Medical Device Link.

BUSINESS PLANNING & TECHNOLOGY DEVELOPMENT

Turning geographic strategy into business reality requires a carefully managed process.

Lawrence I. Strauss

Medical technology companies can decide to expand their manufacturing operations for a number of reasons—to handle sales growth, reach new markets, make a new product, strategically cut costs, or increase management focus. Deciding whether or not to expand, and defining the scope of operations that will be expanded, are the first critical decisions a company must make.

Deciding where to locate the new operation is the next critical decision point. Choosing the right country, region, or state to expand into can have a major impact on the ability of the project to meet its stated goals and, ultimately, on the success of the project. What is the best location for my company's new manufacturing operation?

Strategic Site Selection Criteria

To answer the question above, a company needs to consider and balance a number of criteria. The right site selection decision depends on a careful evaluation of the following six key criteria.

• Manufacturing cost.
• Supply-chain costs.
• Logistics complexity.
• Availability of engineering and management resources.
• Communications management.
• Political stability.

The primary questions that need to be answered when conducting site selection are generally the same regardless of whether a company is considering expanding its own operations or outsourcing production to a contract manufacturer. However, the following two additional criteria must be taken into consideration if a company has decided to set up its own operation rather than outsource.

• Economic incentives.
• Legal implications.

The following sections look at each of these factors in more depth.

Manufacturing Cost. Cost is almost always a factor when choosing a manufacturing site—but the site selection team must decide how important it is in the overall plan. If cost is a critical consideration, then the team must determine where the greatest opportunities to reduce costs lie, and gear its site selection process accordingly.

For example, if labor accounts for most of a product's cost, then the team should seek out low-cost labor sites. If, on the other hand, special manufacturing operations account for most of a product's cost, then the team should look for sites that are near centers of excellence for those operations, or find specialized contract manufacturers.

In evaluating various sites, the site selection team must take into consideration all costs—including labor, overhead, materials, and supply-chain costs. Labor costs include both blue- collar (manufacturing line) costs, as well as white-collar (manufacturing support and management) costs. Site selection should consider the mix of both types of labor needed at the new site when evaluating overall costs. For example, establishing an operation in Mexico might look attractive if the labor needed were mainly assembly-line workers, but it might look less so if the need were for skilled workers, whose salaries can be the same as or even more than they would be in the United States.

Supply-Chain Costs. Setting up a new manufacturing site also means setting up a new supply chain—and dealing with costs related to inventory holding, inbound and outbound transportation, and (if appropriate) customs and duties. In general, the further a site is from the source of a company's components or the buyers of its products, the longer the supply chain. As the supply chain lengthens, inbound and outbound transportation costs increase, and more days are needed to move products from origin to destination. More days in transit means higher inventory holding costs and more working capital tied up in the supply chain.

In certain situations, the costs of inventory holding and transportation can drive site selection closer to sources of materials or end-markets, and away from other cost incentives. For example, one medical technology manufacturer chose to expand its operations in Northern Europe—even though labor costs were lower in Asia—because the benefits of a shorter supply chain resulting from having a European manufacturing site outweighed the labor savings in Asia.

If international site locations are under consideration, it's worth checking what the customs and duty rates will be. While medical devices (and their components) tend to have lower customs and duty rates applied to them, the selection team should be sure that this applies to the sites under consideration.

Logistics Complexity. Besides the cost of shipping in and out of a potential site, the selection team should consider the ease of moving components and products. Issues to evaluate include what modes of transport services are available (e.g., air, truck, rail, or ocean carriers), what frequency they operate with, how reliable they are, and the ease and predictability of customs clearance in and out of the site.

Although such logistics issues may not be the primary consideration for medical technology companies during site selection, they can help narrow down the list of acceptable sites within a region. For example, while neither The Netherlands nor Singapore is technically the geographic center of Europe or Asia, respectively, each is a popular manufacturing site because of excellent transportation access and quick, predictable customs clearance, combined with experienced labor pools and good management resources.

Availability of Engineering and Management Resources. Depending on how technical the manufacturing process is, and how many people the company will be able to relocate to the new location, the selection team may need to evaluate the engineering or management resources available at potential sites—examining the caliber as well as the depth of talent available.

One good sign is the presence of other medical technology manufacturers in the area, which improves the odds of finding the skills you'll need. Another positive indicator is the presence of one or more universities in the vicinity, since graduates often seek employment near their school.

Communications Management. The relative importance of good communications during the site selection process varies greatly, depending on the scope and method of expansion. For example, if a company is planning to relocate an experienced management team to the new site, then immediate, effective communications between the new and existing sites may not be critical. But if a company plans to hire most of the new staff locally, or to outsource production to a contract manufacturer, then the ability of the new and existing sites to communicate effectively and easily in real time becomes more important. Do not underestimate the value of being able to clearly and easily communicate with management at a remote manufacturing site.

Moreover, when a problem arises that threatens to shut down a part of the new plant, the ability to put an experienced company engineer (or other troubleshooter) on a plane and have him or her arrive at the site in just a few hours can be invaluable.

Political Stability. If the site selection team is looking outside of the United States, Western Europe, or Japan, then political stability is another site selection factor that should be taken into account. Although stability can be subjective and changeable—countries like the Philippines that seemed safe a few years ago may not seem so stable today—it's still an important factor to consider. Does the government have a history of maintaining a stable business environment? What is the likelihood that the current government will be replaced by a hostile government in the future?

Economic Incentives. Companies that are planning to set up their own remote manufacturing operations (rather than outsourcing) may be able to take advantage of certain economic incentives. If so, these also need to be factored into the site selection decision. To attract business and jobs, some governments—country, regional, state, or county—offer economic incentives to companies in order to attract them to manufacturing sites in their area. These incentives can take various forms, including (but not limited to) low-cost or free land, grants, or tax breaks. Such incentives should be factored in when evaluating the total cost of various sites under consideration. Although exact figures may not be available, as these are often negotiated only toward the end of the selection process, the selection team should be able to get estimates and defined ranges of what might be offered.

Legal Implications. Medical technology companies that will be expanding their own operations must also consider the legal requirements and implications of setting up a new, company-owned operation at the new site. This is especially critical if the new operation is in a different country, where the legal structure can be (and usually is) very different than that of the home country. Questions that the site selection team must answer include the following.

• What is the process for hiring employees?
• What is the process for laying off or firing employees?
• What is required to own land and a building?
• What is required to build a new plant and put in the needed utilities?
• What taxes will be levied and how large will they be?
• What government regulations will apply to the manufacturing operation and what will be needed to comply with them?

Getting legal advice about these issues early in the site selection process can save significant time, money, and headaches in the long run.

The Decision-Making Process

Once the site selection team has collected this information, it can start the detailed decision-making process. In general, the evaluation can be divided into two parts: financial and nonfinancial considerations. The former includes all manufacturing, supply-chain costs, and economic incentives associated with each site under consideration. The latter includes the other considerations discussed above.

One effective way to conduct the site evaluation process is to have one or two team members lead the analysis and create a matrix that captures the key information for each site under consideration. The entire team can then review this matrix and use it as a basis for asking more-detailed questions, as well as for final decision making. Creating the matrix helps ensure that all of the key questions have been asked and answered for each site under consideration. The team can then use the matrix to eliminate certain sites and focus on the remaining ones in depth.

At this point in the process, different team members typically favor different sites. One technique for giving everyone a say while keeping things balanced is to give each member an equal number of points. To show their preferences, members can apply their points to different criteria. This process has two advantages: it forces each team member to seriously consider his or her priorities and how various priorities compare with one another, and it creates a framework for team members to discuss how they value, or weight, different criteria. The team can then use these weights to gauge the entire team's evaluation of each site under consideration.

Ideally, the site selection team should report to a steering committee made up of senior-level executives from every key function that will be affected by the expansion. The role of the steering committee is not to conduct the site investigation or analysis—that's the job of the site selection team—but to review the team's analysis and either approve it or ask for more information. The steering committee also makes sure that the site selection team has the resources and guidance needed to get the job done.

Conclusion

By conducting a detailed process, as described above, the site selection team and the steering committee can ensure that the site selection decision is firmly grounded in fact, includes all of the important criteria, and has been reviewed (and approved) by all of the required personnel. In short, this will help a medical technology company make sure that it is making the correct decision, and has gained buy-in from the key constituencies as part of the process.

One of the most important advantages of good site selection is that it starts to convert a strategic decision—to expand manufacturing operations—into reality. As such, it is a key element in determining the success of that strategy and, ultimately, of the company's future.

Lawrence I. Strauss is a principal in the worldwide life sciences practice of PRTM (Waltham, MA), management consultants to technology-driven business.

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