Lower tariffs and new markets opening to fore ign investment have complicated the decision about how manufacturing should be organized, says Nikki Tait.

Visit any western toy superstore, and most of the basic products will say 'Made in China' or, perhaps, Malaysia or Indonesia. Until, that is, you reach the Lego section. Suddenly, the boxes are more likely tо identify Denmark, Switzerland or the US as the country of origin.

It might seem logical that a global company, selling into a multitude of country markets and measuring its market share in global terms, should place production facilities wherever costs are lowest. But Lego, the privately owned Danish company, has for years concentrated its manufacturing in Europe and the US, arguing that this best satisfies design and quality requirements. For Lego the notion of cost is only a small part of the production picture.

So how does a global company gо about organizing its manufacturing network? The decision has become more complicated over the past two decades due to a number of factors. On the one hand, trade barriers across much of the world have declined sharply. Simultaneously, a range of new markets - notably in Asia and Eastern Europe - has opened to foreign investment.

This has made global production much more possible. But it has also reduced the need for any overseas plants. Markets that previously demanded local production facilities - because tariff levels made importing far too expensive - can now be supplied from other countries.

Plainly, in this newly-liberalized environment, basic manufacturing costs do become more significant. But there are limits to a purely cost-driven approach. Many companies have built their current production structure through acquisitions over a number of years, rather than in a planned way.

Another problem is that costs themselves can be subject to rapid change, making today's Indonesia, for example, tomorrow's Hong Kong. This adds a further dimension to any global company's investment decision-making. The reality is that manufacturing businesses also need to think: how quickly can we pull the plug?

Some companies have addressed this issue through what is called the 'part configuration' model. This involves selecting a number of regional manufacturing bases which are viewed as longer-term investments, and augmenting them with lower-skilled assembly plants, which can more easily be moved between markets.

The availability of suitable employees also needs to be examined when investment decisions are being made. There may be close links between manufacturing and product innovation and if too much focus is put on low-cost assembly operations, product innovation tends to suffer.

Perhaps the hottest topic is whether a global company needs to be a producer at all. Outsourcing of production to other suppliers gives a company more flexibility, and fits well with a global strategy. A business may be better placed to supply differentiated products into different regional markets, and it can probably adjust more swiftly to changing cost considerations. These operational advantages come in addition to the financial benefits of outsourcing, such as lower capital employed.

But there can be pitfalls. Perhaps no company exemplifies the outsourcing trend better than Nike, the sports shoe group. On paper, its strategy of subcontract - as in the production of its shoes to local factories looks eminently sensible. But these arrangements have turned into a public relations disaster in recent years, as human rights campaigners have complained of 'sweatshop' conditions in many of the Asian plants producing Nike products. Lack of ownership, it seems, does not bring freedom from responsibility.

                                                                                            FINANCIAL TIMES

World business newspaper.

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