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Model Railway Industry Begins to Run Out of Steam in the Far East

When I was growing up I had no end of boy’s toys, Meccano for testing my engineering skills, Airfix kits for testing my patience with assembling intricate model aircraft and ships, Scalextric to hone my racing skills and then there was my Hornby model railway layout. I somehow persuaded my grandfather to convert the loft space in his house into a huge model railway layout with trains running everywhere and with the inevitable derailment taking place on a regular basis!

Due to some supply chain related issues in the Far East, Hornby has recently made some changes to their global supply chain. Hornby has been enjoying a revival in recent years, seeing their traditional toys competing with games consoles such as Sony’s PS3 and Microsoft’s XBOX. Encouraged by their parents, today’s generation of children have been taking an interest in Hornby’s range of products. Hornby recently announced their financial results for the 12 months to 31st March, with a loss before tax of £3.4m on turnover of £57.4m.  Compared to the previous year, pre-tax profit was down 96% while turnover was down 10%. Last year Hornby invested a considerable amount of money in producing Olympics related memorabilia which sold in relatively low numbers and was hampered by supply chain related issues in the Far East. So these two factors alone would have had a major impact on Hornby’s profits for the year.

Over the years Hornby has acquired many businesses, including Airfix to supplement their existing Scalextric and model train related products.  In addition Hornby also acquired Humbrol paints, a key requirement for painting Airfix model kits and finally Corgi. Hornby has grown very quickly in recent years and inevitably they now face a challenge of reducing operational costs in order to boost profitability.  I use to live less than ten miles away from the Hornby factory located in Ramsgate in the UK, and when I went past with my parents I always wondered what it would be like inside their factory. I think at that time it was every schoolboy’s dream to be shown around the Hornby factory, unfortunately I never had that privilege. Like a child going into Willy Wonka’s Chocolate Factory, I never had a golden ticket to go inside!

I am sure the inside of Hornby’s factory today looks very different to thirty years ago, especially as Hornby have moved much of their production to China.  Initially enticed by very low labour costs, Hornby looked to boost their operational profits so that they could go on to acquire other leading companies in the toy industry, as highlighted earlier. For many years this strategy worked, until unrest started to spread across the Chinese worker population.  This has been a major problem for many companies looking to reduce their manufacturing costs by moving production to China.  Strikes and a 15% increase in wages in China have hampered supply chains around the world and in the case of Hornby it was also severely affecting the quality of their products.  In fact Hornby were so disappointed with the quality of the ‘Quickbuild’ Airfix Kits being manufactured in China that they have decided to move production back to the UK.  All future Quickbuild Airfix kits will now be made at a factory in the South of England and their glue based kits will continue to be manufactured in India, for now.

Many western companies have spent the last ten years moving production to the Far East however today near-shoring of production has become a growing theme across the global manufacturing industry, with companies moving production back to their home markets or other key manufacturing hubs such as Brazil and Mexico.  I think it says something when it has been recently reported that some Chinese manufacturers have moved production out of their own country and established a manufacturing operation in Thailand or Vietnam for example. Some would argue that western expansion into China is about to run out of steam and I personally believe that it will be China that continues the global expansion of the manufacturing industry into other emerging markets, assuming they can resolve some of their quality related production issues. Due to the unrest in some of the Chinese based supply chains, we are now seeing unprecedented investment in Brazil and Mexico and Ferrari said that Mexico is likely to become the ‘new China’ from an automotive industry perspective.

When entering new markets many companies will have tunnel vision in terms of spending too much time focussing on the new manufacturing plant and not enough time thinking about how they will on board new trading partners. In addition they will need to think about how they will extend their B2B platform into the new country as well, what B2B standards will they need to support?, what will the communications infrastructure be like? and can they scale the B2B platform to match the demand of their production lines? It is one thing getting the green light to enter a new market but it is another to remember about looking after the needs of your trading partner community.  Many companies hit the buffers when trying to work out how to scale their B2B platform effectively when they should be focused on the main job in hand, in Hornby’s case looking after their manufacturing processes so as not to disrupt production. Hornby is certainly taking the right steps to help minimise any future disruptions across their supply chain.

Managed Services is an approach that many companies have used to manage international expansion.  It also offers the flexibility and scalability to fine tune your B2B platform according to the demands of the business. Whether expanding into new markets or moving production back to your home country, GXS can help keep your business on track.  In the same way that a rail network connects remote train stations, a B2B network such as GXS Trading Grid helps to connect with remote trading partners.  To learn more about GXS in manufacturing take a look at the slideshare presentation below. If you would like to avoid your supply chain looking like a train wreck then please look out for a new webinar that I will be releasing in the next few weeks relating to how cloud B2B integration helps with international expansion projects.

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Mark Morley

As Director, Strategic Product Marketing for Business Network, Mark leads the product marketing efforts for B2B Managed Services, drives industry and regional alignment with overall Business Network product strategy and looks at how new disruptive technologies will impact future supply chains. Mark also has over 23 years industry experience across the discrete manufacturing sector.

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