1.What are the strategic risks and benefits of outsourcing production of the Temecula plant to contract manufacturers in China? Benefits
•Significantly low cost supply from contract manufacturers: Labor, electricity (government subsidy), overhead Risks
•Some costs are expensive: freight cost from China, inventory (lead-time increase because of shipping), and quality control (testing shipped products from China in the US require some cost; time and money) •Exposure of the know-how of “in-mold labeling” (need to provide skill & knowledge to suppliers) •Losing the ability of process innovation
Huge benefit of supply from contract manufacturers from China is the significant cost reduction. It covers the risks, which Bawcombe fears, explained below using financial analysis.
2.Financially compare two of the options (stay in Temecula or outsource to China), include all possible relevant financial measures and explicitly state important factors not included in the financial analysis. According to my financial analysis, the supply from China is so much cheaper than the production in Temecula (shown in the last page). Comparing the NPVs of operation cost in 10 years, the supply from China is approximately 25% cheaper than own production in the US. The cheap labor (half of at Temecula), electricity (1/3), and overhead (1/3) costs exceed the freight cost and remaining lease of Temecula facility, and suppliers margin. The 25% difference of NPVs between the two options seems to cover the risks of environmental changes (cost increase: labor, lower productivity, electricity, land price). The remaining annual $3m lease (8 years) of the Temecula facility could be lowered by cancelling the lease contract or lease it to others. Still there are some uncertainties, transition costs, supplier management cost, taxation, and some general & administrative costs. In the case, the “in-mold labeling” is mentioned...