Global Footprint

The case of Portugal – Planning the relocation

“The roads we take are more important than the goals we announce. Decisions determine destiny.” Frederick Speakman
(English Naturalist)

Most segments of the cable industry are mature, highly competitive and extremely fragmented.
Multinational companies have recognized more and more the strategic importance of consolidations
and M&A deals.

In 2011, Prysmian concluded one of the most important acquisitions in the cable history. The deal with
Draka, a Dutch manufacturer of electrical cables for the telecommunications, energy, infrastructure and
automotive industry, lead to the merger of the two market-leading companies and to the creation of the
Prysmian Group. The latter became the world’s largest cable maker not only in terms of market share
but, compared to their peers, also of profitability KPIs.

An important component of this achievement was Prysmian’s value-generating growth model, which
consists in acquiring underperforming targets and improve their efficiency. This business model implies
that Prysmian needs to effectively manage footprint projects, being able to close or relocate
manufacturing plants. Having little experience in relocation projects, the company recognizes the
importance and criticality of cautiously managing plant closures regarding volumes, resources and
equipments transfer as well as the issues related to products, customers, employees, shareholders and
external stakeholders.

Introduction

Milan, May 8, 2014 – Room 3, SDA Bocconi. Fernando Almodovar, the Portuguese CEO, Teresa
Gomes, the former Head of HR Portugal, and Miguel Alvares, the former Portuguese CFO, have not
met for years until they were selected to participate in the same leadership program. Even if, in the past,
they had worked side-by-side for months, managing the very sensitive issue of redesigning the
Portuguese footprint, the topic had never re-emerged during discussions.

By chance, one module of the program was dedicated exactly to the Portuguese footprint project that
nobody could knew better then them. Considering it a perfect coincidence, they decided to form a team
to understand together what they did well and what could have been done better. As reminded them
before the beginning of the simulation, their experience would be crucial in order to codify the
Portuguese experience into general guidelines aimed at contributing to the development of the
Prysmian Playbook.1

1 This case has been written for the Advanced Leadership Program of Prysmian Group with the aim of involving
participants in a complex simulation of a footprint redesign project. The case is based on a fictive situation and has not the
purpose of comparing or judging good or bad managerial practices, but to understand, map and rationalize the process’
complexities.

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The Portuguese Footprint

After the acquisition of Draka, in Portugal there were 4 plants and a regional distribution centre.

Due to the under-saturation of the four plants (66% saturation, given an overall capacity of 138,4 kT2
and a total production volumes of 92 kT) and the overlap of the products manufactured, the footprint
of Portugal needed a redesign. The first step Almodovar considered appropriate to get an overview of
the situation was to analyse, together with his team, different scenarios.

PLANT

Distribution
Center
COIMBRA
1 hour
3 hours
LEIRIA
2 hours 2 hours
3 hours
LISBON PORTALEGRE
3 hours 3 hours
2,5 hours
BEJA

Figure 1. Geographical allocation

As the common experience of plant closings shows, footprint redesign and efficiency improvement are
extremely sensitive issues and, as such, they have to be managed with the utmost caution. That’s why,
for confidentiality reasons, Almodovar chose to conduct the relocation scenario analysis involving only
a small team made by the local HR, the head of Operations and the local CFO, that he considered the
most relevant functions in terms of competences. Also the analysis had to be conducted with the
maximum prudence. As all the plants were conform to the SAP system, the team felt lucky and decided
to evaluate and compare existing data by basing their assumptions on standard costs, machine
efficiencies and line speeds of the receiving plants.

Beja produced Media Voltage (MV) and High Voltage (HV) products and was thus considered as a
constant not overlapping with other facilities. Portalegre was in a similar situation, as its Building Wires
(BW) installed capacity was heavily saturated and not duplicated in other facilities. In addition, it had a
low fixed cost base. Closing these two plants would have entailed significant building costs for little
benefit.

Per contra, Lisbon and Leiria, were considered as potential options of the Portuguese consolidation
process, as there was both a production and capacity/capability overlap with all the other facilities.

2 Measured at 47 weeks/year (90%)

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To support the decision process, Almodovar summarized all the data collected and the calculations
done by his determined team into a grid of consolidation options (Figure 2).

Plant Option 1 Option 2 Option 3

Beja ✓ ✓ ✓
Portalegre ✓ ✓ ✓
Lisbon CLOSE ✓ ✓
Leiria ✓ CLOSE ✓
Coimbra CLOSE CLOSE CLOSE

Costs & Benefits

Run-Rate Synergies € 5.2 M € 6.4 M € 1.5 M
Restructuring Costs & € 17.7 M € 10.7 M € 4.95 M
Capex
Payback 3.4 years 1.7 years 3,3 years

Figure 2. Consolidation Grid

Option 1 considered the closure of Lisbon and capacity move to Leiria. This alternative was not
developed further as high investments would have been necessary in order to relocate the production
capacity. Furthermore, there were additional complexities and low fixed costs savings associated with
other facilities on site that needed to remain (optical cables, connectivity, cable accessories HV
installation and HV testing Laboratory). Also the third, less radical option of optimizing the volume
allocation without closing any plant was rejected due to the little savings in fixed costs.

On contrary, Almodovar chose to bet on option 2 - the closure of Leiria and move to Lisbon, Beja and
Portalegre. The satisfying payback period of less than 2 years, given by the limited machines relocation
and build as well as the considerable cost savings due to potential efficiencies, determined the final
decision to transfer Leiria's range within the remaining 3 sites.

The preferred relocation action could not only bring the three plants’ saturation at about 75% on 47
weeks, ensuring flexibility based on Management Plan volumes, but also it did not imply any factory-
build costs. The minimized machines relocation reduced the risk of loosing sales and could guarantee
continuity in the deliveries during the implementation. Also the volumes could be consolidated across
the 3 plants, allowing them to maintain their existing product range.
Finally, the choice of closing Leiria did not affect Telecom and Connectivity or compromise HV testing
facility relocation plans.
Considering Coimbra RDC – Regional Distribution Center (leased facility), following a cautious
analysis of the existing opportunities, the distribution was planned to be consolidated into the
Portalegre factory.

The Footprint Redesign Plan

In order to evaluate the different closing options, Almodovar’s team started a complex and top-secret
project. At the beginning, some detailed analysis concerning the level of saturation of production
capacity of the plants and, among them, of each product line (Figure 3), was done. Then, based on sales
estimations reported in the management plan and on compatibility of technologies, capabilities and
capacity sizes, a product relocation from Leiria to Beja, Portalegre and Lisbon (Figure 4) was

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hypothesised, with the objective to leverage the relative specifies and increase the factories saturation
and efficiency, coherently with the established objectives (Figure 5).

In parallel, with the help of the HR and engineering functions, topics like the impact of the relocation
on human resources and manufacturing equipment were explored.

Concerning the personnel, following a long series of detailed evaluations, a plan for labour movement,
lay offs and recruiting was defined aimed at properly allocating the work force to receiving plants, while
consciously estimating the resulting costs and savings linked to the overall efficiency improvement
(Figure 6 and 7).

Similar considerations and elaborations were conducted also in relation to the requirements for
machinery and equipment (Figure 8). In this respect, plant inspections were carried out to evaluate the
availability of free space necessary to accommodate the equipment and optimize the layouts.

Regarding the consolidation of Coimbra’s Distribution Center into the Portalegre factory, a
simplification of some logistic flows was estimated with an increase in efficiency of stock management,
handling and transportation measured in approximately € 830.000 savings on annual basis, against a
total investment of € 1.320.000.

In order to get a 360° view of the whole relocation scenario (production capacities, work force,
equipment and logistics) the project team conducted further estimations assessing potential savings and
investment differentials induced by the project. In particular, the team was interested in tracking the
costs of maintenance and energy as well as other variable and fixed costs linked to the redesign of the
Portuguese footprint. Summary data are reported in Figure 9 and 10 showing the Transforming cost
bridge, Run-rate synergies and Restructuring costs. In the annexes 1 the overall cost-benefit analysis
and the relevant impact in terms of cash generation are shown.

Decisions made under conditions of uncertainty

Given the calculations and the satisfying results, Almodovar felt confident with the chosen redesign
option. However, he knew that it was impossible to predict certain events. There could be problems in
the customer service during the transition period. A potential dispute could emerge with industry
stakeholders (e.g. work council and unions) related to the announcement of the closing intention, pay
negotiations or other regulatory issues. Other difficulties could regard the intention to recruit new
employees in Lisbon and Beja, lowering the wages at starter rate (10% below current offering) to keep
costs under control, or the decision to outsource or contract some headcount and activities.

Almodovar and his team had to take into account the risks deriving from the closure of Leiria, trying to
anticipate them and develop a rational action plan. Each implementation step should be planned in
every single detail with a 360° perspective, considering not only financial aspects, but also operations,
sales, human resources, stakeholder relations and some relevant intangible issues like reputational
impacts.

After an exhausting meeting, the project team finally sat in front of a long list representing all the
actions necessary to mitigate the probability to fail in the intention to redesign the Portuguese
footprint. They just had to decide what to do and when...

The Team was therefore evaluating:

- the possible risks potentially emerging in running the Project;

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- the available options to face them and the best way to keep under control the project;
- the best way to implement a balanced scorecard representing the KPIs to be monitored during
the project.

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 Total Portugal

Cap. (kT) 90%* Prod. (kT) Sat. (%)

138,4 92,0 66,5

*Available capacity based on 24x7x47 weeks (90%). The required volumes based upon Management Plan (Forecast)

Beja Lisbon

Cap. (kT) 90% Prod. (kT) Sat. (%) Cap. (kT) 90% Prod. (kT) Sat. (%)
54,8 31,3 57 11,9 8,2 69

Portalegre Leiria

Cap. (kT) 90% Prod. (kT) Sat. (%) Cap. (kT) 90% Prod. (kT) Sat. (%)
30,4 30,1 99 41,3 22,4 54

Used capacity Available capacity

Figure 3. Capacity and saturation start point (as-is status – Management Plan)

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 AS IS TO BE
*Reallocation ofBeja
volume based on size and capability; ** Added 716t of BW as Portalegre
Beja MP only has 75% of VMLisbon
volume built in; ***
Lisbon
All FP soft skin will be manufactured using Prysmian process and design

Figure 4. Detailed volume allocation

Portalegre Leiria Portalegre

22388t

34000t
34000t

Coimbra Coimbra
21133

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 Total Portugal

Cap. (kT) 90%* Prod. (kT) Sat. (%)

124,4 (-14,1) 92,0 74,5

*Available capacity based on 24x7x47 weeks (90%). The required volumes based upon Management Plan (Forecast)

Beja Lisbon
Cap. (kT) 90% Prod. (kT) Sat. (%) Cap. (kT) 90% Prod. (kT) Sat. (%)
64,4 (+9.5) 44,1 69 20,3 (+8,4) 14,6 72

Portalegre
Cap. (kT) 90% Prod. (kT) Sat. (%)
39,7 (+9,2) 34,0 86

21.1

84%

Used capacity Available capacity

Figure 5. Capacity and saturation end point (to-be status - Management Plan)

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 Leiria/Coimbra Lisbon

Leiria

Coimbra

Portalegre Beja

FTE cost (€/p.a.)

Workers Leira Coimbra Lisbon Portalegre Beja

FTE BC cost (€/p.a.) 29,6 29,6 32 31,5 32
FTE WC cost (€/p.a.) 40 28 44,9 44 43,8 Total
Delta BC (#) -156,5 -14 46 20 55 -49,5
Delta WC (#) -25* -2 2 1 -24
Savings (€) -5632,4 -470,4 -6102,8
Additional Costs (€) 1561,8 630 1803,8 3995,6
Net
benefit (€) -2107,2
*Included 6 additional FTEs directly related to plant

Figure 6. FTE Labour movement

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 Portalegre

Portalegre
Coimbra

Coimbra
Lisbon

Lisbon
Leiria

Leiria
Beja

Beja
1185

2107

[K€] [K€]

Note:
(1) BC Gross Reduction: 171 actual consisting of 157 FTEs in Leiria and 14 FTEs in Coimbra
(2) WC Gross Reduction: 19 FTEs in Leiria + 6 additional FTEs directly related to plant, 2 FTEs to Coimbra
(3) BC Pension/Temps: 24 FTEs of Leiria are temps

Figure 7. FTE net reduction and layoff

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Product Machine/Infrastructure Asset, Current New Relocation
MC No. Location Location Cost €k
All Rod Breakdown – Single Line Portalegre Lisbon 182
FP Power Mica Taping (3x) VT2 Leiria Lisbon 90
BW LSOH Rigid LSOH Sheathing Line PE24 Leiria Lisbon 126
BW LSOH Rigid LSOH Tandemised 6491b Cell PE25 Leiria Lisbon 150
BW LSOH Rigid Skaltec R1 Packaging Line SK2 Leiria Lisbon 35
LV Insulation Line Lisbon 150
Shock Cure System for Ambi Cure Materials Lisbon 10
LSOH Compounds Intermix EC3 Leiria Lisbon 240
LSOH Compounds Platform, Services and Auxiliary Leiria Lisbon 110
Preparation of Vacant Lisbon Area n/a Lisbon 65
LV PVC/LSOH > 35mm2 LV Insulation Line PE10 Leiria Beja 190
LV LSOH > 35mm3 LSOH Oversheating Line 085-A04 Beja Beja 130
LV Armoured Drum Twist Armourer PA8 Leiria Beja 350
Rod Breakdown R5 Leiria Beja 190
BW PVC Rigid Tandemised Drawer/Buncher SM6+SLB29 Leiria Portalegre 150
PVC Rigid – 100m Reel Pack Skaltec R2 Packing Machine External Portalegre 35
BW PVC/LSOH Rigid PVC/LSOH Insulation Line E15 Leiria Portalegre 230
PVC Sheathing Line E22 Leiria Portalegre 250
Rod Breakdown – Heinrich Dual RD1 Leiria Portalegre 250
BW PVC/LSOH < 35mm2 Single Twist Armourer NL Portalegre 175
Test Unit Leiria Portalegre
Platforms/Prep n/a Portalegre 130
Single Twist Armourer PA6 Leiria NL 175

TOTAL (€k) 3547

* Leiria to Lisbon, Portalegre and Beja. Initial high level machine move estimates
Figure 8. Machines relocation

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 BC & WC Variable Costs Fixed Costs Logistics
Wite Mainten. Other Fixed Mater. Variable
Blue Wite
Collars & Other Energy Fixed Costs Efficien. Logistics TOTAL
Collars Collars
non plant Costs Costs Coimbra Compou. Efficien.
AS-IS (K€) 5047 816 240 1380 1290 1248 643 229 - 10893
TO-BE (K€) 3862 134 0 400 632 66 0 0 - 5094
SAVINGS (K€) 1185 682 240 980 658 1182 643 229 600* 6399
REDUCTION (%) 23% 84% 100% 71% 51% 95% 100% 100% - 59%

* Calculated as delta between previous (Coimbra) and new (Portalegre) logistics model.

Figure 9. Transformation cost bridge

Run-Rate Synergies Restructuring & Relocation Opex/Capex

[K€] [K€]

Net asset value properties: €4,4 M Total write off: €2,9 M

Figure 10. Run-Rate Synergies, Restructuring and Relocation Opex/Capex

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Annex 1/a. Cost-benefit Analysis and Cash generation 13
 ASSETS OPEX CAPEX DISINVEST. CASH NO CASH
K€ K€ K€ K€ K€
Assets Costs and Benefits
Old Location cleaning / environmental remediations (-) - -
Sale of properties (+)/ Disinvestment (+) - 4.400 4.400
Total Benefits - - 4.400 4.400 -

Assets Values net (+) VALUE

K€

Real estate Value

Land
Building 4.400
Machinery
Machinery -
Other Assets

Total Assets 4.400

SUMMARY OPEX CAPEX DISINVEST. CASH NO CASH

COSTS (9.425) (4.220) (10.745) (2.900)

BENEFITS 6.399 - 4.400 10.799 -

TOTAL PROJECT (3.026) (4.220) 4.400 54 (2.900)

Annex 1/b. Cost-Benefit Analysis and Cash generation

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