About the Author
Robert H. Hayes, one of the world's leading authorities on production and operations strategy, is Philip Caldwell Professor of Business Administration at the Harvard Business School.
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Chandler Home Products (B)
"A few months ago the head of our European organization asked me to recommend whether we should expand my plant again or locate a new production facility somewhere else in Europe. I studied the situation and alternatives for a few weeks and then suggested that this recommendation be made by someone outside my organization. There were simply too many conflicting interests involved, and I think I would have been regarded as being too biased.
"I am very proud of my plant's performance over the past four years. We have been able to maintain our prices and delivery reliability in the face of inflation, exchange rate fluctuations, new products, and political uncertainty. The arguments that led to the construction of this plant over 15 years ago, and the concentration in it of the production for most of our sales in continental Europe, are equally valid today. The plant is not too large, either in comparison with other manufacturing plants in Holland or in comparison with our own U.S. plant in Peoria. We have room to expand, and I am convinced that the costs of expanding here will be less than anywhere else in Europe."
Roland van Zwieten, Manager of Chandler Home Products' Complant ("Common Market plant") in Nijmegen, Holland, raised his hands expressively and smiled. "You see, I am biased! So my boss agreed with me, and that's the reason a Booz, Allen team is working here now."
Chandler Home Products
Chandler Home Products was a privately owned, family-controlled corporation headquartered in Peoria, Illinois. Chandler's lines of household care products were marketed worldwide. Though no company figures were published, industry observers estimated Chandler's 1978 sales at over $1 billion. Approximately 1,500 different products were sold in almost 50 countries. More than half of Chandler's sales were made outside the U.S.A. Of these a majority were recorded in Europe. Van Zwieten's Complant alone produced almost 150 different product formulations. Since most of these were sold in more than one size, the total number of SKUs (stock keeping units) was in excess of 650.
The bulk of the company's business was concentrated in four product areas: floor care products, furniture polish, air fresheners, and insecticides. Although the percentage varied by product line and by country, roughly 60% of Chandler's sales were in the form of aerosols (sold in pressurized cans), a quarter were in liquid form (sold in cans and bottles), and the remainder were solids. Chandler's strategy had been to seek a dominant market position for its products, while maintaining premium prices, through product innovation and the heavy use of advertising. High gross margins (these varied considerably from country to country, but 60% was not unusual) were needed to finance the costs of R&D, advertising and channel support while still providing adequate returns. The company tried to maintain a profit-to-sales ratio of 5% after taxes.
In recent years attempts had been made to diversify into the personal care field with deodorants and shaving gels. Household care products had also been extended into laundry aids and air fresheners. Introducing new lines of products was part of an overall effort to become less dependent upon Chandler's traditional household care products. The markets for these traditional products had matured in the developed countries and promised inadequate future growth. Moreover, the large market shares which Chandler commanded in its traditional product lines were likely to be the target of increasing competitive assault. Competing in new markets, however, frequently pitted Chandler against such international giants as Procter & Gamble, Unilever, and Gillette.
Despite the fact that the markets for many of its products were maturing, and the overall rate of economic growth in the developed countries of the world was predicted to be less than 3% over the foreseeable future, Chandler hoped that the introduction of new products and the growth of markets in developing countries would enable it to maintain a sales growth rate of 15% per year. It intended to finance most of this growth through internally generated funds, so as to maintain its debt/equity ratio at the current level. This would require careful control over costs and investments, since a 15% sales growth could not be maintained if there were any deterioration in either its profit/sales or its sales/assets ratios. As part of its overall program for maintaining, even improving, profitability, the company intended to gradually shift its resources from low-profit, low-growth products to those that promised higher profits and higher growth. Proposed capital investments were expected to promise a return on investment of at least 25% before tax.
The decade of the 1960s witnessed a significant expansion of Chandler's European operations. While some European subsidiaries predated World War II, none had represented a major source of revenues until this growth period. Thereafter, existing subsidiaries grew in size and new subsidiaries rapidly blossomed throughout Western Europe.
Although most of the products sold in Europe were based on products developed in Peoria, the mix of sales differed greatly from country to country. Even neighboring European subsidiaries often significantly differed both in size and in the relative popularity of Chandler products in the diverse product categories in which they competed. Products were adapted to local consumers by means of local brand names, and sometimes even their formulations were modified to meet local preferences. Thus, the distribution of the income levels in a country, together with national tastes in home furnishing, greatly influenced the product offerings of the local Chandler subsidiary. Some foreign subsidiaries even sold products which had been developed specifically for their own use and which were unavailable in the U.S.
Country managers had considerable autonomy in determining their individual product lines. They could add, drop, reposition, or emphasize products according to their perception of local market conditions. Major product or marketing decisions (e.g. dropping a product, an unusual pricing strategy, etc.), of course, had to be justified before Mr. Genet, Chandler's Executive Vice President for European Consumer Goods.
In 1978 roughly 85% of Chandler's European consumer goods sales took place on the continent, while the U.K. accounted for the remainder. About a third of the sales in continental Europe came from Chandler's French subsidiary. The next largest subsidiary was Italy, whose sales were about half of France's, followed by Spain and Germany. An organization chart for the activities under Mr. Genet's jurisdiction is contained in Exhibit 1.1.
The Decision to Build the Complant
Before 1962 each subsidiary had been responsible for its own production. Following a major study by Booz, Allen & Hamilton it was decided to consolidate European production into two plants. One would be the existing facility at Buxbridge, England (about 50 miles from London) which would be responsible for the production of all of Chandler's products for the U.K. The other would be a new facility, the Complant, located in Nijmegen. This plant would be responsible for the production of the aerosol and liquid products for all of Chandler's EEC subsidiaries (the U.K. was not then a member of the Common Market).
The study which resulted in the decision to build the Complant was triggered by a recognition of two partially related trends in the European environment. First, Chandler's European sales were growing at a rate in excess of 40% per year and therefore would be expected to quadruple (from $6 to $24 million) by 1965 if not before. This forecast sales volume could not be prod