Question

Should World Kitchen outsource Pyrex production and close the Charleroi plant? If so, how many suppliers should the company employ and where should they be located?

dishwas resulted from a process that pressed together yers of thin, strengthened opaque glass. products if they were moved overseas and simply source the lower-cost private-label versions directly sales and marketing functions. THE MARKET Givsn its extensive experience with outsourcing the Giobal Sourcing Department at World Kitchen had existing relationships with manufacturers in the from overseas manufacturers. Thus, an decisions also required close coordination with the y outsourcing ke's for range-top cookware (pots and pans), ce- ramic cookware (CorningWare baking dishes), flat glass (pot lids), and a variety of other metal and PYREX products fell into three categories: prepware, plastic products throughout its lines. There was con- bakeware, and serveware. Prepware consisted cern, however, that no foreign plant-or combina- tion of plants-offered sufficient demand for the PYREX line mixing bowls and measuring cups, two of ghest-volume items. Bakeware included pie plates, loaf dishes, roasting pans, and anything cook food. Serveware included t could be used to serve food at the table he refrigerator (or both). See Ex- hibit 1 for descriptions of PYREX products and cur- largely of capacity to meet PYREX's hi used in the oven to pieces tha or for storage in t Furthermore, when a product was sourced and World Kitchen management was not present or close to the plant where the product was made, quality and consistency sometime ample, the CorningWare products had occasionally suffered from color inconsistencies. Given transpor s suffered. For ex- rent production levels As of summer 2006, market research estimated that 79% of U.S. households owned at least one PYREX product. PYREX held a 75% share of the market, and its largest competitor, Anchor Hocking, controlled 22% of the market. Although World Kitch- en's market-share position was dominant among makers of glass cookware, the PYREX products also competed against nonglass products. In metal, plastic, and ceramic bakeware, prepware, and serveware, the tation distances, breakage frequency ran much higher with the foreign manufacturers. Although the quality of product coming from overseas suppli- ers was often lower than that of the former plants, it still exceeded the standards demanded by World Kitchen's cost-conscious consumers, so actual losses associated with lower quality were questionable Intellectual property, however, presented an in creasingly important challenge. Weak intelectual company's market share was dramatically lower property laws in developing regions raised concerns Most of the glass prepware, bakeware, and serve- about brand dilution and copycat products. In fact, ware products were made in the United States for the the search for glass manufacturers in China uncov- U.S. market, either in World Kitchen's Charleroi facility red several companies with the PYREX-brand logo or in Anchor Hocking's Ohio plant. Because of their Web site, claiming to be producers of the duct. When contacted by World relative weight, glass products were often manufac tured in local markets throughout the world to mini- on their proprietary pro Kitchen, the manufacturers explained that "PYREX" ze shipping costs. Notably, large glass-man mi dicated the high quality of the glass pro- operations were located in Italy, France, Spain, Turkey ries, not that the branded prod- Sourcing Department at World chieve a continuous, high-quality Brazil, Mexico, China, India, and Thailand eir facto the Across the glass-making industry, profit margins were low and shrinking in 2006, averaging about s were produced in their facilities al Kitchen sough ply for each 7%. Owing to increasing commoditization, the busi- ness typically proved unattractive to new entrants in established economies. The lower relative labor costs onitored movements in the labor, ma- in emerging markets, however, made glass produc nufacturing markets in order to "stay tion more attractive. Despite the significant up-front curve" in its sourcing decisions for the capital investment, labor represented a major cost While the daily operations of the depart- challenge for World Kitchen and other producers tionships with suppli- t to develop rela f the product lines. In addition, the terials, and ahead of the d ourchasing goods, the group was also sible for assessing the strategic decision to with established operations in developed economies. Tariffs represented another important dynamic for U.S. consumer-products companies. Tariffs van nd outsource production product and by country of o arg nd Bed Bath & Beyond, followed by the aggregate served to encourage domestic manurac re channel and department stores. As of turing. The Harmonized Tariff Schedule, produ almart represented 32% of World by the U.S. International Trade Commiss mer 2006, the past, Walmart and other re- taile product and its associated tariff. ed t car ucts a re ha ta 512 Part Six Case Studies EXHIBIT 1 Product categories for PYREX Category Annual Production Bowls Covers Measuring cups Baking dishes Pie plates Storage Other Total 9,030,000 6,234,000 4,565,000 16,104,000 2,807,000 583,982 2,148,000 41,471,982 Bowls Pie Plates Oblong Utility Dish Measuring Cups the case and their associated countries of origin, see Exhibit 2 After making the batch of glass in the furnace, workers transferred the melted output to one of four production lines. Because the furnace pro- MANUFACTURING The Charleroi plant, originally owned by Corning, cessed only clear glass, any needed color had to be began producing PYREX with the very first order, in 1915. Though the market had changed and some vi- sual elements had evolved over time, the PYREX pro- EXHIBIT 2 Tariff-rate exceptions by country. duction process remained virtually unchanged. The plant produced up to 47 million pounds of glass an- nually, or approximately 45 million pieces Country of Origin US Import Tariff Rate 18% 22.5% 22.5% 22.5% 22.5% 22.5% The process began with eight ingredients shipped Australia in rail cars directly to the factory and stored in large silos. Computers measured the precise amount ofChina each ingredient for each new batch and factoryThailand workers then moved the fully assembled batch by Italy carts to the furnace. Although the Charleroi plant Turkey had three furnaces at its peak, cuts in both spendingMexico and production over time had resulted in only one surviving "tank," or furnace. Brazil 4% For the entire Harmonized Tariff Schedule, see http://www.usitc -gov/ tata/hts/bychapter/index.htm. dded after the melting process, in one of the forehearths lines. At e molding machines holding 8 to 16 molds of each ti product. The molding machines pressed the into the desired shape, and then the pieces were fire-polished to remove any seams and imperfec nex 513 inning of the four production mea ach line, glass was poured into round applied to the glass as decoration (e.g., the popular The furnace represented the highest fixed costs in e four measuring cups) furnacea o ecause of the high temperatures re factory tions. After fire-polishing, another piece of equip- ficients of extic place insidet did wear out oved to be re quired to melt glass, the furnace had to be lined with refractory materials (blocks) that were strong at high e glass ment used suction to pull the hot g and move it to a rolling table rfec temperatures, resisted thermal shock, were chemic equip- nert, and had low thermal conductiveness a expansion. Each block was made-to-order s oft the mold ficients of to fit a specific place inside the furnace. Although this nt tempered surfacematerial resisted erosion, it did wear out over time, so PYREX could withstand changes from extreme cold seven to eight years the furnace had to be every sethn akage much better lined with new refractory blocks. To do so, the produc emolthe glass left the tion process had to be stopped entirely for sever cool. Once on the rolling table, products remai were moved into a kiln that reheated the glass above refractory its annealing (melting) point. As the glass began to soften, it was blasted with cooler air, whi the outer layer of glass to harden w g process, it began to weeks in order to empty the furnace, chip away any e the glass products remaining hardened glass, tear out and replace the blocks, and then restart the process. Because of the high fixed costs associated with the furnace and the extreme expense of starting and stopping the melting process, the production line ran ch caused hile the inner layer tayed liquid slightly longer. When the inner laver 24 hours a day almost continuously throughout the cooled and hardened, the tension created between year. Since 2002, the plant had produced between the layers stressed the product and created the 39 million and 43 million pieces each year. The plant toughened glass manager called his facility a "dollar-a-piece" opera- the dollar At this point, imperfections in the glass became tion because, for the past several years readily apparent when exposed to the tension: prod amount of exp expenditures approximately equaled the unit volume of production. In 2006, the plant was scheduled to produce around 41 million pieces, cost ing about $39 million. See Exhibit 3 for a cost break s with defects seemed to shatter spontaneously along the rolling table during the cycle of extreme heating and cooling. This tempering process was the last step in the manufacturing line unless paint was down for the Charleroi plant. Fixed- and variable-cost structure. EXHIBIT 3 100 90 80 70 Materials/Supplies Maintenance Utilities Labor De 40 30 20 Variable cost 52 29 epreciation 13 30 Utilities Maintenance Other 514 Part Six Case Studies EXHIBIT 4 Partial Quote from Foreign Manufacturer Inland FOB Weight Cost Tooling Cost to Por: Quote (kg) (S/part) (S/part) (S/par) (S/party S/par) Material Material Machine Labor Freight Product Shape Volume Bid Volume 2-1/2 QT. BOWL 988,000 all 4 QT BOWL 1-1/2 PT BOWL 1-1/2 QT. BOWL 980,000 all-we are quoting our 2 qt bowl 16 OZ. BoWL 1,500,000 all-we are quoting our 19 oz bowl 0.25 2-1/2 QT, BOWL 431,000 all 24 OZ. BOWL 624,000 all 09,000 all-we are quoting our 19 oz bowl 0.25 0.45 400,000 all-we are quoting our 19 oz bowl 0.25 0.45 st 32 OZ. BOWL 1,880,000 all-we are quoting our 35 oz bowl 0.42 0.55 std std 0.05 0.60 4-3/4 QT. SCULP 50,000 all-we are quoting our 4 qt. Bowl 48 OZ. BOWL 450,000 all-we are quoting our 2 qt bowl 8 OZ. BOWL 88 OZ. BOWL TOTAL std 1.90 std 228,000 990,000 9,030,000 all all-we are quoting our 2 1/2 qt bowl 0.12 0.30 std std 0.02 0.32 1.00 1.40 std std *You may bid on part or all of the required total needed for each category or shape. MAKE VERSUS BUY rebuilding, World Kitchen's board had requesteda n this process, Leena Baran requested quotes from foreign suppliers that made In early 2006, the labor contract with the union at make-versus-buy analysis on the PYREX product the Charleroi plant was nearing its end and negotia- line. As an early stepi tions for a new contract had begun. In company was preparing to rebuild the interior of similar pro addition, the e manufactured in Charleroi. ducts to thos the furnace at the plant within two years, at an esti- She hoped to ascertain which products the manu- mated cost of $12 million (a cost that would be facturers could produce, how many they could pro- duce each year, the labor and material costs that made up the prices World Kitchen would pay to these manufacturers, the cost of the freight be- tween the manufacturing plant and the port where it would be shipped to the United States, and a full straight-line depreciated over an expected eight- year life for the rebuild). This cost included hiring an engineering consulting firm-scheduled to begin work sometime later in 2006-to assess damage, as well as the materials and labor needed to replace FOB price. See Exhibit 4 for a response from a Euro the parts inside the furnace. pean supplier to the request for quote (RFQ) sent by Owing to the impending negotiations with the union, as well as the imminent expense of World Kitchen. Supplier Quotes EXHIBIT 5 Lead Time to WKI Freight per pound (to WKI Distribution Price per Pound Current Capacity (millions of Current (per supplier distribution Center Labor Cost (days) per Hour center) Utilization quote) 0.795 Supplier Location lbs.) Australia 0.0180 0.0075 0.760 Ita 85 75% Mexico 89 % WKI Pyrex 515 Although the quality of inform Clearly, this was an important strategic decision, and propriately for World ation provided by tions exactly, Baran was able to develop a good idea of the production and shipping costs per pound for each of the suppliers that responded to her RFQs. She also hoped to reconcile the RFQ data with her supplemental research on labor cost by country. (See Exhibit 5 for summary information from the the quotes did not match World Kitchen's expecta- she wanted to frame the issues ap Kitchen's mana gement team and board of directors. Discussion Questions 1. What are the pros and cons of continuing produc- tion at the Charleroi plant? 2. What downside might there be with offshore RFQs and the supplemental research.) outsourcing production of the Pyrex product line to overseas suppliers? Baran looked through all the various data she had collected and pondered the implications. Should World Kitchen outsource PYREX production and close the Charleroi plant? If so, how many suppliers should the company employ and where should they be located? 3. If the recommendation is to offshore outsource, what issues have to be addressed with the Charleroi plant?

Answer 1

World Kitchen has been in the business for long and has been producing PYREX glass from its Charleroi plant since long. recently the labor cost has been on the rise owing to the recent round of negotiation with the labor union. The fixed cost is huge i.e 58% of the total cost. A cost for internal repair of the furnace costing approximately $12 million needs to be incurred. PYREX does not compete in glass products but also with metals and plastics which are near substitutes of glass in the cookware range and also costs lower. Considering the above facts from the case, PYREX must look for outsourcing partners which helps it in being competitive while lower the manufacturing cost and gaining good margin from each product sold.

World kitchen must consider supply from Mexico, Turkey and Brazil. Mexico has the lowest US tariff rate of only 4% as it is a party to the NAFTA. The labor cost per hour is also very low at 1.68. The average number of lead days is also only 4 days. The price per pound is on a little higher side at 0.825 but it is offset by lower freight per pound cost and low tariffs as well as low labor cost. To keep monopoly and supplier's bargaining power at bay, another supplier must be selected. The second supplier can be from Turkey. Turkey has a low labor cost advantage with reasonable freight per pound cost and one of the lowest price per pound cost. Another favored supplier can be from Brazil, where the labor cost is higher than Mexico and Turkey but the lead time is lesser than turkey, also current utilization is at 95% of its capacity. The freight per pound cost is also reasonable in nature.

Australia and Italy are having a high labor cost while Thailand has a very high lead time and a high transportation cost(freight per pound cost) . China being the low cost country among all is not considered because of high risk of counterfeit products which will dilute the brand image of PYREX glass ( as mentioned in the case).