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A Complete Strategy in Offshore Operations

Interview of Tony Vernaci, Director of International Operations at Textron
Hosted by Doug Donahue, Vice President of Entrada Group

The Entrada Group is proud to bring you a series of informative interviews with leading authorities on some of the essential aspects of offshore operations. These free, educational programs, hosted by Doug Donahue, Vice President of the Entrada Group, cover current topics important to companies operating offshore or looking at moving operations.

Tony Vernaci, Director of International Operations at Textron discusses the current benefits of offshore operations that go well beyond the simple cost savings of the past. Tony explains how Textran’s focus evolved from simple cost reduction to a Four-Pillar strategy of: Growth – Sourcing – Footprint – Talent.

DOUG
Hello, ladies and gentlemen. My name is Doug Donahue and I’m Vice-president of the Entrada Group. We are a shelter operator located in Zacatecas, Mexico. We provide a wide range of services to international manufacturers who are seeking to reduce costs and stay competitive in today’s global economy by manufacturing in Mexico. Today we are very lucky to have Tony Vernachi who is Director of International Operations for the corporate office of Textron. His responsibilities include the development and execution of global strategies for Textron. Textron is a Global 150 multi-industry company with locations in 20 countries and with over 40,000 employees.

Tony, thank you for joining us today.

TONY
Good afternoon, Doug. My pleasure.

DOUG
Today, what are Textron’s goals compared to when they initially set up offshore operations?

TONY
Well, when we initially began -- we’ve really been on this journey for the last few years, so go back, maybe to 2001-2002 when we really started to take more of an interest in our business expansion worldwide -- one of the things we started out with was that we were seeking low cost. Like a lot of suppliers and manufacturers we were looking for low cost sources to manufacture components and ship them back into our primary manufacturing facilities. And that worked out okay. We got going on that and realized some pretty good benefits and located a lot of very capable suppliers around the world. But, over time, we began to realize that that was a strategy that was like a one-legged stool, because there are some factors that you can’t control. And those are factors that can really significantly impact your strategy and essentially melt away your benefits.

One of the things that happened to us a couple years ago was the whole devaluation of the dollar. As the dollar started to lose value, what we had found to be benefits in a lot of these countries simply just started to go away. So we realized that our strategy really needed to be multi-pronged and have more legs to it than just going after low cost. So as we sat back and looked at it, we said, “What are we really trying to achieve?” And, ultimately, what you’re trying to achieve is growth for the company. And with a lot of these areas that we were going into the one thing we recognized is that not only are they highly capable and there’s a lot of extremely good technical expertise and talent around the world, but these are also emerging markets.

So, we really started to shift our thought process and our internal discussions to say these are opportunity areas for us, not just to go in and pull out low cost and ship the product back overseas, but these are opportunities for us to really develop top-line growth for the company. And so that’s really where we are headed today. We don’t continue to refer to these as ‘low-cost countries’; we call them ‘emerging markets’, because that’s exactly what they are. They’re markets that are developing and emerging and becoming very significant players in the world market today. So we go into an area and we look at it for its top-line value that it presents to Textron. And going at it with that thought in mind, you’ve really got a broader approach – what we call a ‘four pillar approach’. The four pillars for us in globalization are growth, talent, footprint and sourcing. Sourcing is still a key piece. Cost is always important, but it’s not the only driver and that’s not the only thing we’re going after.

DOUG
Obviously, when you got initiated on this project and started looking at the different regions, I’m assuming that you looked at, pretty specifically, the low-cost regions of Asia, low-cost regions of Latin America and low-cost regions of Eastern Europe. Were there any substantial differences between the three markets and how you chose to operate in those three different areas?

TONY
There are some differences, because in areas like China, for instance, a lot of the manufacturers – and it’s not always the case for all of them – but a lot of the activity that those manufacturers in China are looking for are high volume. And while we have some very good growth and good revenues in our company, some of our businesses are not necessarily high volume businesses. So that gave us a bit of a challenge. And when I speak about high volume, they’re really interested in the hundreds and thousands of units like what you might find for an automotive supplier. Some of our businesses don’t necessarily fit that bill. So in some areas that presents a challenge because some of our businesses produce what I call ‘snowflakes’ – they make a lot of one-of –kind products that are very engineered, designed and built for a very specific application. So obviously that doesn’t fit the model and the profile for what some of these manufacturers are looking for. So that was one thing that we found. We also found some areas that had some very, very good talent and technical capability, as much as a legacy in some industries; such as, in Eastern Europe we found that there are some very strong pockets of aerospace capability that go back to the World Wars and those industries are still there and very strong. That’s obviously of interest to us because a large portion of our business is in the aerospace and defense area.

DOUG
One of the things that many of my clients are surprised about is the availability of talent that they can get. And it’s also been interesting because they’ve said that they can’t get certain talent in their North American markets. Has Textron found a great wealth of talent and new skills in these markets?

TONY
Absolutely. And one of the areas that I think the U.S. is probably suffering from and there’s a certain price to pay for that is the talent in engineering that’s being put out today. In particular, India and China have got just hundreds of thousands of engineering graduate students every year and really very well qualified individuals and schools. Whereas, the schools in the U.S. are excellent schools, but the number of engineering students that we’re putting through these schools on an annual basis is significantly lower than that of some of these emerging markets. So for us it’s about that kind of talent. Even to the extent where we opened a global technology center in Bangolore, India where we have a couple hundred engineers today that are working on different design and development projects for our businesses across the world.

DOUG
So as they take these, let’s say, ‘higher value jobs’, as they take on this larger responsibility, have you had any difficulty implementing Textron’s corporate strategy across borders, and particularly into emerging markets?

TONY
Well, I wouldn’t necessarily call it a difficulty, but one thing you have to be careful about is that business practices are different across the world and we have a very high level of standard as far as our ethics and compliance that we don’t compromise and we don’t settle for less. So it’s something that you have to have a very concentrated effort on. That as you deploy your different strategies and you start to have more activity, more of a presence around the world, you don’t give in to whatever might be locally acceptable. I’m not saying that those are good or bad, but there are just different practices that are accepted locally in some regions that just aren’t consistent with our policies and our ethics and compliance at Textron. So that’s something that you always have to make sure you stay on top of and you communicate on a very regular basis, you have a zero tolerance, and you just stay right with it the whole way.

DOUG
Over the past few years, Textron and its different divisions have made a substantial investment manufacturing in Mexico. Can you articulate a little bit about why this investment was made and how it is developing?

TONY
Well, Mexico – if you go back 20 years or so with the automotive industry that really started to grow a lot in Mexico – one of the things they were noted for was cheaper labor. And in some cases some people may have looked at it as low-cost, low-skilled labor. What’s happened over time, what we’ve seen over time is that Asia, particularly India and China, really started to open their doors for business. Mexico, to some extent, lost a lot of business to those developing areas. So what Mexico has done is an excellent job of sitting back, evaluating the situation and figuring out how they can compete. If you look at the wages of a worker in Mexico - which are significantly lower than that of the United States, but much higher than what you might find in parts of China - Mexico had a real challenge on its hands. But what they’ve done, in my opinion, is an excellent job of reinventing themselves to the point where they have invested significantly in infrastructure development, in the development of their universities, and they’ve combined that with a very unique partnership between local universities, local governments and local business. To really say “what is the kind of talent that you need?” And then they’re designing and implementing the curriculum programs throughout their whole base of colleges to make sure the students they’re putting out are walking out the door with the talents that business needs. So that’s one big advantage that I’ve seen that Mexico has done an excellent job on.

The other thing is that there’s still a manufacturing base in the United States and Canada. Even though you hear a lot about jobs going overseas, there’s still a very significant manufacturing base in the United States. Manufacturing in Mexico has a very key advantage because it’s one of our neighbors across the border; and what that does is it gives you some advantages for shorter supply chains. You don’t have the 30-40 days of material that’s somewhere between a port in the Far East and a port on the west coast. It also allows you to deal with people that are virtually in the same time zone. Depending on where you are, the time difference is very minimal. In some cases it’s none. If you’re in the western U.S., you’re in the same time zone as Mexico. Another advantage of manufacturing in Mexico: ease of travel. With our businesses there, if there are any issues we need to attend to we can generally get on a flight in the morning, be down at that business somewhere in Mexico -- as far south as Mexico City or even further south – same day and doing business that day. If you’re going to do that with some of the areas in Asia or Europe, you’ve got a full day of travel. And then you’ve got the jet lag and the whole recuperating process. So, to me, there are some very significant advantages that come with manufacturing in Mexico.

DOUG
As Textron goes in, is there a philosophy, a plan to turn the operation over to local talent or are you decentralizing it in that country? Or is there always a large, expatriate influence in the operations?

TONY
It really kind of happens in a couple of phases. Initially, you’ll go into an area and you need to have that transfer of knowledge from your home base to your new operation. With that there’ll be a certain number of expatriates that will go down that will work on getting the facility and the operation up and running. In the process of doing that they’re recruiting key talent, because expatriates are an expensive option and you can’t do that forever. Plus, those expatriates are key people for our operating units as well, so we don’t want to keep them tied up for too long. And we want to make sure we’ve got people there that are local experts. So those expatriates are going in and they’re grooming and building the bench strength for the future leaders that are going to run that business. Depending on the operation and the complexity, over a period of 1 ½ to 3 years you’re phasing our your expatriates and bringing them back home to assign them other tasks you might have and turning the operation over to your local nationals.

DOUG
Do you have any insight for these smaller companies on what issues they should be thinking about when looking to establish an offshore operation?

TONY
The one challenge that the smaller companies always have, because of the business and the scale they have to offer, is that they sometimes have a hard time justifying the cost. But again, that’s one of the benefits I see of going into a park or you have a shelter provider where you’re leveraging the benefit of the personnel and the infrastructure that that shelter provider has. They’re spreading that across multiple businesses, which obviously gives you a benefit. If you were to go down there yourself, you’d need to have your own HR manager, logistics manager, import/export expert. A shelter provider has things like that in place that they use to support multiple businesses and you get the benefit of that. It’s difficult and a challenge because smaller businesses feel like, for them to do it, it’s expensive and they may not have the internal resources that larger businesses have to be able to launch something like that. In smaller companies people wear multiple hats and they find it really difficult, but that’s one of the beauties of going into a country that has a shelter provider.

DOUG
One of the things that we’ve seen in Mexico is that a lot of European companies were being asked, when the Euro was so strong, to set up a North American operation to service that market because it was getting too expensive to service the North American market from Europe. Do you see a regionalization going on? Driven by currency issues, as well as other issues?

TONY
Absolutely. Currency, like I explained before, is one of those things that are out of your control. So as much as you can plan out and you feel like you know what the benefits are going to be, those are influences you can’t control. So you want to be thinking about how you can minimize your value stream, and you want to be as close to your customer as possible. That’s always the best situation for a number of reasons. Obviously, it shortens the supply chain; but also you have a presence in the market, your name is seen in the market, and you’re also closer to that customer and can understand better what their requirements are and what their needs are that might be different. You can do all the analysis you want from afar, design products and parachute them in and there will be some level of success. But the real success is going to come when you get closer to your customer. You can interact with your customer on a more regular basis. You can see their patterns. So any time you can shorten up that value stream and be closer to your customer that’s always the best thing to do.

DOUG
I think that is a lot to take in today! I appreciate your time and I appreciate your efforts and I appreciate you being here today

TONY
My pleasure, Doug.

If you would like to listen to the audio of this transcription, or listen to other interviews regarding topics related to offshore operations, please click here.

These programs are offered as a free service by the Entrada Group. If you have any questions on these or any other topics related to offshore operations, email Doug Donahue at ddonahue@entradagroup.com

The Entrada Group provides offshore manufacturing services for the ultimate in efficiency and effectiveness. Entrada supports companies in quickly launching and maintaining manufacturing operations in Mexico without establishing a legal presence. Through powerful economies of scale, Entrada’s on-site shared-services center offers clients exceptional production control with long and short-term cost reductions.

Learn more at www.EntradaGroup.com