Grog executive team. Understand that you face the possibility of shutting down operations in Tentacle and I want to lend some help and financial expertise. After much deliberation, I believe it is the best decision to keep the Tentacle plant open and not outsource to China.
There are many costs associated with outsourcing to China and I do not believe the positive aspects of outsourcing outweigh the Increase In costs. Cost Analysis Labor Costs Labor is by far the most important factor in this decision. One of the biggest draws to China is their cheap labor.
The relevant labor cost in China right now is $0. 91 per hour with an expected increase of 40% in the next 10 years. In comparison, relevant labor cost in Tentacle right now is $16. 25 with an expected increase of 3% per year (Exhibit 4). Assuming each of Tempura’s 195 employees works 40 hours per week and 50 weeks per year, that totals a labor cost for this year of $6,337,500 compared to $354,900 in China for the same amount of employees. I understand that the cost differential is staggering. However, I would like to point out hat there are many ways to offset these costs without outsourcing to China.
One huge factor in this is worker productivity. Workers are much more productive in the united States and perform tasks at a more efficient rate than in China. The new hand spreader used to require six people to assemble it and we have redesigned the components so that only four people need to work on it. With more advancements like this and making your Tentacle plant as automated as possible, you can cut costs In Tentacle by the hundreds of thousands of dollars. By hiring an outside labor force In China, you would be lengthening the company’s Information gap.
It might take Scoots-Millrace Grog one day to figure out a problem In Tentacle or perform certain testing, when It could take up to two weeks to have that done In China. Keeping your production workers close to your R&D department Is vital for research and product advancement. The only other way Is to have a supply chain manager fly to China frequently to keep up with outsourced operations and make sure they understand the Improvements that need to be made. Supply Chain Costs By looking at Scoots-Miracle Grog’s incoming statements and balance sheets, we can e that the company is steadily increasing revenue each year.
Scoots-Miracle Grog 0. 35, and a Return on Equity of 0. 12. All of these calculations set the company up for a successful transition into China via outsourcing. However, we must take into account the various supply chain costs that will arise if this decision is made. The biggest changes are freight and operational cost. This is an expense that is essentially $0 in Tentacle. Now, it would be around $8,000,000 each year. Since we would only be saving $5,982,600 in labor costs, this does not Justify acquiring a freight expense of $8,000,000.
In addition, Scoots-Miracle Grog would need to hold an additional eight weeks of safety stock in Tentacle at a cost of $460,000 and spend much more on quality managers who can assure that the product arrives in the United States in the perfectly desired form. I do not believe Scoots-Miracle Grog outsourcing to China maximizes its capability to be a leader in the three major utilities: time, form, and place. While $2. 7 billion in revenue is admirable, I do not believe Scoots-Miracle Grog has enough need (domestically or internationally) to Justify outsourcing. Loss of Knowledge
More than anything, I think Scoots-Miracle Grog needs to more fully comprehend the information and knowledge gap that will arise by distancing operations. New production workers will be given the responsibility of understanding Scoots-Miracle Grog products and meet the executive team’s exact specifications. In order to do this, managers will need to fly out frequently, train other managers, and constantly monitor quality among shipments. If the company were willing to expand international operations and sell to the Chinese people, then the information and knowledge gap would not be so large.
However, going there to simply save costs would present an array of new problems and costs. Keeping the company knowledge as close to the domestic market is the safest and smartest thing to do. Conclusion If you are looking to compromise with the executive team, you might consider outsourcing for one year while simultaneously scaling down production and operations in Tentacle. This would, of course, be a short-term plan in order to get the company back on its feet. There would be considerable setup costs for the China production, but the executive team might like this idea in order to save as much as possible now.