TCOFinalAnalysis
- 1. ASSESSING TOTAL COST OF OWNERSHIP For Payson Electronics Current USA supplier vs China supplier vs Mexico supplier Tool A vs. Tool B Submitted By: Nainsi Jain Xiaoman Wu Victoria Yan MorianBlack
- 2. INDEX 1. Executive Summary 2. Assumptions 3. Sensitivities Analysis 4. Risk Assessment 5. Crucial Parameters of Assessment 6. Exhibit 1: Process FlowDiagram with costs involved at each step 7. Exhibit 2: Packing Standards for the chips 8. Exhibit 3: Descriptionof Costs 9. Exhibit 4: Sources of cost data 10. Exhibit 5: Excelworksheets for TCO Analysis 11. Recommendation
- 3. EXECUTIVE SUMMARY ISSUE The purpose of this report is to analyze the total ownership cost of Payson Electronics for sourcing specialized electronic components from China versus Mexico. Included in this report is the definition of costs, the assumptions we made to derive the final costs, the justification for our final choice, sensitivity analysis, risk assessment and recommendations. APPROACH TO THE ANALYSIS Our approach to the analysis was to first develop a process flow chart diagram including the cost factors relevant to the decision. Then we determined which cost issues were pertinent to include in our analysis. Once this was decided we considered the costs involved in each step along the way. We then divided the costs of each tool based on each location involved. Once we divided these up by tool and location, we tallied all the costs and came up with the individual total costs. FINDINGS On a per unit basis we found that China had the advantage costing $3,448 for Tool A versus $4072 and $5489 for Mexico and US respectively. This translated into China again holding the edge in lowest overall total cost of ownership with total cost for shipments to US totaling $3.6 million versus $4.3 million and $5.5 million for Mexico and US respectively. Similarly, China edges out Mexico and US in total cost for shipments to Brazil. Total cost from China to Brazil was $2 million compared to $2.4 million and $2.7 million for Mexico and US respectively. Therefore, it was not difficult to choose China from a total cost financial standpoint. RECOMMENDATION Based on our analysis of short term and long term costs, sensitivity analysis, and risk assessment, our recommendation is to source from China and choose Tool A for production. The reason we decided to source from China was that China had the lowest total cost. The cost factor that had the greatest influence on total cost was that China had the lowest labor cost. In addition to having the lowest total cost, China also rated the best when we performed our risk analysis. Finally, the results of the sensitivity analysis still favored China. Likewise, Tool A turned out to be the more favorable option regardless of which location it was employed at.
- 4. ASSUMPTIONS a) Both the assembly operations will order every month hence there will be total 12 orders in the whole year placed respectively by both assembly locations. b) The current supplier, which is the US supplier, is located in Kansas and close to the Wichita assembly location. c) Material cost listed in the table 1, is the cost per unit. d) The short term costs viz. material costs, assembly costs (yearly maintenance), utilities, consumables, labor costs, transportation costs remain the same over next 3 years. e) Intangible f) The chip category is Integrated Circuits (IC), multi-chip components. So the Electronic Components is duty free when shipping from Mexico to The US. g) Import duty - ❏ According to the NAFSTA from Mexico to USA is 0%. ❏ The import duty levied in Brazil is 16%. ❏ Since the electronic components is classified as NCM 8535.21.00 electrical circuits (for example, switches, fuses, lightning arresters, voltage limiters, surge suppressors, plugs, junction boxes), according to United States International trade commission (see the reference), the import duty on electrical circuit levied in the USA is 2.7% h) In the case of China & Mexico supplier, it states FOB originator’s factory. FOB however is defined as shipment must get custom cleared at the port of origin country. Since the Incoterm is FOB term, we assume that the cost of the transportation from the supplier’s plant to the airport and custom clearance at the port of origin country will be borne by the suppliers. i) We assume a standard packaging for the chips (see Exhibit 2)
- 5. SENSITIVITY ANALYSIS For the sensitivities, we choose the cost component, the utilization rate, as well as the yield rate of both tool A and tool B as the key sensitivities. We also want to find the component that would affect the total cost of ownership most, so that the company can focus on these component to reduce cost. For the Graph 1, it talks about the increased percentage if the cost component increased by 10%, what percentage will the total cost of ownership increased. For the Graph 2, its main purpose is to analyze what the total cost of ownership if the we increase the different component as well as the overall transportation cost. In this way, we can also figure out the important parts of the transportation cost so that it can help us to streamline and simplify the transportation process as well. For the Graph 3, We used data table to analyze the productivity changes for different utilization and different yield ranges. Graph 1 As it shows in the Graph 1, the TCO cost is most sensitive to the material cost in China, and to the Labor cost in The U.S. and Mexico. The Assembly and Utilities do not pose significant influence to the TCO cost compare to the material Cost and Assembly Cost. The Consumables cost, although has not that significantly influence on the TCO cost, but also moderately the TCO cost in certain level.
- 6. Graph 2 As is shown in Graph 2, the transportation cost of TCO typically influence the Brazil transportation line, especially for the Import duty and Transportation cost of Brazil. This is mainly because that the Brazil have a fairly high customs duty for the electrical component in the consideration of protect the local Hi-tech Industry. For the U.S, the US government has a slacker policy for the electronic components. The US and Mexico also are all the member of the NAFSTA, so these two governments enjoy a free-customs-duty policy.
- 7. Graph 3 SensitivityAnalysis of Tool A and Tool B productivity of utilization and yield factors From the result of Graph 3, we can see for tool A, while utilization decreases from 0.7 to 0.5 and yield decreases from 0.97 to 0.96 or 0.95, the productivity of tool A cannot meet the condition of 18000 units (1500 units per order per month) per year. As for tool B, if utilization drops lower than 0.7 then no matter how many good products rate will be (yield), tool B cannot meet the condition of 18000 units (1500 units per order per month) per year.
- 8. RISK ASSESSMENT 1. Deliveryreliability Sourcing from different parts of the world requires taking a country’s shipping infrastructure into consideration. Not only can poor infrastructure add to total costs, but also can affect customer satisfaction based on on-time delivery. In order to consider robustness of infrastructure in both China and Mexico we utilized the Logistics Performance Index (LPI). China received a score of 3.66 ranking 27th while Mexico received a score of 3.11 ranking 54th. Based on these scores China would be considered less of a logistical risk than Mexico. 2. Geopolitical unrest Payson already has an assembly plant in Brazil, and now is considering adding an assembly plant in either Mexico or China. Whenever operating in another country geopolitical unrest is always a risk. The severity of that risk is based primarily on the governmental stability. The less stable the government, the more likely negative implications could occur. Some examples of unrest that could occur range from poor economic conditions and higher taxation, tariffs, or duties, to rioting and nationalization in the extreme case. China economy is relatively stable particularly in relation to Mexico’s where drug cartels are an issue. We would therefore consider China a more favorable risk from a Geopolitical perspective. 3. Risk of obsolescence Being that these PLC chips are high tech components, obsolescence risk is a significant factor. Already the useful life of the PLC chips is only 3 years, however in the technology world 3 years can be considered to be quite a long time. As such there is always the risk of obsolescence. There is always the possibility that a competitor could develop a new advanced technology that will render the PLC chip obsolete. The primary factor that should affect ability to respond to obsolescence risk is lead times. This would favor Mexico over China due to the distance involved. That being said we would not expect this difference in lead time to be a significant factor in regards to risk of obsolescence. 4. Currency exchange risk Currency exchange risk is a global risk for any business these days, but of course that risk is always greater when part of your business operations or your suppliers are located abroad. In considering the currency exchange risk of both China and Mexico, we looked up the S&P rating of each country. China’s S&P credit rating is AA- while Mexico’s rating is BBB+. This is likely largely influenced by the Geopolitical unrest
- 9. factors discussed earlier. These credit ratings therefore lead us to favor China over Mexico from a currency exchange risk. 5. Intellectual PropertyTheft By outsourcing production of the PLC chips, Payson Electronics technology is out of their hands and is being entrusted to the care of their supplier. This exposes them to the possibility of intellectual property theft. If their supplier were to steal their technology they could possibly turn into a competitor. Presumably Payson Electronics would have a patent to protect their intellectual property, but even if that is the case it can be difficult to enforce that outside of the US. There is no clear way to determine if China or Mexico would like to engage in such an activity, rather it would be a general consequence and concern resulting from the decision to work with a foreign supplier.
- 10. CRUCIAL PARAMETERS OF ASSESSMENT Treatment of safety stock Since that we want to choose the China-based company as our suppliers, we must consider the issue of safety since there would be a longer lead time for the product delivery. As the lead time is longer, we must put more safety stock just in case that we may be understock, which will significantly influence our service level and also cause the downtime of the whole supply chain. But we need to fully consider the proper EOQ level to avoid the dormant stocks. Treatment of quality Since now our suppliers are overseas, the quality of the components may not be sufficiently monitored and the return of the defected products is also become difficulty. Therefore, in order to solve this problem, there must be clarification of the duty on both the supplier side and the customer side firstly. Secondly, certain agreement of the quality should also be signed so that there may be sufficient protection on the legislative aspect to the customer. Moreover, it would be better if the company can have the quality expats in the supplier sites to make sure the supplier’s operation is going well. Transport issue Since now the company decides to choose the suppliers located in Asia, the transportation network of the component must be well designed so that the logistics operation is highly efficient and effective. Certain Third-Party Logistics can be chosen, since the overseas transportation is far too complicated and needs expertise in this area. In this way, the company can fully focus on the core competency and be more lean and efficient. Treatment of tariffs, duties and taxes As the company wants to choose China outside the country, the customs duty and tariffs seem unavoidable and the company should fully plan for it because it may take a certain portion of the total cost of the ownership. Identification and discussion of hard versus soft dollar savings Hard Savings 1. Reduction in unit cost of operations and unit cost of production 2. Reduction in transaction costs, overhead costs and transportation costs 3. Increased throughput, resulting in increased sales or revenue Soft Savings 1. Reduction in cash flow and need for working capital 2. Avoidance of capacity enhancement 3. Conformation to changes in the law 4. Increased safety in the workplace 5. Increased employees’ and customers’ satisfaction
- 11. Exhibit 2: Packing Standard of the Chips for overseas transportation 125 chipswill be packedinone corrugatedbox of size 15” x 15” x 15” weighing7.8lbs ** we are considering 1 chipwillweigh1 ounce. Therefore, there will be 4 boxes in case of 500 chips shipment and 8 boxes in case of 1000 chips shipment. 4 corrugated boxes will be packed into one wooden pallets of size 35” x 20” x 37” weighing 44 lbs includingweightof the pallet. Therefore, there will be 1 wooden pallet in case of 500 chips shipment and 2 wooden pallets in case of 1000 chipsshipment. These woodenpalletswill be shippedviastandardaircontainerstospecificdestinations. To summarize: 125 chips/corrugated box 4 corrugated boxes/wooden pallet
- 12. Exhibit 3: Description of Costs 3.1 Tangible or Hard and Intangible or Soft Costs 1) Tangible or Hard Costs: Material costs, assembly costs, utilities, consumables, labor costs, transportation costs 2) Intangible or Soft Costs: These costs might include dissatisfaction with working conditions or customer disappointment with a decline in service or product quality. In our analysis, we are not considering any set percentage for the intangible costs. 3.2 Short-term and Long-termCosts 1) Short-term Costs: We are considering one-year period to analyze the short-term costs. According to our analysis, material costs, assembly costs, utilities, consumables, labor costs and transportation costs are all short term costs which includes both fixed and variable costs over a period of 1 year. 2) Long-term Costs: We are considering three-year period to analyze the long-term costs. According to our analysis, Purchase price of the tool is a long term cost which will turn into variable cost over a period of 3 years because the shelf life of the tool is given as 3 years and after that the tool will no longer be of any use. 3.3 Micro and Macro Costs 1) Macro Costs: Macro costs are the costs which affect the Total Cost to the organization on the macro level. Small changes in these costs can affect the total cost majorly. The top management is always concerned of the major costs while working on cost reduction steps. In our analysis, material costs and labor costs are the major costs. 2) Micro Costs: Micro costs are the costs which affect the Total Cost to the organization on the micro level. Major changes in these costs will affect the total cost a little. In our analysis, assembly costs, utilities, consumables and transportation costs are micro costs in long term.
- 13. Exhibit 4: Sources of cost data 1. Transit Insurance http://www.freightinsurancecenter.com/freightinsuranceonlinerates.htm http://www.priorityworldwide.com/resources/cargo_insurance_guidelines.aspx 2. Air Freight Rates https://www.fedex.com/ratefinder/home http://worldfreightrates.com/freight 3. Road Transportation from airport to assembly location https://www.freightcenter.com/quote/Index/ 4. Import Duty and Taxes http://thebrazilbusiness.com/import-tax-guide/electrical-apparatus-for-switching- protecting-electrical-circuits-for/sp/85352100-1 https://www.usitc.gov/tata/hts/bychapter/index.htm
- 14. Exhibit 5: Excel worksheets for TCO Analysis
- 15. 5.1 Decision Making Assembly Location Supplier Selection USA Supplier China Supplier Mexico Supplier USA Supplier China Supplier Mexico Supplier Total Material Cost (per unit) 3085 2500 2500 3085 2500 2500 PLC (bare) 1750 1500 1500 1750 1500 1500 Input Fiber Array (IFA) 185 150 150 185 150 150 Output Fiber Array (OFA) 1150 850 850 1150 850 850 No. of units per order 1000 1000 1000 500 500 500 Value of one order $3,085,000.00 $2,500,000.00 $2,500,000.00 $1,542,500.00 $1,250,000.00 $1,250,000.00 Transportation Process $18,525.00 $69,735.00 $210,811.20 $240,455.00 Transportation from plant to port of export NA Buyer Buyer NA Buyer Buyer Unloading of truck at port of export NA Buyer Buyer NA Buyer Buyer Custom clearance of goods and handover to airlineNA Buyer Buyer NA Buyer Buyer Transit Insurance NA 0.70% 2.75% NA 0.70% 2.75% Value of Transit Insurance $17,500.00 $68,750.00 $8,750.00 $34,375.00 Carriage charges to port of import NA $1,000.00 $960.00 NA $550.00 $480.00 Import customs clearance NA $25.00 $25.00 NA $20.00 $20.00 CIF Value of goods $2,518,525.00 $2,569,735.00 $1,259,320.00 $1,284,875.00 Import duties and taxes NA 0% 0% NA 16% 16% $0.00 $0.00 $201,491.20 $205,580.00 Transportation to assembly location NA 100 100 NA 100 100 TOTAL LANDED COST OF ONE ORDER $3,085,000.00 $2,518,625.00 $2,569,835.00 $1,542,500.00 $1,460,911.20 $1,490,555.00 Material Cost per year $37,020,000.00 $30,223,500.00 $30,838,020.00 $18,510,000.00 $17,530,934.40 $17,886,660.00 Recommendation : China Supplier is best one. Tool Type Supplier Selection Tool A Tool B Tool A Tool B Tool A Tool B Assembly Cost per year $190,400.00 $280,000.00 $190,400.00 $280,000.00 $190,400.00 $280,000.00 Purchase Price $170,000.00 $250,000.00 $170,000.00 $250,000.00 $170,000.00 $250,000.00 Yearly Maintenance $20,400.00 $30,000.00 $20,400.00 $30,000.00 $20,400.00 $30,000.00 Utilities $20,000.00 $20,000.00 $20,000.00 $20,000.00 $20,000.00 $20,000.00 Consumables per year $5,616,000.00 $5,616,000.00 $5,616,000.00 $5,616,000.00 $5,616,000.00 $5,616,000.00 Cost (per shift per year) $6,000.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00 Shifts per year 936 936 936 936 936 936 Labour cost per year $37,440,000.00 $37,440,000.00 $11,232,000.00 $11,232,000.00 $22,464,000.00 $22,464,000.00 Cost (per shift per year, assuming 1 operator per shift )$40,000.00 $40,000.00 $12,000.00 $12,000.00 $24,000.00 $24,000.00 Shifts per year 936 936 936 936 936 936 TOTAL $43,266,400.00 $43,356,000.00 $17,058,400.00 $17,148,000.00 $28,290,400.00 $28,380,000.00 Recommendation : Tool A is best one. Kansas Brazil USA Supplier China Supplier Mexico Supplier 5.2 Short-term (1 year) analysis
- 16. Supplier Selection Tool Type Tool A Tool B Tool A Tool B Tool A Tool B Material Cost (per unit) 3,085.00$ 3,085.00$ 2,500.00$ 2,500.00$ 2,500.00$ 2,500.00$ PLC (bare) 1,750.00$ 1,750.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ Input Fiber Array (IFA) 185.00$ 185.00$ 150.00$ 150.00$ 150.00$ 150.00$ Output Fiber Array (OFA) 1,150.00$ 1,150.00$ 850.00$ 850.00$ 850.00$ 850.00$ Assembly Cost 190,400.00$ 280,000.00$ 190,400.00$ 280,000.00$ 190,400.00$ 280,000.00$ Purchase Price 170,000.00$ 250,000.00$ 170,000.00$ 250,000.00$ 170,000.00$ 250,000.00$ Yearly Maintenance 20,400.00$ 30,000.00$ 20,400.00$ 30,000.00$ 20,400.00$ 30,000.00$ Utilities 20,000.00$ 20,000.00$ 20,000.00$ 20,000.00$ 20,000.00$ 20,000.00$ Consumablesper year 5,616,000.00$ 5,616,000.00$ 5,616,000.00$ 5,616,000.00$ 5,616,000.00$ 5,616,000.00$ Cost (per shift per year) 6,000.00$ 6,000.00$ 6,000.00$ 6,000.00$ 6,000.00$ 6,000.00$ Shifts per year 936 936 936 936 936 936 Labour cost per year 37,440,000.00$ 37,440,000.00$ 11,232,000.00$ 11,232,000.00$ 22,464,000.00$ 22,464,000.00$ Cost (per shift per year, assuming 1 operator per shift ) 40,000.00$ 40,000.00$ 12,000.00$ 12,000.00$ 24,000.00$ 24,000.00$ Shifts per year 936 936 936 936 936 936 Total Cost except material cost 43,266,400.00$ 43,356,000.00$ 17,058,400.00$ 17,148,000.00$ 28,290,400.00$ 28,380,000.00$ No. of units ordered per year 18000 18000 18000 18000 18000 18000 Per unit cost except material cost 2,403.69$ 2,408.67$ 947.69$ 952.67$ 1,571.69$ 1,576.67$ TOTAL PER UNIT COST 5,488.69$ 5,493.67$ 3,447.69$ 3,452.67$ 4,071.69$ 4,076.67$ Assembly Location Supplier Selection USA Supplier China Supplier MexicoSupplier USA Supplier China Supplier MexicoSupplier No. of units per order 1000 1000 1000 500 500 500 Value of every order 5,488,688.89$ 3,447,688.89$ 4,071,688.89$ 2,744,344.44$ 1,723,844.44$ 2,035,844.44$ Transportation Process $118,925.71 $225,941.87 $290,473.93 $391,258.55 Transportationfrom plant toport of export NA Buyer Buyer NA Buyer Buyer Unloading of truck at port of export NA Buyer Buyer NA Buyer Buyer Custom clearance of goods andhandover toairline NA Buyer Buyer NA Buyer Buyer Transit Insurance NA 0.70% 2.75% NA 0.70% 2.75% Value of Transit Insurance $24,133.82 $111,971.44 $12,066.91 $55,985.72 Carriage chargesto port of import NA $1,000.00 $960.00 NA $550.00 $480.00 Import customsclearance NA $25.00 $25.00 NA $20.00 $20.00 CIF Value of goods $3,472,847.71 $4,184,645.33 $1,736,481.36 $2,092,330.17 Import duties andtaxes NA 2.7% 2.7% NA 16% 16% $93,766.89 $112,985.42 $277,837.02 $334,772.83 Transportationtoassembly location NA 100 100 NA 100 100 TOTALCOSTOFOWNERSHIP $5,488,688.89 $3,566,714.60 $4,297,730.76 $2,744,344.44 $2,014,418.37 $2,427,202.99 Kansas Brazil USA Supplier China Supplier MexicoSupplier 5.3 Long-term (3 years) analysis
- 17. Supplier Selection Tool Type Tool A Tool B Tool A Tool B Tool A Tool B Material Cost (per unit) 3,085.00$ 3,085.00$ 2,500.00$ 2,500.00$ 2,500.00$ 2,500.00$ PLC (bare) 1,750.00$ 1,750.00$ 1,500.00$ 1,500.00$ 1,500.00$ 1,500.00$ Input Fiber Array (IFA) 185.00$ 185.00$ 150.00$ 150.00$ 150.00$ 150.00$ Output Fiber Array (OFA) 1,150.00$ 1,150.00$ 850.00$ 850.00$ 850.00$ 850.00$ Assembly Cost 231,200.00$ 340,000.00$ 231,200.00$ 340,000.00$ 231,200.00$ 340,000.00$ Purchase Price 170,000.00$ 250,000.00$ 170,000.00$ 250,000.00$ 170,000.00$ 250,000.00$ Maintenance over 3 years 61,200.00$ 90,000.00$ 61,200.00$ 90,000.00$ 61,200.00$ 90,000.00$ Utilities per year 20,000.00$ 20,000.00$ 20,000.00$ 20,000.00$ 20,000.00$ 20,000.00$ Utilities for 3 year $60,000.00 $60,000.00 $60,000.00 $60,000.00 $60,000.00 $60,000.00 Cost (per shift per year) 6,000.00$ 6,000.00$ 6,000.00$ 6,000.00$ 6,000.00$ 6,000.00$ Shifts per year 936 936 936 936 936 936 Consumables per year 5,616,000.00$ 5,616,000.00$ 5,616,000.00$ 5,616,000.00$ 5,616,000.00$ 5,616,000.00$ Consumables for 3 years 16,848,000.00$ 16,848,000.00$ 16,848,000.00$ 16,848,000.00$ 16,848,000.00$ 16,848,000.00$ Cost (per shift per year, assuming 1 operator per shift ) 40,000.00$ 40,000.00$ 12,000.00$ 12,000.00$ 24,000.00$ 24,000.00$ Shifts per year 936 936 936 936 936 936 Labour cost per year 37,440,000.00$ 37,440,000.00$ 11,232,000.00$ 11,232,000.00$ 22,464,000.00$ 22,464,000.00$ Labour cost for 3 years 112,320,000.00$ 112,320,000.00$ 33,696,000.00$ 33,696,000.00$ 67,392,000.00$ 67,392,000.00$ Total Cost except material cost 129,459,200.00$ 129,568,000.00$ 50,835,200.00$ 50,944,000.00$ 84,531,200.00$ 84,640,000.00$ No. of units ordered within 3 years 54000 54000 54000 54000 54000 54000 Per unit cost except material cost 2,397.39$ 2,399.41$ 941.39$ 943.41$ 1,565.39$ 1,567.41$ TOTAL COST OF OWNERSHIP OVER 3 YRS. 5,482.39$ 5,484.41$ 3,441.39$ 3,443.41$ 4,065.39$ 4,067.41$ Assembly Location Supplier Selection USA Supplier China Supplier Mexico Supplier USA Supplier China Supplier Mexico Supplier No. of units ordered within 3 years 36000 36000 36000 18000 18000 18000 Value of every order 197,366,133.33$ 123,890,133.33$ 146,354,133.33$ 98,683,066.67$ 61,945,066.67$ 73,177,066.67$ Transportation Process $4,273,576.07 $8,121,385.63 $10,438,007.81 $14,063,559.09 Transportation from plant to port of export NA Buyer Buyer NA Buyer Buyer Unloading of truck at port of export NA Buyer Buyer NA Buyer Buyer Custom clearance of goods and handover to airline NA Buyer Buyer NA Buyer Buyer Transit Insurance NA 0.70% 2.75% NA 0.70% 2.75% Value of Transit Insurance $867,230.93 $4,024,738.67 $433,615.47 $2,012,369.33 Carriage charges to port of import NA $36,000.00 $34,560.00 NA $19,800.00 $17,280.00 Import customs clearance NA $900.00 $900.00 NA $720.00 $720.00 CIF Value of goods $124,794,264.27 $150,414,332.00 $62,399,202.13 $75,207,436.00 Import duties and taxes NA 2.7% 2.7% NA 16% 16% $3,369,445.14 $4,061,186.96 $9,983,872.34 $12,033,189.76 Transportation to assembly location NA 100 100 NA 100 100 TOTALCOSTOF OWNERSHIPOVER 3 YEARS $197,366,133.33 $128,163,809.40 $154,475,618.96 $98,683,066.67 $72,383,174.47 $87,240,725.76 USA Supplier China Supplier Mexico Supplier Kansas Brazil
- 18. 5.4 Percentages analysis SupplierSelection ToolType ToolA ToolB ToolA ToolB ToolA ToolB MaterialCost 166,590,000.00$ 166,590,000.00$ 135,000,000.00$ 135,000,000.00$ 135,000,000.00$ 135,000,000.00$ AssemblyCost 231,200.00$ 340,000.00$ 231,200.00$ 340,000.00$ 231,200.00$ 340,000.00$ Utilitiesfor3year 60,000.00$ 60,000.00$ 60,000.00$ 60,000.00$ 60,000.00$ 60,000.00$ Consumablesfor3years 16,848,000.00$ 16,848,000.00$ 16,848,000.00$ 16,848,000.00$ 16,848,000.00$ 16,848,000.00$ Labourcostfor3years 112,320,000.00$ 112,320,000.00$ 33,696,000.00$ 33,696,000.00$ 67,392,000.00$ 67,392,000.00$ Transportationcostover3years -$ -$ $14,711,583.88 $14,711,583.88 22,184,944.72$ 22,184,944.72$ TOTALCOSTOFOWNERSHIPOVER3YRS. 296,049,200.00$ 296,158,000.00$ 200,546,783.88$ 200,655,583.88$ 241,716,144.72$ 241,824,944.72$ SupplierSelection ToolType ToolA ToolB ToolA ToolB ToolA ToolB MaterialCost 56.27% 56.25% 67.32% 67.28% 55.85% 55.83% AssemblyCost 0.08% 0.11% 0.12% 0.17% 0.10% 0.14% Utilitiesfor3year 0.02% 0.02% 0.03% 0.03% 0.02% 0.02% Consumablesfor3years 5.69% 5.69% 8.40% 8.40% 6.97% 6.97% Labourcostfor3years 37.94% 37.93% 16.80% 16.79% 27.88% 27.87% Transportationcostover3years 0.00% 0.00% 7.34% 7.33% 9.18% 9.17% TOTALCOSTOFOWNERSHIPOVER3YRS. 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% USASupplier ChinaSupplier MexicoSupplier USASupplier ChinaSupplier MexicoSupplier
- 19. 5.5 Sensitivity analysis for transportation costs Assembly Location Supplier SelectionUSA Supplier China Supplier Mexico Supplier USA Supplier China Supplier Mexico Supplier No. of units ordered within 3 years36000 36000 36000 18000 18000 18000 Value of every order $197,366,133.33 $123,890,133.33 $146,354,133.33 $98,683,066.67 $61,945,066.67 $73,177,066.67 Transportation Process $4,273,676.07 $8,121,485.63 $10,438,107.81 $14,063,659.09 Transportation from plant to port of exportNA Buyer Buyer NA Buyer Buyer Unloading of truck at port of exportNA Buyer Buyer NA Buyer Buyer Custom clearance of goods and handover to airlineNA Buyer Buyer NA Buyer Buyer Transit InsuranceNA 0.70% 2.75% NA 0.70% 2.75% Value of Transit Insurance $867,230.93 $4,024,738.67 $433,615.47 $2,012,369.33 Carriage charges to port of importNA $36,000.00 $34,560.00 NA $19,800.00 $17,280.00 Import customs clearanceNA $900.00 $900.00 NA $720.00 $720.00 CIF Value of goods $124,794,264.27 $150,414,332.00 $62,399,202.13 $75,207,436.00 Import duties and taxesNA 2.70% 2.70% NA 16% 16% $3,369,445.14 $4,061,186.96 $9,983,872.34 $12,033,189.76 Transportation to assembly locationNA 100 100 NA 100 100 TOTAL COST OF OWNERSHIP OVER 3 YEARS$197,366,133.33 $128,163,809.40 $154,475,618.96 $98,683,066.67 $72,383,174.48 $87,240,725.76 total cost of ownership without the insurance$127,296,578.47 $150,450,880.29 $71,949,559.01 $85,228,356.43 if the insurance increase by 10% 1.1 the increase value of transit insurance $953,954.02 $4,427,212.54 $476,977.02 $2,213,606.26 total cost of ownership with the insurance $128,250,532.49 $154,878,092.83 $72,426,536.03 $87,441,962.69 increased percentage 0.07% 0.26% 0.06% 0.23% if the insurance decrease by 10% 0.9 the decrease value of insurance $780,507.84 $3,622,264.80 $390,253.92 $1,811,132.40 total cost of ownership without the insurance$128,077,086.31 $154,073,145.09 $72,339,812.93 $87,039,488.83 -0.07% -0.26% -0.06% -0.23% total cost of ownership without the carriage $128,127,809.40 $154,441,058.96 $72,363,374.48 $87,223,445.76 if the carriage increase by 10% 1.1 the increased value of carriage $39,600.00 $38,016.00 $21,780.00 $19,008.00 tco with increased carriage $128,167,409.40 $154,479,074.96 $72,385,154.48 $87,242,453.76 increased carriage 0.003% 0.002% 0.003% 0.002% if the carriage decrease by 10% 0.9 the decreased value of carriage $32,400.00 $31,104.00 $17,820.00 $15,552.00 the decreased value of carriage $128,160,209.40 $154,472,162.96 $72,381,194.48 $87,238,997.76 tco without increased carriage -0.003% -0.002% -0.003% -0.002% tco without the customs duty $124,794,364.26 $150,414,432.00 $62,399,302.14 $75,207,536.00 if the carriage increase by 10% 1.1 the increased value of carriage $3,706,389.65 $4,467,305.66 $10,982,259.57 $13,236,508.74 tco with carriage $128,500,753.91 $154,881,737.66 $73,381,561.71 $88,444,044.74 increased percentage 0.26% 0.26% 1.38% 1.38% if the carriage decrease by 10% 0.9 the decreased value of carriage $3,032,500.63 $3,655,068.26 $8,985,485.11 $10,829,870.78 tco with decreased carriage $127,826,864.89 $154,069,500.26 $71,384,787.25 $86,037,406.78 decreased percentage -0.26% -0.26% -1.38% -1.38% tco without transportation process cost $123,890,133.33 $146,354,133.33 $61,945,066.67 $73,177,066.67 if increased the transportation cost by 10% 1.1 increased transportation cost $4,701,043.68 $8,933,634.19 $11,481,918.59 $15,470,025.00 tco with transportation cost $128,591,177.01 $155,287,767.52 $73,426,985.26 $88,647,091.67 increased percentage 0.33% 0.53% 1.44% 1.61% if decreased the transportation cost 0.9 decreased transportation cost $3,846,308.46 $7,309,337.07 $9,394,297.03 $12,657,293.18 tco with decreased transportation cost $127,736,441.79 $153,663,470.40 $71,339,363.70 $85,834,359.85 decreased percentage -0.33% -0.53% -1.44% -1.61% China -Kansas Mexico-Kansas China-Brazil Mexico-Brazil Insurance impact 0.07% 0.26% 0.06% 0.23% carriage 0.003% 0.002% 0.003% 0.002% Import duty 0.26% 0.26% 1.38% 1.38% transportation process 0.33% 0.53% 1.44% 1.61% Kansas Brazil 0.00% 0.20% 0.40% 0.60% 0.80% 1.00% 1.20% 1.40% 1.60% 1.80% 1 2 3 4 5 6 Sensitivity Analysis for transportation solution Insurance impact carriage Import duty transportation process
- 20. 5.6 sensitivity analysis for other costs China - Kansas China - Brazil Mexico - Kansas Mexico - Brazil 0.70% 0.70% 2.68% 2.68% 0% 14% 0% 14% $18,525.00 $69,735.00 $210,811.20 $240,455.00 Tool A Tool B Tool A Tool B Tool A Tool B $37,020,000.00 $30,223,500.00 $30,838,020.00 $18,510,000.00 $17,530,934.40 $17,886,660.00 $190,400.00 $280,000.00 $190,400.00 $280,000.00 $190,400.00 $280,000.00 $170,000.00 $250,000.00 $170,000.00 $250,000.00 $170,000.00 $250,000.00 $20,400.00 $30,000.00 $20,400.00 $30,000.00 $20,400.00 $30,000.00 $20,000.00 $20,000.00 $20,000.00 $20,000.00 $20,000.00 $20,000.00 $5,616,000.00 $5,616,000.00 $5,616,000.00 $5,616,000.00 $5,616,000.00 $5,616,000.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00 $6,000.00 $37,440,000.00 $37,440,000.00 $11,232,000.00 $11,232,000.00 $22,464,000.00 $22,464,000.00 $40,000.00 $40,000.00 $12,000.00 $12,000.00 $24,000.00 $24,000.00 $80,286,400.00 $73,579,500.00 $47,896,420.00 $35,658,000.00 $45,821,334.40 $46,266,660.00 $43,266,400.00 $43,356,000.00 $17,058,400.00 $17,148,000.00 $28,290,400.00 $28,380,000.00 material cost increase by 10％ per year 1.1 $40,722,000.00 $33,245,850.00 $33,921,822.00 $20,361,000.00 $19,284,027.84 $19,675,326.00 $83,988,400.00 $76,601,850.00 $50,980,222.00 $37,509,000.00 $47,574,427.84 $48,055,326.00 4.61% 4.11% 6.44% 5.19% 3.83% 3.87% material cost decrease by 10％ per year 0.9 $33,318,000.00 $27,201,150.00 $27,754,218.00 $16,659,000.00 $15,777,840.96 $16,097,994.00 $76,584,400.00 $70,557,150.00 $44,812,618.00 $33,807,000.00 $44,068,240.96 $44,477,994.00 -4.61% -4.11% -6.44% -5.19% -3.83% -3.87% ost without assembly cost per year $80,096,000.00 $73,299,500.00 $47,706,020.00 $35,378,000.00 $45,630,934.40 $45,986,660.00 1.1 assembly cost increase by 10% peryear $209,440.00 $308,000.00 $209,440.00 $308,000.00 $209,440.00 $308,000.00 $80,305,440.00 $73,607,500.00 $47,915,460.00 $35,686,000.00 $45,840,374.40 $46,294,660.00 0.024% 0.038% 0.040% 0.079% 0.042% 0.061% assembly cost decrease by 10% per year 0.9 $171,360.00 $252,000.00 $171,360.00 $252,000.00 $171,360.00 $252,000.00 $80,267,360.00 $73,551,500.00 $47,877,380.00 $35,630,000.00 $45,802,294.40 $46,238,660.00 -0.024% -0.038% -0.040% -0.079% -0.042% -0.061% $80,266,400.00 $73,559,500.00 $47,876,420.00 $35,638,000.00 $45,801,334.40 $46,246,660.00 utilities increase by 10% 1.1 $22,000.00 $22,000.00 $22,000.00 $22,000.00 $22,000.00 $22,000.00 $80,288,400.00 $73,581,500.00 $47,898,420.00 $35,660,000.00 $45,823,334.40 $46,268,660.00 0.002% 0.003% 0.004% 0.006% 0.004% 0.004% 0.9 $18,000.00 $18,000.00 $18,000.00 $18,000.00 $18,000.00 $18,000.00 $80,284,400.00 $73,577,500.00 $47,894,420.00 $35,656,000.00 $45,819,334.40 $46,264,660.00 -0.0025% -0.0027% -0.0042% -0.0056% -0.0044% -0.0043% $74,670,400.00 $67,963,500.00 $42,280,420.00 $30,042,000.00 $40,205,334.40 $40,650,660.00 consumables increase by 10% 1.1 $6,177,600.00 $6,177,600.00 $6,177,600.00 $6,177,600.00 $6,177,600.00 $6,177,600.00 $80,848,000.00 $74,141,100.00 $48,458,020.00 $36,219,600.00 $46,382,934.40 $46,828,260.00 0.70% 0.76% 1.17% 1.57% 1.23% 1.21% consumables decrease by 10% 0.9 $5,054,400.00 $5,054,400.00 $5,054,400.00 $5,054,400.00 $5,054,400.00 $5,054,400.00 $79,724,800.00 $73,017,900.00 $47,334,820.00 $35,096,400.00 $45,259,734.40 $45,705,060.00 -0.70% -0.76% -1.17% -1.57% -1.23% -1.21% $42,846,400.00 $36,139,500.00 $36,664,420.00 $24,426,000.00 $23,357,334.40 $23,802,660.00 labor cost increase by 10% 1.1 $41,184,000.00 $41,184,000.00 $12,355,200.00 $12,355,200.00 $24,710,400.00 $24,710,400.00 $84,030,400.00 $77,323,500.00 $49,019,620.00 $36,781,200.00 $48,067,734.40 $48,513,060.00 4.66% 5.09% 2.35% 3.15% 4.90% 4.86% labor cost decrease by 10% 0.9 $33,696,000.00 $33,696,000.00 $10,108,800.00 $10,108,800.00 $20,217,600.00 $20,217,600.00 $76,542,400.00 $69,835,500.00 $46,773,220.00 $34,534,800.00 $43,574,934.40 $44,020,260.00 -4.66% -5.09% -2.35% -3.15% -4.90% -4.86% US Suppliers for Tool A US Suppliers for Tool B China suppliers for Tool A China suppliers for Tool B Mexico Suppliers for Tool A Mexico Suppliers for Tool B 4.61% 4.11% 6.44% 5.19% 3.83% 3.87% 0.024% 0.038% 0.040% 0.079% 0.042% 0.061% 0.002% 0.003% 0.004% 0.006% 0.004% 0.004% 0.70% 0.76% 1.17% 1.57% 1.23% 1.21% 4.66% 5.09% 2.35% 3.15% 4.90% 4.86% USA Supplier China Supplier Mexico Supplier 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% 7.00% US Suppliers for Tool A US Suppliers for Tool B China suppliers for Tool A China suppliers for Tool B Mexico Suppliers for Tool A Mexico Suppliers for Tool B Sensitivity anaysis for tools and suppliers selections Material Cost Assembly Cost Utilities Consumers Labor Cost
- 21. 5.7 Sensitivity analysis of productivity Table 2: Productivity Drivers by Assembly Location and Tool Choice Current Supplier Throughput per hour Tool A 5 5 5 Tool B 4 4 4 Yield Tool A 0.97 0.97 0.97 Tool B 0.98 0.98 0.98 Equipment Lifetime (both) 3 yrs 3 yrs 3 yrs Shifts Per Day (both) 3 3 3 Workdays Per Week (both) 6 6 6 Delivery Reliability 0.995 0.98 0.99 Utilization 0.7 0.7 0.7 LeadTime (weeks) 0.5 4 2 Tool Productivity (thoughput per hour*yield*utilization*shifts hours per year) A 25421.76 B 20547.072 Tool A 25421.76 0.5 0.6 0.7 0.8 0.9 UTILIZATION 0.95 17784 21340.8 24897.6 28454.4 32011.2 0.96 17971.2 21565.44 25159.68 28753.92 32348.16 0.97 18158.4 21790.08 25421.76 29053.44 32685.12 0.98 18345.6 22014.72 25683.84 29352.96 33022.08 0.99 18532.8 22239.36 25945.92 29652.48 33359.04 YIELD Tool B 20547.072 0.5 0.6 0.7 0.8 0.9 UTILIZATION 0.95 14227.2 17072.64 19918.08 22763.52 25608.96 0.96 14376.96 17252.352 20127.744 23003.136 25878.528 0.97 14526.72 17432.064 20337.408 23242.752 26148.096 0.98 14676.48 17611.776 20547.072 23482.368 26417.664 0.99 14826.24 17791.488 20756.736 23721.984 26687.232 YIELD Mexico Supplier China Supplier
- 22. RECOMMENDATION Based on our analysis of the underlying factors, we recommend choosing Tool A for production and choosing China supplier to produce the PLC chip. This recommendation is based overwhelming evidence supported by our analysis. Our analysis found that regardless of shipping location China had the lowest total cost of ownership in comparison to Mexico or US even when taking sensitivity analysis into consideration. Further China has less intangible expenses involved like less risk factors involved. Another consideration in our recommendation to produce in China is that China’s economy is growing by leaps and bounds right now. Therefore, it is more likely that China has the potential to possibly become a consumer in the future. If this turned out to be the case, then Payson Electronics would already have a supplier in China should they decide to establish an assembly plant there. In all, when taking both tangible and intangible costs and benefits into consideration China is the clear winner in the decision of where to source the PLC chips from. Justification for the Recommendation From the sensitivity analysis we given above, the TCO of the Chinese supplier tend to be sensitive to the material cost, while on the other hand, TCO of US and Mexican suppliers tend to be sensitive to the labor cost. This actually reflects that the Chinese Labors are cheaper and take up a less portion of the Total Cost of Component structure. For the transportation Analysis Part, the TCO of Chinese supplier seems to be less sensitive to the transportation cost. This is mainly because that the Chinese logistic industry in now experiencing a significant growth during these year. Also, the tariff also reduced since the Chinese government favored the foreign capital to promote their domestic industry. Brazil, on the other hand, demands a higher level of customs duty as they want to protect the electronic products industry within their country. From a risk assessment perspective, there may be many risks given above due to the outsourcing. Moreover, for the delivery reliability, since the logistic industry is now developing quickly in China, they can provide the high-speed service with lower price. Therefore, choosing a company in China can be with a lower risk of transportation costs. As for the Geographical reason, China is definitely a safer place with less operations for the company to work on. In addition, for the currency fluctuation risk, as the Chinese yuan is not devalued, it is more beneficial for a foreign company to export goods from China. This is just a short-term effect; we cannot predict the value of Chinese Yuan in the future. But there exists a significant risk in China, which is the patent of the product may be plagiarized. Since the assembly process is not a high-value added process, the risk of knock-off is not that severe in this production process. When the company analyzes the cost component, they usually ignore the many kinds of soft costs that also influence the operation of the business. From the perspective of soft costs, China is much better for the suppliers’ decision. As China now is holding a reform and opening-up policy, the government now is carrying out a policy that favors the international trade, and the
- 23. foreign company can enjoy quite a lot of favorable privileges, such as the preferential tariff treatments and preferential duty treatments. What’s more, since china now is on a rapid development stage, there are lots of infrastructures which are being set up in these years, so it may be easier for the company to cooperate with these suppliers.