Question

The following is a paper and pencil exercise. The goal is to illustrate some basic concepts in global sourcing and logistics and to examine what happens when conditions change.

INTRO:

You are running a manufacturing company that has decided to make a new product – a widget (my apologies for the cliché). Your company wishes to sell the widgets in two countries – Freetradia and the Isolated States (as the names imply, Freetradia is an open embracer of the global economy while the Isolated States has a protectionist stance – complete with tariffs and tax breaks for companies that build plants in-country). The company thinks it can sell a million widgets in each of these markets.

In order to make the widgets, your company will have to build manufacturing plants and buy the raw materials/subcomponents of the widget (parts A, B and C). A plant’s maximum capacity is 1 million widgets (so it looks like you will need to build two plants, one to serve each market). Both countries have ample markets to supply A, B and C.

The Bill of Materials below shows the break-even cost the company must charge per widget in each country. This assumes the company builds a separate plant in each country and sources all of the needed parts from local suppliers.

BOM FOR A WIDGET
Country Sold Into:	Freetradia	Isolated States
Plant Location	Freetradia	Isolated States
Plant construction Costs	$10,000,000	$8,000,000
Number of Units Made	1,000,000	1,000,000
Raw Materials:
A Cost	$2	$2
B Cost	$6	$6
C Cost	$10	$10
Total Material Cost	$18	$18
Labor	$12	$12
OH Applied	$10	$8
Total Cost of Widget (break-even price)	$40	$38

Baseline Scenario

In reality companies choose to source components and place manufacturing facilities around the globe. With this in mind, the company considers the nation of Developtopia, a lesser-developed country with a reputation for maintaining quality at improved labor and materials costs. Of course, you must now figure in increased transportation costs and the cost of tariffs imposed by the IS government.

Using the cost table below answer the following:

You may source components from Developtopia, although local laws prevent you from building any plants there. How does this affect your break-even price in each country? Who is getting ripped off here?

Now assume the Developtopian government agrees to allow you to build plants there – what is your overall manufacturing strategy and what are your break-even prices in the two markets? Remember, you must still build two plants overall to service the demand for 1M widgets in each market. (Regarding the tariffs for the I.S., you will have to pay either raw material or finished goods tariffs, not both).

COSTS/RESTRICTIONS:
Raw Materials	Cost in Freetradia	Cost in I.S.	Cost in Developtopia	Transp. Cost (IS-FT or FT-IS)	Transp. Cost (Dev-IS or FT	Tariff (IS ONLY)
A	$2.00	$2.00	$1.00	$0.50	$1.00	$1.00
B	$6.00	$6.00	$3.00	$0.50	$1.00	$3.00
C	$10.00	$10.00	$5.00	$1.00	$2.00	$5.00
Labor	$12.00	$12.00	$4.00
Build Plant	$10,000,000	$8,000,000	$4,000,000
Widget				$2.00	$4.00	$13.00

Final question: who are the tariffs in the Isolated States really protecting?

Answer 1