Arkansas State University
This assignment is being submitted on February 1st, 2013, for Dr. Mello’s 4123 MKTG: Organizational Purchasing course.
Case 10: Eastern Waves Inc.
(Benton 2010) Mr. Patton, the situation in Malaysia is not looking good. “In 1997 Malaysia was hit by the Asian financial crisis.” One of the most effected areas was the manufacturing sector. “In order to rescue some of the largest state-owned companies, the government has imposed several strict trade barriers on certain goods. Included under law in these protected goods are the steel billets, the raw material for use in the downstream steel industry.” The government has also put into effect new labor policies for both domestic and foreign labor in order to protect the domestic workers. The Malaysian steel industry is forced by the government to buy more expensive local steel billets because of the restrictions put on imports to protect the local economy. With falling steel prices, domestic steel prices are getting higher and the foreign prices are getting cheaper. The local billets are priced at RM760 metric ton (MT), while foreign prices are between RM600 and RM680 per MT F.O.B. This 15 to 20% price difference is continually dropping the profits of Eastern Waves Inc. located in Malaysia. Eastern has done research and found that scrap steel can be used as a substitute, but not without its problems. (Benton 2010) There is also a problem with the price of labor for Eastern Waves Inc. in Malaysia: The domestic workers are protected by the government by a new labor policy for workers who make less than or equal to RM1,500 per month to assure economic progress and a good investment climate. The domestic workers are protected by worker-friendly laws. They are hard to manage, difficult to fire, free to resign or quit, and demand full pay each month, even when there is no work. They strike if they are not paid in full each month and are happening more and more as Eastern’s cash-flow problems increase. The foreign workers are paid at the same basic rate as the domestic workers, but the government imposes a yearly levy of RM125 to RM1,500 on each foreign worker and only gives them a 2 year work permit. In addition to this are two other expenses that go along with the foreign workers: half of the airfare expense is to be paid to the foreign worker within one year and housing has to be provided. This makes the foreign labor higher. Eastern decided to go with the foreign labor, even though it is higher. They decided to do this because Eastern thinks that they will save money in the long run. The decision is based on: not likely to quit, dismiss them without legal problems, and they work harder. Administration believes this would give them more labor control and stabilize production flow and reduce costs in other areas. Analysis
(Benton 2010) Eastern will be able to ship the 2,000 MT within the next 6 months based on the half production of 15 MT per day = 15 MT * 25 days * 6 months = 2,250 MT. Eastern has estimated the price of steel at RM1,300 per MT (mega ton). Eastern’s profit margin is 17%. Eastern employs 40 workers at RM1,500 per month basic wage. Malaysia consumes on average of 2.7 MT of billets annually. The domestic billets cost RM760 with a yield of 95% qualified angle steel, 4% semi qualified angle steel, and 1% scrap. The price of the three outputs are: RM1,300, RM1,000, and RM380. The international billets cost RM600, but its purchase is restricted by the government. The substitute plate waste has a holding cost of 15% (about one-third of the holding cost is separating good from bad plate waste, of which about 50% is bad), only a 85% yield of qualified angle steel, 10% semiqualified angle steel, and 5% scrap. Also, the supply of plate waste is irregular and depends on the production schedule of the plate mill Eastern is receiving it from. Eastern is at...