We’ve discussed the decisions that companies make to maximize their competitive advantages. One of the strategies that companies follow is to determine what activities they will perform themselves and which will be performed by suppliers under contract to the company. Part of this decision making is a make or buy evaluation.
During your Supply Chain career, you may find yourself engaged in supporting the decision-making process as your company evaluates whether to make or buy products, assemblies, subassemblies or parts. You and your 4-5 person team work for the Titan Braking Systems company (TBS). Management believes that it may be able to lower its costs by outsourcing some of its braking products. You’ve been tasked to quote suppliers for making three products. You’ve received proposals from suppliers in the following countries:
Argentina Canada India
Ireland Indonesia Mexico
Poland Singapore Vietnam
The proposals have attractive pricing, but you recognize the need to assess whether accepting any of these proposals is in TBS’ best interests. It’s not immediately clear if it’s a better financial deal to continue making these products in-house or outsource them. If you do choose to outsource them, you’re concerned about doing so to a country where there is risk associated with moving production there. You’ve therefore decided that your assessment must look at three elements of the outsource. These assessment elements are:
1.Establishing two quantitative benchmarks, against which you’d assess supplier quotes:
(1) The net present value (NPV) at which TBS is indifferent on whether to outsource the three products or continue making them in-house.
Finding this value requires you to come up with a unit price based on the Table 1 Unit Production Cost data and then utilize the (10) year sales forecast to come up with annual aggregate production costs. You would then calculate the net present value of these annual costs. Use a 10% discount rate.
Tip 1: NPV tables are accessible through a link in our week 6 folder.
Tip 2: Coming up with an annual production cost for each product will require you to allocate overhead to production costs. Overhead can allocated based on labor costs; the sum of unit labor and material; or per unit. You may choose your allocation base.
2) The NPV of which TBS will realize a 10% reduction in costs. This requires you to reduce the projected unit price by 10% in each year and then follow the same steps to develop an NPV, as outlined above.
Table 1 Sales Forecast and Unit Production Costs
2. If all three products are outsourced, it may also be possible for you to close the building housing the factory making these three products and sell the equipment used to produce them. Potential bidders include those suppliers competing to manufacture the parts for the potential outsource. Using company records, you’ve compiled the financial data shown in Table 2. Using this data, you should be able to determine what the book value for these assets, so that you know the minimum price you can charge the bidders for these assets
Table 2 Associated Plant and Equipment
3. You and your team need to demonstrate the ability to research the business environment in one of the candidate supplier countries. This assessment should address the factors that we’ve discussed in class, including, but not limited to
Cultural differences from the USA Political stability Safety standards
Availability of skilled labor Available raw materials Infrastructure
Transition costs – how difficult do you believe it will be
to transition production there? Transportation costs