The strategic significance of production

Written by JP AARHUS BUSINESS Ib Asmussen.
Photo Gregers Tycho
August 2011

Is Denmark losing too much of its production, and not least its knowledge, by having things made in China and India?

Denmark’s falling production is a giant problem for society. As globalisation progresses, more and more Danish jobs are moving to other countries where wages are low – out to the new emerging markets such as India, China and Brazil. But apart from the disappearing jobs, this development also means that the amount of necessary knowledge exchanged between production and the innovative forces in management is now less than it used to be.

“It’s a giant problem of which industry is acutely aware, and there is no definitive answer to the challenge. There are lots of well-educated employees in Denmark on hourly wages who are used to thinking for themselves and raising questions about all possible problems, and this provides useful feedback from production,” notes Brita Lauridsen, manager of the consultancy Strategi & Mennesker –Strategy & People – in Silkeborg, who advises international Danish companies on optimal processes.
“There aren’t many other countries with comparable manpower in production. This gives Denmark a high degree of development. But the people whose job is to develop the products are lacking the expert feedback from production when it is moved to a place where the norm is top-down management, and where the employees only do what they’re told to. When this happens, the exchange of experience between operations and management stops,” says Ms Lauridsen.

The right balance

The big companies which have outsourced prototype and zero-series production thus do not receive valuable feedback from the production environment which, on the whole, could improve quality and reduce manufacturing costs. Prototypes, documented in detail, are made for a new product. The manufacturer then commences mass production of the product, and it is then a difficult task to extract a profit from the product because there are naturally two opposing financial interests between the two companies.

In the medium term, those companies which have outsourced prototype, zero-series and mass production often find that they have less control over the value chain because the key competences which were available during the outsourcing disappear from the company. Even those companies which were conscious of this circumstance will, without their own production, have difficulty maintaining the right level of expertise.

“As with so much else, for most companies it’s a case of finding the right balance between the degree of outsourcing and the degree of own production, in technical jargon also called “make some”. Many companies have bet everything on outsourcing. Some have already found to their cost that this strategy was too radical – and some will certainly come to the same conclusion in the future,” in Brita Lauridsen’s judgment.

Can they keep it under control?

“Emerging markets will grow – also in the future. The interesting point is whether the Chinese and the Indians will succeed in controlling their economies in a time when every single one of their citizens has an ambition to increase their standard of living. Yes, even the enormous rural populations will naturally want their piece of the cake. I will be really interested to see whether they can keep things under control,” says Brita Lauridsen.

“Developments are moving so quickly now that we must begin to realise that we may not be able to move at the same pace. And yes, we must start to see ourselves with some new values which are not so material. In fact we can learn something from the cultures in the emerging markets.”

The manager, Strategy & People, emphasises that each and every one of us must take responsibility for our own lives, but also for the whole of which we are but a part.
“It’s no good that some people wear out while others become unemployed. This happens nationally and internationally. Perhaps we can find a middle way, and be satisfied at some time in the future with a little less,” Ms Lauridsen says.

“In any event, the individual person can’t resolve this problem. It’s a community task.”

Where should the cut be made when a decision is made to move production to the low cost areas? Should product development, process technology and prototype production go too, or should they be kept at home in Denmark? This is now the big question in Danish industry. Brita Lauridsen, herself a manager, does not have a definitive answer to this question, but she is closely monitoring developments.