1. Option #3 suggests Stryker Corporation to build its own facility to manufacture its own PBCs. Under the current situation that some contract manufacturers have weak performance in quality and delivery, the benefits of this option are obvious as following:
First of all, option #3 promised the highest degree of control over quality and delivery, which can solve the major problem that Stryker has faced with recently. On the other hand, self-manufacturing offers an opportunity for Stryker to carry out its own R&D for its specific products. Exclusive products will improve its productivity and competitive advantage in the medical industry, which may offer a chance to hold a larger market share in the medical technology industry. Secondly, since the facility will locate near Stryker’s headquarter, it could decrease both the delivery time and cost from decreasing buying from contract manufactures. Thus, Stryker has no need to hold a large inventory, which can increase its asset liquidity as well as decrease the cost of inventory management. Also, it will decrease the accounts payable because of less purchase from others and reduce the liability pressure. Thirdly, with its own production line, Stryker’s manager and engineers will be more familiar with the products. Therefore, the after-sell service will be improved. This is a good method to improve reputation by retaining customers with satisfactory services. Finally, since the facility may also be offered to other businesses of the company, it will reduce transportation cost for other divisions. Last but not least, this option can make it easier to expand the scale of the company. As the scale expands, the cost will be reduced. Thus, Stryker will make more profit because of its lower cost than other competitors.
However, option #3 also has some risks. First of all, it requires a huge amount of capital investment with uncertain return. The return in the future may not be able to cover the initial investment. Furthermore, the investment will lead to decreasing in cash in the beginning years and increasing in SG&A cost for management. Moreover, the new fixed assets in the factory are more difficult to transform to cash in the market.
Compared with option #1 and #2, especially based on the fact that many contract manufactures are neither qualified nor efficient, we prefer the third option. Although option #1 and #2 needs less capital investment initially, contract manufacturers tend to operate on a thin margin with scant capital. Thus, neither single sourcing nor dual sourcing would meet the needs if Stryker expands its scale and guarantee the quality. Moreover, selecting excellent ones from the numerous suppliers also needs time and money.
2. Here we need to calculate the incremental cash flow. Since the difference between out-sourcing and in-sourcing is only reflected on the initial investment and costs, we begin with these two items. From the case, we found that the earliest investment occurs in 2003, so we make 2003 to be the year 0. We will calculate the incremental cash flow from 2003 to 2009.
Firstly, we consider about the initial investment. The expenditure for site preparation, construction and improvements ($3,030,000), furnishings and non-manufacturing equipment ($126,000) and communication equipment and IT infrastructure ($210,000) should be counted as capital expenditures, which are depreciable in the future. The architectural and engineering fee ($278,000) is treated as expense and is deductable in the year (2003) it occurs.
There is no evidence of sales changing, so we begin with changes in cost. From Exhibit2, we can take the decrease in purchases from contract manufacturers as a cost saving from in-sourcing way. |Annual data: 2004 - 2009 |2004 |2005 |2006 |2007 |2008 |2009 | |PCB Purchases under current sourcing...