Five lessons for manufacturers from the Electrolux Orange closure

Boards want Growth

Electrolux’s local business is very profitable. It is however in a mature market where just about every household has a fridge. The marketing approach being taken is defensive and basically one of defending the current position without innovating. The strategy has been to try and resist share and margin erosion rather than investing to enhance a strong position and growing further. It has been a “me too” strategy of being second to market. Boards want more than just a defensive strategy. They want to see high growth and through the closure of the plant in Orange are now sacrificing very good cash flow to position themselves for what they see as higher top line growth in the future in Asia. They intend to service this growth with local production and supply the established market from their Asian supply base.

Lesson: If you don’t have a marketing plan or mindset to continue to grow and innovate then you will be left behind.

Politics Matters

In a corporate environment it is not enough to be good, even very good, in your performance. The Australian organisation is a tiny outpost in the corporate environment that is far from the centres of power, has no political allies internally, and therefore has no one to strongly support their case to the corporate decision makers.  Its enemies were far better connected to promote their own interests and had the time to play the politics whilst the locals were building fridges. You have to perform at an outstanding level AND be able to manoeuvre through the politics, especially if you represent only a small and barely visible part of the empire. Lesser performing factories which have greater political power will no doubt be reinvested in.

Lesson: Being very good, even World Class does not guarantee success. You need to be absolutely World Class, and develop enough corporate clout to be able to influence the internal political issues in the corporation.

Play the Long Game

Your operation must make money now, and have an eye firmly on the future. Any change you make that increases the structural cost base of the business needs to carefully considered for its long term ramifications. Trading away flexibility, wage rises, any increase in input costs may be a slight issue now, but over five years or more these things add up and they can become a significant hurdle to overcome in your cost base in the future. The supposedly ongoing higher operating costs were cited as one of the reasons for the decision.

Lesson: Ruthlessly resist any increase in structural cost that does not have a clear and solid commercial benefit.

Measures Matter

The decision taken has been referenced back to the cost of production between Thailand and Australia. Standard Cost Accounting was most likely used which can produce a skewed picture if it is not properly applied. What I am curious about is if a cash flow analysis of the two options was fully developed. In order to provide the same level of stock availability to the Australian customers the local Sales Company will have to store dramatically more stock, possibly six times more. This is a lot of money to tie up in cash. They will have to invest to expand their distribution centres to hold this stock.  So while the cost of conversion cost of production may go down, many other costs may go up.  Instead of having a factory that can change its production in line with the fluctuations in market demand, they will now have to forecast demand to a much higher level of accuracy than they can. No one does this well with seasonal products where the lead time to supply is far greater than the time frame in which the market demand can vary. So in addition to potentially non-existing cost savings, the end result could include   stock outs and losses in market share. This is proven by their experience in supply chain management of other imported products.

Lesson: Both alternatives need to be well developed and look at the cash impact of the alternatives. It is hard to go broke if you are choosing an option that maximises cash flow.

Strategy is Not a Reason to Lose Money

Asia has a much lower market penetration for fridges and other white goods. It is a huge growth market that Electrolux has failed to build share, volume, and earnings in. They need to change that or they will be left behind as the Asian producers expand back into Electrolux’ traditional home markets in Europe and the US. Those home markets are flat and the company has failed to fix that problem. Asia is the focal point for growth. So that now appears to be their strategy.

The purpose of any strategy is to give the decision makers a reference point for their decisions. I have never seen a strategy document where losing money was a key outcome. Investing in new markets and operations and budgeting for them to take a few years to begin to return funds to the shareholder is valid if you have a plan to win over that period. Sacrificing a cash cow whilst you build capability to support a growth market is just dumb. They are losing cash flow unnecessarily. They could easily build capability in Asia and continue to milk the cash cow in Australia. Tooling and equipment investment to run the two production sources will be very similar.

Was this studied in great detail? Unlikely, but we will never know.

Lesson: Does your strategy maximise returns? Be ruthless in determining if your strategy is driven by returns or ideology.

In Conclusion, It’s now too late, it’s gone!

All the hand-wringing, the tears, the demands by unions for ministers to get on planes and fly to Stockholm are a waste of time. The time for that energy and emotional commitment was two years ago, probably longer. When any organisation announces a review of the plant viability, they already have a preconceived preference of what outcome they are after: it’s only natural, we all have our preferences.

The biggest lesson in all of this for any business, not just manufacturers, is that every day you need to get up and build your business to the highest level of performance that it can possibly be at. You need to use the brains of every employee, every book you can read, every external piece of expertise you can lay your hands on, and to never, ever, become content with the status quo.

There is no such thing as status quo. While you may not notice the changes from day-to-day, you are either going backward or moving forward. There is no in-between, so make sure you keep moving forward every day. 

Jason Furness is the CEO of Manufacturship, a training and consulting company that specialise in helping manufacturers boost their cash flow. He was the General Manager of Electrolux's Orange plant from 2007- 2010 and led the team that took the plant from break-even to a very profitable business in just 3 years.


Image: Fairfax