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Making Southeastern European economies more efficient, 3.12.2019

Making Southeastern European economies more efficient: The role of manufacturing management practices

December 3, 2019, Campus WU
 

Panelists:

  • Jelena Cerar, Program Manager, Competence Center for Emerging Markets & CEE, WU

  • Herbert Pfeiffer, Head of Sales and Market Management Europe East, FESTO

  • Kalin Vladimirov Dobrev, Head of Electronics & Drives, FESTO Production EOOD

  • Lars Mallasch, Technical Director Packaging Paper, MONDI Group

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Moderator: Phillip C. Nell, Head of Competence Center for Emerging Markets & CEE, WU

In the last years, the countries of Southeast Europe/Western Balkans have become more attractive for foreign investors. Many multinational firms have relocated crucial stages of their production process to the Western Balkans countries thanks to the good geographic location and the availability of cheap and well-educated workers. Most investors are now facing the challenge of improving management practices and competencies of their affiliates in this region. This all happens in a business environment that is still marked by weak infrastructure, lack or mismatch of skills, brain drain as well as remaining regulatory weaknesses that continue to constrain economic development and hamper faster productivity gains. While national governments try to improve the attractiveness for inward direct investment, foreign firms still miss detailed knowledge on where to invest and what to expect from local management practices.

The purpose of the panel discussion was to talk about the status of current manufacturing management practices in SEE and to compare the views of practitioners with the findings of a study on “Manufacturing management practices in the Western Balkans” that was conducted by researchers of the Competence Center for EM &  CEE, Jelena Cerar and Phillip Nell. The panel started with the presentation of the main results of the study by Jelena Cerar. Then the representatives of FESTO and MONDI introduced their companies, their plants in SEE and presented their approaches and experiences in operations management.
 

Presentation by Cerar: Starting point for the study is the fact that firms with strong managerial core practices perform significantly better in terms of productivity and profitability:

A one point improvement in manufacturing management practices (on a 5 point scale) leads to

+23% in productivity

+14% in market capitalization

+1.4% in annual sales growth.

Management practices are defined as situation generic, highly structured sets of activities that can be transferred across organizations and industries to help operations management personnel address similar operational problems. Four types of manufacturing management practices are distinguished in the study: the use of modern manufacturing techniques, performance monitoring, target setting and talent management. Western Balkan countries were chosen as targets because of the increasing investments of foreign firms in manufacturing facilities and the obvious need to improve productivity in the plants. 277 plant managers in B&H, Croatia, North Macedonia and Serbia were surveyed and managers in 28 plants were personally interviewed in 2019.

Main findings:

  • Plants in all four countries run at a similar performance level of management practices.

  • Plants in technology industries are the best run, those in metal industries are the worst one.

  • Plants owned by multinationals are better managed than domestically owned plants.

  • Family and founder owned plants perform slightly better than all the others.

  • Emigration, grey economy, high payroll tax, strict labor laws and a lack of qualified manual workers are major external influences that hinder productivity improvements.

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Then the panelists from FESTO and MONDI followed with their presentations and statements.

FESTO/Pfeiffer + Dobrev: FESTO is an early mover into CEE. The company entered already in the late 1960s the former Soviet Union and then formed its first joint venture in Budapest in the 1970s. Today, the headquarters of FESTO Southeast Europe are in Budapest. They have two global production centers in Budapest and Sofia. The business activities of FESTO are process and factory automation and the provision of complementing didactic services, namely training, consulting and learning systems. The FESTO Global Production Center Sofia was established in 2000 and has today nearly 900 employees. Sensors, valves and servomotors are produced there. In 2019 the Center Sofia was the winner of the Lean & Green Management Award in the category “General Producing Industry”. This award is granted in recognition of the most successful approach to improve resource efficiency in industry. The most powerful tools are a structured shop floor management consisting of “transparency – problem-solving – communication – leadership”, visual management practices and value stream transformation system with focus on flow, lead time and tact.

MONDI/Mallasch: Mondi is present in emerging Europe with 32 production sites and employs nearly 9,000 people in the region. Mondi is producing high quality Kraft paper at the Stambolijski site in Bulgaria. Southeast Europe is characterized by underinvestment in the last 25 years – the countries of the region need modern technology. A main challenge is the tight labor market and a mismatch between education and manufacturing needs. The demographic decline and brain drain are further threats to the economy. The focus at MONDI is on human capital – to attract, qualify and retain people. The import of dual education/training systems could help in this situation. A weak infrastructure and complex permitting procedures are further barriers to economic growth.
 

How to deal with complexity in manufacturing process?

Mallasch: Paper production is a process industry with many steps and wood as a natural input what implies variations in the inputs. While there are systems in place that guarantee quality in the process, education and training of employees play a major role in understanding and managing the integrated production process. That means that a high level of training is needed for blue-collar workers what can go up to 3 years of education at different stations and sites.

Dobrev: As FESTO is mainly an assembler, the supply chain has top priority. Supplies have to be close to the production site and lead times are critical in the whole process. To integrate newcomers quickly good systems have to be established. Good people on the shop floor are key for the performance.

Pfeiffer: Underlines the importance of a good head. Weak bosses produce weak middle managers. The middle management is an underestimated asset. Furthermore, it is a misconception to believe that more regulation improves performance. In order to achieve high performance you have to grant a certain degree of autonomy in decision-making to the teams on the shop floor otherwise you stifle creativity.
 

What do you think about bad practice transfer?

Mallasch: At MONDI we exchange good and bad examples. Management practices cannot go beyond the human nature. The best learning comes from your own mistakes not from others’ mistakes.

Pfeiffer: Talk about the good practices, don’t focus too much on the past, look forward what is the challenge ahead of us. Human nature is driven by motivation.
 

Coming back to the main question – what makes South Eastern European economies more efficient?

Mallasch: Retain the passion of the people.

Cerar: Improve the quality of institutions, which will then leave more space to managers to their jobs right.

Pfeifer: Always try hard to find the best solutions and don’t lose your creativity.

Dobrev: It’s the mindset – it takes time for a deep change. It needs a sense of urgency to speed up the process.
 

Résumé:

  • Despite the structures and systems in place, the employees’ passion, creativity and mindset make the difference between high and mediocre performers

  • The plants in SEE can compete with Western European or US ones when the combination of modern technology, management excellence and high employees motivation is given.

  • Institutional influences such as an inappropriate vocational education system, excessive bureaucracy and deficiencies in the infrastructure are hindering productivity improvements.

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