The Plant Location Puzzle
Ann felt that her strategy of keeping all the parts of the company in the same location, while unconventional, had contributed greatly to cooperation among various departments and, ultimately, to the company’s growth: EDC had become the largest and most profitable bicycle company in the United States. Yet her manufacturing vice president, Sean Andrews, was now urging her to build a plant in China. “Look at the number of companies here,” he had said that morning, as they helped several other EDC staffers stack brochures on the exhibit table and position the company’s latest models around the perimeter of their area.
Manufacturing heads rarely attended trade shows; in fact, this was Sean’s first, but he had wanted to attend, and Ann had supported his interest. “There are too many players in this market,” he had said. “I’ve been saying this for two months now, and you know the forecasters’ numbers back me up. But if they weren’t enough to convince you, just look around. The industry is reaching the saturation point here in the States. We have to break into Asia. ” “Leave it alone, Sean,” Ann had replied. “I know this is something you’re pushing; you’ve said so in the past. But let’s set up a time to talk about it in detail later.
This isn’t the time or the place. ” Now, three hours later, with the show in full swing, Ann understood why Sean had been compelled to speak up again. Having all their competitors in the same room at the same time was a powerful visual reminder of how the industry had changed. She thought about what Sean had said about the U. S. market. In 1992, EDC’s sales and earnings had hit record levels. The company now produced almost 30% of the bicycles sold in the United States. But U. S. mass-market bicycle sales were growing by only 2% per year, while the Asian market for those same bikes was nearly doubling on an annual basis.
And Eldora could not competitively serve those markets from its U. S. manufacturing facility. Two of the largest bike manufacturers in the world, located in rapidly growing Asian markets, enjoyed a significant labor and distribution cost advantage. She stopped at a mountain bike display set up by a fast-growing, young bike company. Mountain bikes with front suspension were the latest trend—the added support and cushion allowed riders to better absorb the shocks inherent in off-road riding without slowing down or losing balance. Most of these bikes were still prohibitively expensive.
But Eldora, too, had an entry in this product category, retailing for about $190, and Ann was proud of it. For years, the company had concentrated its efforts on inexpensive bicycles, which retailed through mass merchandisers for between $100 and $200. Eldora’s prices were slightly higher than other low-end competitors’, but large retailers were willing to pay the premium because EDC had consistently been able to offer many state-of-the-art styles and features with quick, timely deliveries that competitors building overseas couldn’t match.
One of the reasons the company had been so successful was that Boulder, Colorado, was a bicyclists’ mecca. Eldora employees at all levels shared a genuine love of bicycling and eagerly pursued knowledge of the industry’s latest trends and styles. Someone was always suggesting a better way to position the hand brakes, or a new toe grip that allowed for better traction and easier dismounts. And Eldora never had a shortage of people willing to test out the latest prototypes. Another reason was that all marketing staff, engineers, designers, and manufacturing personnel worked on one campus, within a 10-minute walk of one another.
Ann had bet big on that strategy, and it had paid off. Communication was easy, and changes in styles, production plans, and the like could be made quickly and efficiently. Mountain bikes, for example, had gone from 0% to more than 50% of the market volume since 1988, and Eldora had met the increased demand with ease. And when orders for cross-bikes—a mountain/road bike hybrid that had enjoyed a spurt of popularity—began to fall off, Eldora had been able to adjust its production run with minimal disruption. EDC had also benefited from its foray into the high-end market (bicycles retailing for between $400 and $700) 12 years earlier.
One of Ann’s first moves as CEO had been to enter into a joint venture with Rinaldi, a high-end Italian bicycle manufacturer that at the time was specializing in racing models. As part of the agreement, EDC had begun importing Rinaldi bikes under the brand name Summit and selling them through specialty bike dealers. Similarly, Rinaldi had begun marketing EDC bikes in Europe. That arrangement had had lasting rewards: although racing bikes were no longer very popular, EDC’s offerings had taken off. About 20% of EDC’s sales were now made outside the United States (primarily in Europe and Canada) through this and other agreements.