CASE THE PLANT LOCATION PUZZLe® CD Ann Reardon made ber way across the crowded eadishow Moot, doop i vu and oblivious 1 Us any activity all around her: As CEO of the Eldora Company (EDC) forthe pre= vious 13 years, she fa led er organization though a pericd of rao sucess, While as ieycle makers had moved their ‘manufacturing cpertions overseas to ake advantage of lower labor oss, doa had stuck with a domestic manufacturing states eopin its plant on the same campus as is corporate ices in Bouldoe Colorado, Ana felt that be staogy of kogping al un pets ‘ofthe company in the same location, although aneonventionl, had contributed greatly o cooperation among varius departments and, ukimacly,t0 the company’s growth: EDC had become the ages. and most profitable bicycle company in dhe United States, Ye hee rmanufactving vice presidet, Sean Andrews, 3s How Using hor vo buik a plant in China. “Look a ie numbye of companies bee," bo ll sid that meen. Ing, as they hepa several ether EDC stale sack brochures on te exhibit able and pion the company’s lest models around the perimeter of their area, Manufacturing. heads racly ated trad shows: in fact, this was Sean's first bao had wanted 10 ated, and Ann kai sipponed his interes. "There a too many players in this market" he ha sid, “Eve boen saying this for Wo ‘mond nov, and you know to forceasors” numbers back me up. But if dey weren't enough to convince you just ook around. The industry is reaching the saturation poin herein the States. We have to break into Asa “Leave it alone, Sea.” Ann had pie. “I know this is some- thing yu'e pushing: you've said so inthe past. But k's se up a time wo talk: abou it in detail ce. Tis 801 the time or the place." "Now hse hours lz, with de show in fll sig, An unde stood why Sean hal been compel o speak up again. Having all tir compos in the same room atthe same time Wasa poe fil visual reminder of how the industry haa changed. She thoweht aout what Sean had said about the US, market. In 1992 EDC's sales and camings had hit cond levels. The company now pro duced almost 30 parent of the bioyces sold in the inte Stes, ‘US, mass-market bieyelo sabos wore growing by ony 2 parcont por yea, while the Asian markt for those same tikes was nearly ou Fine. anally. And Flora coukd not cempettively serve hse markets fromits U.S. mannactuing fei. Two of the largest bike | ‘manufactures in the work lead in apy growing Asian mar ks, enjoyed a siaifcant labor and distttion cost advantage. ‘She stopped at mourn hike display setup by a ast-growing young biks company. Mounisin bikes with fron suspension were the lest wend—the ade suppor and cushion allowed ders 10 ter abner the shocks inherent in offend riding without slowing dow or hing balancs. Mast ofthese bikes were sill prove expensive. Bat Ekbr, 00, had an enuy in tis pret eats, ‘mxaling for about $190, and Ann was prod of i, For yeas the company haat concentrated is efoets on inexpensive bicycles, ‘which riled dough mass merchandisers for bewwoen $100 and 0% Forts pcos woe sgh higher than ether lower come itor, but ge rears were willing pay the fremium beats EDC hat consistently been able to offer many sate-o- heart snes and fears with quick, ily dlivais that sompaioes building, cvorseas coukn't match. ‘One ofthe reasons the company hal ben so sucess Was hat Boulder, Colorado, was. bieyeisis’ mecea. Eldora employees at all levels shared @ gembine love of bicycling and eagerly pursicd oowledae of the indus last weeds and styles. Somooae was always suggesting a beter vay to post the hand brakes ora new toe grip that allowed foe beter ction aod easier dismount, And Ekdora nover hada shortage of poopie willing to est out the atest noite. ‘Aoiher reason was that all marketing sal, engineers, design- ‘rs ane manufacturing personne! worked on one campus. within & Tssinae walk oF ono anothoe, Ann had bat big oa vat sated it Had paid off. Comnnication was oasy, and changes in les, pwevucton plans, andthe lke conld be made quickly and eficealy. Mountain bikes, for example, had gone from 0 percent to more than 50 percent of the market volume since 1988, and Fllora had mec th increased demand with case, And when ots for cmattikes—a ‘nouniainload bike hybrid tha had enjoyed a spurt of populariy— ‘began to fll of, Fdoea had bovn able to aus its preution run ‘with minimal disruption. [EDC ha alko benefited frm its foray ito the high-end market (bicycles retaitng for beowcen $100 an! $700) 12 years carter, ‘Ono of Ann's fst moves as CEO had boon (0 ener into a joint ‘venture with Rinaldi, a high-end Ralianbicyele manufacture that, atte time was specializing in ring models. As part of the ee ‘meni, EDC fad bogun importing Rinaldi bikos under tho band ‘name Summit and selling them through specialty bike dealers, Simikaty, Rinalli had begun marketing EDC bikes in Europe “That arrangement had had lasing rewards: Although racing bike | were no longer very popular, EDC's offerings liad akon of. About 20 percent of EDC's sales were now made ottsi the United Stes (primarily in Europe and Canada) through this and other agreements. ‘The relationships with Rinal and the specialty bike shops also helped heep EDC menagement aware of the lest indsry tends ‘over the year Most recently, those trends ha ince & moxe ‘nar more etic frame matatals liko aluminum and eabon fiber and more advanced components including the new frnt-ork ss yension systems, Ann examined another rival's brat touting | soodio-beteleased highend model with these advances, EDC ‘engncers were clearly ahead ofthe cars. er satsoction was quickly wapened with thoughts of foreign | sales performance. Beswoen 1987 and 1991, EDC's orsign sles Jad grown at an annual rte of over80 percent. But during the pre- ‘vious wo yeas they hd been a. ‘Sean appeared at Ann's side, joing her out of her thoughts and io the realty of her suroundings. “Dale just finished up te is. round of retailers mestings,”" he said We'd ike wo get some lunch tack overat the hotel and talk about cur options” Dale Stewart vas | Ekbra’s marking vie president. His views of what was best for ths company often difered from Sean, ba the tw had a amiable ‘working felaionship and enjoyed frequent spirited verbal sparing matches, “You won't et this go, will you," Ann said, dhrowing up her Inde in a gesmee of surendee “Fie, k's alk Rat yeu kaon 7 ‘won't make adeeision uni we've hal amore formal round of is- -eussions hack in Boulder next mont” ‘Over sandwiches, Soan mado his casa."Our paimary markets in ‘Noxth America and western Europe represent fess than a quarer of the workvide demand. OF the 200 million bicycles made in the ‘world last yeas 40 million were sold in China, 30 million in tnand 9 million in Tapa. Historically bikes sold in Asia's developing rarkets were low-end products used as primary modes of trans ponation, But the economic picwr: is changing fast. There's a roving midlle clas. Silenly people hive disposable incom “Many consumers there are now seeking higher quality and end styles. Mounain bikes with suspansion an in, And crosbikes are sill bokling thelr own Tn tet, the demand in these markets forthe product categories we price has buen doubling annually, and the growth rte seem ssuinable, “TP woe going wo compete in Asia though, we mood a Toal pant My sa has evaltated many locations there We've hooked at ‘wage rates, proximity to markets, and matetials eos and we feel thai Chinas our best bat. We'd ike open a plac there a soon as possible, and san bulling our postion. Dale jumpes in. “Two of our lagest competitors one fom China, one from Taiwan, have heen filling dhe demand so fi” he ‘aid, “In 1990, 97 poreon ofthe volume produced by these compa nies was for export. In 1994, they are projecting that 45 px of tir production will befor local markets. We ean'tcompete with them from here, About 20 pervent of our poet cos is labor, and the hourly wages ofthe manufocuring workforce in these counties ae berween 5 percent ann 15 percent of ours. Tao eos ws an ‘ukltional 20 percent in transportation and dies to getour bicycles to thoso markets” Ue alanced at Scan quickly and continued. “But here's wire 1 lsagroo wih Sean. I think we noed a shor-erm soltion. These ‘companies havea big ladon us, an the more I dink about tthe ‘more believe Wwe nee (© pu a dire sales operation in Asin st “Dale, you" cra.” Sean said, pouring himself some ive water foenthe pitch onthe table. “*What zoo would an Asian sales ope ‘ation do without a manufacturing plant? T know wo sourse compo- nenis in Asia now; but we cond save anether 10 perceat of those pans if'we wore located there. Then we would really be bringing Eklor to Asia, If we want io compete there, we have (play ftom ur greatest siengit—aqualiy, Ie did it your way, you woul bsg Ekdora bikes. You'd jase selling some prt with our label on it, You wouldn't get the quality. You would’t bil the same kindof reputation ws have hore. Tc wouldnt really be Fea (Over tie Hogs it ule woah “we're building bicycles, no rocket ships” Dale countered. “There are lots of companies in sia that could provide us with a roduc very quickly if we gave them our designs and helped dem “vith her prediction process. We co onsouree prodcton inthe short tem until we made more permanent arrangements.” He turned to Ann, "We could even outsoures the product pomancaty, despite what Scan says. What do we know about building and un ning a plant ia China? All know is we're Jsing potcatil share even as we sit here. The tafing companies arent giving our pro {ue the atlention they deserve, and they also aon’ giving us the information we need on the fetes that consumers in these mar sts want. A ses operation would help us eam the market even as -vo' catering it. Setting up a plant frst would tak t00 long. We need to be over there now, and opening a sales operation is the quickest way ‘Ann ett in, Dale has @ good point, Sean” she sa “We've ‘ben success hers in larg pant bscause our eine operation isin Boulder, on one site. We've had complete control aver our os ‘exible manufacturing operation, and that's been akey factor in our ability to meet rapid change in dhe local market, How woukl we aklress the challenges inherent in manufactoring in a. facility halfway around the world? Would you consider moving there? And for how long? “Also, think about our other options. Ihe biggest issue keeping usout of these markets right now is cos, thea beth of you are ignore ing a few obvious altematives. Right now, only our frame-buikling ‘operation is automated. We coukl cut labor costs significantly by automating. more processes. And why are you so bent on China? Frankly, when Lwas there law month touring facilites, a Lot of what T saw worried me. You know, that day T was supposed to tour a pro- duction Facility, there was a power failure Judging by the reactions ff the personnel in the plant the next day, these outages. are com= rion, The teads t0 the facility are in very poor consiton. And wastowaier and cleaning solvents are regularly dumpod untreated Ino the waterways. We could operate differently if we located there, bur wat impact would that have on costs? “Taiwan has a betier-developed infrastructure than China, What bout making that our Asian base? And I've heart that Singapore offers atractive tax arrangements to new manufacturing operations. ‘Then there's Mexico. I's closer to home, anklaside from distribu tion eosts, tho wago rates are similar to Asia’ and many ofthe other risks would be minimized. You both fecl strongly about this, ‘now, but this isn'ta decision we ean make hased on enthusiasm, ‘Ann crumpled up her sandwich wrapper and drank dhe last of hee soda "Let's got back over to the exhibits, Pm attending the TT sem- ina at 1:30. We'll scheduke a formal meeting. on this subject soon. {was going to say next month, but how about bumping it up two wooks?” ‘Walking back to the convention center with Dale and Sean, Ann swalzed that she wasn't just fiustrted because sho did't know Which couse EDC shold pursue. She was concemed that she seally didn't know which aspects ofthe decision were imponant ad ‘which were imelevant, Should she establish a division in China? It so, which functions should she start with? Manufacturing? Marketing? And what about enginsoring? Or should sho consider a Llfcreut hxatio? Would Cina’ how kabon canis let probe caused by a poor infrastructure? ‘Growth always been vitally important vo Eldora, both in cre- ating value to shareholders and in providing. a work enviconment that could attract and retain the most talemed people. Nove it appeared tha Ann weuld have to choose between continued growth and a damesticonly manufacturing strategy that had soeved hee ‘well. Ann knew the plant location decision she had made years caer had been critical tothe company"s success, and she felt the company’s next move would be just as crucial QuESTIONS 1 Wha is the competitive environment facing EDC? 2. What are EDC's srengths in manuraemring? 3. Should EDC cstablish a manufacturing division in Asia? 4 Whac plan of action would you recommend ro Ann Reaion? Snr Rony acy an yess Raven “Te at Lan RW AO, MURA ID}, CONE 8 OOH HE MUSRE EFC Fite ounce rs ce