Case Report “Stryker: In-sourcing PCBs”

1. Describe the problem that Stryker’s Instrument business faces. Specifically, document the status quo
together with the suggested options for improvement.

Stryker Corporation’s Instruments business operation performance depends on the supply of printed
circuit boards (PCBs), a key component currently provided by a small number of contract manufacturers
that tend to operate on thin margins with scarce capital.

In recent years, some manufacturers have presented problems in quality, delivery and/or responsiveness,
and Stryker can’t find better suppliers.

Stryker’s supply risk is expected to increase spend $20 million on PCBs in the next 2 years will increase

Stryker Corporation’s Instruments business actively considering a change in their sourcing strategy

The Instruments business anticipated spending more than $10 million in each of the next two years on
PCBs, an amount that would increase as the Instruments business grew.

In recent years, the performance of some contract manufacturers had been unsatisfactory with respect to
quality, delivery and/or responsiveness and Stryker had repeatedly found itself looking for new suppliers.

More generally, contract manufacturers tended to operate on thin margins with scant capital.
Bankruptcies were not uncommon, and even without bankruptcy, a financially weak supplier was simply
less reliable.

Given recent events and the shaky appearance of several current suppliers, Stryker Instruments had
resolved to address the issue.
 2. Most division managers actually favor the third option: “In-sourcing”. Compute the incremental free
cash flows that this alternative would generate relative to the status quo (old sourcing strategy).

Work with the annual data given in Exhibit 2. You can make the following assumptions:

− We are at the end of 2003 and all cash flows occur at the end of a specific year.
− The costs associated with (a) site preparation / construction, (b) architectural / engineering
works, (c) furnishing and IT equipment as well as (d) manufacturing equipment are all paid at
the end of year 2003.

− Depreciation starts in January 2004, i.e., assets are already depreciated for the full year,
following the patterns outlined in the case.

− Stryker’s tax rate is 36%.

− The “In-sourcing” decision does not affect the working capital requirements. That is, you can
ignore Exhibit 3 as well as the accompanying descriptions in the case.

− Stryker’s capital budgeting process ignores terminal values – even for assets like buildings – as
well as all cash flows occurring after year 2009.

3. Compute the NPV, IRR and Payback period associated with the incremental free cash flows calculated
in (2). Assume a cost of capital (“hurdle rate”) of 15%.

4. Groups 1-8: You are the responsible project manager for “In-Sourcing.” Prepare a presentation for
the capital budgeting committee that will make the final decision. Outline the business case for “In-
sourcing,” supported by your results in (3). Incorporate deviations from the assumptions in (2) or (3)
that are reasonable and help you justify your request.
Groups 9-16: You are a member of the capital budgeting committee. Prepare a presentation that
critically analyzes the proposal so that you are prepared to question the assumptions / explanations
of the project manager. Particularly, identify the key risk factors, i.e., possible deviations from the
assumptions that strongly affect the project.

For the quantitative analysis you can make use of the Excel file “StrykerPCB_Exhibits.xls” that contains the
data from the Exhibits and is available on the course website.

FMV – Adrian Buss: Case „Stryker PCB“