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Global Manufacturing Management: Extending your worldwide reach

If you’re thinking about setting up a plant in a foreign country, take it a step at a time and look for a partner that shares your goals.

Whether you’re a small, medium or large food and beverage manufacturer, taking the plunge and opening a new plant in a foreign country is a huge decision, often fraught with risks you may have never envisioned. But there are alternatives, and finding the one that makes sense for your operation can help propel your products into the global marketplace.

Co-manufacturing and co-packing get your foot in the door. Joint ventures (JVs) and partnerships with foreign companies combine manufacturing expertise with knowledge of local markets, customs, regulations and laws. Buying an existing manufacturing plant is an option, as it already comes with equipment and a workforce. Building a greenfield plant works if your brand has worldwide recognition, and you have experienced senior management that already understands the process in implementing new plants abroad.

Large companies know joint ventures with domestic and foreign companies extend product reach and markets. For example, PepsiCo Americas Beverages (PAB) already has a bevy of well-known beverage products and, through joint ventures with Unilever and Starbucks, has extended its brands to include ready-to-drink teas and coffees. Familiar names include Lipton Iced Tea, Pure Leaf and Brisk, Tazo Iced Tea, Starbucks Frappuccino, Starbucks Iced Coffee, Seattle’s Best Iced Lattes and Starbucks Refreshers. In 2012, PepsiCo announced retail sales for Starbucks ready-to-drink beverages and Lipton Brisk grew to more than an estimated $1 billion.

 

Extend foreign markets

Want to extend your product line? Why not buy a foreign company? In 1990, PepsiCo purchased Gamesa, a highly successful maker of snack foods and cereals. Gamesa, located in Monterrey, Mexico, has nine production facilities and exports to more than 16 countries.

In 2003, Nestlé and New Zealand dairy cooperative Fonterra, created a JV named Dairy Partners Americas (DPA), which has been involved in extending dairy products markets in Brazil. DPA also recently opened a new dairy distribution center in Araras, Brazil. Located about 93 miles from São Paulo, the 50,000-sq.-ft. facility was built on the same site as DPA’s plant, which makes a variety of chilled dairy products. Cooled tunnels in the new facility connect existing plant production lines to the distribution center.

“Brazil is an important market for Fonterra,” says CEO Theo Spierings. “We continue to invest significantly in the region through our partnership with Nestlé and by developing selected milk pools. The new center enables us to lower distribution costs and move product quickly across the country. And it is leading the way in sustainability by using efficient systems, reducing gas emissions and waste and increasing recycling and the safety of our people.”

 

Penetrating the Chinese market

To break the ice in a foreign market such as China, you can buy or work with a company that already distributes products there, or partner with a Chinese company that produces food and beverage products within the Chinese marketplace. In August 2013, Campbell Soup Company completed the purchase of private equity firm Kelsen Group A/S from Maj Invest, as well as several other investors. Based in Nørre Snede, Denmark, Kelsen produces baked snacks that are sold in 85 countries around the world and has established distribution networks in Asia, South America, the Middle East, and Africa in addition to the US. Kelsen is a market leader in the assortment segment of the sweet biscuits category in China and Hong Kong, where growth is outpacing the $60 billion global market.

Kelsen has been exporting premium Danish butter cookies to China for more than 20 years, and retailers and consumers in major cities have a strong awareness of its Kjeldsens brand. Chinese sales of the cookies have exceeded a compound rate of over 28 percent in the last three years; aggregate net sales have grown at a compound double-digit rate since 2009.

“We are delighted to welcome the Kelsen team to Campbell and to add Kelsen’s distinctive brands to Campbell’s outstanding portfolio of baked snacks, including our Pepperidge Farm cookies and crackers in North America and Arnott’s biscuits in Australia,” says Denise Morrison, Campbell’s president and CEO. Campbell will operate Kelsen as a standalone business, reporting to Luca Mignini, president, Campbell International.

White Wave Foods Company has entered into a JV agreement with China Mengniu Dairy Company Ltd., whereby the JV intends to manufacture, market and sell a range of nutritious products in China. The JV has also executed an agreement to purchase Yashili Zhengzhou, a subsidiary of Yashili Holdings Ltd. Zhengzhou’s primary asset is a production facility currently under construction in China where the JV intends to manufacture its products. Under the terms of the agreement, White Wave will own a 49 percent stake in the JV, while Mengniu will own 51 percent.

 

How to start the process

Four tips for food processing site selection in China

Plan for at least a three- to six-month process to identify, analyze and secure a site. The infrastructure, business regulations and government processes are vastly different from those in the US, so allow ample time and human capital to conduct due diligence. And keep the following four tips in mind as you explore different site options:

1. Property ownership: In China, it is very difficult for a company to own property. Instead, it is usually leased from the government. Lease terms are often for extended periods of time, up to 100 years.

2. Brokers and site selection firms: Brokers and site selection firms are typically state-owned enterprise (SOE) firms. To find experienced, independent firms, use your existing resources in the US or reach out to American expats in China.

3. Supply chain analysis: As part of the site selection process, conduct a holistic supply chain analysis. Where is your raw product coming from, and where is your end-user? Map out your transportation and distribution plan. Each province has different tax laws, so if you’ll be operating across province boundaries, you need to understand the tax implications.

4. Infrastructure: Realize that the infrastructure—from roads to utilities to communications systems—is constantly evolving and often not what you are accustomed to in the US. Investigate the road system within your supply and distribution chains to ensure you’ll have adequate transportation access. Also, be certain the site you select can support your utility and communications requirements.

Source: Derek Bickerton, Stellar. For the complete white paper from which this is derived, visit www.stellar.net/media/35160/food_processing_in_china.pdf.

When, where and how should you extend your reach to foreign markets? Good advice for small to medium-sized processors comes from a consultant who helps companies deploy manufacturing and other corporate functions around the world. “Think hard about why you’re considering an overseas location in the first place,” says Josh Timberlake, senior manager, Deloitte Consulting LLP. If the reason is market expansion and/or getting closer to customers you’re currently serving or projecting to serve in a new region of the world, locating a production facility in that region is the right choice. If, however, it’s solely to find a cheaper place to manufacture products and then export them to the US or other regions of the world, this may not be a workable concept, according to Timberlake.

“Every company I’ve ever worked with—no matter how big or small—way underestimates how important the channel is,” says Kevin Prouty, Aberdeen senior vice president of research. “You need to own the channel to get to the customer. That’s where the JV becomes very important.” Prouty has seen processors reverse the thinking all too often—putting the cart before the horse. They start out researching the manufacturing investment before figuring out how the local distribution channel works. It’s a little like being all dressed up with no place to go.

“There are initially some big-picture issues food processors should consider before setting up a new plant in another country,” says Jason Ramey, national managing partner of international client services, Grant Thornton LLP. The political climate, regulatory requirements, currency issues, food security and an understanding of the level of corruption are all important to start with, especially in high-growth, emerging markets. After you address these factors, it is important to map out a comprehensive plan and formulate a global strategy to identify and assess the opportunities within the country and how to optimize the global operations, according to Ramey. 

Sometimes, companies are “dragged kicking and screaming into the global economy because their markets are moving over there,” says Prouty. Often, this happens when key customers or suppliers decide either to locate outside the US entirely or broaden their scope into world markets such as Russia, India and China.

According to Sam Casey, formerly of Heinz and now with POWER Engineers, a perfect example is Heinz, which had been in China for 25 years when it started joint ventures in three Chinese plants making products for the Chinese market. When popular fast food restaurants such as Burger King, KFC and McDonalds began operations in China and needed ketchup, Heinz could make it for them in China and distribute it through existing channels, saving the fast food chains from having to import ketchup from the US.

However, the risks of food safety and quality always loom on the horizon, no matter what approach you take to extend your global product reach, according to Dexter Manning, Grant Thornton food and beverage practice leader. “Most small or medium-sized food processors find it cost prohibitive to begin their overseas expansion by establishing their own manufacturing operations complete with quality control systems and a supply chain.” Instead, many companies find that contract manufacturing, licensing or franchising in the early stages of market entry is a preferable alternative.

The days of building a new plant have given way to taking different approaches to establish a presence in a foreign market, according to Robert Miller, ConAgra vice president of engineering supply chain. For example, you can test the market through exporting your US-made products, and if they take off, find a contract manufacturer. If the products prove successful enough, your next step might be to purchase the contract manufacturer, which allows you to acquire an existing supply chain and have a manufacturing presence in place.

“Licensing is a good alternative where it is difficult to deal directly with the contract manufacturer, or the market is too small to justify a greater investment of resources,” says Manning. “Contract manufacturing represents a greater investment but still much less than owning and operating your own manufacturing facility. Contract manufacturing also allows for an easier and less expensive exit if the new market does not perform as well as expected.”

In any case, there is no substitute for proper planning and diligence before entering a new market, adds Manning. For instance, you should look for a partner that shares your basic beliefs and business strategies. Prior to finalizing any contractual agreements, validate these synergies by making multiple visits to the plants where your product will be made. Because product safety and quality are so important to food brands, every agreement—whether it’s licensing or contract manufacturing—should include aspects of quality control, recall policies and responsibilities, contract duration, territory and performance measurement.

“The benefits of licensing or contract manufacturing include reduced costs since you do not have to pay for production facilities and equipment. Plus, you get an established supply chain for raw materials and a trained labor force, so you can focus on core competencies,” adds Manning.

Some of the risks associated with licensing or contract manufacturing include a lack of control over the licensee or contract manufacturer; lower quality standards or adherence to quality processes; the loss of intellectual property such as manufacturing processes or recipes; a lack of capacity; and cultural issues. Consequently, before making any decision about expanding to a new market, you should also investigate alternatives such as direct exporting, using international agents or distributors, strategic alliances or simply establishing an online presence via the Internet, says Manning.

 

Think globally, but act locally

Worldwide, Nestlé has 468 factories and more than 339,000 employees, according to Philippe Aeschlimann, corporate spokesperson. “There is a constant exchange of know-how and best practices among factory managers, manufacturing specialists and the strategic business units.”

Despite this worldwide penetration, each business acts locally. “Around the world, our products are adapted to local customs and needs, and manufactured in compliance with local laws and regulations,” explains Aeschlimann. “Manufacturing encompasses all the processes necessary to transform perishable raw materials into safe, shelf-stable, value-added food products for consumers. We constantly seek to improve our manufacturing process as well as our environmental impacts by using efficient technologies and applying best practices.”

Adapting long-standing American products to local tastes can extend your success around the world. “Based on my previous experience [at another company], we had a gold standard on a certain product, and that’s all you made across the entire globe,” remembers Miller. “It had varying levels of success in different countries because we weren’t willing to modify the product flavor profile.” Today, many companies recognize the necessity of fine-tuning food products to local cultures. Acting locally also means understanding the customs and language of the locals, and recognizing that supply chains and production issues may be totally different than those in the US. Miller suggests processors look at schedules and strategies through a different lens—one that takes into account how different cultures and countries work—or they may find themselves with misaligned expectations and outcomes.

Deloitte’s Timberlake suggests that when setting up a new plant in a foreign location, you send a handful of people to get it up and running. Sometimes, it is a good idea to include in this group one or more expats who already understand the local customs and language. A local HR manager can help with hiring local employees.

In the early implementation stages, Casey recommends having staff in the new location who are fluent in the local language. If this isn’t possible, you should find someone in the US—preferably an engineer—who is fluent in the local language to help with the implementation.

Because of the nuances of different languages, Casey notes that in China, translating technical terms and requirements can be difficult. Communicating workmanship expectations is another challenge. Before selecting a general contractor, visit other sites where the company has performed work to evaluate its level of workmanship. Onsite, using mockups or actual photos of acceptable and non-acceptable workmanship can be beneficial.

“Common words and concepts may mean one thing to you and something completely different to [Chinese contractors],” says Derek Bickerton, operations manager, China for Stellar, in a white paper he authored for those considering China operations. To ensure you have the same understanding, Bickerton advises using pictures, detailed drawings, schematics and physical mockup environments showing details such as wall penetrations, floor junctures, lighting fixtures, sanitary standoffs, welding in stainless ductwork and more.

Consistency in the product, process and supply chain

According to Timberlake, one way to achieve consistent product quality and safety is to use the same production equipment and software when you locate in a new market. If the new location has a less capital-intensive labor market, make some adjustments to account for additional labor.

On the controls side of the plant, Miller says the good news is you can find either Rockwell or Siemens representatives in most countries, but there’s still the issue of truly understanding the experience level of the local technical staff. Miller says that while his company has mostly worked with an American controls supplier, it has to be open-minded when it sets up shop in another country. Thus, you should always be ready to add to your preferred suppliers’ list.

Whether it’s equipment or ingredients, processors that aren’t flexible in choosing suppliers can get into trouble, warns Aberdeen’s Prouty. “They bring their fairly stringent quality process over from the US or Europe, but they fail to adequately prepare for quality [issues] in the supply chain. Sometimes, it may be two or three levels deep.” While China has matured industrially over the last 20 years, it’s still difficult finding the right suppliers, getting adequate stocks and finding backup suppliers—especially when it comes to perishable supplies.

Not only are quality ingredients sometimes an issue, so is  packaging. When Heinz sourced glass bottles and plastic caps from a local Chinese supplier for soya sauce, the materials sent to support the test runs during FAT (factory acceptance test) trials were very inconsistent, according to Casey. This caused delays for shipment, and the problems continued through commissioning and startup.

To create a new ketchup line for PET bottles, the processor planned to ship the preforms and the caps from the US, until a local supplier could be validated for quality.

Oftentimes, it’s a matter of quality versus cost equation. Too often, Chinese procurement people are so focused on cost that quality can suffer, having an impact on line speeds and efficiencies. Instead, increased operational costs need to be tied back to the stated procurement savings and adjusted accordingly. The procurement team must be accountable for the final result, reminds Casey.

An existing supply chain is not necessarily without problems. For example, some processors will acquire a local company or brand that happens to come with a local supply chain and work backwards from there, says Prouty. But they need to treat the local brand as though it were brand-new and establish a quality system that includes the supply chain to maintain the status of the brand.

“Perhaps the greatest challenge in the food industry is managing food safety across an increasingly global supply chain where almost every processed food product contains ingredients sourced from various countries around the world,” says Manning. “Therefore, traceability is becoming increasingly important in the discussion of food safety.”

Food safety starts at home, and Bickerton says the best way to make sure food safety standards are met in a new plant is to bring the US standards along and employ them in the overseas operation. Also, during the construction of a new plant being built by locals, a stringent, detailed sanitary design process that follows US food safety standards should be used, and one individual trained in food safety should be onsite. 

ConAgra’s Miller says bringing US food safety standards to another country also helps prevent food safety issues once the plant is up and running. Plus, it’s important to implement regulations surrounding the safe operation of equipment, such as ANSI Z244 (Control of Hazardous Energy - Lockout/Tagout) and NFPA 70 (National Electrical Code), as much as possible to protect employees and have a basis for safe wiring throughout a plant.

 

Some other thoughts about risk

Setting up shop or finding a foreign market for food and beverage products is not an easy task.  First, you’ll need a comprehensive market entry plan that includes customer, products/pricing and supply chain considerations, as well as the appropriate entry vehicle and an effective risk management system, according to Ramey. 

Also, consider the legal, regulatory, reputational, food security and other risks you may have to mitigate. For instance, a tax-efficient structure will be necessary for ongoing tax and audit compliance requirements. In addition, transfer pricing requirements have become more stringent in other countries, so you must ensure compliance and documentation to avoid transfer pricing audits and penalties. You also must avoid overspending when expanding into a new market.

 Considering the number of risks that come with establishing a global presence, taking the time to identify the appropriate resources with the international experience you need can prove crucial to your success—and save you significant time and money.  

For more information:

Josh Timberlake, Deloitte Consulting LLP, 312-486-3067, jtimberlake@deloitte.com

Kevin Prouty, Aberdeen Group, 800-577-7891, kevin.prouty@aberdeen.com

Jason Ramey, Grant Thornton LLP, 312-602-8260, jason.ramey@us.gt.com

Dexter Manning, Grant Thornton LLP, 404-475-0061, dexter.manning@us.gt.com

Sam Casey, POWER Engineers, 724-272-0449, sam.casey@powereng.com

Derek Bickerton, Stellar, 904-260-2900, dbickerton@stellar.net

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