Coloplast Case Study

Executive Summary

Coloplast A/S is a Danish company with Global reach in some 26 countries spanning several continents. The company specializes in developing, manufacturing, and marketing medical devices related to ostomy, continence, wound and breast care as well as skin health. In 2001 the company implemented an off-shoring strategy in neighbouring Tatabanya, Hungary to stay competitive and remain viable in a globalized and ever changing market environment.

During the implementation process Coloplast faced several challenges related to knowledge management and transfer, organizational inertia in the Danish facilities, standardization across the company, and operating production from a global perspective. Coloplast also had to tackle critical issues related to downsizing and retraining as production shifted from Denmark to Hungary.

As the company sought to concretize the offshoring arrangement and further its expansion efforts in a changing European health care environment, Director, Allen Rasmussen, knew that these issues would present a greater challenge to Coloplast in the coming future. To be precise, Coloplast would have to undergo even more major structural, cultural and organizational changes to meet the targeted growth figures.

As Allen Rasmussen, my decision would be to implement changes based on some of the lessons learnt from the relocation of the production to Tatabanya. It was evident from the experiences in Tatabanya that Coloplast needed to focus on the centralization of its decision making and knowledge management infrastructure. Coloplast also needed build a solid information technology infrastructure to help it to become a truly global producer and competitor. Further, I would seek to ensure the standardization of many of its processes which would bring about increased efficiencies and cost savings. These efforts would also produce some amount of consolidation and asset reduction in Denmark.

My long term strategy would be to continue with the offshoring effort and further the expansion of production of mature products in Hungary. I would also add some amount of research and development (R&D) capabilities. Some key activities that would remain in Denmark due to expertise, political fallout, intellectual property creation and retention, etc would be R&D and a very small portion of initial production phase.

Background and Issues Identification

Coloplast is a Danish company producing health care products with subsidiaries in 26 countries around the globe. In 2004 it had over 6000 employees and was earning over 6 Bil. DKK in revenue. Approximately 97% of its sales were outside of Denmark with some 81% within the European market. Much of its production facilities, prior to 2001 when it commenced production operations in Hungary, were located within Denmark. The shift to offshoring some of its production operations to Tatabanya, Hungary was a manufacturing strategy to increasingly locate scale production in low-cost regions.

Even though Coloplast was producing outside of Denmark over 60% of its costs was direct spend in Denmark. Much of this was related to labour and taxes. Labor and taxation in Hungary in comparison was much less even though the level of expertise and skill was almost, if not higher, in some respects than in Denmark.

Since the offshoring process was a new experience for Coloplast operations were well documented for future reference and repetition in other planned locations. The documenting of this process actually revealed some glaring inefficiencies and inadequacies of the company, much of it related to the following:

* Lack of proper knowledge management infrastructure which leads to duplication of efforts and the wasting of resources

* Lack of clearly defined processes and procedures that could be replicated across multiple production sites in multiples scenarios.

* Lack of clearly defined standards which could improve efficiencies and add to faster easier replication.

* A decentralized business model.

* A unionized environment of highly paid workers.

* A poor technology infrastructure.

Environmental and Root Cause Analysis

Coloplast had few competitors and was a global leader in its product lines. It was a pioneer in its industry and had a head start which enabled it to create and solidify its position as a supplier of its products. Further, the company was strategically located in a technologically advanced production market environment with capable and qualified expertise. As time progressed and the company grew and matured globalization became a critical issue. Factors like labour and material costs, the speed of logistics, product development and time to market, market retention and growth required serious thought and strategic vision. In order for Coloplast to maintain its competitive advantage and viability the company would have to change with the times.

In a globalized environment the concepts of outsourcing and offshoring has significant meaning. For some companies this is a new lease on life, a better more efficient and economical way of doing business. It is a chance to tap into new markets, technologies, share expertise, secure raw materials, etc. If companies do not pay attention to these opportunities they run the risk of going out of business as the competitor may be able to produce faster, cheaper, and have newer products on a global scale. Hence, Coloplast's choice and strategy to offshore production in low-cost regions was important.

This was not easy as the company had not done this before. The choice to offshore instead of outsource enabled them to retain core competencies and full control of the quality and cost of production. Intellectual property rights retention was also a critical issue.

By choosing to offshore Coloplast had to find a strategically positioned, stable (political, economical, etc.) environment with a similarly skilled labour force that was cheaper. Hungary provided just the right environment. It was fairly close in proximity and almost central in the European market where Coloplast sold most of its products, culturally closer as opposed to Asia, amongst other strong points.

But in moving to offshore Coloplast discovered that all was not well within its house. While the step and effort was a success in many ways it highlighted deficiencies within the company. In order to overcome these hurdles Coloplast would have to factor in the changing economic climate, new country specific