Emerson

About Emerson Company

• Highly stable and profitable company
• Sales in 1986 : nearly $5 bio
• 83% of Emerson’s products held no 1 or 2 positions in their domestic market
• Had 200 manufacturing locations worldwide (76 in 15 countries outside US)
• 1980 : steadily increasing E&D expense each year of 8 consecutive years
• 1887 : 3.1% E&D expense from sales (record) from average 2%
• Goal : increasing the share of new product sales to 20% of total sales by the early 1990
• CEO : Charles Knight. Had “best cost producer strategy” “
• “pay as you go” : if a division anticipated a shortfall in its annual sales goal of 15% growth, it would implement a severe cost cutting program
• Closed or consolidated 40 manufacturing facilities
• Reduced wages and salaries as a component of total cost
• Divested over $100 mio of low performing product lines
• BU divided into 3 categories :
• Industrial & commercial components
• Consumer products
• Defense/government component and systems
• ACP (Air Comfort Products) Division -> below consumer products category. Provide : variety of ceiling, exhaust, and ventilation fans to network of independent
wholesalers and retailers across US

Domestic Ceiling Fan Market

• Characterized : seasonal and mature
• 1970 : oil price surged down. Demand increased dramatically and consistent. People began to use ceiling fans to circulate their homes and offices in energy efficient
manner.
• Qty : 18 mio units annually
• Retail price : $75 per unit
• 1988 : When oil price stabilized -> size of market dropped significantly, raising competition to a fierce level
• Qty : 13 mio units annually
• Retail price : <$40 per unit

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ACP Products Line

• Marketed 2 ceiling fan lines
• Northwind brand
• Segment : lower end of premium market
• Assembled by an independent Taiwanese vendor and shipped to ACO DC in western Kentucky
• 7 types with brown, white, brass, and or wood finishes
• Accessories also from Taiwan and American vendors
• 1895 brand
• Segment : middle of premium market
• Assembled in US (to be consistent with Emersons “America’s Fan Company” reputation
• To pressure the cost : components were purchased form Hongkong and Taiwan
• 30,000 subpacks needed during 1988
•ACP’s standard of painting and plating finish quality were among the highest in the industry -> priced $100 - $175 retail price per unit

Subpack
• Used by ACP to gain cost savings (using foreign vendors while still using domestic fixed facilities)
• Consisted of a polyfoam package containing the fan outer housing, flanges, and hanging system
• 1 vendor had the contract and responsibility for supplying the subpack in specified qty
• ACP signed auditor to the Taiwanese company that was the lead vendor to monitor quality standards and minimizing disruptions
• 1895 : uncertainty of supply
• ACP choose vendor who provided the lowest delivered cost. Calculation of delivered cost :
• Sum of initial purchase cost of a component, shipping cost, insurance and financing fees, and import duties
• Logistic problem : rare (because handled by professional brokers and freight forwarders)

Pressures on Current Sourcing

• Traditional sourcing arrangements :
1. Subpack quality : 4 weeks from Taiwan to Tennessee. ACP occasionally experienced missing and defective components in subpacks -> production delayed and parts to be
air-shipped (significant cost)
2. Sourcing flexibility : operating in a foreign environment exposed ACP to some degree of political risk. ACP personnel inexperienced in dealing in other developing
countries -> goal : guild access to other developing countries, so low cost alternatives would be available outside Taiwan
3. Currency exchange rate : US$ weakening against Taiwan dollar NT$, and it would continue -> made ACP purchase more expensive
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Sourcing Program Alternatives
• Ken Powers had 4 alternatives that would feasible in sourcing 1895 brand :
1. Continue with Taiwanese vendor.
• Source : Lao Chiang Plating Industries of Taichung (large city near international shipping harbor of Keelung, easily to do export).
• Family owned business
• Labor and tooling cost were much cheaper than American cost
• After negotiation : Lao Chiang wanted to continue to provide the subpacks
• Problem with ACP : quality difficulties, especially in color variations and scratches in the painted and plated parts
• Operation of painting was very manual :
• Quality of the finish depended on the skill of the painters
• Painting stations were not isolated, so dust and particles in the air sometimes settled on the wet paint and cause a defective finish
• Plating problems :
• Employee health and comfort did not appear to be major considerations. Facility were very hot and suffered from lack of ventilation
• Many stampings were scratched on arriving at the site because of inadequate packing and the ride of the rough road
• Some tooling were worn out and been replaced by Lao Chiang’s expense. Emerson owned tooling still in use but the total value <$20,000

2. Change to alternative Taiwanese vendor

• Ja Yang Industrial Company
• Fan subsidiary of a diversified company owned by the former mayor of Taichung
• Located in modern block complex outside Taichung
• Much more vertically integrated and centralized tha Lao Chung
• Maintained an internal tooling department and manufactured almost all its own tools and fixtures
• Had automated plating line and dipping mechanism
• Lacked of modern ventilation system, but enough air space
• Powers wonder if Ja Yang had accurate costing information -> sometimes they pressed customer for major price adjustment

3. Integrate the assembly process in America

• Cost possibly lowered by moving all subpack to US
• American and Taiwanese material cost were roughly the same, primarily because type of materials used in the subpack
• American tooling cost 5x-6x than Taiwanese tooling
• Compensation per hour paid to ACP factory worker was 3-5x paid to an average Taiwanese factory worker
• American labor cost were doubled those Taiwanese labor when calculated on an adjusted for productivity basis -> burden (overhead) cost should be included or
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• Burden cost at ACP : 200% of direct labor

4. Establish sourcing in Mexico

• Potential labor saving : “Maquiladora” plant -> product by Mexican government to ease the massive unemployment and foreign exchange difficulties present in the
country
• Export cost from Taiwan to Mexico were expensive -> not considered as an option
• Allowances (transport, child care, daily attendance, etc) -> made this actual wage 2x minimum wage level
• Average hourly wage : US$75
• ACP should pay in Peso, while inflation in Mexico was very high (20% annually).

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• Burden cost at ACP : 200% of direct labor

4. Establish sourcing in Mexico

• Potential labor saving : “Maquiladora” plant -> product by Mexican government to ease the massive unemployment and foreign exchange difficulties present in the
country
• Export cost from Taiwan to Mexico were expensive -> not considered as an option
• Allowances (transport, child care, daily attendance, etc) -> made this actual wage 2x minimum wage level
• Average hourly wage : US$75
• ACP should pay in Peso, while inflation in Mexico was very high (20% annually).

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