TO:Board of Directors Stryker Corporation
DATE:July 15th, 2011
SUBJECT:In-sourcing PCBs Project Recommendation
The purpose of this memo is to disclose the business evaluation for the three proposed options regarding PCBs sourcing strategy. The analyzed options are: 1. To maintain the current basic sourcing policy but with improvements in the acquiring methodology of key materials. 2. To establish of a partnership with a single supplier to improve quality. 3. To establish a manufacturing facility to in-source the production of PCBs. This option will allow the company to reach higher control and reliability over the manufacturing of such components. The analysis conducted, estimates the net present value, internal rate of return, payback period and discounted payback period of the option of implementing a manufacturing facility (option #3). This option requires considerable outlay to fund the construction of the plant and to procure owned equipment. The analysis was based on the assumption of constant level of sales and a decrease of purchases costs in exchange of higher manufacturing costs. Additionally, there is a benefit in terms of longer accounts payable turnover, increasing from 30 to 120 days due to new negotiations with suppliers. All of the above facts lead to different tax impacts such as: The new capital expenditure leads to a higher depreciation expense which is deductible from tax payments, as well as the new manufacturing costs; accordingly, this result in a lower taxation base that causes a lower tax payment. On the other hand, since the company has lower purchases, this lower production cost increases the taxation base that lead to a higher tax payment. The company cash flow for the analysis under option three is composed by the incremental impacts derived from the in-sourcing of the manufacturing process. The outflows for the seven year period are the capital expenditure $6,3M, the new manufacturing costs $ 55M...