Week 3 General Electric ReportChad Uhler, Chaka Birde.docx
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
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
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.
