The experts' advice

As part of a cost structure revamp, the company should re-engineer the way they convert future product designs to manufacturing

LIAM MELLOR is facing the classic Chinese dilemma. In facing the crisis can an opportunity be exploited? Mellor's consideration of alternatives to be presented to the workers and the Austrian decision-makers need to be informed by how the Irish operation got into this position, and what realistic options exist for both the Irish operation and for Moscon as a corporation. The opportunity for the Irish operation is that Moscon is seeking to invest €300 million in a plant to produce more, yet at a price that is still uncompetitive with their Chinese competitors. Can Mellor and the Irish operation deliver a price that is competitive in the market for the future?

The first thing Mellor needs to do is disentangle his emotional needs and the requirements of his role. Naturally, his emotions run from national pride to personal pride. The Austrians are "baulking" at the idea of investing €20 million in the Irish plant while potentially, (though unstated) salivating over the Wienerschnitzel in investing €300 million in China. Thus, the choice for them is where to invest €300 million.

Mellor needs to convince the Austrian decision-makers that underinvestment has been a critical ingredient in the current crisis. A forensic, comparative analysis of the relative competitive positions, cost positions and productivity positions of the Moscon Irish plant with its AcuGrand competitor needs to be completed. This internal cost analysis needs to be complemented with an assessment of buyer needs and buyer willingness-to-pay for those needs. The opportunity needs to be framed not by incremental improvement, but by a radical redefinition of the cost-value proposition.

This analysis needs to be shared with the workers in the plant. Their livelihoods are on the line, their future is at stake, but they also have a stake in the future and their choices and actions will influence that stake.

Mellor would need to point out to Moscon management that investing in a country where they have little experience has a different risk profile to deepening investment in a country where they have experience and have been successful. Naturally, assistance from the State agencies in supporting the argument to deepen investment and in the provision of other supports is required. - Prof Pat Gibbons

A NUMBER of factors seem to have contributed to Moscon's misfortunes, and some key diagnostic issues are relevant. Management shortcomings in recognising how uncompetitive the business costs had become; lack of accountability and complacency in the management controls; and possibly lack of effective corrective action were all factors. Management failed to understand the market and also underestimated their competitors.

Productivity measures were not adequately focused as part of the company culture. There seems to have been a distinct lack of vision in investment in upgrading the quality of the manufacturing capacity, or any innovation in product design. The question is: are Moscon's problems a market or marketing issue?

Cost restructuring would be a major step towards restoring how the company can increase its profitability. They should focus on labour costs, which could be significantly reduced. By restructuring basic product costs, including wastage, onsite costs could be reduced by 40 per cent. In addition, more focused procurement and effective buying tactics would yield substantial gains. Areas of particular attention would be excessive management costs.

Creating a more productive capacity by implementing a whole range of changes in work practices, could then be implemented.

As part of a cost structure revamp, the company should re-engineer the way they convert future product designs to manufacturing. Part of that process would be to: outsource components to sub-assembly vendors; aggressively control inventory and raw material costs; look at substitution of alternative components; seek Far East partners.

Sourcing supplies of competitively priced raw material should be high on a priority listing. Identifying structures through auctions and partner programmes to source competitive pricing of basic commodities would be central to seeking major cost reductions of the order of 12 to 20 per cent for bulk purchases.

Medium to long-term thinking is to effect a JV arrangement and an MBO of the company. Key market players both at channel partners level or distribution, and potentially a major raw material vendor could look at supporting an MBO-type effort. Specifically with a stronger management team in place, there are a variety of funding options from fresh equity, to a blend of soft loans and attractive payment options to fund growth directly out of operations. - John Flaherty

THE MBO option would be the most attractive option to local management of Moscon and the employees. Investing in new production technology would increase productivity levels and reduce overall production costs. Investment in advanced technology might reduce the level of labour content in production, and thus reduce the labour cost advantage of the Chinese competitor. Such an investment would require generous support from government agencies. Mellor needs to significantly increase his customer base to recover the additional investment in new technology. Crucially, he would have to demonstrate that he could retain existing customers and attract additional customers. However, the MBO arrangement is fraught with risks.

Even if additional investment in technology increased productivity, his Chinese competitor would still enjoy a major advantage in labour costs. In addition, Mellor is heavily dependent on the construction sector, and is thus exposed to downturns in demand in this sector. Re-designing existing products and targeting new markets would bring its own set of challenges in the form of recruiting additional design resource and competitor reactions in new markets.

The outsourcing option offers a number of advantages. The most obvious one is that of lower labour costs in a foreign location such as China. Were they to source component manufacture directly from foreign suppliers, investment in capital equipment and technology would be reduced, achieving greater flexibility by converting some of his fixed costs into variable costs.

Through outsourcing production, Mellor would be in a better position to focus resources in marketing and design, allowing him to further strengthen the Moscon brand and design new products. However, there are considerable risks in the form of managing language, cultural and geographical distance barriers.

Cornering the market in the older product portfolio might be an attractive option in the short-term. However, over the long-term the lack of investment in production and new product design would mean limited growth for the company and inevitable decline.

Clearly, outsourcing production would be the least attractive for employees, leading to redundancies for many employees in production part of the company. Mellor would have to assess both the redundancy costs and the potential for industrial action arising from this action. Some staff would be retained in production activities such as final assembly and managing the foreign operation. Additional opportunities may arise in marketing, global sourcing, and design as the company seeks to strengthen its capabilities in these areas.

Finally, focusing on maintaining its position in older products might secure employment in the short-term, but lead to a contracting workforce in the long-term. - Prof Ronan McIvor