Answered: Mexico or China? Discussion Questions…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

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please answer 5 questions below, my deadline is coming in tomorrow

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476
OPERATIONS RESEARCH
Part Seven Case Studies
EXHIBIT 4 Operating metrics by plant location.
Production cost
U.S.
Mexico
China
Capital expenditures, equipment moving costs, and
startup costs (thousands of US$)
U.S.
Mexico
China
Annual demand for Side-by-Sides
Shipping cost from China
Cost per unit
Side-by-Side units per container
Ground transportation cost (US$)
Cost per mile
Side-by-Side units per truck
Other
Tariff for China import
Transportation cost (US$)
Miles to Distribution Center
From Roseau
Tacoma, WA
1,636
2,161
Los Angeles, CA
Irving, TX
1,267
A factory in Mexico would require hiring sixty new
employees, the same as in China. Side-by-Sides would
be shipped to the United States by truck in batches of
26 units at an average cost of $2.30 per mile per batch.
Although trucking companies claimed they could cross
the U.S. border and deliver the products in two days, in
practice it took between two and seven days.
Capital expenditures, equipment moving costs, and
startup costs for a Mexican factory would total $9.5 million.
Under the provisions of NAFTA (North American Free
Trade Agreement), Polaris would pay no tariffs on imports
from Mexico into the United States.
EXHIBIT 5 Demand assumptions.
Annual Demand
(units)
Distribution Center Location
Tacoma, WA
3,650
Los Angeles, CA
7,050
Irving, TX
3,800
Cost per unit
400 USD
4,560 MXN
1,950 CNY
9,500
10,000
14,500 units
5%
190
26
2.30
26
From
Monterrey
2,261
1,505
437
United States
A third option for Polaris's senior management was to
maintain the status quo for production of Side-by-Sides
EXHIBIT 6 Exchange rate history.
CNY/USD
MXN/USD
Year
2000
2001
8.28
9.34
8.28
9.66
2002
8.28
10.80
2003
8.28
11.29
2004
9.19
10.90
2005
7.97
10.90
2006
7.61
10.93
2007
6.95
11.16
2008
6.83
13.50
2009
6.77
12.63
2010
6.65
12.40
CNYChinese yu
MXN - Mexican peso
USD US dollar
EXHIBIT 7 Map of Polaris locations in 2010.
Wyoming MN
product
development
a
o Spirit Lake IA
Roseau MN
manufacturing
Vermillion SD
distribution center
manufacturing)
Monterrey MX
possible plant site
without incurring additional costs. Polaris had tradition-
ally been associated with a strong "Made in America"
Е
culture, and management believed that the company's
employees and customers were proud that all Polaris
products were manufactured in the United States. In
addition, the proximity to headquarters and product
development facilities enabled managers to collaborate
quickly and easily with design engineers and technical
staff in the manufacturing plants.
RECOMMENDING A SOLUTION
As Krishna reviewed the data for each option, he knew
he needed to consider qualitative as well as quantitative
factors to find the best solution for Polaris. Should he
recommend keeping production in the United States, or
should he recommend siting a new plant in either
Mexico or China?
Discussion Questions
1. Which location provides Polaris the greatest cost
advantage? Calculate the NPV of the three locations
using a 10% discount rate.
Polaris Industries Inc.: Global Plant Location
Polaris Industries Inc.: Global Plant Location
Osceola WI
manufacturing
Medina MN
headquarters
477
2. Would your recommendation change if the foreign
exchange rate increased or decreased by 15%?
3. What other factors should be considered in making
this decision?
4. Calculate a weighted scoring model. Decide on
qualitative factors that you think are important in
this decision, e.g. location near R&D, quality, loss
of intellectual property, and currency risk. Then
how much weight you would attach to factors
such as NPV and each of the other factors to total
100%. Then assign a score (1 to 10) to each factor
for each of the three locations. Calculate a total
weighted score by multiplying the weight times.
the factor score and adding over all factors for
each location.
5. Which of the three locations do you recommend and
why?

$474 OPERATIONS RESEARCH Part Seven Case Studies EXHIBIT 2 Polaris sales by product. On-road vehicles 4% Snowmobiles 10% Parts and accessories 17% ATVs and side-by-sides 69% Polaris was the dominant player in the ORV market based on market share. In 2010 ORVS accounted for 69 percent of Polaris's sales, with Side-by-Sides com- prising the majority of sales in this segment. Looking ahead, the company was excited by the potential growth in emerging markets. From Latin America to Asia, Polaris had begun to invest heavily in marketing to increase awareness of its brand. For example, in China the company placed off-road image advertising in rac- ing and extreme sports enthusiast publications. Simi- larly, in Latin America Polaris was leveraging its brand in the utility vehicle space to penetrate the substantial agricultural industries. MANUFACTURING In 2010 all of Polaris's manufacturing operations were located in the northern Midwest. In addition to its corporate headquarters in Medina, Minnesota, and product develop- ment and innovation center in Wyoming, Minnesota, Polaris operated three manufacturing facilities in Roseau, Minnesota; Osceola, Wisconsin; and Spirit Lake, lowa. Roseau, the birthplace of the Polaris snowmobile, housed research, development, and manufacturing for the snow- mobile, ATV, and Side-by-Side divisions. Roseau also included a small state-of-the-art injection molding plant that produced plastic parts for the Roseau and Spirit Lake factories. As demand grew for ATVs and on-road vehicles, Polaris established an additional manufacturing facility in 1994 at Spirit Lake. This facility produced select ATV. watercraft, and Victory motorcycle models. Osceola was primarily an engine and components supplier for the other two facilities. All other components were sourced through more than 450 global suppliers. In 2010 Polaris sourced almost 40 percent of its components and materials from outside the United States, up from 30 percent in 2008. The company was also increasing low-cost country (LCC) sourcing, almost doubling its LCC spend to approximately 24 percent in 2010. To support its production capabilities in and around the northern United States, Polaris had three warehouse facilities in Minnesota for raw materials, export process- ing, and distribution. When demand for parts, apparel, and accessories exceeded the company's warehouse capacity in 1997, a new distribution center was opened in Vermillion, South Dakota. In addition to its U.S. loca- tions, Polaris also owned and operated regional sales and distribution centers in Winnipeg, Canada, and in Northern Europe and Australia. REDESIGNING THE SUPPLY CHAIN Krishna had to consider the tradeoff between manufac- turing and transportation costs when redesigning the supply chain for Side-by-Side products. On one hand, manufacturing in markets with low labor costs could result in significant savings. Although labor rates in tra- ditional LCCs such as China were rising. U.S.-based labor was still more costly. On the other hand, with oil prices rising steadily, Krishna knew transportation costs would be far lower if he kept production close to customers. Senior management at Polaris was also concerned about a manufacturing talent gap in the United States. Over the past twenty years, decreased funding for com- munity colleges and trade schools had resulted in tech- nical workers becoming increasingly difficult to find. Moreover, young trade school graduates were less interested in moving to the locations where Polaris oper- ated, which were small towns with only one large employer. By comparison, well-trained technical talent was relatively easy to find in many South American and Asian countries. Lastly, Polaris expected much of its future sales growth would come from overseas markets, particularly emerging markets. There were multiple ways to enter these markets, including acquisitions and joint ventures, but building a facility in an emerging market could potentially help Polaris capture future demand. CHOOSING A MANUFACTURING LOCATION Krishna and his team considered several options fort optimizing the manufacture of Side-by-Sides and the design of the supply chain. They concluded that the best options were either to continue production in exist- ing American factories or to build a new plant in China or Mexico. Beyond the specific pluses and minuses of each location, Krishna needed to consider the following in making a final decision: . The majority of demand for Side-by-Sides was in the southern United States. The states with the highest share of sales volume in 2010 were Texas and California. • Side-by-Sides were high volume-to-weight/low value- to-weight products, which meant that shipping costs accounted for a large fraction of their retail price. • Polaris's senior management placed a high value on ease of communication with its manufacturing plants and believed that in-person interaction among manag- ers, design engineers, and production staff was a key driver of the company's long-term product innovation. • If Polaris moved production of Side-by-Sides abroad, the company planned to lay off sixty workers at its Roseau plant. Each worker would be paid a one-time severance of $20,000. . Given the weak economic environment, Polaris as- sumed that demand for Side-by-Sides would remain flat for the next five years. Data on labor costs, production costs, transportation costs, capital expenditures, and exchange rates for each location are included in Exhibit 3 through Exhibit 6. China Polaris's senior executives were excited about the low costs in China, but labor costs had been rising in the manufacturing-heavy eastern region; over time the com- pany would likely have to look further inland to find low- cost labor, which would further increase the length and variability of product transportation. Polaris also had EXHIBIT 3 Labor assumptions. Monthly Wages 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Hourly wage Working months/year United States China (CNY) 649.5 729.2 814.5 916.8 1,041.3 1,169.4 1,313.1 1,497.2 1,740.3 2,016.0 $26/hour 12 Polaris Industries Inc.: Global Plant Location Polaris Industries Inc.: Global Plant Location concerns about its ability to successfully collaborate with a Chinese factory due to time-zone differences and cultural dissimilarities. Operating a factory in China would require Polaris to hire sixty new employees on location. It also would result in a one-time charge of $10 million for capital expenditures, equipment moving costs, and startup costs. Polaris would have to pay a 5 percent tariff on all production and transportation costs when importing products into the United States. Side-by-Sides made in China would be transported to the United States on container vessels, with each container holding twenty-six vehicles. The cost to ship one vehicle to the United States from China was $190 per unit, or $4,940 per container. Although shipping companies claimed the containers would reach the United States in about twenty days, in practice shipping time was highly variable, with a range of nineteen to thirty-three days. Mexico Polaris's senior management saw several qualitative advantages to operating a foreign manufacturing facility in Monterrey, Mexico. (See Exhibit 7 for map.) Monterrey was relatively close to the United States, which would allow for easier in-person collaboration between the manufacturing facility and Polaris's staff. In addition to geographical proximity, managers believed cultural familiarity would make collaborating with a Mexican workforce easy. Lastly, although Polaris believed that long-term sales growth would come from emerging mar- kets in Asia, it also believed that near-term growth would occur in the United States-particularly in the southern United States, an area close to Monterrey. Annual Wage Growth (%) Mexico (MXN) 2,392.0 2,910.5 3,367.6 3,537.5 3,737.7 3,858.8 3,983.8 4,112.9 4,246.2 4,383.7 China (CNY) 12 12 13 14 12 12 14 16 16 Mexico (MXN) 22 16 wwwwwar555 3 475 3$

Transcribed Image Text:474 OPERATIONS RESEARCH Part Seven Case Studies EXHIBIT 2 Polaris sales by product. On-road vehicles 4% Snowmobiles 10% Parts and accessories 17% ATVs and side-by-sides 69% Polaris was the dominant player in the ORV market based on market share. In 2010 ORVS accounted for 69 percent of Polaris's sales, with Side-by-Sides com- prising the majority of sales in this segment. Looking ahead, the company was excited by the potential growth in emerging markets. From Latin America to Asia, Polaris had begun to invest heavily in marketing to increase awareness of its brand. For example, in China the company placed off-road image advertising in rac- ing and extreme sports enthusiast publications. Simi- larly, in Latin America Polaris was leveraging its brand in the utility vehicle space to penetrate the substantial agricultural industries. MANUFACTURING In 2010 all of Polaris's manufacturing operations were located in the northern Midwest. In addition to its corporate headquarters in Medina, Minnesota, and product develop- ment and innovation center in Wyoming, Minnesota, Polaris operated three manufacturing facilities in Roseau, Minnesota; Osceola, Wisconsin; and Spirit Lake, lowa. Roseau, the birthplace of the Polaris snowmobile, housed research, development, and manufacturing for the snow- mobile, ATV, and Side-by-Side divisions. Roseau also included a small state-of-the-art injection molding plant that produced plastic parts for the Roseau and Spirit Lake factories. As demand grew for ATVs and on-road vehicles, Polaris established an additional manufacturing facility in 1994 at Spirit Lake. This facility produced select ATV. watercraft, and Victory motorcycle models. Osceola was primarily an engine and components supplier for the other two facilities. All other components were sourced through more than 450 global suppliers. In 2010 Polaris sourced almost 40 percent of its components and materials from outside the United States, up from 30 percent in 2008. The company was also increasing low-cost country (LCC) sourcing, almost doubling its LCC spend to approximately 24 percent in 2010. To support its production capabilities in and around the northern United States, Polaris had three warehouse facilities in Minnesota for raw materials, export process- ing, and distribution. When demand for parts, apparel, and accessories exceeded the company's warehouse capacity in 1997, a new distribution center was opened in Vermillion, South Dakota. In addition to its U.S. loca- tions, Polaris also owned and operated regional sales and distribution centers in Winnipeg, Canada, and in Northern Europe and Australia. REDESIGNING THE SUPPLY CHAIN Krishna had to consider the tradeoff between manufac- turing and transportation costs when redesigning the supply chain for Side-by-Side products. On one hand, manufacturing in markets with low labor costs could result in significant savings. Although labor rates in tra- ditional LCCs such as China were rising. U.S.-based labor was still more costly. On the other hand, with oil prices rising steadily, Krishna knew transportation costs would be far lower if he kept production close to customers. Senior management at Polaris was also concerned about a manufacturing talent gap in the United States. Over the past twenty years, decreased funding for com- munity colleges and trade schools had resulted in tech- nical workers becoming increasingly difficult to find. Moreover, young trade school graduates were less interested in moving to the locations where Polaris oper- ated, which were small towns with only one large employer. By comparison, well-trained technical talent was relatively easy to find in many South American and Asian countries. Lastly, Polaris expected much of its future sales growth would come from overseas markets, particularly emerging markets. There were multiple ways to enter these markets, including acquisitions and joint ventures, but building a facility in an emerging market could potentially help Polaris capture future demand. CHOOSING A MANUFACTURING LOCATION Krishna and his team considered several options fort optimizing the manufacture of Side-by-Sides and the design of the supply chain. They concluded that the best options were either to continue production in exist- ing American factories or to build a new plant in China or Mexico. Beyond the specific pluses and minuses of each location, Krishna needed to consider the following in making a final decision: . The majority of demand for Side-by-Sides was in the southern United States. The states with the highest share of sales volume in 2010 were Texas and California. • Side-by-Sides were high volume-to-weight/low value- to-weight products, which meant that shipping costs accounted for a large fraction of their retail price. • Polaris's senior management placed a high value on ease of communication with its manufacturing plants and believed that in-person interaction among manag- ers, design engineers, and production staff was a key driver of the company's long-term product innovation. • If Polaris moved production of Side-by-Sides abroad, the company planned to lay off sixty workers at its Roseau plant. Each worker would be paid a one-time severance of $20,000. . Given the weak economic environment, Polaris as- sumed that demand for Side-by-Sides would remain flat for the next five years. Data on labor costs, production costs, transportation costs, capital expenditures, and exchange rates for each location are included in Exhibit 3 through Exhibit 6. China Polaris's senior executives were excited about the low costs in China, but labor costs had been rising in the manufacturing-heavy eastern region; over time the com- pany would likely have to look further inland to find low- cost labor, which would further increase the length and variability of product transportation. Polaris also had EXHIBIT 3 Labor assumptions. Monthly Wages 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Hourly wage Working months/year United States China (CNY) 649.5 729.2 814.5 916.8 1,041.3 1,169.4 1,313.1 1,497.2 1,740.3 2,016.0 $26/hour 12 Polaris Industries Inc.: Global Plant Location Polaris Industries Inc.: Global Plant Location concerns about its ability to successfully collaborate with a Chinese factory due to time-zone differences and cultural dissimilarities. Operating a factory in China would require Polaris to hire sixty new employees on location. It also would result in a one-time charge of $10 million for capital expenditures, equipment moving costs, and startup costs. Polaris would have to pay a 5 percent tariff on all production and transportation costs when importing products into the United States. Side-by-Sides made in China would be transported to the United States on container vessels, with each container holding twenty-six vehicles. The cost to ship one vehicle to the United States from China was $190 per unit, or $4,940 per container. Although shipping companies claimed the containers would reach the United States in about twenty days, in practice shipping time was highly variable, with a range of nineteen to thirty-three days. Mexico Polaris's senior management saw several qualitative advantages to operating a foreign manufacturing facility in Monterrey, Mexico. (See Exhibit 7 for map.) Monterrey was relatively close to the United States, which would allow for easier in-person collaboration between the manufacturing facility and Polaris's staff. In addition to geographical proximity, managers believed cultural familiarity would make collaborating with a Mexican workforce easy. Lastly, although Polaris believed that long-term sales growth would come from emerging mar- kets in Asia, it also believed that near-term growth would occur in the United States-particularly in the southern United States, an area close to Monterrey. Annual Wage Growth (%) Mexico (MXN) 2,392.0 2,910.5 3,367.6 3,537.5 3,737.7 3,858.8 3,983.8 4,112.9 4,246.2 4,383.7 China (CNY) 12 12 13 14 12 12 14 16 16 Mexico (MXN) 22 16 wwwwwar555 3 475 3

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