Operating in the UK as a strategic choice

Posted on 11 Mar 2009 by The Manufacturer

In an increasingly global marketplace, the decision to offshore activities or maintain operations in the UK is a big concern for manufacturing organisations. Research carried out by Cranfield University attempts to understand the underpinning drivers for companies making the strategic decision to operate in the UK. Part I of a two part article by Hugues Charrat, Dr Denyse Julien and Ian Machan

Since the early 1970s, the ‘offshoring’ of manufacturing activities to low cost countries in order to reduce labour or total costs has increased. But many companies only saw the reduction of direct costs and failed to recognise that offshoring can bring other hidden costs and problems, such as transport costs or cultural differences. Because of the challenges associated with offshoring, many companies are deciding to keep operations in the UK or to relocate their offshoring activities back to the UK.

“UK manufacturing is not in terminal decline, far from it. The sector still employs nearly 3 million people, generates around 60 per cent of exports and has come a long way from smokestacks, oily rags and truculent trade unions”. Sutherland (2008 – bibliography on online version)

The Manufacturing Advisory Service (MAS) (Livesey, 2006) defines manufacturing as “the full cycle of activities from research, design and development, production, logistics, and service provisions to end of life management”. MAS makes a clear distinction between production and manufacturing. Production is defined as “the physical process of making, bending, etc” and manufacturing “the over-arching process from the sourcing of raw materials and converting them, to goods and their associates services”.

The research carried out at Cranfield University surveyed seventeen manufacturing companies from different sectors. Six core categories of drivers were identified from the literature on the subject:

Customer focus drivers
Every company should be focused on customer satisfaction. Some organisations will decide to keep operating in the UK to satisfy their customer expectations. The potential dangers in offshoring for these organisations include loss of customers and damage to reputation. Some organisations have adopted a strategy which involves separating their production into ‘high value’ and ‘low value’ products. The high value products are produced in the UK and targeted at customers who expect an ‘English’ production while the lower value products can be produced offshore, targeting the mass consumption market.

Financial drivers
Financial drivers such as exchange rates are an obvious concern for every company and are frequently cited as the most important. These drivers will be considered against marketing or technical drivers but will always be of great importance in deciding the final sourcing strategy.

Logistics drivers
This is one of the most important categories because of the broad types of features within it. The company that chooses to operate in the UK for logistical reasons may be a foreign company wishing to access the UK market, or a UK owned company. The need for speed to market and responsiveness to customers is often a key consideration to organisations who cite these drivers as the most important.

Marketing drivers
Many foreign companies have clear marketing drivers to operate in the UK. Access to market and being a niche player are crucial for many UK companies deciding to keep operations in the UK.

Political drivers
Political drivers are of significant importance for UK-owned companies, as they consider the relationship between the company and the UK government as well as with other governments. These drivers have a significant importance in sourcing strategy and are sometimes the key reason for deciding not to offshore operations.

Technical drivers
While the technical drivers are very important they are often viewed as less critical than the financial. Some companies prefer to change their techniques and adapt their products if they can have financial or marketing benefits.

Customer focus
Respondents of the survey were asked to indicate, on a scale of 1 to 6, where 6 was most important, the importance of 12 different drivers for maintaining operations in the UK. The results identified that five drivers came out as more important based on their average score (Fig 3). Ranked in descending order, these are:

a. Special niche
b. History of the company
c. Market access
d. Access to skilled labour and knowledge
e. Staying close to key customers

A common theme for these five key drivers, which fall across a number of the categories outlined above, was defined as ‘Customer Relationship Focus’. This observation underlies the importance of aligning the company’s strategy with the needs of their key customers and understanding the core differentiators of their business. It is also interesting to compare this with earlier studies looking at drivers in favour of offshoring (Bacon, 2007) where the primary driver was found to be cost reduction. For companies choosing to maintain operations in the UK the emphasis appears to be more on customer relationships and position in the market.

Belonging to a special niche market often requires the company not to offshore for different reasons. A special niche may imply a low volume of production and consequently it may be better to produce locally than offshore where additional costs associated with offshoring can be kept to a minimum. It could also require the operation to take place in a specific area if the product is geographically positioned.

The second most important factor was the ‘history of the company’; 10 of the 17 respondents rated this factor as very important in the sourcing strategy decision.

Barriers to offshoring
Another interesting output from the survey was the companies’ opinions on the barriers they see to moving operations offshore (Fig 4). Seven factors out of a possible 18 emerged as most relevant. These are ranked below in descending order of importance:

a. Risk of the loss of knowledge (intellectual property etc)
b. Would have increased the response time to the customers
c. Product quality required could not be achieved
d. Skills and knowledge not found overseas
e. Customer’s expectation about the “Englishness” of the brand image
f. Transfer of knowledge too difficult
g. Problem in resolving problems overseas

The seven factors can be grouped into three main themes: knowledge management, customer relationship management and technical management. The biggest individual concern for the companies surveyed was the potential loss of intellectual property. Some companies try to mitigate the risk of the decision to offshore to gain cost reductions through keeping the production in-house, even if offshore.

Once a company has decided to operate in the UK, it needs to adopt an effective strategy to meet competition from companies based in low cost countries. To achieve this, companies will need to undertake a detailed evaluation of activities that could remain in the UK, including operations that should be kept in-house, and those which can be outsourced offshore.

Many companies follow a mapping process to determine activities that are, or are not, appropriate for outsourcing. Figure 5 (to view the diagram, see online story at www.themanufacturer.com) provides an example from one UK company where all their components from a single business unit were mapped onto the matrix of core versus competitiveness to help the management assess the potential components for outsourcing which fall into the ‘buy’ quadrant.

This is an abridged version of an article supplied by Cranfield University and available online in full at www.themanufacturer.com. The second part of the article will appear in the April issue of The Manufacturer.

The results of this research demonstrate that operating in the UK brings significant advantages to companies in terms of economic and political stability, supply chain and management efficiency and finally, access to skilled labour and knowledge. One of the most common drivers for choosing to operate in the UK is related to a focus on customer satisfaction. Thus a company will decide not to offshore those core activities which provide it with the capability to be more responsive to its customers and to offer better services in the marketplace.