Location, location, location

Posted on 5 May 2010 by The Manufacturer

A manufacturer of spiral-wound tubing used in specialist electrical insulation applications, West Sussex-based Lamina Dielectrics is something of an export success story. Over 90% of the company’s output is shipped overseas. Malcolm Wheatley investigates.

Formed from materials such as polyester, polyamide and fluorinated ethylene propylene, the company’s products can be found in loudspeakers, refrigerators and air conditioners, as well as in more esoteric applications — the particle detectors used in highenergy physics, for instance, with the recently-built Large Hadron Collider at CERN in Switzerland being a case in point.

Yet despite the potentially lower costs — and greater profits — available from shifting output to lowcost overseas economies, Lamina Dielectrics remains firmly wedded to its two-acre site in Billingshurst, just south of Horsham. Moving overseas, says Patrick Hester, the company’s chairman, “Is just something that isn’t up for debate.” Yes, he concedes, going overseas could reduce costs. But, he insists, for several reasons it’s simply not going to happen. Indeed, the idea hasn’t been discussed in years, so firm is the belief that far from creating opportunities, an overseas move could in fact critically damage the business.

Welcome to the complex new world of supply chain network design — a once-predictable field where decisions about where to locate manufacturing operations were formerly based on a well-understood handful of clear-cut variables that hadn’t changed in years.

Go back to the 1970s and 1980s, for example, and just a handful of factors weighed on companies’ decision processes. Transport costs; relative wage rates; government subsidies; tariffs; currency exchange rates. There weren’t, at the end of the day, that many factors to consider.

Admittedly, ‘postponement’ and economies of scale strategies sometimes added to the mix, as did decisions about where — and at what stage in the manufacturing process — to hold inventories, but the resulting calculations weren’t complex. ‘Hard hedging’, where businesses tried to match the currency mix of their purchases with the currency of their sales, was another popular strategy of the time, pursued by, among others, mainframe computer manufacturer ICL.

But very often it often turned out that just one or two variables would effectively carry the day. In the case of bulky or heavy products, for example, transport costs were front of mind. With perishable goods, it was transport time that ruled the roost.

And with process industries, especially in the petrochemical sector, it was transport mode that mattered: rail, sea or pipeline as appropriate.


In other instances, government subsidies of various kinds played a significant part in the decision process, especially where the manufacturing process was labour-intensive and thus job-creating.

When Ford built its massive engine plant in Bridgend in the late 1970s, the plant that now produces a huge percentage of the company’s worldwide engine output, government subsidies through tax breaks and regional development aid heavily influenced the decision. Similarly, government inducements saw companies such as Dell, Intel and Microsoft set up manufacturing facilities in Eire.

In the 1990s, especially in multi-plant businesses, following the establishment of the Single European Market in 1992, economies of scale began to play a greater part. The name of the game? “Consolidate to scale, and work fixed assets more and more efficiently,” explains Alan Braithwaite, chairman of Berkhamsted-based international supply chain strategy consultants LCP Consulting.

Unilever devoted considerable resources to optimising a significant proportion of European manufacturing operation, centralising Europewide production of each major product group on a handful of sites, balancing economies of scale against increased inventory holding and higher transport costs.

Ford, meanwhile, began a Europe-wide consolidation exercise that is still ongoing, and which would eventually see vehicle manufacturing centred on plants such as Köln in Germany, Valencia in Spain, and Genk in Belgium — leaving only Transit van production carried out in the UK, in Southampton, and with a portion of output being shared with Kocaeli in Turkey.

Going global
Come 2000, and the ground rules began to change yet again. The creation of the euro wiped out, at a stroke, choices between individual European countries on the basis of currency considerations.

European lawmakers, too, began to impose limits on the ways in which member states could provide incentives and inducements to manufacturers moving there, eliminating some of the games of ‘musical jobs’ that had seen manufacturing operations uprooted from one European country, just to be plonked down in another, simply to attract a higher level of subsidy.

‘Globalisation’ became the buzzword, with manufacturers looking longingly at the low wage rates on offer in Eastern European countries — especially those inside the European Union — as well as at emerging Far Eastern economies such as India and China.

Yes, some of the old considerations remained.

Transport costs, tariffs, wage rates: these were the critical considerations. But over such extremes of distance, they took on disproportionate importance.

“What businesses didn’t understand, as they did the calculations, was that you need to factor in the impact of uncertainties and longer lead times,” says Charles Davis, a partner with London-based consultants A.T. Kearney.

Off-shoring up
Because to truly establish the extent to which offshoring really made sense, companies needed to build such factors into what has become known as a ‘Total Landed Cost’ calculation. The idea: compare the cost of domestic production with the total cost of bringing the same item onto UK soil; the overall ‘landed’ cost, in other words.

The fly in the ointment: include in your calculations factors such as additional inventory holding required by overseas manufacturing, and the lack of responsiveness brought about by longer lead times, and it turned out that for many manufacturers, off-shoring wasn’t the goldmine that they had anticipated.

“The drive towards off-shoring has been very powerful over the last ten years, but there are now some challenges to the value proposition,” warns Mike Bernon, a senior lecturer in supply chain management at Cranfield’s School of Management.

And those challenges, he adds, are starting to overshadow long-established considerations such as relative wage rates and other cost-based offshoring inducements.

Reputational risk, for instance, is increasingly giving manufacturers cause for concern. Such concerns used to be centred on quality issues — think of China’s various quality-based scandals, for instance. No more.

Child labour, health and safety abuses, pollution: increasingly, having seen manufacturers such as sportswear firm Nike get their fingers burned, companies are wondering how to evaluate the potential dangers of bad publicity in their location decisions.

Sustainability, too, is moving centre-stage as a reputational risk, as lobby groups — and consumers — become increasingly aware just how far goods are being transported to reach them.

“Sustainability is undeniably increasing the pressure for local manufacture,” says Bernon. “It’s not a pressure that’s going to be seriously affected by a 30% cost difference, but some production will undoubtedly come back.” Responsiveness, too, is another factor that is increasingly focusing manufacturers’ minds. China might be cheap, goes the logic, but it’s an awful long way away. The result: a growing number of manufacturing business specialising on satisfying the demand for quick turnround and short batch run manufacturing.

And the government isn’t complaining, often helping to fund such ventures, in a throwback to the subsidy largesse of the 1970s and 1980s.

Taking it back? Take Warrington-based United Electronic Manufacturing Services, established late last year, which received funding through the government’s Enterprise Finance Guarantee scheme — as well as loan funding from Royal Bank of Scotland’s Lombard division — to provide low volume contract manufacturing services, when established.

And the surprise, says director Craig Helm, has been just how successful the business has been, even at winning higher-volume business. “With sterling getting cheaper, we are winning business back from the Far East,” he says. “Companies are definitely getting better at understanding Total Landed Cost.”

And they are also getting better at understanding the difficulties posed by intellectual property right protection, adds Jayne Hussey, a partner at London law firm Pinsent Masons. Especially when combined with legal systems in which the notion of intellectual property is either poorly defined or poorly enforced — and when it is foreign companies that are making a complaint.

And that, it turns out, is one of the most significant factors keeping West Sussex-based Lamina Dielectrics in the UK.

“We’ve a highly skilled workforce, our own tool room in which we develop or adapt our own production machinery and if we moved abroad, that technology would inevitably leach outside the company,” says chairman Patrick Hestor. “It really is all about intellectual property protection.” In short, concludes Paul Christodoulou, senior industrial fellow at the University of Cambridge’s Institute for Manufacturing, when it comes to location decisions, “there isn’t a single right answer.” The Institute has made a study of how a number of leading manufacturers — including Cisco, Philips, Zara and GKN — have approached the question of location, and has come to the conclusion that the calibre of the decision process itself is the critical factor to get right.

“Companies have tended to approach location decisions opportunistically, and in a short-term ad hoc manner — which can lead to the wrong decisions being taken,” he says. “Taking a more systematic approach provides huge benefits.” In short, as companies presently relocating from China back to the UK — or from China to Eastern Europe — can confirm, location decisions conform to an age-old rule: decide in haste, repent at leisure.