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Holger Company
Group No 8, Section C
Submitted to: $$$$
Date of Submission: 25/11/
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Executive Summary
Case let1:
A European Company is planning to start a new textile production facility. They have identified 5 possible international locations namely China, England, France, India, Mexico. The numerical value for each factor is given along with the weights which represents the strategic importance of that factor to the company. Best Location is to be found out.
Case let
Holger company was started in late 1800’s, it started making small machine tools but later ventured into larger machines and automobile components for Volkswagen and Mercedes. During the world war Allies bombed the production facility which left them in ruins. Thanks to capital infusion by a British group, it was allowed to continue. Later the company grew impressively with revenues from Asia, Europe and Northern America. In the late 1980’s market was very competitive thus the company found it difficult to control its manufacturing costs. Thus it decided to relocate its production facility. It had two locations in consideration. One at New Castle in England and other at Incheon in South Korea. Both locations had its own set of difficulties like relocating the key personnel, proximity to its suppliers, proximity to its customers, setting up new manufacturing facilities, productivity of the labour, the construction charges, the labour charges of each nations, the trade unions. The management has to weigh all the factors to decide upon which location to shift their production to.
Statement of the Problem
Case let 1:
A European based company is considering developing a new textile facility principally for ladies and children clothing. The management has identified 5 international locations to set up their plant. The countries are China, England, France, India and Mexico. The management has identified 5 critical factors upon which the location strategy has to be implemented. The 5 factors are Productivity of the work force, the construction cost, labour cost, Proximity to
its clients and proximity to its suppliers. The strategic importance of each of these factors to the company has also been identified by calculating the weight factor for each. Each factor has different numerical values associated with each nation. The higher the numerical value, more favourable the site is. The management has to do a weighted factor analysis to find out which site is the most favourable one to set up the plant.
Short term problems facing the management are
- Finding the optimal location considering the 5 critical factors
- Finding the key personnel for the manufacturing facility
- Whether to build the plant ground up or acquire an existing facility
Long term problems are
- Capacity planning for the new plant
- Demand forecasting for the new plant
- (^) Adjusting to the culture of the new country and its work force
Case let 2:
Holger Company which started out its production by manufacturing small machine tools later shifted to large machines and automobile parts. The company suffered a mishap during the Second World War when its manufacturing facilities were bombed. But it recovered and achieved impressive growth until the 1980’s. By the late 1980’s competition was high and Holger Co was struggling to control its manufacturing costs. It now wanted to shift its production base from Germany. The company identified 2 locations based upon different factors. One was at New Castle in England and the other at Incheon in South Korea. By the late 1980’s Germany had become the hub of machine and automobile manufacturers. The heightened competition forced Holger to control its manufacturing cost to stay competitive in the market. As the demand for its raw materials has gone up, the prices also would have shot up in Germany which has probably forced Holger Co to shift it manufacturing facility.
Short term problems facing the management are
- Choosing the optimal location between England and South Korea
- Relocating the key personnel from Germany to the new plant
- Handling the existing work force, termination of workers
- Construction costs of the new location
Long term problems facing them are
- The productivity of the new work force
- The labour cost
- The ease of reaching its customers
- The ease of accessing the supplies
- It’s a port city, so is accessible through land, sea and air.
- Heavily dependent on coal mining and ship building for which Holger supplies machineries and parts.
- Holger can relocate 90 key personnel from its current facility
- Situated in Europe where Holger derives its maximum revenues (70%).
- Culturally much more in alignment with Germany than South Korea.
- Politically stable country
- Stable law and order
- Lesser influence of trade unions from the beginning of 1980’s
- Highly developed infrastructure and high standard of living
Cons
- Situated in Europe, so has higher wage costs than South Korea.
- Coal mining and ship building industries are showing decline
- Lesser scope of market growth relative to South Korea.
Pros and Cons of Incheon
Pros
- It is also a coastal town. So accessible through land, sea and air.
- Close to the Asian market which has high growth potential.
- Cheaper wage costs as compared to England.
- Politically stable country
- Fast developing infrastructure
Cons
- Holger can relocate only 50 of its people from Germany, so must recruit new personnel for key jobs
- Culturally much different from Germany so adaptation will be a problem.
- Stronger presence of trade unions.
- Much more volatile market than England.
Recommended Solution, Implementation and Justification
The solution, its implementation and justification has been taken up End-of-case questions given in the case study.
End of Case Questions
Case let 1:
- Based on data, provided, determine the preferred location for the facility.
Based on the factor rating method, the calculations are given below.
Criteria Weighing Factor
China England India Mexico France
Productivity 3 70 85 65 70 80 Construction Cost 2 55 35 60 60 25 Labour Cost 3 90 55 75 80 45 Proximity to Customers
1.5 50 90 60 50 100
Proximity to Suppliers
0.5 50 30 55 45 60
Weighted Score 10 690 640 657.5 667.5 605
Based on the given facts, China is the most preferred location for the new manufacturing facility for the textile facility. Mexico comes second in terms of the most favoured location for the facility.
Justification:
China has been textile hub for long mainly because of its cheaper labour cost and its productivity. Because most other textile majors have also set up their facilities in China, the resources like information and talent are high in China compared to other nations. Companies always like to locate near their competitors leading to Clustering. This clustering will eventually lead to information spill overs, which is beneficial for the industry.
- Illustrate the sensitivity of the weighted score for France according to the numerical value of the labour cost by a graph for the numerical values of the labour cost from 45 to 100 in increments of 5. Assume the weighted score of other sites remain constant. What would have to be the numerical values for France in order that it breaks even, that is its weighted score is same as other sites?
The equation y = 3x+ 470 is formed from various factors of France. ‘y’ representing the total rating for each country and ‘x’ representing the labour costs ranging from 45 to 100 so that France has same factor rating as other countries.
Equating the equation 3x+470 to the factor rating of each country and solving gives the following results,
China Englan d
India Mexico
73.33 56.67 62.50 65.
So at these values of labour costs will equalise France with other sites.
Questions of Case let 2:
- Discuss what might have been some of the reasons for the high costs of manufacturing operation in Germany?
The reasons for the high manufacturing costs in Germany might have been
- High labour cost
- Competitive pressure
- Rising cost of raw materials
- What would be the impact in Germany if the company relocated its facility out of Germany?
If Holger relocates its facility out of Germany, it would be impacted on several fronts. They are
- Loss of jobs of almost 850 people
- Loss of tax paid by Holger
- Current Account Deficit of Germany will take a hit, since Holger was importing to European, Asian and American countries
- Ties with long term suppliers will be affected
- The reputation of Germany as a manufacturing company would be questioned
- What are the advantages to the firm in relocating to England? What do you believe could have been the inducements?
The advantages of moving to England are,
- (^) England is highly accessible through land, sea and air.
- New Castle in which company planned to start its manufacturing was heavily dependent on coal mining and ship building for which Holger could supply machineries and parts.
- Holger can relocate 90 key personnel from its current facility as compared to 50 in S. Korea
- Situated in Europe where Holger derives its maximum revenues (70%).
- Culturally much more in sync with Germany than South Korea.
- Politically stable country
- Stable law and order
- Lesser influence of trade unions from the beginning of 1980’s
- Highly developed infrastructure and high standard of living
The inducements offered could have been
- Subsidized land rates for the construction of new facility
- Subsidized electricity and power charges
- Tax benefits for the firm
- What are some of the disadvantages in relocating to England?
- Situated in Europe, so has higher wage costs than South Korea.
- Coal mining and ship building industries are showing decline
- Lesser scope of market growth relative to South Korea.
- What are the advantages of shifting to South Korea?
- Highly accessible through land, sea and air.
- Close to the Asian market which has high growth potential.
- Cheaper wage costs as compared to England.
- (^) Politically stable country
- Fast developing infrastructure
- What are the disadvantages of relocating to Korea?
