Kiwi Medical Devices Ltd.: Is “Right Shoring” the Right Response?

The Race of Life

Exhausted, Michelle Ledger leaned against the stop sign, stretching out her burning calf muscles. She had just finished a 90-minute, 20-kilometer run. Amazingly, she wasn’t even training for a marathon. Rather, she was burning off anxiety. Every time pressure at work ratcheted up, she turned to her favorite pastime—long-distance running. Somehow, running along Waitemata Harbour and looking to the Waitekere Ranges calmed her inner worries as she focused on the task du jour at work. As she began her cooldown routine, Michelle reflected on the events of the past few months.

At the forefront of her thoughts was the morning’s executive steering committee meeting. It had not gone well. Timothy Craig, CEO of Kiwi Medical Devices Ltd., had pressed Michelle for a solution to Kiwi’s eroding market share. Michelle hated having to say, “I don’t know,” but she didn’t have an answer. Worse, she had to admit she wasn’t sure when she would know. Kiwi had never “offshored,” and the complexity and nuance of the analysis was daunting. Yet, despite the angst caused by Tim’s repeated, intense questioning, Michelle was certain that a wrong decision made in haste would cost far more than the uneasiness of the moment.

As director of operations at Kiwi, Michelle had been tasked with increasing Kiwi’s manufacturing capacity and competitive capabilities. The need to evaluate offshoring was raised by a recent market analysis, which revealed that although Kiwi retained an innovation edge over aggressive global rivals, it had lost cost and delivery advantages. As a result, competitors were taking share in markets around the world. By setting up production operations in Asia, competitors had lowered their cost structures, changing the rules of the competitive race. Michelle and her team needed to respond—and quickly. Although confident her team could help Kiwi regain its leadership position, Michelle wasn’t quite sure how Kiwi could best restructure its global operations to gain advantage.

Kiwi’s Marathon Begins

Kiwi Medical was born in the late 1960s. The offspring of Kiwi Design & Electronics, a high-end, innovation-driven manufacturer of household appliances, Kiwi Medical came into existence as a hedge against a highly volatile appliance market. Kiwi Design had sought to find a countercyclical market where it could leverage its technological expertise. Heated humidification devices used in respiratory and sleep apnea applications seemed to offer a good fit from at least three perspectives:

  1. The industry was underdeveloped and lacked entrenched competitors.

  2. Kiwi’s technology and R&D expertise gave it a strong foundation that could be used to transform the industry and establish Kiwi as a world leader.

  3. The medical device industry had strong global growth potential.

Following 30 years of solid growth and good financial performance, Kiwi Medical was spun off as an independent company in 2001 with its headquarters and manufacturing in Auckland, New Zealand.

Kiwi’s Spring for Global Sales

By 2009, Kiwi Medical’s global sales had reached NZ$398 (its market capitalization was approximately NZ$1.5 billion). Kiwi sold to hospitals, long-term care facilities, and home health care dealers in over 120 countries worldwide. Its core products included respiratory humidifiers and neonatal care products such as infant warmers and resuscitators. Kiwi had also developed a strong presence in the obstructive sleep apnea (OSA) market with a focus on continuous positive airway pressure (CPAP) therapy devices. Kiwi also manufactured and distributed the accessories needed to effectively deploy its equipment (e.g., single-use and reusable chambers as well as breathing circuits). See Table 4.1 for a breakdown of sales by product group.

Table 4.1
Financial Performance at Kiwi Medical Devices Ltd.
  2009 2008 2007 2006 2005
Sales Revenue (NZ$000) 485,516 345,966 342,978 289,547 240,566
Foreign exchange gain (loss) -26,799   11,927     4,179   34,910   30,844
Total Operating Revenue 458,717 357,893 347,157 324,457 271,450
Cost of goods sold 212,087 177,811 151,298 121,365   98,127
Sales, general, & other expenses 118,929   97,859   95,909   81,679   67,382
Research & development expenses   28,310   24,091   20,668   17,348   16,196
Operating Profit 102,391   58,132   79,282 104,065   89,745
Net financing expense -17,353   -3,822       337       350     1,247
Profit before tax   85,038   54,310   79,619 104,415   91,562
Tax expense -22,805 -19,034 -29,034 -34,450 -30,157
Profit after tax   62,233   35,276   50,504   69,965   61,405
Revenue by Product Group:
Respiratory & acute care 244,527 182,043 175,950 162,537 142,940
Obstructive sleep apnea 202,604 165,378 161,059 152,150 118,275
Distributed and other   11,586   10,472   10,148     9,770   10,235
Total 458,717 357,893 347,157 324,457 271,450
Revenue by Region:
North America 208,861 165,685 169,689 168,610 132,250
Europe 151,907 115,999 107,938   86,421   77,917
Asia Pacific   71,787   58,287   53,412   54,656   50,422
Other   26,162   17,922   16,118   14,770   10,861
Total 458,717 357,893 347,157 324,457 271,450
Financial Position:
Tangible assets 371,520 313,667 305,283 253,896 213,331
Intangible assets   42,217   18,000   21,492   13,574   16,979
Total assets 413,737 331,667 326,775 267,470 230,310
Liabilities -209,436   -136,003   -90,228 -63,477 -38,279
Shareholders’ equity 204,301 195,664 236,547 203,993 192,031

From 2005 to 2009, sales had grown at a solid, if not spectacular, pace of 9.5 percent per year (see Table 4.1). Kiwi attributed the sales growth to its intense focus on technological innovation and a relentless quest to expand its global market presence.

  • Product Innovation. Kiwi was dedicated to improving existing products as well as developing innovative, complementary product offerings. Indeed, a continued commitment to research and development enabled Kiwi to target new medical applications for its core technologies. From 2005 to 2009, Kiwi spent an average 6.3 percent of sales on product development and clinical research. By 2009, its research team of engineers, scientists, and physiologists had grown to 253 people. In 2009 alone, Kiwi had obtained 371 patents in markets around the world (79 in the US). An additional 365 patent applications had been filed (73 in the U.S.).

  • Global Market Development. Kiwi’s largest market was North America. However, Kiwi had a very strong presence in both Asia and Europe (see Table 4.1). To support its aggressive marketing initiatives, Kiwi had developed a 493-person sales, marketing, and distribution team. Direct sales offices had been established in Australia, China, the Euro zone, India, New Zealand, Scandinavia, the UK, and the U.S. In addition, Kiwi had developed relationships with over 90 distributors worldwide. To help support continued market expansion, Kiwi opened two new distribution centers in Canada and Japan in 2009.

Kiwi’s Cramped Manufacturing Footprint

Kiwi had long been proud of its New Zealand heritage. Indeed, Kiwi touted, “We manufacture, assemble, and test our complete range of products, including many components, in our custom-built facilities in New Zealand with a total area of approximately 51,000 m2.” These facilities possessed advanced manufacturing technologies and had obtained highly visible ISO 9001 and ISO 13485 (international medical device) quality certifications.

Although provincial, New Zealand-based manufacturing had provided Kiwi a relative cost advantage vis-à-vis its toughest rivals in Europe, Japan, and the US. However, as Kiwi chased global sales, operating costs seemed to be racing out of control—they had increased 16 percent per year over the past five years. Now that rivals had globalized their production networks, Kiwi’s limited base of operations was becoming a liability.

Kiwi’s Race Turns Uphill

By most measures, 2009 had been an outstanding year for Kiwi. Operating revenue was up 28 percent with both product groups—respiratory (34 percent) and OSA (23 percent)—delivering strong growth. Better yet, operating profit increased by a very healthy 76 percent. However, a very challenging 2008 coupled with the general upward trend in operating costs led Tim Craig and the executive steering committee to initiate an in-depth analysis of competitive and market trends.

Michelle had been a member of this scanning team. To her dismay, many of the findings—especially those related to Kiwi’s more mature products in the respiratory market—had led her back to her favorite running trail along Waitemata Harbour. Nonetheless, she kept a list of the most pertinent findings posted by her office door. She had highlighted the most distressing points in red. The list included the following items that would influence Kiwi’s long-term success in the respiratory market:

  • The respiratory device market was a NZ$1.4 billion market. Global demand for respiratory care devices was expected to rise three to five percent annually for the next 20 years.

  • Kiwi’s share of the respiratory market was had decreased from almost 25 percent to 17.5 percent in the past four years. Kiwi’s market share was falling by 2 percent per year!

  • Kiwi’s traditional competitors were headquartered in Europe, Japan, and North America. Although their historical costs had exceeded Kiwi’s, four of Kiwi’s five largest rivals had shifted manufacturing to lower-cost sites in China, Vietnam, and Indonesia. As a result, these rivals now enjoyed a 10–15 percent price advantage for comparable respiratory devices.

  • New, low-cost but less technologically sophisticated rivals had emerged in China. These rivals could not match Kiwi’s innovation, but they put tremendous pressure on Kiwi’s more mature product line. Of note, these Chinese rivals challenged Kiwi’s value proposition. Some customers had begun to ask a threatening question: “For some applications, how much price premium is state-of-the-art technology worth?”

  • Real wages in New Zealand were rising faster than in most of Europe and North America. Collective bargaining units (unions) were gaining a foothold with Kiwi’s former parent company, Kiwi Design & Electronics.

  • Kiwi Breathers (the name of Kiwi’s respiratory devices) were crated and shipped airfreight in lots of five on an EXW basis to customers outside New Zealand. Although product could be delivered to 80 percent of Kiwi’s global customers within five to seven days, customers were asking for even faster responsiveness. Many customers were now ordering competing devices from more geographically proximate rivals.

  • Available airfreight capacity from New Zealand was dropping. Transportation costs from New Zealand were rising faster than from North America or Europe. (Were freight rates during the 2007 oil spike a harbinger?)

The competitive marketplace was clearly more hostile, and potentially volatile, than at any time in Michelle’s nine years with Kiwi. After taking a deep dive into the facts presented by the market study, Kiwi’s management determined that it needed to reduce operating expenses by at least three percent per year over the next five years while offering better—that is, faster, more robust—delivery. The goal was to reverse Kiwi’s market share slide and raise operating profit by five to eight percent annually. Offshoring seemed to be the only possible response. As Michelle and her team began to explore this option, they identified three separate but related questions that needed to be answered.

  1. Where was the right place to set up overseas manufacturing?

  2. How much investment and risk was Kiwi willing to incur as it set up overseas operations?

  3. How should Kiwi provide logistical support for its overseas operations?

Choosing Where to Run?

For Michelle and her team, which had become known as the “right-sourcing” team, the natural starting point in the search for a right-sourcing location was to follow the competition to Asia. However, given Kiwi’s global sales platform and customers’ desire for responsive delivery, the team decided to add Slovakia, Poland, and Mexico to the initial set of possible host countries. As the right-sourcing team met to discuss options, they began to identify potential country selection criteria. From an initial list of over 30 criteria, the team settled on the following 10 criteria that appeared to best delimit Kiwi’s needs.

  1. Labor costs

  2. Labor skill and experience

  3. Transportation costs

  4. Transportation lead times to/from the factory

  5. Duty rates (for incoming raw materials as well as export of finished product)

  6. Political stability/corruption

  7. Local taxes

  8. Unions, strike risk

  9. Permits and factory setup cost

  10. Management relocation expense, lifestyle, and safety

As the right-sourcing team defined the critical criteria, several countries under consideration fell off the list, leaving the team with four finalists to evaluate more closely: China, Indonesia, Mexico, and Slovakia. To help make the final decision, the team assembled a fact sheet comparing each country (see Table 4.2).

Table 4.2
Country Fact Sheet
China is the world’s fourth largest country, at 9,596,961 square kilometers, and most populous country, with 1.3 billion people (median age = 34.1 years; fertility rate = 1.79 children born per woman). China has a rich heritage and history—its Chinese name is translated as “Middle Kingdom.” Since the early 1990s, China has initiated economic reforms that have led to dramatic industrialization. Average GDP growth has exceeded 10% for the past 20 years, helping lift GDP/capita to NZ$9,168. Since 2000, no country has attracted more FDI than China.
Indonesia is a Southeast Asian archipelago consisting of hundreds of islands that comprise 1,904,569 square kilometers. Indonesia is the world’s fourth most populous country and largest Islamic country, with 240 million people (median age = 27.6; fertility rate = 2.31). GDP/capita (PPP) is NZ$5,641 and has recently grown at over 5% per year. About 17.8% of the population lives below the poverty line. As a member of ASEAN and one of Asia’s emerging Tigers, Indonesia is an attractive FDI destination; yet, an inadequate infrastructure hinders economic growth.
Mexico covers an area of 1,964,375 square kilometers and has a population of 111 million (median age = 26.3; fertility rate = 2.34). Mexico shares a 3,200 kilometer border with the U.S. Since ratification of NAFTA in 1994, Mexico has achieved an impressive record of attracting FDI, becoming one of the most industrialized countries in Latin America. GDP/capita is NZ$18,618. The labor force is estimated to be 46 million, unemployment is at 6.2%, and 18% of the population lives in poverty. Violence has increased since President Calderón declared war on Mexico’s drug cartels.
Slovakia is a small country at 49,035 square kilometers and is located in middle Europe. It has a population of 5,463,046 (median age = 36.9; fertility rate = 1.35). As a member of the EU, Slovakia has ready access to the rest of the European market. Economic reform has led to rapid industrialization and growth. GDP/capita is NZ$29,760. The labor force is 2.6 million with an unemployment rate of 11.8% and 21% of the population living below the poverty line. The literacy rate is 99.6%.
Criteria China Indonesia Mexico Slovakia
Hourly Compensation NZ$1.14 NZ$1.07 NZ$5.51 NZ$11.79
Labor Skill Good Acceptable Very Good Very Good
Transportation Costs:        
     New Zealand to . . . Low Low Medium High
     . . . to Asia Low Low Low High
     . . . to Europe High High Medium Low
     . . . to U.S. Medium High Low Medium
Transport Lead Times:        
     New Zealand to . . . Very Good Excellent Good Good
     . . . to Asia Excellent Excellent Good Good
     . . . to Europe Acceptable Acceptable Good Excellent
     . . . to U.S. Acceptable Acceptable Excellent Good
Duty Rates:        
     New Zealand to . . . Low, Variable Low, Variable Free w/re-export Low, Variable
     . . . to Asia No duty No duty 3–4% 3–4%
     . . . to Europe Free/19.6% VAT Free/19.6% VAT Free/19.6% VAT Free/19.6% VAT
     . . . to U.S. No duty No duty No duty No duty
Corruption Index 3.6 2.8 3.3 4.5
Economic Freedom Index 51 55.5 68.3 69.7
Global Competitiveness 4.74 4.26 4.19 4.31
Taxes (Corporate/Value-Added) 25%/17% 25%/10% 28%/16% 19%/19%
Strike Risk Low, increasing Moderate Moderate Moderate
Factory Setup        
     Permit (ease/cost factor) Moderate/High Easy/Moderate Easy/Moderate Moderate/High
     Land Cost NZ$42/m2 NZ$42/m2 NZ$40/m2 NZ$54/m2
     Building Cost NZ$279/m2 NZ$317/m2 NZ$247/m2 NZ$396/m2
Management Lifestyle Acceptable Difficult Favorable Favorable

Despite the methodical approach, different members of the team adopted advocacy roles for each of the countries. Some team members felt it would be foolish to allow competitors to operate in China unimpeded. They did not want to give rivals a first-mover’s advantage in developing the Chinese market. Others noted that Kiwi’s strength was leading-edge innovation. They felt being close to developed markets of Europe and the U.S. was pivotal. Michelle could understand both arguments and hoped that rigorous analysis would provide a tipping point that all of the team could rally around.

Of course, once a country was selected, Michelle knew it would be vital to select the right city. This decision, however, was more important and challenging for China and Mexico. After all, the options in these two countries were both greater and more diverse. In both countries, the team noted that the most important differentiation was between long-established investment zones and interior cities. The advantage of classic investment centers like China’s Guangdong province and Mexico’s border cities of Tijuana and Juarez was simplified setup and logistics. By contrast, interior cities like Chongching and Saltillo offered lower wage rates, a more abundant and stable workforce, and better tax incentives.

Running with Risk, but How Much?

From the inception of the analysis, Michelle had recognized that neither she nor anyone else on the right-sourcing team had global manufacturing experience. Even so, Michelle was not so naïve to think that doing business the New Zealand way could be easily transferred to one of the finalist countries. She realized that regardless of country choice, navigating the politics and managing the cultural differences in the country of choice would be a real challenge. This reality increased both Kiwi’s and Michelle’s risk of failure. No wonder she spent so much time running during the past three months.

Fortunately, as the team invested in the due-diligence process, they identified opportunities to minimize Kiwi’s exposure to the uncertainties of global operations. Most importantly, they realized that going global did not mean they had to go all in. Three options for expanding capacity and improving competitiveness existed: subcontracting, shelter operations, and a wholly owned subsidiary.

Subcontracting offered the easiest and the fastest way (often as little as 30 days) to get started. Subcontracting involved finding a local manufacturer of OEM electronics that could produce to Kiwi’s design specifications. Kiwi could thus minimize investment. Although Kiwi would have to provide the specialized equipment and arrange for delivery of needed components, it would have no brick-and-mortar responsibilities. The subcontractor would manage manufacturing and provide logistics support. Two downsides worried Michelle. Kiwi would lose some control over the production process and thus product reliability. Further, Michelle expected that unit costs would be higher under subcontracting.

Shelter operations required more time to get going than subcontracting (around 60–90 days), but compared to a wholly owned subsidiary, shelters reduced the initial investment and mitigated the learning challenges associated with new setups. A shelter service provider would manage the hassles of getting the business up and running. In essence, Kiwi could maintain control of the production process and product technologies without getting bogged down in administrative and legal annoyances. As the team met with several shelter service providers, five caught their attention:

  1. Assistance with accounting and tax services as well as obtaining licenses and permits

  2. Help with legal and fiscal representation in the host country

  3. Provision labor procurement and HR services, including payroll and performance monitoring

  4. Sharing of expertise regarding raw materials sourcing and vendor-managed warehousing

  5. Help with customs clearance and duty-rate analysis

Wholly owned subsidiaries offered Kiwi maximum control, and they often delivered the lowest operating cost structure, but they were know-how intensive and risky. If Kiwi pursued this course, the right-sourcing team would have to find a site, manage construction of the facility, and perform all the administrative tasks performed by the shelter service providers. Understanding the details of doing business locally was a must. So too was developing needed political and business relationships. Ownership was the preferred option for companies that were (1) looking to make a long-term commitment, (2) seeking to establish large-scale operations, and (3) needing high levels of technological or new-product support. The key was achieving the long-term success needed to justify the up-front capital and emotional investments.

Selecting a Race Support Team

Even as the team began to develop the country-selection criteria, Michelle realized that right-sourcing demanded more than just good manufacturing decisions. The fact that several of the criteria were transport-oriented underscored the need to build the right logistics infrastructure to support the overseas operation. The good news: Kiwi had a lot of exporting experience. At least here, the team would not be running completely in the dark. Still, supporting a global manufacturing operation would be more complex than anything that Kiwi had done before.

Because of time pressures and the lack of direct experience, the team decided the best option would be to outsource the logistics support to a third-party logistics (3PL) company. Such a decision fit well with Kiwi’s past behavior. Senior management at Kiwi had always emphasized that Kiwi was an R&D and manufacturing company—not a logistics provider.

To prepare for effective outsourcing, the team mapped out the basic materials flows. Mapping revealed the need to find 3PLs that could handle three distinct types of logistics: (1) inbound movement of capital equipment, (2) inbound movement of raw materials and components, and (3) outbound movement of finished goods to customers around the world. A closer inspection of the materials flow map suggested that Kiwi should evaluate the 3PLs’ ability to set up and manage an inbound cross-dock warehouse. After all, regardless of country choice, Kiwi’s primary suppliers were geographically dispersed and would be shipping product into a port of entry—probably in less-than-container-load quantities. From a cost perspective, it might make sense to consolidate these shipments at the entry point and then ship them on a truckload basis to the new factory. Based on this analysis, the right-sourcing team developed a request for information (RFI) asking for the following:

  1. Pricing, capacity, and lead-time information for movement of raw materials from 10 international suppliers to the appropriate port of entry for each of the four country finalists

  2. Pricing and timing information for movement of capital equipment from five European suppliers to each proposed site option

  3. Pricing for consolidation of inbound shipments at a cross-dock warehouse

  4. Pricing, capacity, and lead-time information for appropriate ground transport from port of entry to actual manufacturing site

  5. Pricing, capacity, and lead-time information for appropriate ground transport from factory to airport for export shipping

  6. Pricing, capacity, and lead-time information for movement of finished product to international customers by either truck or air depending on customer location

  7. Pricing information for preparing all paperwork (customs clearance as well as inspection of capital equipment and raw materials) on inbound shipments to the factory

  8. Pricing information for all import/export documentation related to outbound shipments of finished goods (to include in-bond documents for international shipments)

The team had just sent out the RFIs a few days earlier. The three big logistics integrators—DHL, FedEx, and UPS—had been selected as potential support team leaders because they were viewed as capable of providing one-stop shopping for Kiwi’s global needs. Although DHL had been Kiwi’s sole global 3PL for its New Zealand import/export shipments for 20+ years, the team felt it was time to verify that DHL was still capable of providing Kiwi top-notch service at world-class prices.

In addition, tailored RFIs were sent to local freight forwarders in each country to assess their ability to provide ground transport, cross-docking, and customs clearance and documentation services. Kiwi wanted to make sure that it built the right relationships to get things done on the ground. Sometimes this could be done best by a local player with good connections.

Time to Relax—For a Moment

Having run through the day’s stress, Michelle finished her cooldown routine. Suddenly, she realized that until the detailed responses to the RFIs were returned, the team could do little more than wait. The rest of the homework had been done. The right-sourcing team was closer to making more progress than she had realized. Life was good after all.

Of course, Michelle knew that this was the lull before the storm. Once the information from the 3PLs came back, a decision would need to be made. Then the real work of execution would begin. Only then would they find out whether they had truly right-sourced Kiwi’s mature products, reducing freight and manufacturing costs, shortening lead times, and increasing Kiwi’s geographic reach. If they had done their job well, Kiwi would have additional capacity at its New Zealand facility to design and build the new, more technologically sophisticated products that were the lifeblood and future of Kiwi Medical Devices.


  1. Which of the four finalist countries should Michelle and the right-sourcing team select for its new right-shore facility? Or should Kiwi stop, take a deep breath, and continue its New Zealand-centric manufacturing model? Hint: a weighted-factor model might provide insight into a good choice.

  2. Given Kiwi’s competitive challenge and its strategic goals, would you suggest a port of entry or an interior city for the new manufacturing facility? What specific factors drove your decision?

  3. Which mode of entry/operation—subcontracting, shelter, or wholly owned subsidiary—would you recommend? What factors should really drive this decision?

  4. What do you think of Kiwi’s decision to invite new players to bid for the logistics support business associated with the right-shore operation?

Action Activity

Consider yourself the newest member of the right-sourcing team. Focusing on the information presented in the country fact sheet, use a spreadsheet to develop a weighted-factor model to help decide among the country options. Use the narrative from the case to help establish appropriate weights for each criterion. Perform a sensitivity analysis and come to class prepared to share your findings. Beyond identifying the “right” country for Kiwi’s new manufacturing facility, be sure you can answer one of Timothy Craig’s favorite questions: “How robust is your solution?”