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  Famosa: Dealing With a Global Production Strategy 

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The aggressive price competition of products imported from Asia has sent a number of Spanish sectors into crisis. To dodge this, many companies have chosen to outsource their production to Asia.

One example of a company adopting this strategy is Famosa, a benchmark in the industry, with over 50 years of experience. The toy industry crisis of the '90s prompted the company to outsource the production of its toy accessories to China in an effort to reduce costs.

But how can a company that has always operated locally manage to start subcontracting part of its processes to a foreign country? In this case study, IESE Prof. Alejandro Lago analyzes the difficulties that subcontracting to China has brought for Famosa, and he scrutinizes the advisability of such strategies.

In 2003, facing tough competition, Famosa's shareholders decided to sell the company to a VC firm, which came in and replaced the management team.

The new management plan set the ambitious goal of being an industry leader in three years' time based on three keys: leading in the domestic market; expanding international sales; and relocating the manufacture of some of the finished products to China. The last one required a major overhaul of the company's entire operating structure.

The Life of a Toy
Toys have a very pronounced seasonal sales pattern - namely, the Christmas campaign, which runs from September to early December - as well as a very short life cycle. For Famosa, this means running the risk of making an obsolete product, since the company completely renews 60 percent of its supply for the following year.

Famosa markets some 1,500 items, classified into eight product categories. The design duties fall on the R&D department. That entails a creative yet somewhat disorderly process that requires a lengthy incubation period and product meetings every three months.

The sales division is in charge of approving the launch of a new toy. A year before the Christmas campaign, the smiled-upon designs are put together in an internal catalog that gets presented to sales directors and eventually becomes the basis for the definitive sales catalog. In March, the sales department makes an initial sales forecast for the Christmas season.

As for sales, Famosa invites its customers to the factory in Onil, Alicante, for them to make product selections and indicate their purchasing schedules. This lets the sales department make adjustments to its forecasts. The real orders are taken between late June and September.

Landing in China
At the time of its decision to start subcontracting the manufacture of its accessories, Famosa was working with Li & Fung, Ltd., a leading company in global manufacturing sourcing solutions. The product, however, continued to be finished in Spain, so that the "Made in Spain" certificate of origin could be applied.

As sales relations with Chinese companies became more simplified, Famosa founded Famosa International, Ltd., and with that began working directly with suppliers.

Contrary to popular opinion in the West, production capacity in China is by no means infinite, but in fact quite the opposite: toy factory workers are hard to come by during the peak campaign months. That is why forecasts are paramount in meeting deadlines in the production and sales process, which is divided into three phases:

Development of Prototypes, Molds and Choosing the Supplier. The R&D department in Spain sends the designs to Famosa International to have the prototypes made. Starting the process of making molds in turn kicks off the process of assigning the supplier, where the cost variable plays a fundamental role.

Production Planning and Launch. In March, the planning department decides the volume of manufacture for each item based on the sales forecasts. In April, master production scheduling (MPS) meetings are held with Chinese suppliers at their factories. In late June, the planning department reviews the manufacturing proposals and fixes the first set of order fulfillments and proposes or adjusts the following ones.

Reception of Merchandise and Customer Delivery. From mid-September to December, customers receive their orders. Most of these customers (Toys'R'Us, Carrefour, El Corte Inglés, for example) need to liquidate as much excess stock as possible, and thus request that their products be delivered just before they need it on the shelves.

Assessment of the Experience
For Famosa, outsourcing products to China has entailed the transformation of a process that had traditionally been very much local into a tough international task. One byproduct has been reduced flexibility in production plans, given the substantial lengthening of the delivery schedule in the manufacturing.

So, how does one reduce costs without giving up flexibility? Perhaps the strategy of sending most of the finished product to China is not the best move, and maybe some of the Famosa production should stay in Spain. Or maybe it should go even further and not only send out purchase orders, but also find out to what extent it can negotiate production scheduling with suppliers and improve its follow-up.

Whatever the solution, toy production is nothing to play with lightly.

This article is based on:  Famosa. Global Production Strategy
Year:  2008
Language:  English