(Case analysis)

Fuyao Glass American: Sourcing Decision

Student Name : Luigi Sun

Student ID: 121120990022
Course: Business Consulting and Change Management (MIB), 2022
Instructor: Junfang (Emma) Xi, PhD. Associate Professor
(1)Look at the bill of materials costs in Exhibit 16. Why are the percentages for each category so
different for the Ohio factory versus the one in Tianjin?

Overall, the estimated cost for the program at Ohio was significantly higher than that of Tianjin.
Exhibit 16 shows that Ohio was 21% higher than the target price while Tianjin was 19% lower. To
compare each cost item at the bill of material cost, we could find that 6 out of 7 of them were
relatively more expensive in Ohio, which was mainly influenced by the production yield.

By looking at raw materials, the price of raw material per windshield in Ohio costed 53% above the
price in Tianjin. This difference might be related to the variance in purchase price of material and the
production yield. One explanation to this could be that the purchasing price for raw materials in the
U.S. were costlier than in China. On the other hand, the factory required to input extra units of raw
material for each defective item, due to the U.S. production workforce, was lacking in the skills
required to effectively rework on such blemishes.

Secondly, a labor cost required to produce one unit of windshield in Ohio was 950%, which is much
higher than in Tianjin. Labor rate and productivity were two elements in labor expense. The labor
rate was $3.7 in Tianjin, which was considerably lower than that of $25 per hour in Moraine.
Moreover, the productivity in terms of workers per line and output per shift for the Ohio production
workforce were also comparably less efficient than the Tianjin team, due to the inexperience of the
workers. In addition, Ohio was required to employ more labor to finish the same amount of
production when compared to Tianjin. It could be interpreted that the huge labor expense was a
result of a larger labor workforce as well as a higher wage when compared to Tianjin.

Third, regarding electricity, the cost gap was the smallest. The electricity cost per unit in Ohio was
2% slightly over than in Tianjin. Three major factors that influenced the unit cost were electric power
rate, equipment power consumption and also the production yield. The electricity cost per kilowatt-
hour in Tianjin was 70% higher in comparison to in Ohio. However, the production in Ohio involved
higher equipment power consumption due to automation. New plants in Ohio inescapably suffered
from lower production yields in the beginning until the operators were well equipped to do their
tasks both effectively and efficiently.

Most of cost occurs to be much higher in Ohio comparing to Tianjin. However, the packaging and
transportation cost of Tianjin far outweighed the Ohio by 620%. Sourcing from Tianjin involved a
considerable packaging and transportation cost. The material and labor used to package and
repackage the glass, shipping cost from Tianjin to Plymouth, tariff and customs clearance, plus the
inventory carrying cost imposed a heavy cost on each item. In contrast, the shipping cost from
Moraine to Plymouth plus the inventory carrying cost was only $2.13 for each unit.
(3) If you were the factory manager in Ohio and you wanted to be the source, what would you do?
If you were the Tianjin factory manager?

I was the factory manager in Ohio, I would convince Wen Li that the advantages of the Ohio factory
definitely exceed the disadvantages. In order for me to get that contract, as a factory we need to
show the geographical advantage over Tianjin. A report must be conducted about the superiority in
proximity of the Ohio plant to the customers’ assembly factory. This will help us to win the contract,
since it shows higher flexibility in dealing with disruption due to relatively more time than that of
Tianjin. Therefore, the risk is certainly much lower in Ohio than that of Tianjin, if unexpected
disruption occurs. Therefore, it is crucial to allay and eliminate their concerns about the production
yield with positive statistics for reference. For example, positive production start-up learning curve
from the Fuyao factory. Fuyao may be in the red in the short term but it is quite optimistic that we
would turn a loss into profit when the team members get used to their tasks.