Published 07 Dec 2016
New Balance is a shoes manufacturing company. The company is competing with other big multinational companies like Adidas and Nike to get a share of the running shoe market. New Balance has only one production site located at Everett Street in Boston. New Balance is considering expansion of its operations to step up production. There are several options that are available to New Balance with different advantages and disadvantages. The company needs to decide on whether to add up another shift in its site at Everett Street, to move out to another site in Lawrence, Massachusetts or Texas or expand international to Ireland.
Putting up a second shift in the Everett site required looking for additional warehousing space. This could lead to employer problems as finding good supervisors could be difficult. Additional people in the same premises could also lead to the reduction of motivation. Lawrence, Massachusetts offered a potential site requiring the conversion of the leased warehouse to a production site. A new based agreement had to be made and equipment bought. Texas was a potentially good site. Leased premises were required at Texas, and this could be got at about $0.95 per square foot.
The materials overhead costs needed to be 2% – 3% higher than in Boston. Establishing operations in Ireland required the purchase of a closed down shoe factory at the cost of $420,000. Due to additional changes, the unit material cost was likely to increase by 3%-4%. Expansion required more investments and control of the operations. However, quick expansion could lead to deterioration in quality and could lead to competition difficulties (Harvard Business School 9-10).
Davis, the president of the New Balance, has several options from which to choose a course of action. One option is to introduce the second phase in the operations of New Balance at the Everett Street site. The second option is to move to Lawrence, Massachusetts and convert the leased warehouse into a production site. The third option is to establish a production site at Texas. The fourth option is to go international and establish a production site in Ireland.
Each option has different requirements, limitations, benefits, and risks.
Adding another shift to operations at the Everett Street production site meant looking for a new storage facility as the second phase could increase output beyond the capacity of available facilities. This is also aimed at averting raw material inventory problem. It also meant hiring new staff and supervisors.
Setting up production in Lawrence, Massachusetts entailed connecting the leased warehouse from its use to a production site. The owner could lease it at the cost of 0.85 per square foot per year. The production site also required investment in equipment estimated at $100,000. New employees had to be hired to offer labor.
Setting up production in Texas required the same cost of equipment as in Massachusetts. The production site of about 40,000 square feet should be leased at the cost of about $0.95 per square foot. Material and overhead costs were expected to be higher than I n Boston.
Establishing production in Ireland entailed buying a factory at the cost of $420,000 which included $90,000 for equipment. Material costs were estimated to be higher in Ireland (Harvard Business School 10).
Comparing the options each had its setbacks despite the benefits that could be derived. Adding another shift in the production at Everett Street, Boston could lead to great savings in production overheads as some of the overheads costs are fixed. At Boston, it was possible to get additional space at a cost which was relatively cheaper than in the other palaces. The annual lease cost per square foot in Boston was $0.75 compared to 0.85 in Massachusetts and $0.95 in Texas. However, adding another shift in Everett Street production site could lead to reduced motivation and coordination of employees. It was not easy to find competent staff and supervisors for the second phase. Discontentment of the workers could lead to their unionization bringing more challenges to the company.
Massachusetts offered an opportunity to get labor at a cheaper rate than in Boston. The wage rate was about 10% lower than in Boston. Also, it was easier to get workers in this area as some shoe factories had closed previously meaning there were people with the required skills and expertise ready to be employed. However, production in Massachusetts meant additional costs on the site and materials.
Setting up production in Texas meant a good opportunity to reach the southwest area. Texas had lower operating costs, and it was easy to get skilled employees. However, starting operation in this area meant increased costs. The lease charges were higher than in Massachusetts, and the overhead was estimated to be 2-3% higher than in Boston. Texas also required the same investment in equipment as in Massachusetts.
Going to Ireland meant going international. Though this could facilitate penetration of the European market, it was a challenging venture for New Balance. Starting operations in Ireland required a major investment of $420,000. This is a major investment compared to expansion within the United States. Going to Ireland required the establishment of a more complex system to manage the operations and venture into a new market that was not particularly certain. This was a big risk for a firm like new Balance. Besides, that production in the Ireland site was expected to be 20% to 25% below that of the Boston site (Harvard Business School 10).
Also, this could increase the material costs per unit.
The main benefits to maintain production at Everett Street site and adding a second phase are on costs. It will be cheaper than any other option. Massachusetts offered a big area for expansion of production and low-cost labor. Labor was readily available, and the economic development agency was ready to aid in the establishment of the site. New Balance could also obtain assistance with licenses and utilities. Besides that, there was not very far from Everett site and hence no much additional material costs.
Texas offered a better site with its low operating cost and absence of state taxes. Labor was available and required the same investment in equipment like in Massachusetts. Texas also offered a very nice opportunity to access the southwest region and thus eliminates delivery problem sales representative in the area had been facing.
New Balance should set up their new production site at Texas. The market in the west was relatively bigger than in East and setting up the site in Texas will help access the markets in the area. This will also avert delivery problems experienced earlier. Labor in Texas is available, and there are no state taxes. The sales are expected to grow steadily as indicated by Exhibit 5: Domestic sales forecast (Harvard Business School 15) and so New Balance should expand its production to meet this sales increase.
Setting up the production in Texas will mean a major investment and improvement of the management systems of New Balance. This will also require greater marketing efforts to create the market for the new production. And because other competitions are likely to come in New Balance should develop a strategy on how to deal with competition and thus maintain profitability.
Harvard Business School; (1994). New Balance Athletics Shoes. Harvard. Harvard Business School.