Coloplast a/S – Organizational Challenges in Offshoring
COLOPLAST A/S – ORGANIZATIONAL CHALLENGES IN OFFSHORING Coloplast one of today’s leading suppliers for medical devices and associated services, was established in 1957 in Denmark. The company operates in 5 business areas: ostomy, urology (continence care), wound care, skin health and “Amoena”, for external breast forms. In 2004, 92. 5% of the total group profit derived from the chronic care divisions ostomy and continence care, which have very stable product lines.
However, as a part of the company’s 2008 strategy consideration revenues were supposed to be ensued by a total of 20% of products established within the past 4 years, dating no further back than 2004. Coloplast is one of the companies that were born globally. In the year of its foundation already every second ostomy bad was being exported, by 2005 97% of its revenue was generated outside of Denmark. Until 2001, the company had six major production facilities within Denmark.
In 1999, the management level, for the first time, took a closer look at the idea of offshoring its production to a low-cost location. During the following thorough evaluation period the organization carried out extensive feasibility studies and interview Danish companies, which had already offshored to one of the locations in question. The evaluation committee undertook field trips to Poland, Ireland, Czech Republic and Hungary. Eventually, it had been decided to offshore to Hungary.
Coloplast’s managers where aware of the language barrier on the Hungarian side as well as the social impact problems due to the redeployment of Danish employees, hence they took precautions to avoid work stoppages; they introduced an open and honest communication policy. The substantial one-off costs could be minimized by transfer or reassignment of employees in combination with the usage of voluntary attrition and early retirement. However, the offshoring process uncovered and amplified the weaknesses of the decentralized organization.
The management realized in order to effectively transfer the knowledge to Hungary they had to introduce standardization into their production process. The company’s internal organization had to be changed very fundamentally. Offshoring to Hungary was a great success and the company gained considerable knowledge. Estimates forecasted an annual growth rate of 10% leading to a doubled production in 2010, which would require 50% more staff and space. Despite the fact that the Hungary project went very ell, management acknowledge that they had missed out on a few great opportunities concerning for example local sourcing, because the offshoring organization had consumed most of the managerial capacities. The main question for Rasmussen was now: “Should the internal organizational issues be tackled fist and the offshoring to China initiated later, or is the knowledge they have gained and the guideline they have derived from the last offshoring project enough to proceed immediately without the risk of overseeing important issues again?