Executive operating costs or was it ‘we do

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Last updated: September 13, 2019

ExecutiveSummary Having set a strong global footprint in the medicalmanufacturing industry, what made Kiwi Medical pause and re-think theiroperations, which led them to off-shore rather implement a right-shorestrategy? – is it their weary market shares, was it the ungovernable operatingcosts or was it ‘we do it all’ nature? Whatsoever it may be, I strongly believethat Kiwi’s lack of pace in globalization in their manufacturing network hasled them to deteriorate.

 In-order to reach the set expectations of reducing operatingcosts by min 3% per year for over a 5-year period and reverse their erodingmarket share to level up the profits, Kiwi’ leadership leaned on offshoring.They’ve realized that they need to snap up their competitors and ultimatelybecome more flexible.  Having a pyramid of issues ranging from maintainingtheir quality to providing faster delivery options to its potential customers,the right-sourcing team had to decide on the following factors that canpossibly be a hit or miss:·       Choosingwhere to run its operations?·       Expandits capacity to enhance flexibility and competitiveness.·       Re-organizetransportation modes and methods ·       Selecta reliable 3PL service provider in addition to selecting a resourcefulfreight-forwarder. The following case analysis aims to understand theproblems Kiwi is facing and there by implement alternatives and facilitate Kiwiin right-shoring.BriefBackgroundBornin the late 1960’s in a highly unstable/ underdeveloped market, Kiwi leveragedwith its technical expertise.

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  Its strongroots in R&D helped them to be lead the medical appliance industry. By 2009Kiwi medical Ltd reached NZ 1.5 Billion towards their market capitalization, salesgrew at a pace of 19%/ year (2005-2009). Their product innovation was of top-notch quality but in-spite of havinga customer base in 120 countries they always lagged in setting up a globalfootprint. Having about 46% of sales in NA-region, 33% in Europe and 13% inAsia-Pacific.

To buttress this vigorous growth, they developed a 500-person sales& marketing, distribution teams, and had also set up direct sales officesin NZ, Australia, China, India, Scandinavia, U.S and U.K. Intention to maintainthe market-expansion they opened 2 D.C in Canada and Japan and were focused onbuilding relationships with distributors worldwide but in my opinion, they justacted late in the game. Their operating costs were seemingly high, although onecould possibly reduce operating costs by investing in technology /automation ofday-to-day business functions and mostly by outsourcing.

Kiwi had a “We do itall” nature. This along with the rivals who embraced globalization had led Kiwirealize its misses. There still exists a demand for respiratory care in-fact itis set to rise by 3-5%, but Kiwi isn’t doing well, it had a downfall from25-17.

5% in 4 years plus the market share was falling to 2%. Kiwi’s rivals haveshifted their production to low-cost labor countries like Vietnam andIndonesia. China is now producing low-cost lower grade technology applianceswhich 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 haveset up operations in low labor countries.Ø  How to reduce operating costs and implement fasterdelivery slots?Ø  How to maintain value propositionsAnalysisand Alternatives:I – Choiceof country:ForKiwi who never ventured into off-shore, selecting the right place to set-upoverseas manufacturing was a challenge. They came up with a mix of qualitativeand quantitative factors such as: Labor costs and expertise, Permits, Taxes,Strike-rate, Set-up costs, Duty & Customs, Transportation cost andlead-times, Health-Safety-Environment, corruption.

The team had 4 countries tochoose from: China, Indonesia, Mexico & Slovakia.China:Chinaby-far has always been a go-to option for outsourcing and offshoring this canbe mainly due to its sweeping population and low-labor costs. In-addition theirtax rates are low, and the Chinese govt. provides subsidiary energy.

Since theindustrial revolution, China has been transformed form a agrarian society to anIndustrial powerhouse.  The average GDPhas exceeded 10% for the past 20 years. Thereis however a need to focus on the factors Kiwi had set-up, China provides goodlabor skill, reasonable transportation costs to Asia but the costs to Europeand U.S are high and medium, one cannot ignore the market base in Europe andthe U.S which amounts to 76% this could result in deteriorating the lead-times.Although the global competitiveness is high, one cannot ignore the politicalbarriers and corruption.Indonesia:Touted as Asia’s next bigopportunity, Indonesia looks to be a promising country with the lowest hourlycompensation, but the skill level is borderline acceptable which can be anegative considering Kiwi is obsessed with proving quality products to itscustomers.

Being mainly dependent on maritime transportation system,un-reliable and expensive transportation is a growing bottleneck to Indonesia. The cost of moving goodsis high due to lack of infrastructure, regulations. Kiwi here is trying toshort its lead-times, but due to inefficient in the transportation network thelead times to ship to the U.S and Europe are relatively high.

Corruption may bethe lowest in this country however the World Bank and International FinanceCorporation ranked Indonesia at 166th position for ease of business.One must deal with construction permits averaging upto 158 days with 13procedurals, enormous cost associated with setting up electricity, also thetrading across the borders takes a significant amount of time for clearance.Slovakia:Slovakia is a high-incomecountry, sitting at the heart of Europe it maybe a good country to selectconsidering the 33% sales in Europe. The transportation costs seem relativelybetter than China and Indonesia.

Being a high-income earning country, thehourly compensation is relatively very high amongst the other comparable countries,Also the corruption is the highest standing at a 4.5 according to corruptionindex. Mexico:Mexico has been brandedfor its drug cartels and violence localized to certain communities but that maybe changing. Mexico is now trending to be the biggest rival to many emergingmarket economies. With a relatively low labor cost in comparison to Slovakia,Mexico also offers a high-level labor skill, with good lead times. The exportduty rates are free (Nz, Europe). Considering the highest sales in U.

S, Mexicocould be a better option, however registration a property takes 74 days whilein comparison to OCED countries it takes 26 days. Trading across boarders canbe time taking at times due to the free-trade zones and lucrative tradebusiness.II – Choiceof Site:China:Coastal Investment vs Interior-city Investment:China has about 34 majorand 2000 minor ports, Guangdong has 7 ports. Guangdong’s Guangzhou is a hugetransportation hub. Guangdong has advanced water and road transportation.

Also,a lot of multinational companies have invested in their service industry whilein comparison Chongqing is turning into trading powerhouses due to relativelylower 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 coastalinvestment is possibly a better option. Surabaya and Jakarta have beenattracting foreign investors and business. These cities boast to be able tosupport impeccable international trade and seem to have a capability toestablish a stable distribution network.Slovakia:Coastal Investment vs Interior-city Investment:Since gainingindependence from Czech Republic, Slovakia has adapted modernization andattracted some foreign trade. If Kiwi were to set up their unit here Bratislavaseems a good option considering they support port operations and are adaptingnew 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 200man-hours to complete in an average.Mexico:Coastal Investment vs Interior-city Investment:Since the inception ofborder industrialization or Maquiladora Program, offshore to Mexico has seen asignificant amount of increase. Interior cities like Saltillo and Guadalajaraclaim to offer similar benefits in promoting easier connection to the U.

SPorts. Considering coastal regions like Juarez and Tijuana, as mentionedearlier 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 citiesin the world, with highest homicide and violence rate. Tijuana is one of fastgrowing cities in Mexico, and is a hub for many multinational conglomeratecompanies. San-Diego is called its sister city making Tijuana-San-Diego aninternational metropolitan conurbation, having mere 20-mile distance it’s theclosest border shared with the Port of San-Diego.

III – Modeof Entry: In-order to expand theiroperations, Kiwi being risk averse in nature must choose between Subcontractmethod, Shelter operations and Wholly-owned subsidiaries.Subcontracting:   Itis easy and fast to implement, and would be entirely managed by thesub-contractor. Here choosing the right sub-contractor plays a key role. Thishelps in minimizing the investment costs, however Kiwi would have to providespecialized equipment and ensure its being delivered on time. The disadvantageson this method however is loss of control and reliability which are key toKiwi. Shelter-Options:Shelterservice provider helps in setting up the business and manages legal andadministration related works. Kiwi can still enjoy reduced initial investmentsand can maintain control of its technology and production processes. 1.

    Shelterservice provider facilitates with tax services, accounting and helps inprocuring licenses and permits and customs clearance.2.    Handleslocal employment and HR services like payroll, Performance monitoring alongwith legal help.3.    Helpsin sourcing raw-materials and warehouse management.Wholly-Owned Subsidiary:Thismode of entry provides higher stability and maximum control and eventuallyhelps in reducing the operating costs, however this requires a lot ofground-work and research into the area of operation. Kiwi would have to find asite for operations, construct the facility and perform all its operations.

Basically, they would be a parent company. Kiwi will still hold all of itssubsidiary stock. Sometimes this type of vertical integration can be veryuseful if the ultimate goal is to provide large-scale operations, require adepttechnological support and to create long-term relationships.IV –Logistics Support: With offshore comesgreater responsibility in choosing the right logistics service provider, whocan seamlessly even help in freight-forwarding. One need to look at the pricingfor inbound-outbound services, credibility, safety-record, Reputation andcustomer service and also flexibility (freight-forwarding). Kiwi couldinitially 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 incomparing rates, quality, reliability, flexibility and mainly trust.

Recommendations:I – Choiceof country: MexicoPerforming weightedanalysis as shown in Exhibit a and b, comparative analysis of both quality andquantity have been considered according to the 10 factors that Kiwi has set. Ihave assigned weights summing to ‘1’ and rated the countries on comparison fromTable:2 (given in case). From my spreadsheet analysis, I’d go with Mexicomainly due to the close proximities the country shares with U.S and as knownKiwi holds ~46% sales in the U.S. Kiwi can now make faster lead-times and alsofocus more on the NA market, can possibly enter Canadian market as wellconsidering it has already set up a D.CII – Choiceof Site: TijuanaKiwi has never venturedinto offshoring, for a company who is risk-averse this is relatively a bigdecision. Tijuana is a large manufacturing hub; a lot of firms have set upoperation here.

performing weighted analysis (Exhibit c), I believe Tijuana isbest option for Kiwi to set up its operations. Tijuana has lesser crime rate, adaptssimplified logistics. Also, the closest port is San-Diego with only 20 milesdistance moving goods can be faster, cheaper and reliable.III – Modeof Entry: Shelter initially aiming towards Wholly-SubsidiaryThere seems to be aserious tradeoff between risk-aversion and short-term cost savings. For acompany like Kiwi who is in it with both feet, but is also risk-averse, Ibelieve selecting a shelter option initially is a safer bet they could have ashelter service contract for 3to5-year period and depending on the sales andoutput they can venture ultimately to Wholly-subsidiary.IV – Logistics Support: Requiring robust logisticcapacity-Kiwi has been building relationship with DHL, but I believe it isequally important to invite bids from UPSD, FXFD. DHL might be vigorous in EU,Asia regions UPSD, FXFD have a great base in NA.

CurrentStatus of Case Initiative: With the advent ofglobalization, came a plethora of opportunities for developing countries toemerge as a strong market. The main aim of globalization was to expand businesshorizons and be able to participate in business in a global level. The fourlargest emerging economies are the BRICS countries (Brazil, Russia, India,China and South-Africa (added in 2014)). Although China would still want tocall itself as an emerging market, the labor costs are shifting gears implyingthat China may not be an emerging market anymore.Although China is stillattracting a lot of business it is evident that business just don’t rely oncheap labor or reaching mass-markets, it is important to gauge the expansioncapabilities, quality, corruption and language barriers.

China’s coastal areahas led to a dramatic increase while offshoring near Central China could be adisadvantage with ocean freight due to increased lead time issues.On the other hand, Mexicomight not hold great reputation but sure is upping its game. U.

S imports arethe highest, every established company would want their business flourish inthe U.S. For companies targeting NA-Region Mexico is the real deal. Mexico has become astrong base for establishing manufacturing operations. Its trade politicscredit to its huge advantage.

Although there re challenges like corruption andculture differences, the advantages make Mexico more suitable for trading. Theadvent of Maquiladora or Boarder Industrialization Program increased the scopefor globalization in Mexico. The NAFTA also played an major role in pushingMexico to greater heights. Though there wasrecession 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 toestablish their unit in Mexico can operate under Shelter service providers, whoalready are licensed under Maquiladora, so there is no hassle in involvingaccounting or legal personnel.Conclusion: Business is everevolving, and so are the trade-policies.

In the Kiwi case, after performing theweighted analysis and analyzing Kiwi’s keen interest in NA-region with arisk-averse nature, I recommend that Kiwi should act fast and implement aManufacturing base in Mexico-Tijuana (considering Tijuana proximity andreputation in Manufacturing) under Shelter mode of entry at least for initial3-5 years under a Maquiladora system, after which I think considering Kiwi’sintention of long-term relationship nature- they can opt for Wholly Subsidiary.I also believe that theyshould continue using DHL’s services until they find an optimal price matchwith reliability and trust. They can still use DHL for their EU and Asia regionwhile FXFD/UPSD could be used for customers in the NA-Region. By adapting this, theycould still maintain a competitive edge over their rivals and may resolve theirburning issues and ultimately improvise their market share and maintain theirvalue propositions.

 

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