New Balance Case Report

Overview of the Case

New Balance has experienced exponential growth of demand in 1977 and must decide on the new location of a production facility in order to meet the growing demand. There are two critical pieces of information that the management team needs to consider before deciding to go with the recommendations that will be stated here or making a different decision. These pieces of information are the forecast of demand and the decision of the dimensional analysis for location. Both of these data sets are critical to the location decision as well as the future of the company as a whole. If New Balance does not know how many pairs of shoes to forecast, then they will not be able to satisfy the demand of the market, regardless of opening a new location. Choosing the best location for the new production facility is also important as choosing the worst location could lead distribution difficulties, higher overhead costs, or even result in the company paying more for labor than they should. The purpose of this report is to determine the forecast through the year 1980, analyze the individual locations for the new facility, and provide the best recommendation based on the analysis.

Three Year Projections

For the years 1976 and 1977, New Balance experienced significant growth of demand. While experts of the athletic shoe industry project the number of serious runners to increase by 35% each year for the next three years, New Balance must be more conservative in their forecast as over-projecting can result in flooding the market. A conservative, yet ambitious, forecast is a demand of 1,425,076 pairs of shoes total through 1980. This forecast is the result of using the trend-smooth model with a damped trend. The damped trend is the most conservative forecasting method, projecting less than a linear trend.

By observing Exhibit 1a, it is seen that the damped trend produces numbers that are consistently within the acceptable error range. The error range for this forecast is 5,518 pairs of shoes below actual data and 7,000 pairs of shoes above the data. By using a trend modifier of 0.9, a level weight of 0.2, and a trend weight of 0.3 the forecast created this conservative projection. The level weight and trend weight used are from the data in Exhibit 1b. The trend modifier used has the smallest error gap from all modifiers that were tried, so it will be able to continue this pattern of small errors and deliver a forecast that is realistic and achievable.

Location Decision Overview

Choosing a new location for the New Balance production facility is a key element in the well-being of the company’s future. If the location that is not best for New Balance is chosen, the company would lose market share and profitability. There are three qualitative and four quantitative elements used in the dimensional analysis model to compare the three locations from which New Balance must chose. These factors are annual labor rates, total rent/purchase price (set to three years rent), equipment costs, availability of skilled labor, size of the facility, distribution capability, and the quality of schools. Each of these factors were chosen based on the economic implications that they would have for the company.

The current production facility on Everett St. is capable of producing an average of 1,600 pairs of shoes per day. This amount has not kept up with demand as New Balance has a back log of 100,000 orders. The ideal number for New Balance is 3,000 pairs of shoes produced per day in their new facility. The labor costs in the dimensional analysis have been adjusted to the number of workers required to reach the 3,000 pairs produced per day (see Exhibit 2).

Analysis of the Texas location

The Texas location is very attractive to New Balance as there are currently about 70,000 people in the labor force that have experience in the apparel industry. The wage rates are also quite a bit lower than Massachusetts (Exhibit 2). Although the labor force and wages are important to the Texas location, the decision factor that makes it most attractive is the capability to distribute products quicker than before. As is stated in Exhibit 1 of the case, New Balance has a large market in Texas, the Midwest, and Western regions. By establishing their new production facility in Texas, New Balance will have a better distribution system in place that will allow them to expand their market growth on the western side of the country. By being able to better serve Texas and the Western regions of the country, the company’s overall market share will grow, as will the profits over the years. Texas also has many ports to export goods so New Balance would be able to ship directly to the European markets with relatively little trouble. This is an important factor as New Balance would like to break into the athletic shoe market in Europe.

Analysis of the Lawrence, MA location

Lawrence, Massachusetts is close to home. This will allow Davis to maintain the personal relationship with employees that he currently strives to achieve. However, being 20 miles from the location on Everett St., the labor market is smaller and the company will be pulling from the same pool of candidates that it has been hiring from since its inception. This is because Massachusetts only has 43,000 people in the labor market with experience in the apparel industry. The labor costs for the Lawrence location are also strikingly similar to those on Everett St. as the wage rates are only 10% lower. Distribution will be better as the total production will increase. New Balance will have more pairs of shoes to distribute, however, the distribution times will not decrease to the far reaches of the country. Distribution would be able to increase to the markets in Europe with two production facilities located on the East Coast. This will help New Balance gain ground in Europe but the company would not gain much, if any, market share in the United States if distribution to the West Coast is not improved.

Analysis of the Ireland location

There are many reasons why Ireland is attractive to New Balance, the prospect of owning the production facility instead of leasing it, the lowest labor wages, and the potential to create a large base in a new market are almost enough to make the company choose this location without further analysis. However, it must be taken into consideration that there currently is a very small market in Europe and no indication as to when that market will experience growth. With a small market, the majority of the shoes produced would have to be shipped to America to be distributed in the existing markets. Another issue that New Balance must consider is that the labor force in Ireland is less experienced and produces on average 20-25% less than the Everett St. location. This is a concern as the target number of pairs produced per day is 3,000; New Balance would have to hire at least 50 additional employees in order to reach this goal.

Ireland certainly has potential to be the start for New Balance in Europe. The consumers in Europe have already started to show some interest, however, starting a facility in Europe would also mean adding an effective distribution system in Europe. While this is what it would take to be an international company, there is already competition in the European market that has the potential to undermine New Balance by having a more effective distribution strategy or shoes of better quality. Ireland holds great potential for New Balance, but is also an extreme risk for the company.

The Location Decision

Each of the locations chosen by New Balance as a possibility for the new production facility holds a great deal of potential for the company. However, only one location can be chosen at this time and the dimensional analysis model has chosen the Texas location. The next best location is in Lawrence, MA with the third best location being in Ireland. The dimensional analysis is only able to compare two cities at a time, so the first comparison is between Lawrence, MA and Texas as is seen in Exhibit 3. The qualitative factors were ranked from 1-10 with 1 being the best and 10 being the worst. The exhibit shows that Texas was the better choice based on the factors listed.

The second comparison was between Texas and Ireland. While Ireland had lower labor and equipment costs, the price of the facility, skilled labor supply, and distribution capability were not able to beat that of the Texas location. The overall decision came down to the labor supply and the distribution capability of the new location. Texas has the best geographic location to help New Balance incorporate a new and improved distribution strategy in the United States and in Europe. The labor market is also the most skilled and has the most people readily available to work at this new facility. Therefore, the best choice for New Balance to make at this time is to start manufacturing shoes in Texas.

The Future for New Balance

With the market for serious and causal runners growing almost exponentially every year, it is highly possible that New Balance will need to open a third production facility within 5-7 years in order to meet demand. Given the same options for locations as the second facility, New Balance would then want to re-assess the market in Europe and begin production at a facility there if the demand has reached 300,000 pairs of shoes per year. Until there is a market for shoes in Europe, it would be best to keep the manufacturing facilities in the United States as that is the largest market for New Balance.

New Balance will be able to meet the growing demand with the forecast through 1980 being well over 1,000,000 pairs of shoes. By locating their next production facility in Texas, they will be able to have a better distribution strategy throughout the United States. As a result of this forecast and location decision, New Balance will be able to gain market share in the next three years and increase the company’s profitability.

*Images have been redacted.*

*Originally written in February 8th, 2017*