Styker Case

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manufacture its own PCBs in its own facility near company headquarters in Kalamazoo, Michigan. Once such a facility was up and running, it might be expanded to supply PCBs to other Stryker businesses as well. Of the three alternatives, Option #3 promised the highest degree of control over quality and delivery. From that perspective, it was most the a ttractive. But it also required the largest capital outlay and the largest increment to Stryker’s headcount and payroll. Whether it offered an adequate return on investment was a question that had to be carefully studied. If Stryker Instruments wanted to proceed with the investment, it would have to obtain numerous approvals. Stryker Corporation’s capital budgeting procedures required specific business and financial analyses of proposed expenditures. The financial analyses included stud ies of outlays, costs, profitability, risks, and shareholder returns. More specifically, estimates of net present value (NPV), internal rate of return (IRR) and payback period all had to be prepared before a project could receive funding. For the exclusive use of N. PIRANI This document is authorized for use only by nadeem pirani in Financial Analysis/Fall 2011 taught by David Kuipers from September 2011 to December 2011.207-121 Stryker Corporation: In-sourcing PCBs 2 Stryker Corporation Stryker Corporation was a leading provider of spec ialty medical and surgical products with 2002 revenues and operating profits of $3.0 billion an d $507 million, respectively. The corporation’s divisions included Orthopaedic Implants, Medical and Surgical Equipment (MedSurg), Rehabilitative Medical Services, and International Sales. Summar y operating and financial data for Stryker as a whole are presented in Exhibit 1 . MedSurg had 2002 sales of $1.1 billion, an increa se of 13% over 2001, which came from three major business units. Stryker Endoscopy produced video-imaging and communications equipment and instruments for arthroscopic and general surgery. Stryker Medical produced hospital beds and other patient-handling equipment along with emergency medical service products. Stryker Instruments produced surgical instruments, operating room equi pment and interventional pain control products. Stryker Instruments operated manufacturing facilities in Michigan, Puerto Rico and Ireland and recorded global revenues of approximately $430 million in 2002. PCBs were used in virtually all of Instruments’ key products and platforms, sometimes in more than one application. They were contained, fo r example, in instrument consoles, footswitches, handpieces, chargers, docks, and monitors. Stryke r had considered in-house manufacturing of PCBs before – a proposal had been developed as recently as 2001, but had not been executed. In 2003, as supplier reliability continued to cause concern, the idea was once again receiving serious study. The Proposal An in-sourcing strategy had been studied in vari ous forms so far and the proposal might change further before implementation. In its current vers ion the proposal called for the construction of a new building with 30 ,000 square feet of space on eight acres owned by Stryker in Kalamazoo, Michigan. Site preparation, construction and improvements were expected to cost $3,030,000. This sum did not include architectural and engineer ing fees of $278,000. Furnishings and non- manufacturing equipment would cost $126,000. Communication equipment and IT infrastructure would cost an additional $210,000. The building would be ready for manufacturing equipment by April 1, 2004. The proposed facility would manufacture all of th e various types of PCBs required by Stryker Instruments and hence require many kinds of ma nufacturing equipment. Stryker Instruments’ managers and engineers were already familiar wi th the requisite manufacturing processes and had prepared detailed specifications for the needed equipment, including descriptions of equipment, software, and related systems by model...
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