Question

Plant Efficiency Change

In the baseline scenario, we assume that all plants are equally efficient regardless of location. In reality, a potential tradeoff in making the decision to relocate globally is that a foreign plant may have cheaper costs but be less efficient.

In this scenario, the Developtopian plant only runs at 80% efficiency (for every 100 sets of inputs, only 80 widgets are made).

Assuming this inefficiency only affects raw materials and labor, what is the impact on where you will source parts and/or build plants? (Hint: you must still make 1M widgets at each plant. The increased costs of the parts/labor are bolded below.)

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	$1.25	$0.50	$1.00	$1.00
B	$6.00	$6.00	$3.75	$0.50	$1.00	$3.00
C	$10.00	$10.00	$6.25	$1.00	$2.00	$5.00
Labor	$12.00	$12.00	$5.00
Build Plant	$10,000,000	$8,000,000	$4,000,000
Widget				$2.00	$4.00	$13.00

Lower Quality Finished Goods

In the baseline, we assume that widgets (or raw materials/subassemblies) are of equal quality regardless of where they are produced. Another potential tradeoff of “going global” is that the price will be lower, but so will the quality.

In this scenario, the widgets from the Developtopian plant have a 20% failure rate – that is, 20% of your customers return them for a full refund. On top of that, it costs you an additional 5% of revenues to process the returns and provide customer service.

Now you have a 25% hit on your revenues. How does this impact your decision about where to source parts and/or build plants for the two markets? (Hint: calculate the price as before but then divide by .75 to capture effects of revenue loss. This is new break-even price).

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

  

Answer 1

we assume that widgets (or raw materials/subassemblies) are of equal quality regardless of where they are produced. Another potential tradeoff of “going global” is that the price will be lower, but so will the quality.

the widgets from the Developtopian plant have a 20% failure rate – that is, 20% of your customers return them for a full refund. On top of that, it costs you an additional 5% of revenues to process the returns and provide customer service.