshoring project such as Total Cost vs. Total Cost Savings. Monitoring the metrics of expenses and comparing those expenses to their current operations will be a good indicator of any cost savings. Human capital must be monitored, as human resources were an issue that was already identified in Hungary. Turnover, and training costs must be monitored, recorded and reported.