CASE: Kodak Business Imaging Systems Divisions By Problem How does a multinational corporation choose between various manufacturing sites for its products? Kodak’s business Imaging Systems Division designed, manufactured, marketed and sold microfilm readers and printers. More than 50% of reader/printer businesses were outside the U. S. Kodak’s readers and printers were manufactured in two plants; Rochester, NY and Manus, Brazil. The Rochester plant served the world market except Brazil.
The Brazil plant served only the Brazilian Market. An underlying problem that forced Kodak to evaluate the location of its manufacturing sites is increasing pressure from foreign competition. Kodak was losing market share to their primary competitors; European and Japanese companies. Customers were beginning to shift based on Low price and better value. Multinational corporations have to be prepared to deal with both local and foreign competitors. It is hence essential to the company to establish a competitive advantage.
In order to be able to compete companies have to address a number of issues including various costs, management, research etc. Kodak’s Business Imaging Systems Division needed to also consider whether manufacturing only, development only, or both was appropriate in each country of operation [ (Kodak Business Imaging Systems Divison, 1992) ]. As a result of the ongoing process of globalization, companies have to include the option of selecting an international location in their strategies [ (Harm-Jan Steenhuis, 2004) ].
Kodak selected a high level manufacturing executive to handle the responsibility of examining plant location aspects of manufacturing strategy [ (Kodak Business Imaging Systems Divison, 1992) ] The Business Imaging Systems Division (BISD) of Kodak identified the plant location issue as being central to their competitive strategy. Keith and Andy as part of their analysis had to come with a model that would be useful to Kodak and other companies facing a product manufacturing sourcing decision. Theory Theory selected were those dealing with location decisions for internationally operating companies.
Porter’s distinction between configuration and co-ordination is essential to discussing location. According to Porter, configuration indicates the location of facilities and the inter-facility allocation of resources whereas co-ordination refers to the question of how to link or integrate the production and distribution facilities in order to achieve the firm’s strategic perspective [ (Bert Meijboom, 1997) ] Two key variables identified are 1) the primary motive for establishing the factory and 2) the extent of technical activities at the site.
The first variable addresses access to low cost input factors, use of local technological resources and proximity to the market. The second deals with aspects such as process engineering and improvement, product customization, after sales service, decision making on procurement and distribution and ultimately, product development. [ (Bert Meijboom, 1997) ] Configuration and Co-ordination aspects can be integrated as demonstrated below; Mapping International Factory Networks, “Source”“Offshore”| “Lead”“Outpost”| “Contributor”“Server”| High
Level of technical Activities Low Access to low Use of local technologicalProximity to Market Cost input factors resources [ (Ferdows, 1989) ] Ferdow in the above model identifies six types’ plantsoffshore, source, server, contributor, outpost, and lead plant. Plants abroad start as off-shore and source. Ferdow describes Lead plants as possible in theory only. The vertical axis shows the levels at which technological activities are performed at the plant; otherwise level of competence at a plant.
The horizontal axis shows the 3 drivers of the decisions namely, low cost of input factors, technological resources and Proximity to market. Problem Causes Kodak’s main problem was caused by Increasing pressure from foreign competition which was eating away at their market share and highly priced products. BISD was finding it difficult to compete with competitors whose products were priced near Kodak’s Unit Manufacturing Cost. Kodak’s Configuration: Two plants, one in Rochester, NY and a second in Manaus Brazil.
Rochester plant serves the world market through distribution centers located in Rochester, Stuttgart and Singapore. The Brazilian plant serves the local market only. [ (Kodak Business Imaging Systems Divison, 1992) ] Facts Previous location decisions had been based on models which applied subjecting weighting to political risk, labor availability, union activity and infrastructure. The model used in the case computed the ROI for the various locations being analyzed over a ten year period. The various locations being considered all had different advantages.
For Instance, Table 3 shows the differences in tax rates in the locations that were being considered. In this category, Ireland was chosen both for its access to the EEC and its special tax rates for manufacturing. Managers had a preference for Taiwan based upon the fact that they already had factory space and the technical graduates that would be available for labor. Variable 1: Primary Motive for establishing the factory. Low cost input factors; (Exhibit 7) Singapore and Taiwan had the lowest material costs. Mexico had the cheapest labor.
In summary after taxes Mexico had the lowest cost of input factors. According to Exhibit 11 Mexico had the highest ROI for both products in consideration. (Capture1 and capture 2). Local Technical Resources; Taiwan produced the second largest number of technical graduates. Proximity to market; Of the six locations being considered, Rochester and Singapore would have the closest proximity to the market as Kodak already had distribution centers in these areas. Variable 2; Extent of technical activities at the site Quality control, Kodak had many supplier quality problems.
Considerable local management time was spent communicating with suppliers and it took 15% of the time of a bilingual Kodak manager based in Rochester (including regular visits to the plant) to oversee the communication with the suppliers. [ (Kodak Business Imaging Systems Divison, 1992) ] Assumptions Low cost Input factors; the location with the lowest production cost, and lowest taxes would have the lowest cost input factors. Locations in areas that are in developing nations would have lower productions costs compared to those in developed countries. E. g. roducing in Thailand would be cheaper than In the U. S. Local Technical Resources; locations in developed countries have more and better technical resources compared to locations in developing or less developed countries. Proximity to Market; Kodak’s consumers are mostly in developed countries and less in developing or third world countries. Kodak is likely to have less competition in developing countries as opposed to developed countries where most competitors would be located. Partial Solutions Kodak would have to produce a low –cost high quality product in order to have a competitive advantage.
The low cost products could be achieved by reducing over head costs and all other variables contributing to it. High quality products would mean investing some more into R&D. One of the options provided by Keith and Andy in the case is establishing a high-profile project to redesign a low cost version of a current product, capitalizing on new technologies and design for manufacturing. Final Solutions In order to solve the problem of finding the best manufacturing site, Kodak would have to find the key factors in configuration and co-ordination and link the two.
According to Meijboom and Vos configuration and co-ordination are seldom entirely integrated. However a high level of integration can be proposed by linking representatives from each branch [ (Bert Meijboom, 1997) ]. According to Ferdow’s model the second variable i. e. level of technical activity at a site can be linked with all three of the first variable’s factors( low cost of input factors, local technological resources and proximity to market) or to any one of these factors.
Kodak needs to maintain high quality technologically competitive products hence low level of technological activity wouldn’t be a good option. Kodak would have to find a combination that retains a high level of technical activity and choose one of the three factors that are most beneficial. Conclusion 1; High level of technical activity and low cost of input factors. Kodak would have a hard time combining these two factors as Rochester; their high level of technical activity site is not their lowest cost of input factors.
Conclusion 2; High level of technical activity and local technological resources. With this link of factors, Taiwan would be a good choice based on the fact that it produces the second largest number of technology graduates. Conclusion 3; Kodak could choose between setting up a contributor or a server plant. For this to be possible, information is needed on the distribution of Kodak’s market share around the world. Conclusion4; More information is needed in relation to technological resources and proximity to markets to be able to select the best link between the variables.
Information as stated in conlcusion3 and more data in relation to technological resource. Works Cited Bert Meijboom, B. V. (1997). International Manufacturing and Location Decisions:Balancing configuration and co-ordination aspects. International Journal of Operations & Production Management , 790-805. Ferdows, K. (1989). Managing International. New York. Harm-Jan Steenhuis, E. J. (2004). Assesing Manufacturing Location. Production Planning and Control , 787. Kodak Business Imaging Systems Divison, 2-2 (September 29, 1992).