Polaris was the dominant player in the ORV market based on market share. In 2010 was still more costly. On the other hand, with oil prices rising steadily, Krishna knew ORVs accounted for 69 percent of Polaris's sales, with Side-by-Sides comprising the transportation costs would be far lower if he kept production close to customers Case Study majority of sales in this segment. Looking ahead, the company was excited by the Senior management at Polaris was also concerned about a manufacturing talent gap potential growth in emerging markets. From Latin America to Asia, Polaris had begun to in the United States. Over the past twenty years, decreased funding for community Polaris Industries Inc. invest heavily in marketing to increase awareness of its brand. For example, in China the colleges and trade schools had resulted in technical workers becoming increasingly In September 2010 Suresh Krishna, vice president of operations and integration at company placed off-road image advertising in racing and extreme sports enthusiast difficult to find. Moreover, young trade school graduates were less interested in moving Polaris Industries Inc., a manufacturer of all-terrain vehicles (ATVs). Side-by-Sides, and publications. Similarly, in Latin America Polaris was leveraging its brand in the utility to the locations where Polaris operated, which were small towns with only one large snowmobiles, sat in his office in Medina, Minnesota, deliberating the recommendation vehicle space to penetrate the substantial agricultural industries. employer. By comparison, well-trained technical talent was relatively easy to find in he was developing for a new plant to manufacture the company's Side-by-Side vehicles. many South American and Asian countries The economic slowdown in the United States had put considerable pressure on Manufacturing Lastly, Polaris expected much of its future sales growth would come from overseas Polaris's profits, so the company was considering whether it should follow the lead of In 2010 all of Polaris's manufacturing operations were located in the northern Midwest markets, particularly emerging markets. There were multiple ways to enter these several of its competitors and open a facility in a country with lower labor costs. China In addition to its corporate headquarters in Medina, Minnesota, and product development markets, including acquisitions and joint ventures, but building a facility in an emerging and Mexico were shortlisted as possible locations for the new factory, which would be and innovation center in Wyoming, Minnesota, Polaris operated three manufacturing market could potentially help Polaris capture future demand. the first Polaris manufacturing facility located outside the Midwestern United States. By facilities in Roseau, Minnesota; Osceola, Wisconsin; and Spirit Lake, Iowa. Roseau, the the end of the year Krishna needed to recommend to CEO Scott Wine and the board of birthplace of the Polaris snowmobile, housed research, development, and manufacturing Choosing a Manufacturing Location directors whether Polaris should build a new plant abroad or continue to manufacture in for the snowmobile, ATV, and Side-by-Side divisions. Roseau also included a small Krishna and his team considered several options for optimizing the manufacture of Side- its American facilities. state of the-art injection molding plant that produced plastic parts for the Roseau and by-Sides and the design of the supply chain. They concluded that the best options were Spirit Lake factories. As demand grew for ATVs and on-road vehicles, Polaris either to continue production in existing American factories or to build a new plant in Polaris industries Inc. established an additional manufacturing facility in 1994 at Spirit Lake. This facility China or Mexico. Established in 1954, Polaris was a manufacturer of high-performance motorsport produced select ATV, watercraft, and Victory motorcycle models. Osceola was primarily Beyond the specific pluses and minuses of each location, Krishna needed to products, including ATVs, Side-by-Sides, and snowmobiles. With nearly $2 billion in an engine and components supplier for the other two facilities. consider the following in making a final decision: sales in 2010, it was a strong player in the $10 billion power sports market alongside All other components were sourced through more than 450 global suppliers. In . The majority of demand for Side-by-Sides was in the southern United States. The competitors Yamaha, Honda, Arctic Cat, Ski-Doo, and Harley Davidson. 2010 Polaris sourced almost 40 percent of its components and materials from outside the states with the highest share of sales volume in 2010 were Texas and California. Polaris's customers were primarily located in North America (85 percent); its United States, up from 30 percent in 2008. The company was also increasing low-cost Side-by-Sides were high volume-to-weight low value-to-weight products, which international customers were concentrated in Europe. Foreign markets were becoming country (LCC) sourcing, almost doubling its LCC spend to approximately 24 percent in meant that shipping costs accounted for a large fraction of their retail price increasingly important to Polaris; international revenue had grown 21 percent in 2010, 2010 Polaris's senior management placed a high value on ease of communication with its and was forecasted to grow even more in 2011. Polaris products were sold through 1,500 To support its production capabilities in and around the northern United States, manufacturing plants and believed that in-person interaction among managers, distributors in the United States and 1,000 distributors in the rest of the world Polaris had three warehouse facilities in Minnesota for raw materials, export processing, design engineers, and production staff was a key driver of the company's long-term Polaris's heritage was deeply rooted in the power sports industry. The company and distribution. When demand for parts, apparel, and accessories exceeded the product innovation. introduced its first snowmobile in the 1950s and its first ATV in 1985. Between 1985 company's warehouse capacity in 1997, a new distribution center was opened in If Polaris moved production of Side-by-Sides abroad, the company planned to lay and 2010 Polaris sold more than two million ATVs. In 1992 Polaris entered the personal Vermillion, South Dakota. In addition to its U.S. locations, Polaris also owned and off sixty workers at its Roseau plant. Each worker would be paid a one-time watercraft market, but it lacked a sustainable distribution system and exited the business operated regional sales and distribution centers in Winnipeg, Canada, and in Northern severance of $20,000. in 2004. In 1998 the company introduced the first Side-by-Side off-road vehicle (ORV), Europe and Australia. Polaris assumed that demand for Side-by-Sides would remain flat for the next five which was expected to surpass ATV sales during 2011. Also in 1998, Polaris entered the years. parts, accessories, and apparel segment, which grew significantly over the next decade. Redesigning the Supply Chain Finally, Polaris also introduced its first on-road vehicle in 1998-a motorcycle with the Krishna had to consider the tradeoff between manufacturing and transportation costs Data on labor costs, production costs, transportation costs, capital expenditures, and brand name "Victory"-to compete with Harley Davidson. Combined, these products when redesigning the supply chain for Side-by-Side products. On one hand, exchange rates for each location are included in Table 15-9 through 15-12. were forecasted to bring in $2.2 billion revenue in 2011. Polaris's total revenue grew manufacturing in markets with low labor costs could result in significant savings. China more than 20 percent in 2010 and was expected to grow 8 to 11 percent in 2011. Although labor rates in traditional LCCs such as China were rising, U.S.-based laborPolaris's senior executives were excited about the low costs in China, but labor costs had Mexico Cost per mile 2.30 been rising in the manufacturing-heavy eastern region; over time the company would Polaris's senior management saw several qualitative advantages to operating a foreign Side-by-Side units per truck 26 likely have to look further inland to find low-cost labor, which would further increase the manufacturing facility in Monterrey, Mexico. Monterrey was relatively close to the length and variability of product transportation. Polaris also had concerns about its United States, which would allow for easier in-person collaboration between the Miles to Distribution Center ability to successfully collaborate with a Chinese factory due to time-zone differences manufacturing facility and Polaris's staff. In addition to geographical proximity, From Roseau From Monterrey and cultural dissimilarities. managers believed cultural familiarity would make collaborating with a Mexican Tacoma, WA 1,636 ,261 Operating a factory in China would require Polaris to hire sixty new employees on workforce easy. Lastly, although Polaris believed that long-term sales growth would Los Angeles, CA 2,161 1,505 location. It also would result in a one-time charge of $10 million for capital come from emerging markets in Asia, it also believed that near-term growth would occur Irving, TX 1,267 437 expenditures, equipment moving costs, and startup costs. Polaris would have to pay a 5 in the United States-particularly in the southern United States, an area close to percent tariff on all production and transportation costs when importing products into the Monterrey. United States. A factory in Mexico would require hiring sixty new employees, the same as in TABLE 15-11 Demand Assumptions China. Side-by-Sides would be shipped to the United States by truck in batches of TABLE 15-9 Labor Cost Assumptions twenty-six units at an average cost of $2.30 per mile per batch. Although trucking Distribution Center Location Annual Demand(units) Tacoma, WA 3.650 Monthly Wages companies claimed they could cross the U.S. border and deliver the products in two Annual Wage days, in practice it took between two and seven days. Los Angeles, CA 7,050 Growth (%) Capital expenditures, equipment moving costs, and startup costs for a Mexican Irving, TX 3.800 China (CNY) Mexico (MXN) China (CNY) Mexico factory would total $9.5 million. Under the provisions of NAFTA (North American Free (MXN) Trade Agreement), Polaris would pay no tariffs on imports from Mexico into the United 1909 649 5 2,392.0 States. 2000 729. 2,910.5 12 22 TABLE 15-12 Exchange Rate History 2001 814.5 3,367.6 12 16 Year CNY/USD MXN/USD 2002 16.8 3,537.5 13 5 TABLE 15-10 Operating Metrics by Plant Location 8.28 9.34 2003 1.041.3 3, 737.7 14 6 Cost per unit 2001 8.28 9.66 2004 1,169.4 3,858.8 12 3 Production cost 2002 8.28 10.80 2005 1,313.1 3,983.8 12 3 U.S. 400 USD 2003 8.28 11.29 2006 1,497.2 4,112.9 14 Mexico ,560 MXN 2004 9.19 10.90 2007 1,740.3 4,246.2 16 w w w China 1,950 CNY 2005 7.97 10.90 2008 2,016.0 4,383.7 16 Capital expenditures, equipment moving costs, and startup costs (thousands of 2006 7.61 10.93 US$ 2007 6.95 11.16 United States U.S 2008 6.83 13.50 Hourly wage $26/hour Mexico 9,500 2009 6.77 12.63 Working months/year 12 China 10,000 2010 6.65 12.40 Other Side-by-Sides made in China would be transported to the United States on Annual demand for Side-by-Sides 14,500 units container vessels, with each container holding twenty-six vehicles. The cost to ship one Tariff for China import United States 5% vehicle to the United States from China was $190 per unit, or $4,940 per container. Transportation cost (USS) from China A third option for Polaris's senior management was to maintain the status quo for Although shipping companies claimed the containers would reach the United States in Cost per unit 190 production of Side-by-Sides without incurring additional costs. Polaris had traditionally about twenty days, in practice shipping time was highly variable, with a range of Side-by-Side units per container 26 been associated with a strong "Made in America" culture, and management believed that nineteen to thirty-three days. Ground transportation cost (USS) the company's employees and customers were proud that all Polaris products were manufactured in the United States. In addition, the proximity to headquarters andproduct development facilities enabled managers to collaborate quickly and easily with design engineers and technical staff in the manufacturing plants. Recommending a Solution As Krishna reviewed the data for each option, he knew he needed to consider qualitative as well as quantitative factors to find the best solution for Polaris. Should he recommend keeping production in the United States, or should he recommend siting a new plant in either Mexico or China? Based on "The Value of Design," Electronics Business, June 2003. Ibid. Heidi Elliott, "OEMs Seek Single Point of Contact for SCM." EDN Network, June 15, 2003