Taking manufacturing advantage of Europe's single market

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European Management Journal Vol. 13, No. 3, pp. 257-268, 1995 Copyright © 1995 Elsevier Science Ltd

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Taking Manufacturing tvantage of Europe's Single Market ROBERT COLLINS, Professor of Manufacturing Management and Strategy, IMD, Lausanne; ROGER SCHMENNER, Professor of Operations Management, Indiana University School of Business, Indiana, USA

This article is a sequel to the Manufacturing 2000 Executive Report 'Manufacturing Strategies in Western Europe '1 which described how manufacturing companies were modifying their manufacturing strategies and practices within the region. The present article focuses on the ways in which some manufacturers have been able to alleviate the impact of downward pressure on costs, to slash excess capacity and to realize the promised

I

synergies of merger and acquisition initiatives through the adoption of Pan-European manufacturing strategies.

The fundamental aspects of a Pan-European manufacturing strategy are described together with the benefits to be achieved. This article highlights how companies have surmounted the challenge to implementing such strategies. Eliminating excess capacity, effecting the integration of operations, marketing and sales, rationalizing plant location decisions, adopting 'rigid flexibility' in manufacturing and overcoming barriers to change are discussed and illustrated with examples from practice.

Lastly, the lessons to be learned from the European experience are summarized and inferences drawn regarding the crafting of pan-regional manufacturing strategies for manufacturers operating in NAFTA, SAFTA and the Asia Pacific Region. Six criteria are identified: avoid manufacturing myopia; build product focused plant networks; create pan- regional organization structures; adopt 'rigid flexibility'; standardize systems and procedures, and identify obstacles to implementation.

Western European unity has been taking a beating lately. The collapse of the exchange rate mechanism (ERM) and the tepid support of the Maastricht treaty have slowed the momentum for monetary and political union. Nevertheless, despite these setbacks, the move- ment towards a Single Market has continued. It is true that as of April 1994 only 119 of 230 legislative initiatives considered essential to the completion of the Single Market had been passed into law by all of the member states of the European Union (formerly the European Community). Nevertheless, for any one country, about 85 per cent of the necessary initiatives have passed into law, and more follow each month.

As the Single Market has evolved, many companies

EUROPEAN MANAGEMENT JOURNAL Vol 13 No 3 September 1995 257

TAKING MANUFACTURING ADVANTAGE OF EUROPE'S SINGLE MARKET

have been forced to sit up and take notice. The current recession in Europe has reinforced this. There is no avoiding the fact that European manufacturers are hurting, and for some very good reasons: high costs, vast overcapacity, and a continuing trend of mergers and acquisitions that has left manufacturing organizations scrambling to keep up. (See Appendix for a description of the research that underlies the assertions and points of view expressed in this article.) Consider these points in more detail:

Cost Pressures The costs of many European products are high and European companies know it. They are high for a variety of reasons:

High labor costs and benefit packages (e.g., bonuses, vacations, shorter working weeks). German manufacturing wages are the world's highest and French benefit packages can amount to as much as 50 per cent of total labor costs. Workers routinely receive 5 or 6 weeks of vacation annually. This is on top of more national and local holidays than US workers customarily receive. Yet, the European work week is well below 40 hours a week, even in non-recessionary times. Restrictive practices. European managers are often constrained in the policies that they can pursue. The number of hours of overtime permitted is limited. Part-time workers cannot work more than a set number of hours per week. Women are sometimes forbidden to work night shifts. Round- the-clock shift operations are sometimes difficult to staff. The list goes on. High exchange rates. Despite a recession, Euro- pean currencies have been high relative to the dollar, due primarily to the tight monetary policy of the Bundesbank. Such high rates have been affecting the prices of European goods in the world market. Protectionism. The long history of protectionism in a number of European industries (not simply agriculture) has contributed a legacy of high costs. The Single Market lashes out at precisely this, but there are still some industries, such as telecom- munications, where protectionism persists. Bloated bureaucracies. Relative to much of what remains in the US, the management ranks of many European companies are bloated. Military-style hierarchies are still common.

Reducing costs has become a priority. It dominates the strategic concerns of many European firms, like quality improvement dominates the strategic concerns of many American firms and flexibility does with many Japanese firms.

Overcapacity Layered on top of the cost pressures on companies is pervasive overcapacity. More than half of the companies surveyed in our research (55%) revealed overcapacity situations and this was true for both process and non-

process industries. For 15 per cent of the companies, the overcapacity is 'severe'. And, for only 8 per cent of the companies are there any undercapacity situations that could warrant investments in new plant and equipment. Furthermore, this overcapacity exists despite the fact that there have been more plant closings than openings during the past 10 years for the companies surveyed.

Merger and Acquisition Activity There has been a dramatic degree of merger and acquisition activity within Europe in the past decade. More than 50 per cent of the companies/divisions surveyed had engaged in acquisitions and mergers during that time. As a result, many companies can now boast of sales throughout most of Europe. The brand names advertised may not be the same, but these companies now have a significant influence outside their native countries. What they lack, however, is an effective manufacturing strategy to support sales in these diverse markets.

Pan-European Manufacturing: The Way Forward The way forward is now clear, however. It is the adoption of a Pan-European manufacturing strategy. To understand better what this means, consider how manufacturing is organized for many companies operating in Europe.

Many European manufacturers have located, or have inherited, plants which have traditionally served their host countries and former colonies. Typically each plant produces the entire range of output that the company's local sales company sells, or, at least, much of it. Because some of the countries served have limited populations, the plants themselves may be small compared to similar plants in major markets. Their locations are typically dictated by historical accident or proximity to the company's major market. The plants are paired with their local sales companies and they run their operations independently of similar company operations in other European countries. Product characteristics and packaging are generally the province of the local sales companies. Above the marketing/sales and production operations reigns a country managing director.

The Pan-European manufacturer is organized in dramatically different fashion, but a fashion that is familiar to many American or Japanese companies operating in Europe. Rather than a geographically-based strategy, the Pan-European producer follows a product- based strategy. Thus, different products are made in different factories and are shipped over a broad geographic area. A company switch to a Pan-European orientation typically involves a narrowing of product line responsibilities for plants and an increase in the markets they serve. Importantly, such a switch in strategy frees management to concentrate on a limited product line in any one factory. Such a reorientation brings about more attention to product flows, redesign

258 EUROPEAN MANAGEMENT JOURNAL Vol 13 No 3 September 1995


of plant layouts, better materials handling, new investments in equipment, and different workforce practices. Critical mass can be achieved in staff areas such as new product development, purchasing and process engineering.

With a change to a Pan-European strategy, the scale of operations is likely to increase. Thus, more specialization within manufacturing can be sought. Reorganization can concentrate manuacturing and design know-how, and state-of-the-art approaches can be more easily mastered. Overheads may decline, especially relative to the volumes produced, because the narrowed product line can facilitate a more 'visible' production process and less need for 'systems' to run the factory and because teams can act to delayer the levels of military-style hierarchy that prevail in some European firms.

Company organization typically changes. Because the brand and product have become Pan-European in character, it usually makes sense to centralize selected aspects of the marketing and sales functions. This is becoming a virtual prerequisite if major customers are themselves organized as Pan-European countries. Centralization leaves the country manager with con- siderably less responsibility and power. Even more power is ceded if manufacturing is reorganized as well so that the country's plants produce less than a full line of products. Manufacturing management then becomes a coordinator of networks of plants rather than autonomous units.

The results of such a switch in strategy can be dramatic, particularly with respect to the lowering of production costs. Take Company A, a confectionery maker. As a result of aggressive merger and acquisition activity, Company A had almost a score of plants scattered throughout Europe, each making an assortment of products for small, well-defined geographic areas. With the advent of Pan-European thinking, the company closed about half of them and remissioned the others so that product lines are now made at separate locations in what are termed international manufacturing centers. The national sales organizations and distribution channels are unchanged, but they are fed now by the product line-specific international manufacturing centers. Company A has been able to reconfigure the layouts of its factories so that materials move from factories to markets much more economically. The increase in volume has justified more automation. There are fewer setups and the time lag in the feedback of information regarding quality and other operational issues is now much shorter than previously was the case. Not only has this reorganization increased productivity, but the simplification of the factories has meant that now product costs are better known. This, in turn, has permitted manufacturing to resist marketing 'whimsy' more effectively than ever.

Pan-European manufacturers are rethinking their approach to plant scale. The choice of product line for each plant can be made with an eye to 'minimum

efficient scale'. Furthermore the capacity utilization of these plants can be more effectively managed. In moving to Pan-European operations, the generous buffer capacities typically present in the independent, country-based plants are squeezed out of the reduced number of plants that the company decides to keep in operation. Because of such actions, Pan-European manufacturers are less plagued by over-capacity than their brethren.

The shift to Pan-European manufacturing offers more than cost and scale benefits. Our research shows that although many European manufacturers are adopting at least some of the latest manufacturing initiatives -- JIT, TQM, employee involvement, MRP II -- Pan- European manufacturers are moving much more swiftly. They are far ahead of the competition in understanding and implementing the key ideas of time- based competition and lean production.

The way forward is thus clear. The difficulty for many European producers, of course, lies in how to get there. Ironically, many American and Japanese companies operating in Europe are already there. American and Japanese multinationals constitute a disproportionately larger share of the Pan-European manufacturers perhaps because they have not been burdened with the tradition and inertia that has plagued many European companies. American and Japanese companies are more apt to think of Europe in the same terms as they think about their home markets where product-specific plants serving wide geographic areas are the norm. Only now are progressive European producers such as TetraPak, Schindler, and Borealis catching up.

What It Takes to Become Pan-European The way to Pan-European manufacturing is not mysterious, but it does take considerable resolve. Some difficult challenges lie along the path: slashing excess plant capacity, effecting better coordination with marketing and sales, rethinking locations, standardizing products and processes, and overcoming a number of obstacles to implementation, notably those involving personnel policies and attitudes. Let us consider these in depth.

Slash Excess Plant Capacity Many European manufacturers are operating at less than 50 per cent of rated capacity. Many have taken the plunge to downsize their operations, but it is not easily accomplished. Nearly four-fifths of the companies surveyed had decreased their employment levels as a result of reorganization.

Moreover, the companies surveyed had closed more plants in the previous decade than they had opened. The current overcapacity in many industries will simply guarantee that more plant closings will occur. Never- theless, there is real reluctance among European



companies to downsize. The costs to manufacturers of severance and redundancy payments, particularly in the southern reaches of Europe, are often considerable. But, moreover, there is a mindset to avoid downsizing if at all possible. While this is commendable in one sense, in another, it sometimes precipitates more dramatic layoffs than might have occurred if some anticipatory cuts had been made earlier.

The overcapacity situation is exacerbated by the numerous small plants that are found throughout Europe. Although there are some huge manufacturing complexes among the companies surveyed -- a few among the largest in Europe -- there are many smaller plants as well. These smaller plants also tend to be those that primarily serve domestic markets. Indeed, just over half of the plants accounted for in our survey serve such markets and, on average, they are a quarter the size of the plants that are mainly export-oriented.

The proliferation of many small, domestic market plants poses the question of whether such facilities are undersized relative to the prevailing technology, and are thus more costly. Even in such a major industry sector as automobiles, European mass market producers such as Renault, Volvo, Peugeot, and Fiat are running scared, wondering if they have sufficient scale to survive into the next decade as independent companies. Scale has driven their merger explorations. Even in the chemical industry, where Europe has traditionally been a major world player, concern for scale, in combination with concern for overcapacity, has led to a number of asset swaps among companies (for example, ICI and DuPont for nylon and ICI and BASF for polypropylene).

I Becoming Pan-European in manufacturing takes a certain amount of ruthlessness

At Company B in the electronics and electrical machinery industry, executives now feel that a plant or site employing somewhere between 1,000-2,000 people is preferred. This is a significant departure from its past thinking about scale. The company currently has, on the one hand, very small sites employing only 100-250 people and, on the other, very large ones employing 5,000 or more. Management at Company C, in chemicals, is focusing on employment levels that can be comfortably managed, particularly as regards safety, health and environmental considerations, as well as community relations. 'We need to be big enough to be a force in the community but not large enough to overwhelm'.

Becoming Pan-European takes concerted action. The companies that have adopted strategies of serving many European markets from fewer plants have already begun to bite the bullet. Our research has documented that these companies have been more ruthless than those whose plants serve mainly single countries; their net closings have been relatively more numerous.

Closing plants becomes a very political decision within companies and European multinationals are as political as they come. Thus, anything to make the decision more objective helps, particularly if it calms the passions that can flare when, from amongst several alternatives, one country's plant is targeted for closure. Some companies in Europe are employing some classical mathematical techniques such as linear programming to gain this objectivity. Such techniques can assess how best to allocate the production of particular products to specific plants, given forecasted demands for the countries or other sub-markets within Europe. They can place costs on various plant network scenarios so that appeals to spare a particular plant or two from closing, for example, can be evaluated from an objective, hard-number base of understanding. These models, once developed, can solve scenario after scenario quickly. Thus, companies can easily see the cost advantages that one plant closing (or opening) scenario may have over another.

Effect the Integration of Operations, Marketing and Sales As mentioned earlier, many European firms are organized into 'manufacturing companies' that distribute their products through 'sales companies', usually separate sales companies for each of the major European nations. The manufacturing companies themselves may be struc- tured into separate entities for each major product line. Often, the sales companies dictate to the manufacturing companies the product characteristics and packaging for their markets. This type of organization seems to have spawned more autonomy throughout the European operations of many firms than one finds in the US. Stated in another way, there are frequently many more managing directors (general managers) in European companies than there are in American ones, and they are used to more independence in formulating product, pricing, and sourcing policies than their counterparts in American firms. The result tends to be customization, more small scale runs, and more uncoordinated manufacturing activity in Europe. The plant that acts as a feeder to another plant, or a series of other plants, is a much rarer breed in Europe than in the US; European plants tend to stand more on their own.

Changing this modus operandi means centralizing control and coordination. Marketing and sales strategy making is instead managed from a European head- quarters, while implementation remains with the local and national management. This, in turn, means that production planning and logistics for the various manufacturing facilities need to be coordinated from a European perspective as well. This is a significant re- direction of operations for many companies.

For example, consider Company D, an electro- mechanical product producer. The company had grown through the acquisition of several mainly national companies. As a first step towards Pan-Europeanism, the geographically spread plants dealing with similar product technologies were grouped together and



managed as distinct units. However, the sales organization remained geographically based. This created a good deal of friction, and in a second step, the sales forces were reorganized by product line. This meant that, for the first time, the sales organizations had to cross national boundaries and match up product line by product line with the plants. The reorganization along product lines has worked, and with an unexpected benefit, more direct and complete feedback from the sales organizations to manufacturing. Product development and customizat ion have improved as a consequence.

Pan-European operations do necessitate greater attention to planning and coordination across geographic areas, and this frequently involves corporate or divisional centralization of some operations or functions. A good example of the need for such planning and coordination arises in cigarette manufacture where tax legislation affects production planning decisions across plants in Europe. It makes a difference if taxes are levied on the weight of tobacco input to the process or on the number of cigarettes produced, and when during the course of manufacture and distribution such a levy takes effect.

The tiers of the distribution system and the number of warehouses can be reduced as the plants ship in more truckload quantities and more directly to major customers. Transportation expenses may actually rise for the plant because finished goods need to be shipped over a broader geographic area. However, Pan- European companies are betting that any increase in transportation expense will be offset by significant savings in the manufacturing process itself. The recent agreement on truck transportation within Europe will gradually enable more and more haulers to pick up and deliver within a European country other than the one in which they are based. The expectation is that transportation expenses will actually decline in real terms in the future. Even if this is not the case, the greater uniformity in transportation costs throughout Europe will provide greater flexibility in sourcing and distribution decisions.

Redefining the missions of a company's various plants around Europe can help force some other benefits. Company B, for example, had historically pursued a policy that placed the most important plants, the 'mother plants', in its home country. The roles of new product introduction, process engineering, and the development of new capabilities were placed into these mother plants on purpose. The branch plants in other countries were never trained to be broadly capable and, thus, were never regarded in that way. They, and their managers and engineers, were viewed as second class. Managers and engineers from the mother plants were not encouraged, nor were they eager, to take assign- ments in branch operations. Recently, Company B has changed its tune. A reorganization has put greater emphasis on branch plants and the capabilities that they can master. The old policies are now slowly dying out.

Of course, not all companies are centralizing operations to the same degree. Company E, a diversified food producer, has centralized its quality control, production engineering, and financial control functions to a greater degree than its marketing or production functions. Given differences in tastes between countries, pursuing this more restrained approach to Pan-European manufacturing has its advantages. Ford of Europe, long one company spanning operations in several European countries, notably Germany and the United Kingdom, is another example of a company that is increasingly Pan-European without being totally centralized.

Rationalize Plant Location Decisions In the past, European plant locations have been dominated either by market considerations or by historical accident. For the Pan-European producer, much as for the American one, the plant location decision reflects costs much more than previously. The kinds of costs that can be influenced by location include labor costs, and the costs associated with access to suppliers and to sister plants within the company.

Company F, a specialty chemicals producer, has closed some of its smaller operations and has consolidated their responsibilities into a new plant that was specifically located at a low cost site to serve all of Europe. Not only has the new location lowered costs itself, but the move to the new facility unleashed dramatic new thinking about the plant's design. For the first time, the company successfully harnessed technical innovations that, although 20 years old and well known, had not been exploited under the company's previous, non-Pan European management.

Company G, a machinery manufacturer, deliberately sought a new location for an expansion of its operations. Its home country, although a candidate for the expansion, ceded its claim largely by its insistence on extensive local controls on building and building codes themselves. These acted to delay the speed of construction and thereby increase costs substantially. Company G built the new facility in another European country where the building regulations were much less onerous and where labor availability and affordability (wages plus benefits) were more attractive.

Incentives for location in particular regions exist in most European countries. For example, for years a Berlin location meant significant tax benefits and subsidies. Other incentives exist in places such as the north of England, Scotland, and the north of France, to name three. Judging from what some of the companies inter- viewed volunteered, such incentives do play a role in newer, more Pan-European location choices.

Pan-European customers have influenced their suppliers as those suppliers have located new plants to serve them. Company H, driven by a large and finicky Pan- European customer, has built several new plants to serve this major customer. The Pan-European mentality



of its customer has prodded Company H to adopt suc- cessively more product-specific plants with dramatically improved plant designs that have facilitated teamwork, better quality, and better and more rapid materials handling.

Adopt 'Rigid Flexibility' in Operations Pan-European manufacturers understand, more than other European manufacturers, that flexibility in production is not achieved via numerous plants producing a diverse array of products for single country consump- tion. Flexibility of all types comes from redesigning the way the factory operates. And, such a redesign for flexibility is achieved by combining simplicity with discipline, yielding what we term 'rigid flexibility'.

These two words, used together, sound contradictory, but a paradox of sorts exists. It is this: if the manufacturing requirement is flexibility, then an atmosphere of permissiveness cannot be tolerated. Discipline and simplicity must prevail instead. An analogy lies with the gymnast. The coach breaks down the gymnast's various routines into simple elements. The complexity of the routine comes from combining the many simple elements. And, with the discipline of a strict regimen of training, the gymnast learns how to combine the simple elements effortlessly to develop the flexibility we so much admire. The factory is no different. When complexity and confusion settle in and when 'training rules and routines' are bent or broken, factory performance suffers. The antidotes of simplicity and discipline help to establish the stable, fundamental framework that enables the factory to be flexible.

Consider the consumer packaged goods producers. They have achieved low unit manufacturing costs through the establishment of standard product 'footprints' (e.g. can diameters, bottle heights) that contri- bute to simplicity in factory operations such as filling, packaging, and palletizing (fewer changeovers and greater operating speeds), yet permit great diversity in the look of the container and what gets put into it. Such simplicity has been won through the discipline of design for manufacturabflity where systematic thinking and rules of thumb are rigorously applied to the design cycle.

The need for flexibility in manufacturing comes in various guises: customization of products, the creation of additional product features, quick product development times, short leadtimes from order to delivery, and frequent delivery of small quantities of product. If we examine some now well-known manufacturing initiatives that have been developed to make factories more flexible and agile, we can see that, in each case, best practice combines simplicity with discipline. Table 1 documents some examples of this. These examples help to demonstrate what is meant by 'rigid flexibility'.

What does the adoption of 'rigid flexibility' imply for Europe's manufacturers? In the main, this means increased standardization where possible and attention

to manufacturability, production coordination, problem solving, and experimentation. Although these may be desirable traits, they are not pursued as zealously in Europe as one might think. Table 2, for example, documents the extent of standardization of various types in Western Europe. As the table reveals, standardization is not widespread. Moreover, Pan-European producers are much more standardized in all categories than others. This is evidence that they have exercised the necessary simplicity and discipline to gain more flexibility in their operations than other companies.

Our research shows that those companies implementing a Pan-European strategy have proceeded along the road to standardization -- of all kinds -- at a much swifter rate than the companies whose plants sell mainly to their home markets, and even at a swifter rate than companies whose plants sell a broad product line across a wide geographic area. The Pan-European companies are much more likely to have standardized product formulations or engineering specifications, packaging, product numbering, components/parts numbering, quality assurance standards, and computer systems, such as MRP. This suggests that standardization is not simply a function of how broadly the typical plant ships its output, but that it is also a function of the narrowing of product line responsibilities. As the table demon- strates, only the Pan-European companies have really progressed with standardization.

As an example of how Pan-European companies have adopted 'rigid flexibility', consider the following example. To accommodate the multiplicity of television transmission 'standards' that exist in Europe, Pan- European Company I designed a major electronics module that was standard for all of its television production of a particular size. The module could be easily customized later on the assembly line to meet the specific country requirements desired while keeping the previous assembly steps the same. While some component redundancy existed, this was more than compensated for by not having to reconfigure the assembly line itself every time a different country's specification was required.

Recognize and Overcome Obstacles to Implementation For any number of companies, Pan-European manufacturing makes sense, but as Table 3 shows, a number of obstacles make it difficult, if not impossible, to implement.

The most frequent obstacles that companies have had to overcome have involved personnel related issues. Some are easy to understand, such as managers' reluctance to move to a different country and the problems of coping with cultural differences across European countries.

Others are more subtle. For example, many company reorganizations involving the centralization of some



Table 1 How Simplicity and Discipline Support Different Needs for Flexibility

Need for Flexibility

Customization of products

Supplier Responsiveness • Frequent deliveries of

small quantities

Set-up Time Reduction

Throughput Time Reduction: • Cellular

manufacturing • Flexible

Manufacturing Systems (FMS)

Supply-Demand Management • Material planning and

control systems Just-in-Time Manufacturing

'Right-First Time' • Worker Empowerrnent

Simplicity

Standard footprints, modular designs, automated assembly

Fewer suppliers, lower number of purchasing transactions, less materials handling

Reconfiguration & re-layout of work areas, less wasted motion and effort, re- engineered jigs & fixtures Product or part families

Easy access to and visibility of stocks and flows of material in the supply chain

Clear pull system signals, great visibility on the factory floor and less need for traditional controls, lower levels of inventory Clear task definitions

Discipline

Design for manufacturability, design for assembly

Sharing of forecast and order data with suppliers, continuous improvement feedback loops, suppliers on design teams Following prescribed methods exactly, practice

Even-paced production planning, operator checking of quality, preventive maintenance, cross- training

Data integrity, rigorous updating of bills of material, part numbers, engineering changes, inventory counts, etc. Levelling of production plans, good housekeeping, problem identification and problem solving, experimentation, setup reduction Training and follow-up with personnel affected

Source: R.S. Collins and R.W. Schmenner, 'Achieving Rigid Flexibility: Factory Focus for the 1990s', European Management Journal, Vol. 11, No. 4 (December 1993), pp. 443-47.

aspects of marketing and sales have led to effective 'demotions' for senior country managers who formerly had both production and marketing/sales reporting to them. A number of companies have had to choose between retaining high-performing managers at the country managing director level or pursuing a Pan- European strategy involving their reassignment. Many of these companies, having chosen the latter, have seen some managers resign rather than accept what they perceive to be a loss in power, esteem and status.

Some obstacles are political, pertaining to government regulations or public sector procurement. For example, the former affect pharmaceutical companies in the location of formulation plants. While in the telecom- munications industry the latter effectively denies foreign firms market access in many instances.

The increase in environmental consciousness among manufacturers and stakeholder groups has affected Pan- European manufacturing strategy. In the chemical industry, the significant capital investments necessary

to support safety, health and environmental initiatives tend to further the concentration of disparate process units in a number of large complex sites throughout Europe rather than their dispersion.

Other obstacles are operational. For some companies the incompatibility of computer hardware and software throughout their European operations precludes effective information exchange and thus material flow. Internal benchmarking is compromised because of the incompatibility of cost and performance measurement systems.

The differences in culture, customs and cuisine across Europe pose particular challenges to manufacturers in fast-moving consumer goods. Meeting the discerning requirements of such a heterogeneous group of consumers is not the issue. Rather, it is one of whether such requirements can only be satisfied through a number of plants located in the various markets or a fewer number of plants each dedicated to a subset of these markets.



Table 2 Standardization of Company Products and Operations

Non-Pan-European Firms Pan-European Firms

Item Much more More Not or Less Much more More standard standard standard standard standard

Not or Less standard

Product formulations/ 18% 52% 31% 45% 41% 14% engineering

Packaging 27 37 37 37 47 17 Pricing 21 34 44 37 27 37 Product numbering 17 34 49 44 26 30 Components/parts 16 25 59 46 21 33 numbering Quality assurance 50 27 23 80 20 0 standards Computer systems (such 24 40 26 41 38 21 as MRP)

Note: The question read as follows: 'Have your division's or company's products and operations become more standardized throughout Europe over the past 5 to 10 years? Please indicate how things have changed for the following categories:' There were four different responses possible for each item category: (1) Now much more standardized for Europe; (2) Now somewhat more standardized for Europe; (3) Little changed, not standard; and (4) Less standard now.

Tests show that the differences of the means for all items except pricing are statistically significant at the 5 per cent level.

Table 3 Obstacles to Pan-European Manufacturing Strategies

Reorganization would involve "demotion" of senior executives and a loss of status or esteem

Moving personnel from country to country

Cultural differences among managers that affect attitudes, performance, etc.

Governmental regulations

Problems in harmonizing products for different countries

Union/management relations

Environmental concerns

Incompatible computer-based information systems

Incompatible cost or performance measurement systems

Unchanging, uncompromising tastes or fashions in consumers

Other obstacles cited

Process Non-Process Industries Industries

45% 40%

33 49

38 34

26 29

29 17

19 23

24 6

12 23

10 14

7 3

12 9

Note: The question read as follows: 'As you think about your division or company, have there been any obstacles that you have had to overcome in order to implement a more Pan-European manufacturing strategy? Which of the following have been obstacles for you already or are obstacles that you think you will surely face?'

Entries are the percentage of respondents citing each criterion.



Anyone travelling extensively in Europe can attest to the challenges of product harmonization. Relying on the hotel to provide an electric hairdryer is seen as preferable to carrying one's own equipment along with a bewildering array of transformers, adaptors, plugs etc.

Lessons Learned and Broader Implications Pan-European manufacturing strategies have been pursued by firms in response to market pressures demand- ing less expensive and better products as well as faster product and service responses. Market driven pricing has replaced cost plus pricing. Cost reduction has become a way of life for many European manufacturers shackled with plants that are too many, too small, too complex, and too autonomous.

Some firms have recognized the need to radically modify the European territorial structure of their businesses. They have taken a Pan-European rather than a national perspective in defining markets and how to serve them. This Pan-European perspective has provided the opportunity to assess a portfolio of plants and to review total manufacturing costs rather than pursue a myopic assessment of variable and fixed costs on a plant-by-plant basis.

The portfolio approach allowed these firms to tackle the debilitating problems of overcapacity, duplication, and insufficient scale, to move to product-focused operations, and to realize the potential synergy of merger and acquisitions. Narrowing product line responsibilities has facilitated changes in methods, planning and logistics as well as standardization of products, processes, and procedures. Continuous improvement has given way to fundamental transformations of manufacturing practice. Experience has been concentrated in fewer locations and critical mass established so that more manufacturing muscle has developed.

A Pan-European manufacturing strategy means assessing a portfolio of plants and reviewing total manufacturing costs

It is apparent that some firms have been able to implement Pan-European strategies faster than others. As a Pan-European strategy takes hold, there is a need for the company to assess the balance between centralized task sharing and local autonomy. For example, brand/product management tends to become centralized, although this does not mean that all product/ business management needs to be in one location. Also, the role of VP-Manufacturing shifts from a staff to line function as plants are removed from national management control. Clearly at issue is the power, status, esteem and influence of those executives previously associated with autonomous national entities. Many of

the American and Japanese firms, as relative newcomers to Europe, have not had as long a history of such structures as European firms. As such, the internal barriers and resistance to change are not as ingrained there.

Manufacturing firms operating within the European Union have accumulated a wealth of experience in managing operations in a multi-cultural, multi-lingual environment while coping with the disparate macro- economic performance and domestic political agendas of national governments. Although the EU is not as far along in eliminating the physical, technical, and fiscal barriers to trade as many had hoped or expected, significant progress has been achieved. Furthermore, the EU will undoubtedly increase in size as a number of other Central and Eastern European countries follow Poland's lead in applying for membership.

The EU attests to the reality of the regionalization of business activity and of manufacturing in particular. NAFTA, the Asia Pacific Region, and the possible emer- gence of the South American Free Trade Area (SAFTA) as early as 1995 are further examples of such economic regionalization. As firms reassess their nationally based manufacturing strategies in these regions in the light of pan-regional opportunities, the European experience should not be forgotten. The strategic role of Mexican maquiladoras might benefit from a reassessment in the light of the evolving centers of manufacturing compet- ence in Europe or the role of facilities such as GM's automotive operation in Eisenach, Eastern Germany. For many firms, manufacturing strategy in Brazil has been dictated by the realities of high tariffs on imports, much as was the case in Spain and Portugal prior to their membership of the EU. With Brazil being tipped to become the economic powerhouse of SAFTA, manufacturers there could benefit from an analysis of what has occurred in Spain and Portugal.

For many years the Asia Pacific Region was synonymous with Japan and the four dragons: Korea, Hong Kong, Singapore and Taiwan. Today the list has been ex- panded to include Malaysia, Indonesia, and Thailand, with China, the Philippines, and Vietnam waiting in the wings. With the impressive economic growth rates and burgeoning markets in many of these countries, manufacturing firms are faced with a set of complex choices as to how best to meet both market demand within the region and export markets served from the region. Again, the parallel with the choices that faced American and Japanese manufacturers as they established themselves in Europe is marked.

Within the EU, manufacturing firms are grappling with the challenges of international competitiveness. As regionalization emerges, manufacturing firms operating in NAFTA, the Asia Pacific Region, and SAFTA might well learn from European experience as they craft pan- regional manufacturing strategies.

In doing so they need to consider the following:



Avoid manufacturing myopia By taking a pan-regional rather than national perspective in defining markets and how to serve them, manufacturers can mitigate the problems of overcapacity, duplication and insufficient scale that have beset many of their European based counterparts.

Build product-focused plant networks Pan-regional manufacturing strategy is rooted in product focused operations. Theses facilitate a fundamental transformation in manufacturing practice through the concentration of experience in a few locations.

Build pan-regional organization structures Assess the balance between centralized task sharing and local autonomy. A pan-regional organization is not a confederation of national entities.

Adopt rigid flexibility Examine carefully the type of flexibility the operation should offer the marketplace and then adopt the appropriate simplicity and discipline so that the flexibility desired can be attained.

Standardize systems and procedures The effectiveness of material flow and information exchange within the region is dependent upon the implementation of standardized systems and procedures -- quality, parts management, production control -- as well as more standardized products and packages.

Identify obstacles to implementation Obstacles to implementation are rooted in the aspirations of various external stakeholders, including national governments, international agencies and pressure groups. In Europe, many manufacturing firms have found that at times progress towards the implementation of a pan-regional strategy can be severely hampered by the constraints imposed by such stakeholders.

On the other hand, internal obstacles to such implementation are surprisingly frequent. These are often rooted in local managers' own aspirations. Many country managers, while engaged in local warfare, lose sight of the pan-regional battleground.

A p p e n d i x 2

T h e Research Project This article draws on a study of Western European manufacturers and how they have changed their approach to manufacturing. The study combined interviews of 16 companies in a variety of industries with detailed survey returns from a broad cross-section of 93 manufacturers (67 company divisions and 26 entire companies) that were identified in advance as having factories in more than one Western European country.

These 93 returns cover 1,022 factories in Western Europe

employing 654,371 people. The Appendix Table documents the plants involved by country and the major industries of those plants, according to the Standard Industrial Classification (SIC) codes. Of course, not all of the companies operate in each European country; the table also shows how widespread company involvement is.

The surveys themselves were 5 pages long and dealt with 17 major questions about the division or company's European operations and manufacturing strategies. The response rate was 25 per cent. The 17 categories of questions included the following:

Industry Market leadership in home country and/or Europe Geographic spread of sales for major product line Estimate of manufacturing capability relative to the competition Number of factories operated, their locations within Western Europe, and total employment Major criteria in making plant location decisions Degree to which the following programs have been pursued (MRP II, ISO 9000, TQM, JIT (with suppliers, in own factory), employee involvement) Extent of changes that have occurred in the last 5 to 10 years for: number of plants, plant size, capacity, equipment, time to make product, product development, plant layouts, methods, computer systems, production planning, performance measures, vertical integration, suppliers, sources of supply, warehouses, tiers in distribution, direct shipping, transportation cost Needed competitive attributes for the future Nature of reorganizations at the division/company in last 5 to 10 years Reasons behind any reorganizations Nature of any changes to the responsibilities of plants in Europe Degree of standardization throughout Europe for: product formulations, packaging, pricing, product numbering, component/parts numbering, QA, computer systems Changes, if any, to the locations sought for new plants in Europe Number and location of new plants opened during the last 10 years Number and location of plants closed during the last 10 years; reasons for plant closings Obstacles observed to Pan-European manufacturing strategies

N o t e s 1. This research was supported by Manufacturing 2000, a

research partnership between IMD, Lausanne, Switzerland, and these companies: BaUy, BP Chemicals, DuPont de Nemours, Exxon Chemical International Inc., Heineken, Johnson & Johnson, KNP BT, Nestl~ SA, Nokia Mobile Phones, Omega SA, Siemens AG, Sony Europa GmbH, and Volkswagen Audi AG. This research does not necessarily represent the views of these organizations.

2. Permission to publish kindly granted by IMD, Lausanne.



Appendix Table 1 Companies/Divisions and Plants by Country end by Industry

A. Companies/Divisions Operating in Each Country (of 93 total) and Plants by Country

Country Plants Co./Div. Country Plants Co./Div.

Austria 16 8 Luxembourg 3 2 Belgium 53 30 Netherlands 68 32 Denmark 10 9 Norway 19 8 Finland 41 13 Portugal 23 15 France 157 52 Spain 82 43 Germany 153 46 Sweden 82 26 Greece 11 5 Switzerland 47 21 Ireland 19 11 United Kingdom 165 55 Italy 73 28

Total 1,022

B. Companies/Divisions and Plants Operating in Each Industry

Process Plants Co./Div. Non-Process Plants Co./Div. Industries Industries

Food processing 258 7 Apparel 9 1 Tobacco 22 3 Leather 9 1 Textiles 5 2 Fabricated metals & 43 9

machinery Paper 80 5 Electronics & 114 12

electric equipment Chemicals 209 27 Motor vehicles & 77 8

suppliers Petroleum 32 1 Instruments 14 4 Rubber/Plastics 56 5 Stone/Clay/Glass 5 1 Primary metals 36 3 Miscellaneous* 53 4

Totals 756 58 Totals Employment 252,581 Employment

* Miscellaneous includes can-making, semiconductor fabrication, and photographic supplies.

266 35 401,790



ROBERT COLLINS, IMD, International Institute for Management Development, 23, Chemin de Bellerive, P.O. Box 915, Lausanne CH-IO01 Switzerland

Robert Collins is Professor of Manufacturing Management at liVID Lausanne. His specialist areas are manufacturing strategy, manufacturing

planning and control, organizational development, and management education. He is the author of numerous articles and case studies in these fields, including papers in European Quality, European Management Journal, Business Horizons, as well as Manufacturing 2000 Executive Reports. He regularly addresses international conferences and seminars, and was recipient of an EFMD Case Writing Award in 1992, and ECCH European Case of the Year Awards in 1991 and 1994.

ROGER SCHMENNER, University of Indiana, School of Business, 801 West Michigan Street, Indianopolis, Indiana 46202-5151, USA

Roger Schmenner is Professor of Operations Management at the Indiana University School of Business and Chairman of the Technology Management Department. His research

interests include manufacturing strategy, productivity, and industry and service operations location. He is the author of Production/Operations Management: From the Outside In (Macmillan, 5th edition, 1993), Plant and Service Tours in Operations Management, (Macmillan, 4th edition, 1994), and of Service Operations Management, (Prentice-Hall, 1995). His papers have appeared in the Harvard Business Review, Sloan Management Review, European Management Journal and the Journal of Operations Management, among others.


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Taking manufacturing advantage of Europe's single market