Volume 15

Issue 2
June 2017
HEC215

Offshoring: Where Should KindyBis Make Its Socks?

Case 1 prepared by Fabien PEYROL, 2 Claudia REBOLLEDO,3 and Jean-François
CORDEAU 4

KindyBis 5 is a French SME with annual sales of roughly €10 million. It produces socks for both
children and adults, offering high-quality products ranging from sports to dress socks. The high
quality of its socks in terms of both materials and stitching have enabled KindyBis to maintain its
position in the European hosiery market, its products are sold by Europe’s major retailers. The
company’s market includes the Iberian Peninsula (20% of sales), France (30%), Benelux (15%),
Germany and Austria (15%), and Italy (20%). Although sales have decreased in recent years, the
company hopes to increase its profit margin without compromising either quality or product image.
Its senior managers have considered moving production overseas, but opinions vary regarding what
form such offshoring should take. To limit the risk, some would like to outsource only part of the
production process, while others favour a more radical solution, moving the entire plant overseas.
Faced with these options, KindyBis is seeking tools and methods to help it chart its course.

While its sales have declined, KindyBis is still a major French hosiery manufacturer. It has
achieved this feat despite strong international competition by having its R&D department
implement recommendations emerging from its marketing studies. As a result, KindyBis products
have improved considerably, with special fibres providing better air circulation and elasticity.

Production
KindyBis operates just one 20,000 m2 plant, located at its head office in Beauvais, north of Paris.
This plant produces 5 million pairs of socks annually with average daily production of 4,348 batches,
at five pairs per batch. The plant employs 250, with a 230-day work year.

1 Translation from the French of case #9 00 2017 001 “Délocalisation internationale : où KindyBis devrait-elle produire ses
chaussettes?”
2 Fabien Peyrol holds a Master’s in administration (M.Sc.) – International logistics, HEC Montréal.
3 Claudia Rebolledo is an associate professor in the Department of logistics and operations management at HEC Montréal.
4 Jean-François Cordeau is a professor in the Department of logistics and operations management at HEC Montréal.
5 Kindybis is a fictitious company, but the case is inspired by Kindy, a real company.
© HEC Montréal 2017
All rights reserved for all countries. Any translation or alteration in any form whatsoever is prohibited.
The International Journal of Case Studies in Management is published on-line (http://www.hec.ca/en/case_centre/ijcsm/), ISSN 1911-2599.
This case is intended to be used as the framework for an educational discussion and does not imply any judgement on the
administrative situation presented. Deposited under number 9 00 2017 001T with the HEC Montréal Case Centre, 3000, chemin de
la Côte-Sainte-Catherine, Montréal (Québec) H3T 2A7 Canada.
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 Offshoring: Where Should KindyBis Make Its Socks?

KindyBis’s procurement of raw materials meets fair trade standards, and the company deals only
with European suppliers. Its innovative production process was designed to minimize
environmental impact and water consumption.

Market constraints
The textile industry is undergoing an upheaval in some developed countries. Asian competition,
particularly following the end of import quotas in the 1990s and 2000s, has sparked fierce
international competition. Production costs are high in western countries compared to those in Asia,
the Maghreb, and Eastern Europe, yet prices are fairly low. To survive, firms must decrease their
production, logistics, and administration costs. This is why many western firms are looking to
offshore production.

Despite sluggish economic conditions, 400 million pairs of socks are sold in France each year,
suggesting that KindyBis could increase market share if it became more competitive, especially in
terms of price.

KindyBis is also positioning itself as an online seller, having created a website for the KindyBis
brand along with the number one website in France devoted to the sale of socks:
www.voschaussettes.fr (yoursocks.fr).

Distribution constraints
Cost management alone will not ensure survival, however: retaining distributors is crucial.
KindyBis’s European distributors are international giants: Carrefour is the world’s second-largest
retailer after Wal-Mart; Tesco is the third largest; and Décathlon is France’s leading sportswear
retailer. To minimize inventory, the firm’s distributors use the just-in-time inventory system and
require short delivery times.

KindyBis distributes most of its products to five distribution centres in Paris, Zaragoza, Milan,
Munich, and Rotterdam (see table 1). KindyBis manages deliveries by professional carriers to the
five distribution centres as indicated below. Truck capacity is not crucial since socks don’t weigh
much. A 40-ton European truck has a load capacity of 25 tons.

Table 1: KindyBis distribution centres

France Spain Italy Germany Netherlands
Paris Zaragoza Milan Munich Rotterdam
Percentage of production 30% 20% 20% 15% 15%
Batches per year 300,000 200,000 200,000 150,000 150,000
Batches per shipment 5,769 7,692 7,692 7,143 7,143
Number of shipments 52 26 26 21 21
Delivery conditions (maximum time) 1 week 2 weeks 2 weeks 2.5 weeks 2.5 weeks

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 Offshoring: Where Should KindyBis Make Its Socks?

Suppliers
With regard to suppliers of raw materials, we know only this:
• Suppliers are responsible for transporting raw materials to the plant.
• Cotton (80% of the finished product) is supplied by a French manufacturer of high-
quality, fair-trade certified cotton.
• Elastane (1%) is supplied by a reputable French firm with which it has had a lengthy
business relationship.
• Polyamide (19%) comes from a Spanish supplier with which it began doing business
only recently. Its deliveries have always been on time and of excellent quality.

The offshoring project

KindyBis faces increasing financial challenges. Although its products sell well, growth seems
unattainable, with customers seeming to prioritize low prices over quality. Two years earlier, the
company had responded to this situation by launching a low-cost, entry-level line of socks. Just
one year later, KindyBis withdrew these products, deciding to streamline operations by focusing
on the firm’s core business: high-end socks.

Despite this clear strategic orientation, KindyBis’s financial statements showed little improvement.
At the last shareholder meeting, the financial director announced that the company would try to
increase its profit margin by lowering production costs. Representatives of the French labour
unions declared that they were doing everything possible and threatened to strike.

While not yet ready to commit to offshoring, KindyBis commissioned a preliminary analysis of
possible sites based on three major criteria laid out in its strategic guidelines. First, the plant had to
be located in or near continental Europe to facilitate road freight transport. KindyBis has many
years’ experience managing road transport but has not yet developed expertise with other modes
of transport. Another consideration was proximity to distribution markets. Major distributors insist
on relatively short delivery times and will no doubt tighten these requirements in the coming years.
Finally, KindyBis sought a country where the textile industry already had a strong structural base,
allowing it to operate at full capacity. Based on these criteria, three countries were selected:
Portugal, Poland, and Turkey. In each of these countries, an industrial suburb was identified based
on the company’s needs in terms of size (minimum 30,000 m2), proximity to road transport hubs,
and economic importance of the textile industry: those of Krakow (Poland), Istanbul (Turkey), and
Lisbon (Portugal). Exhibit 1 shows a compendium of factors related to the countries selected as
possible locations.

KindyBis recently decided to make a second attempt to launch a new line of low-end socks. The
marketing director believed that offshoring would ensure the viability of this strategy since the
failure of the first attempt had been attributed to the cost structure of the Beauvais plant. This view
was supported by an analysis done by the company’s financial controllers. The marketing director
was also convinced that production of the new line of socks should be fully outsourced. He
therefore asked the purchasing director to find international suppliers able to meet the company’s
needs. Exhibit 2 shows the preliminary analysis done for this purpose.

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 Offshoring: Where Should KindyBis Make Its Socks?

The offshoring question was complex. KindyBis had to decide where to manufacture both its high-
and its low-end product lines and whether to continue to manufacture the socks itself or have them
made by international suppliers. Moreover, these decisions had to be compatible with the
company’s long-term objectives and justifiable to stakeholders (employees, unions, government,
and local suppliers).

2018-05-28

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 Offshoring: Where Should KindyBis Make Its Socks?

Exhibit 1
Compendium of factors related to countries selected as possible locations1
Cost of manual labour 2
Gross monthly
Number of Annual labour
Labour cost minimum wage Monthly labour cost
employees cost
(2011)
France €1,365.00 €341,250 €4,095,000
Portugal €565.83 €141,458 €1,697,490
250
Poland €348.68 €87,170 €1,046,040
Turkey €384.89 €96,223 €1,154,670

Annual transport costs

France Spain Italy Germany Netherlands Total annual
Paris Zaragoza Milan Munich Rotterdam transport costs
Beauvais €15,883.71 €56,834.23 €46,689.24 €35,040.96 €18,727.72 €173,175.86
Lisbon €166,232.20 €47,044.82 €101,201.15 €93,836.61 €83,578.03 €491,892.80
Krakow €144,091.06 €116,850.08 €64,774.29 €36,172.65 €48,348.24 €410,236.33
Istanbul €259,859.44 €152,321.42 €96,452.49 €74,469.68 €102,905.78 €686,008.80

Telecommunications costs
The table below shows the 2010 telecommunication cost index in relation to figures from 2005. 3
Portugal 92.45
Poland 97.40
Turkey 106.32

Energy costs
Here is the energy cost index, also in relation to figures from 2005, for the three countries
concerned. 4
Portugal 125.12
Poland 137.80
Turkey 175.20

1 The data gathered from the Eurostat website date back to 2010-2011; they have changed since then.
2
Eurostat: http://ec.europa.eu/eurostat/statistics-explained/index.php/Minimum_wage_statistics
3
Eurostat: http://ec.europa.eu/eurostat/statistics-explained/index.php/Archive:Telecommunication_statistics
4
Eurostat: http://ec.europa.eu/eurostat/statistics-explained/index.php/Energy_price_statistics

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 Offshoring: Where Should KindyBis Make Its Socks?

Corporate income taxes

Corporate taxes 1
Portugal 25%
Poland 19%
Turkey 20%

This table shows the corporate tax rate in the three countries. The figures were taken from
Wikipedia and the site of the European Commission.

Climate
The following table indicates the sunshine hours as shown in the climate section of the Wikipedia
page for each city.
Climate
Portugal 2,806
Poland 1,469
Turkey 2,470

Crime
Number of
crimes Population Ratio
Portugal 430,534 10,617,575 0.041
Poland 1,082 057 38,115,641 0.028
Turkey 986,319 70,586,256 0.014

The crime rate is based on the population of the country divided by the number of crimes as
provided by Eurostat, the statistical office of the European Union. 2

Cost of living
Cost of living is based on the price index for each country provided by the Organisation for
Economic Cooperation and Development (OECD 3), giving Portugal a base value of 100 for
comparison purposes.
Portugal 100
Poland 69
Turkey 66

1 Wikipedia (taxes in Europe – corporate income tax):

http://fr.wikipedia.org/wiki/Fiscalit%C3%A9_en_Europe#Imp.C3.B4t_sur_les_soci.C3.A9t.C3.A9s
European Commission: http://ec.europa.eu/youreurope/business/managing-business/paying-taxes/poland/index_en.htm
Wikipedia (Tax rates around the world): http://en.wikipedia.org/wiki/Tax_rates_around_the_world
2 Eurostat: http://ec.europa.eu/eurostat/statistics-explained/index.php/Archive:Crime_statistics
3 OECD: http://stats.oecd.org/index.aspx?lang=en

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 Offshoring: Where Should KindyBis Make Its Socks?

Proximity of head office

The following table, created from simulated data on the ViaMichelin site, shows the distance in
kilometres and travel time between the possible sites and head office.

Head office
Lisbon 1,831 17 hours, 32 min 17.5
Krakow 1,549 13 hours, 58 min 14
Turkey 2,768 27 hours, 27 min 27.5
Distance Travel time Travel time
(0.25 hours =
(km) (hours) 15 min)

Proximity to customers
The following table, based on simulated data on the ViaMichelin site, shows the distance between
the different sites and the distribution centres.
Round-trip distance
(km) France Spain Italy Germany Netherlands
Paris Zaragoza Milan Munich Rotterdam
France Beauvais 158 2,324 1,864 1,728 850
Portugal Lisbon 3,506 1,890 4,300 4,902 4,396
Poland Krakow 3,084 5,092 2,658 1,760 2,510
Turkey Istanbul 5,520 6,488 3,988 3,818 5,406

Borders (customs)
Portugal and Poland are in the Schengen border-free zone. Turkey is not.

Economic, political, and structural risks

Economic, political, and structural risks can be evaluated using Euromoney indices showing the
riskiness of financial investments 1.
Economic risk index Political risk index Structural risk index
Poland 64.36 69.67 58.02
Portugal 42.14 64.31 61.36
Turkey 60.94 60.07 56.70

1
EUROMONEY website, country risk index used in making financial investment decisions:
http://www.euromoney.com/Article/2773235/Country-risk-March-2011-Country-rankings-and-
acknowledgements.html#Thank_You

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 Offshoring: Where Should KindyBis Make Its Socks?

Natural risks
To estimate the natural risks associated with each option, it’s useful to look at the natural disasters
that have occurred in each of the three countries. The following tables summarize the natural
disasters that have occurred in each country in the past thirty years.
Poland 1
Natural disasters from 1980 to 2010
Overview
No. of events: 37
No. of people killed: 1,693
Average killed per year: 55
No. of people affected: 370,666
Average affected per year: 11,957
Economic damage (US$ X 1,000): 8,266,150
Economic damage per year (US$ X 1,000): 266,650

Portugal 2
Natural disasters from 1980 - 2010
Overview
No. of events: 29
No. of people killed: 2,933
Average killed per year: 95
No. of people affected: 157,052
Average affected per year: 5,066
Economic damage (US$ X 1,000): 7,188,776
Economic damage per year (US$ X 1,000): 231,896

Turkey 3
Natural disasters from 1980 - 2010
Overview
No. of events: 97
No. of people killed: 21,964
Average killed per year: 709
No. of people affected: 7,730,453
Average affected per year: 249,369
Economic damage (US$ X 1,000): 25,013,300
Economic damage per year (US$ X 1,000): 806,881

1 http://www.preventionweb.net/english/countries/statistics/?cid=136
2 http://www.preventionweb.net/english/countries/statistics/?cid=137
3 http://www.preventionweb.net/english/countries/statistics/?cid=177

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 Offshoring: Where Should KindyBis Make Its Socks?

Exhibit 2
Summary table produced by KindyBis to evaluate potential suppliers

Supplier 1 Poland Supplier 2 Portugal Supplier 3 Turkey

Purchase price per
0.42 Euros 0.69 Euros
batch 0.47 Euros
Transport costs See country compendium
EU (border +
Schengen Schengen + euro Neither
currency)
Political risks See country compendium
Structural risks See country compendium
Natural risks See country compendium

Quality (certifications) No certification ISO 9001 ISO 9001 in progress

Flexibility of Firm order every 3 Firm order every 2 Firm order every 2
production volume weeks weeks weeks
ERP, Lean, TPS
Maturity of production ERP (Odoo – Open
ERP (SAP) (Toyota Production
system (ERP) ERP)
System)
Compliance with lead
No data Average Excellent
times (reputation)

No EDI (Electronic No EDI, but interested

IT (EDI) EDI in place
Data Interchange) in developing it

Availability of Yes, ratios indicate

No Yes, high debt ratio
financial reports good management

After-sale service in
Openness to No after-sale service, After-sale service English, marketing
communication no one speaks French difficult to contact manager speaks
French

Interested in a long- Interested in a long-

Long-term perspective No indication
term relationship term relationship

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