Coloplast has been in operations in Denmark for nearly 60 years. The company specializes in producing medical devices such as disposable ostomy bags, antifungal cremes cleansers and moisturizers. For 42 years, all Coloplast operations were contained within Denmark, however 97% of its revenue was generated by exporting its products beyond its national borders. In 1999 the company changed its philosophy and began to investigate off shoring its production facilities. In 2001 the first Coloplast production facility opened its doors outside of Denmark. The expansion took place in Tatabanya Hungary. This location was chosen because of cheaper labour and land rates, as well as a more favourable tax rate. The city is located in the Western region of the country which provided better infrastructure. Coloplast had no blueprint to navigate through the expansion process, and had to learn and develop best practises by trial and error.
By 2004 the management team in Tatabanya had advanced the production system to the point where it was outperforming the longer established Danish facilities. In 2005 Coloplast revealed an aggressive plan of Strategy 2008. In this plan the company states it will strive to achieve a profit margin of 18% while maintaining 10% organic growth. A key pillar of this plan is the continued relocation of volume production to Hungary and further expansion to China. Coloplast is at crossroads, it needs to decide if it has learned enough from its first international expansion that it can duplicate and improve its success in new locations, or if it should delay new locations and focus on fine tuning its operations in Denmark and Hungary. Issues
Coloplast’s expansion into Hungary was executed with no prior international expansion experience to draw from. Eventually over time, it proved to be a successful operation which surpassed quality levels of its Danish facilities . The company believes it can successfully take the lessons learned in Hungary and apply them to other international locations. Coloplast also believes that the Tatabanya operation could still be fine tuned and improved to improve its results even further. Some of the problems that need to be improved upon are. Knowledge sharing / Communication styles
The production expansion in Hungary has revealed to Coloplast that decentralized approach to knowledge sharing may not work in all situations or locations. The old configuration in Denmark had most facilities and staff within a 30 min drive from each other. This allowed for more direct contact between facilities sharing processes, best practises, policies and ideas. This approach was not as successful in Hungary, Tatabanya is far from Danish headquarters and needed to have a much more direct approach. The decentralized system actually put the Hungarian operation at a disadvantage as there was a lack of manuals and instructions for them to work with in any language, not just Hungarian. Accounting procedure – Danish Kronner currency
93% of all products created by Coloplast was exported outside of Danish borders, this allowed the company to reach much larger markets then just its small domestic population. When an order is invoiced it is done so in the Kroner, the local Danish currency. This forces the company to exchange currency on the majority of all its transactions, exposing a currency risk if not managed carefully. It was estimated that currency exchange contributed up to 2% of overall loses in 2004. Outsourcing jobs negative impact on Danish workforce
Coloplast has a large knowledge pool of its existing workforce in Denmark. With its volume production facilities shifting to new markets it is finding it challenging to maintain its Danish workforce in their existing roles. The company would like to be loyal to its Danish workforce and keep them employed, maintaining high morale. Coloplast would like to avoid expensive severance payments and negative public relations of reducing staff in Denmark while expanding operations internationally. Analysis
Coloplost needs to continue to expand and grow it business. Internal estimates indicate that by 2010 the company will require double its current product volumes. At the same time they have set aggressive profit margin and growth goals. The international production expansion strategy is an important part of its goals. Coloplost hopes to meet the growing demand of its customers and achieving revenue goals by expanding production facilities in countries with lower operating costs One of the lessons learned by Coloplost after the expansion in Hungary is the importance of the transfer of knowledge and communication between all segments of the business. This area needs to be improved prior to further expansion to China. During the last expansion management was so busy dealing with communication issues that they failed to fully take advantage of local sourcing opportunities, instead importing more expensive options. Management in Denmark must also decide how to properly utilize their domestic workforce, when many of their current production positions are shifting to new countries.
This will be a very important decision as these employees hold a high level of tacit knowledge of the company that it does not want to lose. The reporting of sales/conversion back to Danish currency represented a 2% loss. Continued expansion into new markets in both production and sales will make this issue even larger then it currently is. It is in the companies best interest to retain its Danish workforce when possible. These employees have the best understanding of the operations and can contribute to the companies success in training and perfecting best practises instead of focusing on production. Coloplost is still in a growth phase and redeployment/training of these people will save on severance costs and maintain a positive image for the company. Recommendations
By improving the Hungarian operation and exploring further expansion opportunities such as China the company is demonstrating how essential expanding into low cost markets is to its overall long term strategy. A presence in the Asian marketplace will expose Coloplost to a massive consumer base to build its sales. This international market diversification will reduce the company’s dependence on its traditional European customers who’s health care systems are under reform and potentially not as profitable as before. A new strategy must be formed for the changing European markets, by expanding revenue streams, it provides the company time to assess reality of the new market conditions. Another benefit of having operations in Asia is increasing logistics options for the Coloplast. A Chinese distribution point could also be created providing better coverage in Asia and potentially shipping to North America as well. The Danish location will continue to ship to Hamburg and export to North Europe while the Hungarian facilities will by pass by-pass Hamburg and ship directly to Southern Europe.
This plan will streamline the shipping process cutting costs for the company. The decentralized approach employed by the company while it was only operating in Denmark does not work on a global scale. Communication between all locations the company must be improved and two changes should be made immediately. First all processes and procedures needs to be documented in written form in all of the languages of the countries that the company will operate in. Coloplast has a large workforce in Denmark that will be shrinking in size due to the off shoring process. The company should select their most experienced and specialized staff to work on this project, providing new employment opportunities while reducing costs of retraining and severance fees. Second, the company should invest in a knowledge management system that will allow for file and idea sharing between all locations world wide.
Coloplost should adjust its accounting procedures and no longer invoice in Danish kroners, instead they should invoice all sales in Euro’s. This will reduce the need to perform a foreign exchange transaction on all sales. If the company must later convert the currency to Kroners, they can do so when the exchange rate is in their favor. To further protect themselves from foreign exchange risk, they should hedge their transaction and purchase an option contract of swapping Euros for Kroner. Further shifting of volume away from Denmark is forecasted to reduce the Danish workforce by approximately 600 jobs over the next 5 years. It is best to get ahead of it and continue to offer early retirement and retraining packages to its employees. By utilizing its most knowledgeable employees to assist in training and manual creation, Coloplast hopes to retain the assets in its workforce that have the highest amount of the knowledge of its processes and production. This will help keep staff reduction to a minimal. Alternatives
Delay further expansion – focus on improving Hungarian operations This option will make it difficult for the company to reach its long term goals. Make it possible to rotate management staff in different international facilities to help spread knowledge and share best practises among all operations Create a strong emphasis in using top Danish production workers as trainers to help develop new operations. write training manuals, proven to work well with Danish employees in the past. Development of a team from experienced staff to assist in trying to source products locally may be a win win scenario. Keep Danish staff employed while reducing costs for the company. These employees would know systems best. Creation of secondary distribution points to better serve new markets. China could handle Asian and North American markets, Hamburg (Danish port) could handle traditional Northern European markets and a new distribution point could be created to funnel Hungarian supplied products to Southern Europe and beyond