Your firm is one of the last remaining manufacturers of bicycles in the United States. Z-Mart is a U.S. retail chain with nearly 1,000 stores in fifteen countries. Z-Mart has asked you to prepare a proposal for a large number of bicycles to be sold at discount prices under the Z-Mart brand name. They must have a U.S. retail price of no more than $100. Z-Mart would also like to sell these bikes through its stores in France and Italy in order to compete with the European bikes made in that market.
What factors would be taken into consideration in determining whether to assemble the finished bicycles in the United States, Taiwan, or the Philippines?
There are many factors to be taken into consideration. First we have to think about if we want to make a new factory for assembly or buy an existing one, using all variable and fixed costs to calculate the breakeven point. Second, if we decide to make a new factory, we have to see the same parameters in all three countries, and compare them to know which one is more efficient.
The parameters we have to look at are like:
Supplier cost and quality
The cost of logistics to different markets like Europe or US from all locations
How much time shipments need to get from factory to outlet
Customs and taxes
Since the labor cost and other costs in Taiwan and Philippines are much less than the US, this means it may be better for them to assemble them there.
So all these factors have to be taken into consideration and calculated in detail, only then we can make a decision in what country we should assemble.
The following steps followed while deciding on the bike final assembly location:
- Calculate the breakeven point for the demand
- Using various parameters, do a comparison
Step 1: Make or Buy decision using fixed cost and variable cost calculate breakeven point for a given demand
Step 2: If we decide to set up our own, we need to compare three locations on various parameters Cost of setting up own facility in the US, Taiwan and the Philippines such as fixed cost and variable cost
- Production cost
- Overhead costs
- Supplier cost
- Supplier quality
- Logistics cost to markets such as The US, Europe etc forms these locations
- Lead time for shipments to retail outlets
- Tax/customs benefits for onshore/offshore manufacturing
Step 3: Calculate Total Cost of Ownership (TCO) for all the three locations
Step 4: Use scoring model to calculate the overall scores for all three locations
Step 5: Choose the best one as the location.