CHAPTER 5
Danfoss A/S - Global Manufacturing Footprint
This case was prepared by Professor Torben Pedersen and Research Assistant Jacob Pyndt of the Copenhagen Business School. We thank Danfoss A/S for its helpful collaboration in developing this case. The case is developed solely as a basis for classroom discussion rather than to highlight effective or ineffective management in administrative situations. Some facts have been disguised to retain proprietary rights. Not to be used or copied without written permission from the authors. Instructors who wish to use this case may contact the authors at [email protected] or [email protected].
Looking at the world map of Danfoss production sites, COO Hans Kirk speculated: One of our main challenges for the years to come is to optimize the geographical location of our production sites and to explore the possibilities for a consolidation of our global plant portfolio. I see a lot of small lights all over the world, each representing a Danfoss plant. The question is where the lights should be in the future, and whether it is advantageous to unite some of those lights. Traditionally, Danfoss expanded its product lines following the one product, one plant philosophy, which suggested that each time a new product was invented, production capabilities were mobilized and a new plant was built. This development had resulted in more than 50 plants worldwide; yet the majority located in European markets. The plants operated independently, as product lines were very specialized and shared few aspects that could create scope effects. Despite the geographical multiplicity, the specialization of Danfoss global production network, and the complex product portfolio, Danfoss expressed a one-company identity. Contesting the conglomerate identity, CEO Jrgen Mads Clausen declared: We are not a conglomerate. We would be if we owned a string of unrelated companies, but all our divisions are linked together (Berlingske Tidende 27 March 2005).
Faced with saturated European markets, Danfoss began investigating how the plant portfolio could be optimized in terms of better coordination between production units in 2004. One objective was to be positioned appropriately to meet future market demand. As the center of international commerce moved towards Asia, the companys focus on Denmark and Europe might become
Danfoss A/S Global Manufacturing Footprint
inappropriate. Literally, the task was to turn Danfoss plant portfolio, with its high degree of specialization, into a global production network and investigate the potential benefits of interlinking production operations. Danfoss also needed to consider economies of scale and scope, and how production relocations would impact R&D.
A team was put together to investigate a target footprint that could serve as the basis for future investment and divestment decisions. The team worked closely with CFO Ole Steen Andersen and reported regularly to the entire Executive Committee. The team included Senior Director Ian Colotla, a mechanical engineer from the University of Colombia and with a PhD from Cambridge. With seven years of experience in engineering, manufacturing and project management at Danfoss, Mr. Colotla was a specialist in international production networks. He worked together with Senior Director Nicholai Lche Tandrup who, in addition to his consulting experience, had worked on issues related to strategy and business development within Danfoss. In addition, external consultants were brought in to assist. One of the teams prime tasks had been to generate scenarios for a competitive production network structure by 2014. Conducting this comprehensive analysis, they needed to consider inflexible manufacturing volumes, product mix allocation and footprints with a strong focus on high cost countries while overcoming barriers to change for existing footprints.
Introduction to Danfoss Under the original name of Dansk Kleautomatik- and Apparat-Fabrik (Danish Cooling Automatics and Equipment Factory), Mads Clausen founded Danfoss in 1933. The company was established in response to Danish custom barriers and import bans hindering the trade of automatic valves for refrigeration plants which then took place in the United States. Danfoss developed from a small valves shop into one of Denmarks largest industrial groups, with sales of DKK 16,345 million in 2004 and 17,543 employees worldwide (see exhibit 1). Danfoss is privately held by the Bitten and Mads Clausen Foundation, and members of the Clausen family. Danfoss activities are divided into three main business areas: refrigeration and air conditioning (RA), heating and water (HW) and motion controls (MC), each a leader within its industry. Danfoss owns a significant share of one of the worlds leading manufacturers and suppliers of mobile hydraulics, Sauer-Danfoss (see exhibit 2).
The Danfoss group presents itself as a leader within research, development and production, sales and service of mechanical and electronic components for several industries (Danfoss website).
Danfoss A/S Global Manufacturing Footprint
Generally speaking, the companys products help to heat and cool homes and offices, refrigerate food and control production lines. The companys mission statement reflects its objective: Making Modern Living Possible. Danfoss has a global network of 118 sales companies, 72 agents and distributors, and production facilities in 56 factories in 20 countries. All together, these locations produce, sell and distribute 250,000 items per day.
Despite its global presence, the majority of Danfoss sales comes from Western Europe, equaling roughly 65% in 2004. Other important sales regions include Eastern Europe (11%), North America (8%), and Asia-Pacific (10%). The geographical distribution of employees also reflects Danfoss strong European orientation. While approximately 6,200 employees work in Denmark, 11,300 are employed outside Denmark. Of these 65 % are located in Europe, with most working out of Germany, Slovenia and France. Organizational Development Danfoss was strongly attached to its original home in Nordborg on Als, a small island located in southern Denmark. Given its strong commitment to local community initiatives and the business environment, a symbiotic relationship between the company and Als existed, particularly in Nordborg. Danfoss took pride in its long tradition of social responsibility towards both employees and the surrounding environment. All together, Danfoss provided over half of the jobs in Nordborg, amounting to roughly 3500 employees, of which approximately 550 were engineers. Due to its remote location, the business press often speculated about the difficulties Danfoss must have had in recruiting talented business people. However, according to CEO Clausen, the headquarter location on Als would continue to serve as the focal location in the future. There are no places that can match what we have here. It would take a long time to build up the technological foundation we possess here at Als. It is not us who are located remotely. It is the others who are located far from us (Berlingske Tidende 27 March, 2005). At the end of 2004, the company hired Niels B. Christiansen, age 38, as Executive Vice-President and COO. Mr. Christiansen came from a position as President and CEO of GN Netcom, where he had a successful track record in increasing sales substantially. More importantly, he possessed a global outlook and extensive business experience in China. One of his first tasks was to monitor Danfoss more than 50 worldwide production sites together with Executive Vice-President Hans Kirk. According to Mr. Christiansen, Danfoss
Danfoss A/S Global Manufacturing Footprint
needed to employ a young leader with global experience and a keen interest in industrial engineering. Having traveled four out of five days the first six months of service, he had obtained a grasp of the multiplicity of Danfoss many business areas. Mr. Christiansen then felt equipped to explore new business opportunities and areas for improvement in Danfoss global organization. He talked openly of delegating more responsibility to subsidiary management units to capture market trends swiftly. Commenting on his own role, Mr. Christiansen stated: I believe my key skill is my ability to explore how we can do things in a different or new way. Being at the helm when the course has been set is also critical, but less challenging (Brsen 21 April 2005). Different Product Divisions On 1 January 2005, Danfoss officially changed the names of its core business divisions to the Danfoss Refrigeration & Air Conditioning Division, the Danfoss Heating Division (including Danfoss Water Controls), and the Danfoss Motion Controls Division (see exhibit 3). The RA division comprised by far the largest unit with respect to sales, generating approximately 53% of Danfoss total sales in 2004 (see exhibit 1). Business units within RA, such as Compressors, and Industrial and Appliance Controls, were responsible for product development, production and key accounts. The RA products were manufactured at 27 factories in 16 countries (see exhibit 4) and sold to the global market through the divisions own sales organization. The sales organization, responsible for sales, marketing, customer support and distribution, was organized into four global regions: Europe, the Middle East and Africa; Asia-Pacific; and North and Latin America. Marketed products included household refrigeration, commercial refrigeration, industrial refrigeration, industrial air-conditioning, supermarket refrigeration and industrial controls for manufacturers (OEMs), wholesalers and installers.
Comprising roughly 26% of total sales, the HW division constituted the groups second largest division. The divi
