The company Is considering whether to continue with incurring its spreader products or switch to outsourcing in China. The solution lies in an analysis of quantitative and qualitative data comparisons and deciding which ideology would benefit the company in the long haul.
When considering the costs it seems as though outsourcing would save a to of money for the firm, however, we must think strategically. Thinking strategically means the long run, and using the statistics we were given we can estimate that the costs of outsourcing are growing quicker exponentially. Yes, the labor In China Is cheaper but over a span of ten years wages are estimated to increase by 40 percent in China whereas in Template there is an estimated 3 percent annual increase, or approximately 30 percent over the next decade.
The additional $8,000,000 freight charge when choosing to outsource would be the biggest expense. Over a span of ten ears this Is estimated to Increase by 30%, almost 10. 5 million dollars by 2017. The only area we would be saving on Is the electrically costs (other than the obvious difference in the annual lease costs), but compared to the freight charges it is very little. The electricity costs in Template are due to increase only 25% (compared to freight charges increasing 30%) over the next ten years.
This means by 2017 electricity in Template would increase to 20 cents per kilowatt hour as opposed to . 078 cents in China. Assuming the 8,000,000 kilowatt hours used in 2007 for 2017 this would amount to $1 In Template and $624,000 in China. This savings Is insignificant compared to the additional freight expense, and therefore, would not be worth the accompanying risks of outsourcing. The financial pressures stemming from the initial leasing of the new facility in Template may have been one of the best things that have happened to Scoots Miracle-Grog.
The management team went through breakthrough processes adding value to the company in areas that other companies lack. The increased costs endured during this time led the facility to successfully Improve productivity through product and process Innovations, and also rained Its production line workers In lean management techniques. These improvements created a six percent increase in productivity and are estimated to continue for the next five years. They also realized how important it was to collect data considering the changes they were going through.
They did this through computer-aided designs and research and development teams; further illustrating the competence of this facility and the management. In switching to outsourcing we would not only lose quality In our product but also an Internal workforce team that a lot of other companies struggle and usually fail to provide. Furthermore, the increased risk of defective products and the added lead time that comes with the territory could potentially decrease the value of our company and hinder customer satisfaction.
In order to compete with the potential short term savings of outsourcing, the company must cut costs. Energy costs of the plant are currently at an annual total expired surcharge. Assuming the company continues to use the same amount of energy it does now, energy costs will still amount to about $1 in 2009. I believe our answer to this problem is adopting solar power. Although a new genealogy, many large and successful corporations that have been around for a long time have made the transition to solar energy because of its costly benefits.
These companies include Macy’s, Wall Mart, Apple and ‘kea. The success of these corporations at significantly saving on energy costs through this transition can be used as a benchmark for Coot’s Miracle-Grog. Currently the initial costs of installing solar power panels have decreased due to its growing popularity. Another large expense within the plant is labor costs. With 195 employees at an average rate of 6. 25 per hour and assuming a forty hour work week (although some are temporary workers) this amounts to $126,750 a week; $507,000 a month; and $6,591,000 a year.
Although the need for labor has decreased, firing people would not be the answer. Profit will be paralleled with increasing productivity which is estimated to rise six percent every year for the next ten years plus three percent for the next five. The cause of these productivity improvements are thanks to the workforce team employed at the Template facility. With the company growing in productivity and refit, plus the savings from adopting solar power energy we would easily be able to dissolve these labor costs. Additionally, our overhead costs would decrease since they are a portion of our energy usage.
With the continuous growth of the company we may even be able to open another facility in the future where we can utilize employment further. The only reason to outsource to China is to save costs and as explained before Scoots Miracle-Grog wouldn’t be saving much in the long haul, if anything at all. When considering the exponential rates at which China’s labor is rowing, the additional freight expenses, $100,000 raw materials costs, $460,000 in safety stock, plus the general and administrative costs management anticipates, outsourcing does not make sense.
Furthermore, the rates at which China’s costs are estimated to increase are assumed to be too low. Over a span of ten years we would be saving very little in costs and sacrificing a lot in value. The successful attempts at improving productivity in which the Template plant has gone through in the minimal amount of time it has been open proves what an asset this facility has become; wowing that they can step up to the plate when need be and make the necessary transitions to improve but also control the process thereafter and make sure it works.
The plant has only been open for six years and their success in this short amount of time provides a forecast of what is to come. With the help of this team we would be able to focus on cutting costs internally.