Fuyao Glass America- Sourcing Decision - b) MoraineUnit Cost ( PDF

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Indian Institute of Management Bangalore

Supply Chain Management Fuyao Glass America

Submitted by: 1811032 1811047 1811048 1811060 1811102 1811370

Questions: 1. If the delivery of windshields will begin three years from now, compare the cost of production and delivery of windshields from Tianjin and Moraine plants. The comparison is given as follows: detailed explanation given in Appendix A Tianjin

Moraine

A B

Raw material Labor

13.28978 22.84815 4.78 9.98

C

Electricity

1.51125

D

Depreciation

1.623932 4.479544

E F

Other mfg cost SGA Packaging and transportation Total

0.898925 1.986296 6.129032 9.185185

G H

1.28375

14.68612 2.13 42.91513 51.89205

Delivery Costs Paper packaging Repackaging labor Transportation Tianjin to Plymouth Moraine to Plymouth Tariffs and customs (6%) Inventory carrying cost Total

Tianjin 2.9

Moraine 0

1.856117 5.83 3 1.1 14.68612

1.67 0 0.46 2.13

2. Consider the inventory carrying cost shown in Exhibit 17. It appears to be calculated using the following formula: Holding cost rate (5%) x Value of inventory ($50) x Number of days (160 or 67)/365 Do you agree with this formula? Why? If not, then write up to three ways in which this formula can be improved. The above formula used to calculate inventory carrying cost doesn’t reflect the accurate figure. In this formula we have taken value of inventory as $50 per unit (estimated target production price of one windshield) for both countries which actually is different for different facilities. Also, inventory held in warehouse is in different forms i.e. Raw material, processing stock and finished goods, and for different number of days. Hence, if we

calculate the inventory carrying costs individually at different stages for different form of materials, we would get the more realistic Inventory carrying cost. Ways to correct the formulaa. Given holding cost rate (5%) is taken to be same for both countries, while it should depend on country where warehouse is located. Holding rate is proportional to real estate prices where warehouse is located. As in US real estate prices are high in comparison to China, hence holding cost rate should also be higher in US. b. As raw material (costing $13.28 in Tianjin vs $22.84 in Moraine) is held in inventory for 46 days and looking at significant price difference of raw materials for both countries, calculating inventory holding costs using given formula overestimates the holding cost for Tianjin while underestimates the holding cost at Moraine production facility. Hence calculating holding cost at different stages would give more accurate figure. Suggested formula is given below Inventory carrying cost = Raw material carrying cost + Processed stock carrying cost + finished goods carrying cost c. Here the value of inventory for both plants is taken at $50 per unit whereas it should be taken at their actual cost of production i.e. $42.92 for Tianjin and $51.89 for Moraine. If we use actual production costs in Inventory carrying cost formula, the inventory carrying cost for Tianjin would reduce and for Moraine, it will increase. Hence, we will get more accurate figure of carrying cost and will enable us to take better strategic decision.

3. Would you consider shipping plate glass from China to Moraine plant to reduce raw material cost? Why or why not? No, I wouldn’t consider shipping raw material plate glass from China to Moraine Plant due to the following 2 reasons: a. Landed cost of RM for plate glass imported from Tianjin exceeds the RM cost in Moraine plant The cost of RM for plate glass at Tianjin and Moraine plants will be $13.29 and $22.85 respectively three years from now. The RM cost of $13.29 is ex-factory cost and therefore packing, transportation and clearance charges are to be added in-order to get true cost of RM at Moraine plant which totals to $27.98 ($13.29+$14.69) which is costlier than $22.85 of RM cost at Moraine plant. Therefore, the best course would be to not import plate glass from China for Moraine operations. b. Packaging cost for plate glass shipments will increase tremendously Plate glass is more brittle in comparison to laminated or tempered glass and it has less impact resistance. So, the packaging needs be strengthened by either changing packing material or packaging standard to protect the plate glasses. Also, the material handling system at Moraine plant would have to be equipped to handle such consignments. These

activities will increase the overall RM cost of plate glass sourced from China thereby making it non-lucrative. 4. If you were Wen Li, which of the two sourcing options would you recommend to Cho? Justify your answer. We would recommend that for the time being, importing from Tianjin does seem like a good idea. As we estimated, after 3 years, there is a significant difference ($51.98 in Moraine $42.92 in Tianjin = $9.06) in per unit cost of production of windshield owing to the learning curve effect. Hence, we believe that Mr. Wen Li should suggest her boss Mr. Cho to keep on importing windshields from Tianjin for US markets until Moraine’s cost of production per unit doesn’t come below Tianjin’s. However, having said that, we also need to keep an eye on macroeconomic factors. For example, we need to keep an eye on labour wage costs which are increasing in China and decreasing in US, so at a certain point, producing in China won’t make sense. Further, any increase in tensions between US and China owing to Trade Agreements can affect our cost of production severely in China. For example, US can increase anti-dumping duties or any other kind of customs and tariff. In the long-run, Fuyao should look into enhancing the capacity at manufacturing facility in US or can setup a new production facility to cater to the needs of US and Canada.

Appendix A

Raw material

Tianjin

Moraine

13.28978

22.84815

4.78

9.98

B

Labor

C

Electricity

1.51125

1.28375

D

Depreciation

1.623932

4.479544

E F G H

Other mfg cost SGA Packaging and transportation Total

0.898925 6.129032 14.68612 42.91513

1.986296 9.185185 2.13 51.89205

I J

Yield Output per shift

K L M

N P

95% 800

93% 800

Total Salary per month Total Production per month No. of Workers per line

90745.65 19000 57

163338.3 16368 50

Electricity Total Electricity Consumed in a month (Current) (KwH) Total Electricity Consumed in a month(After 3 years) (KwH)

281092.5

305019

287137.5

350207

Remark Raw material cost has been extrapolated as per production yield. Raw Material for Tianjin = 13.01*0.95/0.95 This is given by Total Salary divided by total production in a month No. of electricity units(P)*Unit rate/Total Production in a month(L) Extrapolated using yield and output per shift. Tianjin=1.55/(780*0.93)*800*0.95; Moraine =3.17/(650*0.81)*0.93*800 Extrapolated as per production yield. Tianjin = 0.88*0.95/0.93; Moraine =1.73*0.93/0.81 Extrapolated as per production yield. Calculated in Appendix B

As per case data. Further, we have assumed that Moraine plant has not been able to develop rework capability in 3 years As per case data Tianjin = 5000*(1.3^3)/6.9*57; Moraine = 25*((10.0945)^3)*8*22*50 Increase/Decrease in wage rate is as per case data Total saleable output excluding defective parts As per case data

Tianjin = =1.55*780*25*0.93*6.9/0.69; Moraine =1.58*650*0.81*22/0.06 Electricity consumption has been extrapolated as per production yield

Appendix B Delivery Costs

Paper packaging

Repackaging labor

Tianjin 2.9

Moraine Remark 0 Assuming there will no change in unit paper packaging cost Since Repackaging is done at Plymouth, the cost has been calculated as per US labor rates. Given by 6*25*((1-0.0945)^3)*8/(12*40)

1.856117

Transportation Tianjin to Plymouth Moraine to Plymouth Tariffs and customs (6%)

Inventory carrying cost Total

5.83 1.67

3

0

1.1

0.46

14.68612

2.13

Assuming the shipping rate per container stays at $7000 Assuming the shipping rate stays constant

Assuming no changes in customs and tariff

Assuming target cost stays at $50...