UV0420

EMERSON ELECTRIC COMPANY ACP DIVISION:

THE FAN SUBPACK SOURCING DECISION

While gazing at the stack of quotes, letters, and blueprints in front of him, Ken Powers
decided it was time to make a recommendation regarding the sourcing of the Emerson “1895”
ceiling fan subpacks for the upcoming 1988 fiscal year. The choices had been narrowed down to
four basic options, each with both short- and long-term implications for Emerson Electric
Company’s ACP (Air Comfort Products) Division. The month of July was almost over; any major
sourcing changes would have to be done quickly to guarantee the availability of subpacks later in the
fall. Powers sat down and started to review the files once more.

Company Background

Emerson Electric Company was a diversified Fortune 100 conglomerate consisting of over
50 autonomous divisions. It was a highly stable and profitable company, with over 29 consecutive
years of increased earnings. Sales in 1986 were nearly $5 billion; in that year, according to Forbes
magazine’s industry analysis, 83% of Emerson’s products held the number one or two positions in
their domestic markets. The firm had over 200 manufacturing locations worldwide; 76 were located
in 15 countries outside the United States.

In response to a strong dollar and declining exports during the 1980s, Emerson geared up for
an assault on world markets by steadily increasing Engineering and Development (E&D) expenses
each year for eight consecutive years. In 1987, E&D expenses reached a record high of 3.1% of sales
from an historical average of about 2%. As part of a strategic move in the 1980s towards global
products and markets, Emerson and its affiliates redesigned existing product lines and created new
products that would meet world market requirements while maintaining domestic market dominance.
According to the company’s 1986 annual report, Emerson had a goal of increasing the share of new
product sales to 20% of total sales by the early 1990s.

Emerson’s CEO, Charles Knight, was a stolid adherent of the “pay-as-you-go” principle for
the company’s business units. If a division anticipated a shortfall in its annual sales goal of 15%
growth (the standard goal for the corporation), it would implement a severe cost-cutting program to

This case was prepared by Keith L. Paige under the supervision of Professor Edward W. Davis. It was written as a basis
for class discussion rather than to illustrate effective or ineffective handling of an administrative situation. Copyright 
1988 by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order copies,
send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced, stored in a
retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of the Darden School Foundation. Rev. 7/93.
 -2- UV0420

protect profitability. In maintaining itself as a formidable global competitor, the company had closed
or consolidated over 40 manufacturing facilities, reduced wages and salaries as a component of total
cost, and divested over $100 million of low-performing product lines.1 Under Knight, Emerson had
developed its well-known “Best Cost Producer Strategy” which, simply translated, meant achieving
the lowest cost consistent with the highest attainable quality and performance.

Emerson’s business units were grouped into three broad categories: industrial and
commercial components, consumer products, and defense/government components and systems. The
Air Comfort Products Division (generally referred to simply as “ACP”) fell into the consumer
products category. ACP was a relatively small division that traced its roots back to the year 1895;
the division provided a variety of ceiling, exhaust, and ventilation fans to a network of independent
wholesalers and retailers across the United States. Ken Powers, a student at a mid-Atlantic business
school, was an Emerson summer intern in the foreign operations area. Powers had several years
work experience in engineering and manufacturing with a major U.S. automotive company before
attending business school. A significant portion of his summer work experience with Emerson was
devoted to the sourcing of components for ACP. This was his first experience in sourcing as well as
his first experience in international manufacturing. He reported to the manager of International
Purchasing, a position that had been created two years earlier at ACP, shortly after the division had
begun sourcing overseas for the first time in its history.

The Domestic Ceiling Fan Market

The ceiling fan market was characterized as seasonal and mature. This description was a
drastic change from just a few years earlier, when demand was much higher and more consistent
over the year. The market had surged during the oil shocks of the 1970s as people began to use
ceiling fans to circulate air and cool their homes and offices in an energy-efficient manner. At the
peak of this demand, approximately 18 million fans were sold annually at retail prices well over $75
per unit. This lucrative market soon attracted foreign competitors, because technological and other
barriers to entry were minimal. As oil prices stabilized, the size of the market dropped significantly,
raising competition to a fierce level. Most estimates of market demand for 1988 ranged from 11 to
13 million units. Retail prices reflected this competition, with many retailers offering fans for under
$40 per unit.

Most retailer orders were placed with manufacturers in the early spring so that the fans would
be available at the retail level during the warm summer months. While ceiling fans were distributed
across the nation, the great majority were sold in the southeastern states. Almost all ceiling fans were
sold partially assembled and required minor assembly and installation by either the customer or a
professional installer.

1
“The Champion of The Management Process,” Chief Executive, (Summer 1987).
 -3- UV0420

The ACP Product Line

ACP marketed two ceiling fan lines under the Northwind and 1895 brand names. These fans
came in a variety of sizes ranging from 36 to 56 inches. (Ceiling fans were measured by the diameter
of the path traveled by the ends of the blades.) All fans sold by ACP had features that made them
superior to most fans sold in the United States, including heavy-duty motors for longevity, zinc
(instead of plastic) hanging systems for extra safety, and aluminum motor covers and five-ply
wooden blades for quietness. An illustration of these and other ceiling fan components is shown in
Exhibit 1. In addition, ACP’s standards for painting and plating finish quality were among the
highest in the industry. Because of their superior features and quality image, Emerson fans were
priced in the $100 to $175 retail price range.

The Northwind models were entries in the lower end of the premium market segment. All
models in the Northwind line were assembled for ACP by an independent Taiwanese vendor and
shipped complete to ACP’s distribution center in western Kentucky. A full-time ACP auditor was
assigned to the vendor facility and was responsible for the quality and timeliness of shipments.
Seven different types of fans were produced, with brown, white, brass, and/or wood finishes.
Accessories such as light kits, hanging chains, and wall switches for the Northwind and other ACP
fans were also sourced as complete units from various Taiwanese and American vendors.

The 1895 models were entries in the middle of the premium market segment. Named for the
year Emerson first manufactured ceiling fans, these models were assembled in the United States to
be consistent with Emerson’s “America’s Fan Company” reputation. As a concession to cost
pressures, however, many components were purchased from sources in Hong Kong and Taiwan.
Most of the parts were gathered together and shipped to the ACP assembly plant in a kit that ACP
referred to as a “subpack.”

Subpack Production

A subpack consisted of a polyfoam package containing the fan outer housing, flanges, and
hanging system. While many vendors could be involved in supplying the various parts, one vendor
had the contract and responsibility for supplying the subpack in specified quantities. The chosen
vendor had to manufacture or purchase a wide variety of materials, including painted and plated
steel for the housings, aluminum for the flanges, and zinc for the hanging system. ACP assigned an
auditor to the Taiwanese company that was the lead vendor to monitor quality standards and
minimize sourcing disruptions at both the vendor and subvendor level.

Subpacks were used by ACP to gain the cost savings possible by using foreign vendors while
still using domestic fixed facilities and the output of a sister division. Subpacks arrived in lots of
2,000 to 4,000 units at an ACP assembly plant in Tennessee. Here they were matched on a one-for-
one basis with an Emerson Motor Division motor, miscellaneous other parts, and warranty and
instruction pamphlets. Each motor and subpack set was then packaged in a four-color cardboard
carton, sealed, and shipped to a central warehouse. Approximately 30,000 subpacks for 1895 model
 -4- UV0420

fans would be needed to supply the assembly plant during fiscal year 1988. The order mix for these
subpacks is shown in Exhibit 2. While similar production of subpacks was expected for fiscal year
1989, there was some uncertainty about plans for the 1895 line of fans in succeeding years.

Given an acceptable level of vendor performance, ACP usually chose a vendor who provided
the lowest delivered cost. Delivered cost was calculated by summing the initial purchase cost of a
component, shipping costs, insurance and financing fees, and import duties. (Appendix A describes
in detail some representative costs involved in importing ceiling fans from Taiwan.) Logistical
problems for ACP management were rare, because most of the transport and forwarding
arrangements were handled by professional brokers and freight forwarders.

Choosing vendors on the basis of lowest delivered cost did not always address the future
uncertainties and strategic implications of a sourcing decision. The decision on the subpacks would
have to be guided by qualitative as well as quantitative judgments.

Pressures on Current Sourcing

The management of Emerson had three general concerns about the traditional sourcing
arrangements for the subpack:

1. Subpack quality: Quality, as measured by the vendor’s conformity to production standards,

was a critical issue in dealing with foreign suppliers. Four weeks were required for a
shipment to travel from the Taiwanese vendor to the Tennessee assembly plant. ACP
occasionally experienced missing and defective components in subpacks, which caused
production to be delayed and parts to be air-shipped at significant cost.
2. Sourcing flexibility: The vast majority of ACP foreign sourcing was concentrated in Taiwan.
While Taiwanese business conditions were stable, operating in a foreign environment
exposed ACP to some degree of political risk. ACP personnel were inexperienced in dealing
in other developing countries. Robert Jolly, the Director of Foreign Operations and the
executive responsible for foreign sourcing of ceiling fans and a variety of other products,
was very aware of this limitation. One of his aims was to build access to suppliers in other
developing countries so that low-cost alternatives would be available outside Taiwan.
3. Currency exchange rates: The U.S. dollar (US$) had been weakening against the new
Taiwan dollar (NT$) in spite of countering actions by the Taiwan Central Bank. Because all
contracts with suppliers were paid with NT$, these changes in the exchange rate had made
ACP purchases more expensive. While economists generally agreed that this trend would
continue, there was wide disagreement as to how far the US$ would fall before stabilizing
against the NT$. A history of the US$/NT$ exchange rate is shown in Exhibit 3. Because it
was part of a foreign company, ACP could not legally hedge currency, but it did require
vendors to make forward purchases of NT$ against a letter of credit established by ACP at a
Taiwanese bank.
 -5- UV0420

Sourcing/Production Alternatives

Ken Powers had outlined four alternatives that would be feasible in sourcing the 1895 model
fans. All of the alternatives involving a vendor switch assumed that a “running” change was
possible; that is, either building inventory to a level high enough to last until the alternative source
was producing acceptable subpacks or continuing orders with the current vendor on an as-needed
basis. Current seasonal inventory levels were sufficient for six months of wholesaler orders. The
four alternatives were as follows:

1. Continue with current Taiwanese vendor: The established source for 1895 subpacks was Lao
Chiang Plating Industries of Taichung, Taiwan. Taichung was a large city located on the
western coast relatively near the international shipping harbor of Keelung. This location had
helped in its development as an industrial and exporting center.

Like many of the exporting companies in Taiwan, Lao Chiang was family owned, controlled,
and managed. Although many of the managerial tools common in American companies were not
used, this lack of sophistication and control had not severely hindered the company’s growth.
Taiwanese labor and tooling costs were much lower than American costs, which had enabled Lao
Chiang to undercut American bids for the subpack business. Lao Chiang wanted to continue to
provide the subpacks; after a long series of negotiations, Patson Chiang, the manager of Lao Chiang,
submitted the quotes shown in Exhibit 4.

Lao Chiang purchased steel stampings for the fan housings from local suppliers and plated or
painted them to the desired finish. The finished housings were then matched with other purchased
components to complete the subpack. The subpacks were packaged and loaded into 20- or 40-foot
long shipping containers that were sent via ship and rail to the ACP plant.

ACP had experienced some quality difficulties with Lao Chiang over the past year. These
difficulties most often involved color variations and scratches in the painted and plated parts of the
housings. Ken had visited the Lao Chiang operations to examine the facilities and see what steps
were taken to improve quality.

The Lao Chiang operations were divided into two sites. The largest was located just outside
town and consisted of a large, corrugated-metal building, housing offices attached to a smaller and
concrete building for painting and plating lines.

Plain steel stampings were received at the front of the building and directed to either the
painting or plating line. The parts to be painted were taken to the painting work stations and loaded
on a rack. Painters using air-powered spray guns applied paint to the various parts and set them aside
to dry. Since the operation was totally manual, the quality of the finish depended on the skill of the
painter. The painting stations were not isolated from other operations, so dust and particles in the air
sometimes settled on the wet paint and caused a defective finish.
 -6- UV0420

The parts to be plated were loaded on small multi-armed metal racks. Operators using
overhead power winches lifted the racks and manually dipped them in a series of tanks containing
plating solutions. The purity and strength of the plating solutions, along with the sequence and
length of the immersions, determined the color, gloss, and uniformity of the plating finish. The
individual workers, who wore rubber boots, gloves, and aprons to protect themselves from the
caustic solutions, worked in close proximity to each other. They were responsible for physically
moving the racks in the correct sequence and for timing each immersion. Employee health and
comfort did not appear to be major considerations; the facility was very hot and suffered from a lack
of ventilation.

After being plated, the stampings were hand-sprayed with a lacquer coating and dried by
being passed briefly over a flame. They were then stacked and loaded with the painted stampings on
a truck for transport to the assembly site.

The assembly site for the subpacks was located 10 miles from the plating and painting
operations. Powers noted that many of the stampings were scratched on arriving at the site because
of inadequate packing and the ride over the rough roads. Here the stampings were matched with the
other components of the subpack. Approximately 10 women staffed the production line that
assembled and packaged the subpacks. This site was devoted exclusively to subpack assembly,
whereas the plating lines were used for producing many other Lao Chiang products.

Patson Chiang was aware that the stampings were being scratched in transit and was taking
measures to eliminate this problem. Powers believed that, while aggravating, the overall quality
difficulties ACP had experienced with Lao Chiang were not serious enough by themselves to justify
switching to an unproven vendor.

Emerson traditionally purchased and retained rights to the tooling used by both vendors and
subvendors to produce proprietary products. This practice had been followed with Lao Chiang, but
some tooling had since worn out and been replaced at Lao Chiang’s expense. Powers was uncertain
of the value and condition of the Emerson-owned tooling still in use but believed the total value to
be less than US$20,000.

2. Change to alternative Taiwanese vendor: Another Taiwanese vendor was interested in

providing subpacks to ACP and had been provided production specifications and estimated
volumes. This vendor, Ja Yang Industrial Company, submitted the quote shown in Exhibit 5.
Working under the assumption that the tooling at Lao Chiang was unavailable, Ja Yang had
also calculated new tooling costs for all of the parts in the subpack (shown in Exhibit 6).

Ja Yang was the industrial fan subsidiary of a diversified company owned by the former
mayor of Taichung. Other subsidiaries were involved in businesses ranging from small electrical
components to bakeries. Ja Yang was managed by one of the owner’s sons and was located in a
modern, concrete-block complex outside Taichung.
 -7- UV0420

Ja Yang was much more vertically integrated and centralized than Lao Chiang. A number of
Taiwanese- and Japanese-made stamping presses on-site enabled the company to produce stampings
internally. Like most Taiwanese stamping shops, Ja Yang maintained an internal tooling department
and manufactured almost all its own tools and fixtures.

An automated plating line was located in a building close to the stamping presses. The types
of tanks and solutions used were the same as those used at Lao Chiang, but the dipping mechanisms
and timers were much different. Ja Yang’s racks were attached to one hoist and controlled by one
operator, instead of having each rack controlled by a separate operator. An automated timing
mechanism dipped, timed, and lifted the racks into and out of the solution in unison, or the length of
immersion in the various tanks could be adjusted. The plant lacked a modern ventilation system, but
enough air space was present above the tanks to dissipate the fumes somewhat. An assembly line
connected via conveyor belt to the plating and drying section of the factory was where the subpacks
were to be assembled if Ja Yang was successful in securing the ACP order.

Every section of the complex appeared to be running well below capacity. Paul Wang, the
managing director of the company, assured ACP that operations could be switched over to subpack
production quite easily.

Powers wondered if Ja Yang had accurate costing information, given the favorable quote
they had submitted. He was aware that vendors sometimes pressed customers for major price
adjustments after tooling was installed and actual costs were calculated.

3. Integrate the assembly process in America: Unused factory space was available in the ACP
factory in Tennessee. While “apples-to-apples” cost comparisons between Taiwanese and
American sourcing were difficult to establish, costs could possibly be lowered by moving all
subpack sourcing to the United States. Powers had gathered the following rough cost
estimates and information in order to explore this option.

Materials contributed the great majority of costs in the manufacturing of subpacks. Powers
was surprised to learn that American and Taiwanese material costs were roughly the same, primarily
because of the types of materials used in the subpack. Nonfabricated plastic and basic metal parts
prices were competitive when made in America (as opposed to parts such as electrical components).
The added costs of importing these plastic and metal parts usually made American prices lower than,
or at most, equal to Taiwanese prices on a materials-only basis.

American tooling, however, usually cost five to six times as much as Taiwanese tooling. This
price differential was somewhat deceptive, in that there were marked differences in the type and
durability of the tooling. For example, an American-sourced plastic injection-mold tool proposal
would include a mold that had a life of 500,000 “shots” and an automated means of removing parts
from the mold. A Taiwanese proposal would include a mold with a life of 100,000–175,000 shots
and a semi-automated means of removing the part from the mold. Taiwanese tool makers were able
to cut some costs in tooling because they relied more on laborers to perform transfer functions. Even
after adjusting for differences in types and durability, however, Taiwanese tooling was significantly
 -8- UV0420

cheaper. ACP would not consider importing tooling for subpacks because of tool adaptability and
shipping costs.

The ACP plant was in a rural part of Tennessee. As with many other Emerson manufacturing
sites in the United States, it was the major employer in the town where it was located. The
production workers were unionized, but labor relations were generally amicable. The average hourly
wage rate was approximately $5.06 per hour, and benefits were an additional 30% of this rate.

As with tooling, labor costs between the workers at the ACP factory and the Taiwanese
alternatives were difficult to compare directly. The compensation per hour paid to an ACP factory
worker was three to four times that paid to an average Taiwanese factory worker. The compensation
per hour did not, however, address the relative productivity of each worker. Powers recalled a
general estimate that American labor costs were double those of Taiwanese labor when calculated on
an adjusted-for-productivity basis. He was not totally comfortable with this rule, however, because
he did not know if it was valid or applicable to his particular situation. He was also unsure if this
general rule included burden (overhead costs). Burden at the ACP factory was charged out at 200%
of direct labor. His experiences at business school led him to exclude this burden from his
calculations, but Powers was uncertain if this presumption was acceptable to the in-house accounting
staff. In spite of these concerns, he was at a loss for an alternative way to adjust for productivity
differences.

Several other questions came to Powers’s mind while he reviewed the figures he had
gathered to use in evaluating the American sourcing alternative. Would the loss of this volume
change shipping rates for other ACP imports from Taiwan? Would there be pipeline-inventory
savings? Would there be any savings on inspecting and auditing reductions? What value should be
assigned to marketing considerations? Powers wanted to remember these questions when doing his
analysis, even though he did not have the answers to them.

4. Establish sourcing in Mexico: The fourth alternative Powers examined was moving the
sourcing of the subpacks to Mexico. He had recently visited some sister-division assembly
operations along the U.S.-Mexico border and was intrigued by the potential labor savings
attainable by switching to Mexico as a source. Border plants, known as “maquiladora”
plants, were becoming a popular vehicle for lowering assembly costs while maintaining
proximity to the United States.

Maquiladora plants were a product of efforts by the Mexican government to ease the massive
unemployment and foreign exchange difficulties present in the country. Under this program, foreign
companies had access to low-priced labor without having to pay the normally high import duties on
materials shipped into Mexico. A short overview of the maquiladora program is given in Appendix
B.

Powers was familiar with two areas south of the California-Mexico border with maquiladora
industrial parks: Tijuana, which is south of San Diego and Mexicali, located directly across the
border from El Centro, California. ACP would have to purchase and ship over all tooling and
 -9- UV0420

materials for the subpacks from the United States, because Mexican sources for these items were
either nonexistent or extremely expensive. The transportation costs to import tooling directly from
Taiwan to Mexico were expensive, so this avenue was not considered as an option. The technology
needed for just the assembly portion of the subpack was uncomplicated and consisted of little more
than fixtures and a roller conveyor line.

Powers had made his visit to the maquiladora plants in June. At that time, the minimum wage
for unskilled labor was 3,360 pesos per day. The actual wage paid in most plants, however, was
considerably higher than the minimum wage. Allowances for transportation, meals, child care, daily
attendance, etc., combined to push the average actual wage up to about twice the minimum wage
level. By law, employees were paid for every day of the week (7 days), although a 6-day, 48-hour
working week was standard. Thus the effective average hourly wage for a plant worker was about
980 pesos, or US$0.75, at the June 1 exchange rate. These established wages were subject to
frequent change, because inflation in Mexico was very high. A 20% increase had been granted by
the government in April; another 20% increase was expected in July. ACP would have to pay
workers with pesos purchased at the government-controlled exchange rate, which sometimes varied
considerably from the free-market rate available to tourists. Recent exchange rates for the Mexican
peso and the United States dollar are shown in Exhibit 7.

Powers was uncertain about the rent that would be required for an assembly site in Mexico.
A recent study on a related Emerson product had assigned a burden rate that was 13 times the labor
cost. This burden rate had included plant rent, utilities, and miscellaneous other items. Staffing needs
other than production supervision and direct labor were minimal, because the management of
industrial parks often provided personnel and hiring assistance.

What was the correct decision in the subpack sourcing question? Powers would prefer to
source subpacks from the ACP plant in the United States, but given the current market situation, cost
control was a paramount factor. If subpack sourcing was to return to the United States, it would have
to be justified on a cost basis. After briefly reflecting on how global even a routine sourcing decision
had become, Powers returned to the task at hand.
 -10- UV0420

Exhibit 1
EMERSON ELECTRIC COMPANY ACP DIVISION:
THE FAN SUBPACK SOURCING DECISION
Ceiling Fan Components
 -11- UV0420

Exhibit 2
EMERSON ELECTRIC COMPANY ACP DIVISION:
THE FAN SUBPACK SOURCING DECISION
Fiscal Year 1988 Subpack Requirements

1895 Series

Model Size Type Units

CF3042 42" Brown 500

CF3042W 42" White 2,500

CF3342 42" Plated 2,000

CF4052 52" Brown 2,500

CF4052W 52" White 10,000

CF4152W 52" White 2,300

CF4352 52" Plated 9,300

CF5152 52" White with Plated Sides 300

CF5352 52" Plated 200

CF6352 52" Plated 400

Total 30,000
 -12- UV0420

Exhibit 3
EMERSON ELECTRIC COMPANY ACP DIVISION:
THE FAN SUBPACK SOURCING DECISION
Taiwan Dollar: U.S. Dollar Exchange Rate

New Taiwan Dollars: 1 U.S. Dollar

7/1/84 39.87

7/1/85 39.77

7/1/86 38.10

1/1/87 35.69
2/1/87 35.14
3/1/87 34.96
4/1/87 34.36
5/1/87 32.98
6/1/87 31.89
7/1/87 31.03

All new Taiwan dollar figures shown are New York Foreign Exchange Selling Rates as reported by
the Wall Street Journal.
 -13- UV0420

Exhibit 4
EMERSON ELECTRIC COMPANY ACP DIVISION:
THE FAN SUBPACK SOURCING DECISION
Lao Chiang Quotation

July 1, 1987 1895 Series Fan Subpacks NT$s per Unit

Description | CF3042 | CF3042W | CF3342 | CF4052 | CF4052W | CF4152 | CF4352 | CF5152 | CF5352 | CF6352 |
Upper Housing
H35814244D 60.20 60.20 93.30
H35814239D 65.76 65.76 65.76 105.75
H35700092D 76.43 97.83 97.83
Lower Housing
H35814240D 35.24 35.24 48.83
H35814238D 41.50 41.50 55.39 55.39
H35815396D 70.46 92.23 92.23 |
Screw-Oval
5202-0487 2.68 2.68 2.68
5202-0330 2.68 2.68 2.68 2.68
Nut-Hex
4100-5009 1.44 1.44 1.44 1.44 1.44 1.44 1.44
Label
N10814266B 0.44 0.44 0.44
N10814267B 0.44 0.44 0.44 0.44
Loose Parts*
B10814303B 20.42 20.42 20.42 20.42 20.42 20.42 20.42
B10815404B 20.16 20.16
B10700084B 23.96
Canopy Housing
H35814229C 11.05 11.05 17.77 11.05 1.05 11.05 17.77 14.94 23.14 23.14
Down Rod
N20814222B 10.51 10.51 16.64 10.51 10.51 10.51 16.64 9.99 13.86 13.86
Pad-Upper
P06814275E 11.91 11.91 11.91
P06814273E 12.78 12.78 12.78 12.78
Pad-Lower
P06814276E 10.98 10.98 10.98
P06814274E 11.88 11.88 11.88 11.88
Switch Hsg.-S/A
H35814255B 17.56 17.56 25.12 17.56 17.56 17.56 25.12 38.05 48.40
H35700081C 49.43
Switch Hsg. Cvr
C63814236C 7.63 7.63 9.51 7.63 7.63 7.63 9.51 10.52 12.98 12.98

Card-Warning 0.43 0.43 0.43 0.43 0.43 0.43 0.43

Package-Flanges
P02814256D 77.70 77.70 82.16 77.70 77.70 82.16 82.16 82.16 82.16 82.16
Ball Assembly
B15814503A 10.83 10.83 10.83 10.83 10.83 10.83 10.83 10.83 10.83 10.83
Bracket-Hanger
B90700028D 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00 12.00
Band Trim
B20815395C 72.59 72.59
B20700079C 63.13
Labor Costs 18.98 18.98 18.98 18.98 18.98 18.98 18.98 inc. inc. inc.
Other Costs 18.98 18.98 18.98 18.98 18.98 18.98 18.98 inc. inc. inc.
Gross Profit 9.00 9.00 1.69 21.53 21.53 21.11 2.28 inc. inc. inc.
Total 337.97 337.97 404.11 364.10 364.10 382.02 425.48 418.13 486.18 481.54
 -14- UV0420

Exhibit 5
EMERSON ELECTRIC COMPANY ACP DIVISION:
THE FAN SUBPACK SOURCING DECISION
Ja Yang Quotation

July 2, 1987 1895 Series Fan Subpacks NT$s per Unit

Description | CF3042 | CF3042W | CF3342 | CF4052 | CF4052W | CF4152 | CF4352 | CF5152 | CF5352 | CF6352 |
Upper Housing
H35814244D 56.38 56.38 72.94
H35814239D 63.45 63.45 63.45 83.68
H35700092D 59.42 59.42 79.14
Lower Housing
H35814240D 32.29 32.29 41.27
H35814238D 38.77 38.77 46.06 46.06
H35815396D 64.00 64.00 69.05
Screw-Oval
5202-0487 2.55 2.55 2.55
5202-0330 2.74 2.74 2.74 2.74
Nut-Hex
4100-5009 2.35 2.35 2.35 2.35 2.35 2.35 2.35
Label
N10814266B 0.59 0.59 0.59
N10814267B 0.59 0.59 0.59 0.59
Loose Parts*
B10814303B 19.91 19.91 19.91 19.91 19.91 19.91 19.91
B10815404B 16.42 16.42
B10700084B 23.30
Canopy Housing
H35814229C 10.78 10.78 15.19 10.78 10.78 10.78 15.19 12.61 12.61 17.77
Down Rod
N20814222B 7.35 7.35 11.28 7.84 7.84 7.84 13.72 9.17 9.17 16.05
Pad-Upper
P06814275E 9.80 9.80 9.80
P06814273E 10.78 10.78 10.78 10.78
Pad-Lower
P06814276E 6.86 6.86 6.86
P06814274E 9.80 9.80 9.80 9.80
Switch Hsg.-S/A
H35814255B 15.19 15.19 21.56 15.19 15.19 15.19 21.56 26.69 26.69
H35700081C 29.96
Switch Hsg. Cvr
C63814236C 6.37 6.37 8.82 6.37 6.37 6.37 8.82 7.45 7.45 9.17
-
Card-Warning 0.39 0.39 0.39 0.39 0.39 0.39 0.39
Package-Flanges
P02814256D 68.60 68.60 76.44 68.60 68.60 76.44 76.44 80.06 80.06 89.44
Ball Assembly
B15814503A 8.33 8.33 8.33 8.33 8.33 8.33 8.33 9.74 9.74 9.74
Bracket-Hanger
B90700028D 11.27 11.27 11.27 11.27 11.27 11.27 11.27 13.19 13.19 13.19
Band Trim
B20815395C 68.57 68.57
B20700079C 48.87
Labor Costs 24.50 24.50 24.50 24.50 24.50 24.50 24.50 inc. inc. inc.
Other Costs 17.25 17.25 17.25 17.25 17.25 17.25 17.25 inc. inc. inc.
Gross Profit 20.72 20.72 24.76 22.17 22.17 23.38 26.54 inc. inc. inc.
Total 321.48 321.48 376.06 341.08 341.08 357.42 399.92 367.32 367.32 405.68
 -15- UV0420

Exhibit 6
EMERSON ELECTRIC COMPANY ACP DIVISION:
THE FAN SUBPACK SOURCING DECISION
Ja Yang Tooling Quotation

Ja Yang Industrial Company, Ltd.

Tooling Estimates for Emerson Electric Company

Nomenclature Part No. Quote in NT$

Upper Housing H35814244D $135,000
Upper Housing H35814239D $175,000
Upper Housing H35700092D $155,000
Lower Housing H35814240D $115,000
Lower Housing H35814238D $115,000
Lower Housing H35815397D $125,000
Canopy Housing H35814229C $25,000
Switch Housing H35814230C $70,000
Switch Housing Cover C63814236C $30,000
Band Trim B20815395C $70,000
Mounting Strap S92814223B $30,000
Nameplate N11700083A $30,000
Nameplate N11815403A $30,000
Upper Pad P06814273E $40,000
Upper Pad P06814275E $40,000
Lower Pad P06814274E $40,000
Lower Pad P06814276E $40,000
Total Estimate $1,265,000
 -16- UV0420

Exhibit 7
EMERSON ELECTRIC COMPANY ACP DIVISION:
THE FAN SUBPACK SOURCING DECISION
Mexican Peso: U.S. Dollar Exchange Rate

Mexican Peso: 1 U.S. Dollar

7/1/84 201
7/1/85 317
7/1/86 Not quoted
1/1/87 911
2/1/87 975
3/1/87 1,044
4/1/87 1,115
5/1/87 1,180
6/1/87 1,259
7/1/87 1,344

All Mexican peso figures shown are New York Foreign Exchange Selling Rates as reported by the
Wall Street Journal.
 -17- UV0420

Appendix A
EMERSON ELECTRIC COMPANY ACP DIVISION:
THE FAN SUBPACK SOURCING DECISION
Ceiling Fan Importing Costs

When buying goods from both domestic and foreign suppliers, the delivery terms are often
noted as “FOB” followed by a city name or plant site. This term, which is an acronym for “Free on
Board,” specifies where the transportation responsibility for the purchased goods transfers from the
seller to the buyer. Calculating the transport costs from the FOB location to the end destination is
relatively straightforward for domestic purchases but is often quite complicated when dealing with
foreign purchases. This appendix will illustrate some of the added costs incurred when dealing with
imported goods. The products used as an example are the components for ACP ceiling fan subpacks
purchased in Taichung, Taiwan, for use in the assembly plant in Tennessee. Delivery terms are FOB
Plant.

Importing costs can usually be classified as either transport or transaction costs:

Transport costs include the charges for physically moving the shipping container holding the
subpacks from the supplier plant to the American assembly plant. There are three separate legs in the
process of moving a container, each with different costs.

The first leg is drayage, which encompasses transport from the supplier to the shipping docks
or other miscellaneous connecting transport. In ACP’s case, these costs were included in the ocean
freight costs.

The second leg is ocean transport from Taiwan to the port of Los Angeles. The cost for
shipment was usually a flat rate per container. This rate was usually negotiated annually and could
vary drastically from year to year depending on available ship capacity and the level of competition.
Containers were usually 20- or 40-feet long, with the larger size much cheaper on a cost-per-cubic-
foot basis.

Arriving in Los Angeles after about three weeks, the container would travel the third leg of
its route. It was loaded on a rail car or tractor-trailer for transit to the assembly plant in Tennessee.
The mode of travel on this leg depended on how immediate the need for parts was at the plant. Rail
freight rates were lower than trucking rates, but reflected in this lower rate was a longer delivery
time.

Transaction costs encompassed charges for importing paid to brokers, banks, and customs
departments that could be directly attributed to a particular shipment. Brokers were usually freight
forwarders and the like who, for a fee, processed shipments and monitored customs requirements
and documentation. Banks were involved by providing letters of credit in paying the foreign supplier
and for shipment insurance. Letters-of-credit costs involved both a flat fee and a percentage of
shipment value, while insurance was usually only a percentage of shipment value.
 -18- UV0420

Appendix A (continued)

Duties, a tax on the import or export of goods, were often the most complicated items
encountered in calculating transaction costs. Duties varied by item and originating country, and
different rates might apply to different components within a single part or assembly. In the subpack,
the duty rate for the electrical switch was different from the rate for the capacitor. The duty for the
balance of the subpack was different from both of these rates. In the interest of simplicity, a single
duty rate has been assumed for this example.

The term “landed cost” is often used to describe the sum of the FOB, transport, and
transaction costs; it is intended to reflect the true direct cost of importing a component. Following
are example calculations of landed costs for subpacks, under the stated assumptions.

Assumptions

All Taiwanese Costs Converted to U.S. Dollars

Product Cost: $12/Subpack
Container Capacity: 4,000 Subpacks/40' Container; 2,000 Subpacks/20' Container
U.S. Drayage Fee: $85 for either 40' or 20' Container
Ocean Transport Cost to West Coast: $2,000/40' Container; $1,575/20' Container
Rail Freight to Tennessee: $1,450/40' Container; $1,025/20' Container
Truck Freight to Tennessee: $1,987 for either 40' or 20' Container
Freight Forwarding Fee: $105 for either 40' or 20' Container
Letter of Credit Transaction Fee: $25
Letter of Credit Commission: .00187 of Shipment Value
Insurance Cost: .000985 of Shipment Value
Import Duty Rate: 4.46% of Shipment Value

40' Ctnr 20' Ctnr 40' Ctnr 20' Ctnr

Cost Element Via Truck Via Truck Via Rail Via Rail

FOB Price $12.000 $12.000 $12.000 $12.000

Drayage 0.021 0.043 0.021 0.043
Ocean Freight 0.500 0.788 0.500 0.788
Inland Freight 0.497 0.994 0.363 0.513
Forwarding Fees 0.026 0.053 0.026 0.053
L.C. Transaction Fee 0.006 0.013 0.006 0.013
L.C. Commission 0.022 0.022 0.022 0.022
Insurance 0.012 0.012 0.012 0.012
Duty 0.535 0.535 0.535 0.535

Landed Cost/Unit $13.620 $14.458 $13.486 $13.977

 -19- UV0420

Appendix B
EMERSON ELECTRIC COMPANY ACP DIVISION:
THE FAN SUBPACK SOURCING DECISION
Maquiladora Overview

A maquiladora operation was a Mexican production facility that imported duty-free raw
materials, added value (assembly, processing, etc.), then exported its production to markets outside
Mexico. This type of production arrangement was becoming popular because of the wage savings,
tariff treatment, transport and inventory savings, and liberal ownership rules associated with
maquiladora operations.

Wage savings were the primary lure for attracting production operations to Mexico. In mid-
1987 fully burdened wages for general labor were less than one U.S. dollar per hour, compared with
wages in the two- to four-dollar range for Taiwan, Hong Kong, Singapore, and South Korea. The
recent appreciation of most Asian currencies and depreciation of the peso relative to the U.S. dollar
had made the Mexican labor cost advantage even more substantial than before.

Mexico waived normal tariffs on materials imported for use in maquiladora production. Raw
materials entered duty-free, as long as they were secured by a bond and exported within six months;
duty was paid only on the value added in Mexico when the product was exported.

The geographic proximity of Mexico to the United States was another factor in favor of
maquiladora production. Transport times and distances from Mexico were a fraction of those from
Asia. This proximity allowed lower shipping expenses and less distribution-pipeline inventory.

A final attraction about maquiladora operations was the modified equity ownership rule.
Maquiladoras could be 100% foreign owned, whereas most corporations operating in Mexico were
required to have majority ownership by Mexican nationals.

The financial incentives to manufacture products in Mexico should not, however, mask the
difficulties associated with operating a maquiladora plant. The three most substantial hurdles were
the lack of an educated labor pool, high turnover rates, and the lack of a developed infrastructure.

The lack of educated labor was a constraint on the types of production possible without large
amounts of in-house training. Mexico’s general labor was characterized by low numeric and analytic
skill, and even college graduates were trained to a far less degree than their American counterparts.
This picture was in striking contrast to most of the Asian newly industrialized countries, where
educated workers were readily available.
 -20- UV0420

Appendix B (continued)

Absenteeism and high turnover rates limited the efficiency of the production work force.
These problems were present for a variety of reasons ranging from the levels of pay and the type
of work to cultural factors. Typical direct labor turnover rates were 5% to 15% per month, with
absenteeism at 3% to 10%.

The underdeveloped Mexican infrastructure also caused difficulties in operations. Commonly

cited difficulties were poor communication capabilities, poor transport facilities for workers,
material, and equipment, and lack of raw materials and components.

Some general observations can be made about products that would be most suitable for
maquiladora production: for example, high labor content as a percentage of total value and very
simple worker tasks at each step of manufacturing or assembly would be desirable, as would an
assembly-line type of production of a standardized format. Also, high production volumes with level
output throughout the year would maximize the labor cost savings.