Where to Make a New Product: case study

Internal Competition for a New Healthcare Product

How do multi-nationals decide where to make new products? In this case, the choice was between existing facilities in the USA or the UK.  Each existing site made a product similar to the new one. Each had an established technology that would be used at the chosen site. The company also had a long-standing strategy to rationalize facilities in the two countries.

There was a prima facie case for the US site. It was local to the market for the new product, the time to obtain regulatory compliance was shorter and the current unit manufacturing cost of the existing product range was 20% lower.

Other considerations favoured the UK site.  Activity based analysis of the existing product lines in the two countries showed that marginal costs were much lower in the UK.   The UK used a process technology that was more modern and inherently more flexible.  Further, the existing US product was in decline, whilst the UK made one was still growing fast.  Capital plans for expansion could accommodate the new product without excessive new expenditure.  On top of this were financial advantages from tax benefits and local grant-aid.

The process of reaching the decision was effectively a competition by each site to bid for the new product.  Costs, inventory, responsiveness and capacity for both current and predicted new operations were presented.  This levelled the “fact” playing field. Each party had to assimilate the knowledge of the other over a range of issues such as regulatory matters, process reliability and operational efficiency.

They then had to commit to improvements to come up to the performance of the other. This commitment was more important that the final decision.

by James La Trobe-Bateman, reMODEL Consultants International Ltd