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Fuyao v1 submitted - scm

Operation Management (ITM University)

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Supply Chain Management, PGP 2019-21

Fuyao Glass America: Sourcing Decision

Group No. 3
1911041 | 1911070 | 1911132
1911211 | 1911245 | 1911372

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Question 1: If the delivery of windshields will begin three years from now, compare the cost of
production and delivery of windshields from Tianjin and Moraine plants.

Cost of the windshield after three years at both the plants is compared below on the following basis:
a) After three years, production yield at Tianjin & Moraine plants would be 95% (including rework
& repair) & 93% respectively.
b) Output per shift at both plants would be 800 pairs.
c) Workers at Moraine plant would reduce to 50 & remain the same at the Tianjin plant.
d) Wages in China are increasing at the rate of 30% per annum, while wages in USA are decreasing
at the rate of 9.45% per annum.

S.
Cost Tianjin Moraine Remarks / Assumptions
No.
- RM cost at Tianjin & Moraine are 13.01*0.93/0.95 &
A Raw material 12.74 17.33
19.9*0.81/0.93 respectively
- Current labor cost per hour at Tianjin is 5000/
(8*25*6.9) = 3.62
B Labor 4.77 9.98 - Labor cost at Tianjin & Moraine after 3 years will be
3.62*(1.3^3) *57*8/(800*0.95) and
25*(0.9055^3)*8*50/(800*0.93), respectively
- Electricity cost at Tianjin & Moraine are
C Electricity 1.52 1.38
1.55*0.93/0.95 & 1.58*0.81/0.93 respectively
- Depreciation cost is a fixed cost. Accordingly, it will
not increase with an increase in output per shift
D Depreciation 1.48 2.24 - Depreciation cost at Tianjin & Moraine will be
1.55*(780*0.93)/(*800*0.95) and
3.17*(650*0.81)/(0.93*800) respectively
Other
- Other manufacturing costs at Tianjin & Moraine will
E manufacturing 0.86 1.51
be 0.88*0.93/0.95 & 1.73*0.81/0.93 respectively
costs
- SG&A cost at Tianjin & Moraine will be
F SG&A 5.73 5.66 6*(780*0.93)/(800*0.95) & 8*(650*0.81)/(800*0.93)
respectively
Packaging and
G 13.62 1.87 - See Appendix A
transportation
H Total cost 40.71 39.97

Question 2: Consider the inventory carrying cost shown in Exhibit 17. It appears to be calculated
using the following formula:

Holding cost rate (5%) x Value of inventory ($50) x Number of days (160 or 67)/365

Do you agree with this formula? Why? If not, then write up to three ways in which this formula
can be improved.

The inventory carrying cost calculated as per above formula does not take information specific to
Tianjin and Moraine plants. The different components of the calculation formula like inventory

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holding rate and value of inventory are taken same for both China and USA. Further, different
components of inventory (raw material, work-in-progress & finished goods) are valued at the same
target cost of finished goods.

The formula can be improved in the following ways-

1) Holding Cost Rate: The holding rate of inventory should be different for both Tianjin & Moraine.
It should primarily account for the difference in storage costs & capital costs at both these
locations.

2) Components of inventory: Different costs should be considered for different components of the
inventory like the cost of raw material should include only glass plate cost whereas finished
goods should include the total production cost. However, as per the current formula, even raw
material is valued at the target cost of finished goods.

3) Valuation of inventory: The total cost per unit should not be the value of the inventory to
calculate carrying cost. Inventory should be valued at the cost incurred to bring them to their
current location and condition. For instance,
 Cost of finished goods at Tianjin
= Total cost – (SG&A cost + Packaging, Re-packaging and Transportation costs)
= 40.60 – (6 + 15.33) = $ 19.27
 Cost of finished goods at Moraine
= Total cost – (SG&A cost + Packaging, Re-packaging and Transportation costs)
= 60.44 – (8 + 2.13) = $ 50.31

Accordingly, the correct formula for calculating inventory cost should be:
Holding cost rate% X (Value of RM inventory x RM inventory holding period / 365) X (Value of
WIP inventory x WIP inventory holding period / 365) X (Value of finished goods inventory x
Finished goods holding period / 365) X (Value of in-transit inventory x in-transit inventory
holding period / 365)

Question 3: Would you consider shipping plate glass from China to Moraine plant to reduce raw
material cost? Why or why not?

We have considered the following factors in evaluating shipping plate glass from Tianjin, China to
Moraine, USA.

1. Cost of Plate Glass: After three years, the plate glass cost (including shipping costs) for bringing
it from Tianjin plant is estimated at $ 23.83 (for details refer Appendix B) whereas plate glass
cost manufactured at Moraine is estimated at $ 24.72 (for details refer Appendix B). The plate
glass cost manufactured at Moraine is slightly more than Tianjin.

2. Shipping Costs: As per the current estimates on account of the bankruptcy of Hanjin Lines, and
the continuing growth of Chinese exports, it is expected that shipping costs for transportation
from Tianjin to Moraine will increase in the future.

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3. Packaging cost: Windshield is more break-resistant than plate glass because it is made through a
special lamination process where two plate glasses are joined with an interlayer of polyvinyl
butyral (PVB). Therefore, more strong packaging will be required to transport plate glass from
Tianjin to Moraine. Hence, packaging costs may also increase.

Solely basis expected cost estimates, it is beneficial to source plate glass from the Tianjin plant. It will
result in a benefit of $ 0.74 per unit of plate glass. However, if the expectation of an increase in
shipping and packaging cost outweigh the advantage of sourcing plate glass from Tianjin, then this
decision should be reviewed basis the expectation of an increase in costs.

Question 4: If you were Wen Li, which of the two sourcing options would you recommend to Cho?
Justify your answer.

Basis the current cost estimates, the per unit cost at Tianjin plant is $ 40.60 and per unit cost at
Moraine is $ 60.44. Therefore, as per current cost estimates sourcing the windshield from Tianjin is
beneficial.

However, any decision on sourcing has to be made keeping in mind the long-term view as supply will
start after 3 years, and the supply can continue anywhere between 5-10 years. The cost behavior
over these years is crucial to take the decision.

According to our cost analysis of both plants (Tianjin and Moraine) after 3 years given in question 1,
the per unit cost of supplying from Tianjin is $40.71 while per unit cost at Moraine is $39.97.
Therefore, after three years, sourcing of windshields from Moraine is beneficial. This benefit is on
account of the following reasons:

1. Labor cost in the USA is on a decreasing spiral which will provide huge savings in the long
run.
2. First -pass yield of Moraine plant has increased at a much faster pace than the Tianjin plant.
After three years, the first-pass yield of both the plants is similar (except 2% of rework)
3. As per current estimates, the shipping rates for transporting goods from China can increase
in the coming years.

Further, trade relations between China and the USA are on fragile grounds and any new regulations
might lead to restrictions on imports. In case of any major policy changes, the supply if sourced from
China, will lead to a huge penalty for Fuyao.

Taking all the economic and non-economic factors into consideration, Wen Li should recommend
sourcing the goods from Moraine.

Apart from above, Wen Li can also go for other strategy wherein the plate glass will be sourced from
Tianjin rather than sourcing it from Mt. Zion, Illinois. As shown in question 3, the cost of sourcing
plate glass from Tianjin is less than sourcing it from Mt. Zion, Illinois. It will result in saving of $ 0.74 *
93% per unit of the windshield. However, this option will be weighed keeping in mind the trade
relations between China & USA, packaging and shipping costs.

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Appendix A

1. Packaging & Transportation Cost

Unit Cost ($)

Cost component Tianjin Moraine Remarks/Assumption

Paper packaging 2.90 - Assumed no change in unit paper packaging cost
Repackaging labor 1.86 - Cost is calculated as per US labor rates
- 6*25*((1-0.0945)^3)*8/(12*40)
Transportation
Tianjin to Plymouth 5.83 - Assumed no change in the shipping rate of $7000
Moraine to Plymouth 1.67 - Assumed no change in the shipping rate of $1500.
Tariffs and customs (6%) 2.46 - The transfer price of $41 is considered for
transferring from Tianjin to Moraine
Inventory carrying cost 0.57 0.20 - See point 2 below
Total 13.62 1.87

2. Inventory carrying cost

a) Tianjin
Unit Cost ($)

Inventory Carrying
Inventory (Days) Tianjin Remarks
Cost Cost @ 5%
Inventory held at
-RM Inventory 46 12.74 0.08 - Only RM cost is considered to calculate
carrying cost
-Throughput 7 21.37 0.02 - Production cost except packaging,
time repackaging, transportation & SGA is
-FG safety stock 7 21.37 0.02 considered to calculate carrying cost
In transit ocean/ 50 32.56 0.22 - Production, packaging & transportation
truck cost is considered to calculate carrying cost.
- Repackaging & SGA cost is not considered
Safety Stock at 50 32.56 0.22 to calculate the carrying cost.
Plymouth
Total 160 120.59 0.57

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b) Moraine
Unit Cost ($)

Inventory Carrying
Inventory (Days) Moraine Remarks
Cost Cost @ 5%
Inventory held at
-RM Inventory 46 17.33 0.11 - Only RM cost is considered to
calculate carrying cost
-Throughput time 7 32.44 0.03 - Production cost except
-FG safety stock 7 32.44 0.03 transportation is considered to
calculate carrying cost
In transit ocean/ - - - - Production & transportation cost is
truck considered to calculate carrying
Safety Stock at 7 34.10 0.03 cost.
Plymouth - SGA cost is not considered to
calculate the carrying cost.
Total 67 116.31 0.20

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Appendix B: Plate Glass Cost at Tianjin & Moraine

Unit Cost ($)

Cost Item Tianjin Moraine Remarks

- Tianjin cost = 13.01/93% & Moraine cost
Cost of manufacturing plate glass 13.99 24.57
= 19.90/81%
Paper packaging, 40
pieces/package, 12 packages per 2.90 - Assumed will remain same for plate glass
shift
Transportation
- Tianjin to Plymouth, per piece - Assumed that this is also applicable for
5.83
based on full container transportation from Tianjin to Moraine
- Tariff & customs clearance is applicable
Tariff and customs clearance on the transfer price
0.70
(6%) - Plate glass is transferred to Moraine at
$14
Raw Material carrying cost 0.41 0.15 - See below
Total Cost 23.83 24.72

Plate Glass Inventory Cost of Carrying Cost

Tianjin Remarks
(Days) Inventory @ 5%
Raw Material at Tianjin 46 13.99 0.09 Only plate glass is taken to
calculate the carrying cost
In-transit inventory 50 23.42 0.16 All costs are included to
Raw Material Inventory 50 23.42 0.16 calculate carrying cost
at Moraine
Total 146 0.41

Plate Glass Inventory Cost of Carrying

Moraine Remarks
(Days) Inventory Cost @ 5%
Raw Material at 46 24.57 0.15 All costs are included to
Moraine calculate carrying cost
Total 46 0.15

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