Mr.. Patton, vice-president of purchasing for Code C, Inc. , is concerned about a price increase from a Malaysian supplier. Last summer Code C was celebrating a 60 percent cost reduction based on replacing their major specialty steel supplier with Eastern Waves, In Kanata, Malaysia. Eastern Waves Is a small steel manufacturing company In Malaysia. It has several plants In Malaysia and China and produces various downstream steel products such as angle steel, I-beam, and round bar. The angle steel plant is located in Kanata, Malaysia.
The production method of the angle steel is called continuous rolling, and the key raw material ingredient for angle steel production is billets. When operating at full efficiency, the annual capacity of the angle steel production Is 10,000 MET. Suggested Assignment Questions 1 . As Jon James, please write a critique analyzing the situation in Malaysia for Mr.. Patton. What recommendations do you suggest? 2. How can Code C avoid future sourcing disruptions? 3. How should Code C critically analyze future global sourcing alternatives? Analysis 1.
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As Jon James, please write a critique analyzing the situation in Malaysia for Mr.. Patton. What recommendations do you suggest? The global sourcing arrangement between Code C and Eastern Waves Is extremely complicated from a quantitative and qualitative viewpoint. The total cost of sourcing is perhaps the most important variable. For instance, the associated qualitative risk profiles were (1 ) the impact of national interest and (2) the political conditions in Malaysia. The quantitative costs were (1) direct labor costs, (2) materials shortages and (3) indirect governmental costs.
Moreover, the general uncertainty associated with Malaysian governmental business practices makes this sourcing deal a risky proposition. The purchase risk perception (PR) is based on the perceived associated risk with alternative countries. Buying professionals who evaluate the offshore sourcing option must ultimately rely on their best Judgment in estimating the risk/reward that is associated with various offshore suppliers. Global vs.. Messmates sourcing The costs of global sourcing include some of the same costs found in domestic sourcing; there are also costs that are different.
The major cost categories are administrative, exclusively foreign and common costs. 1. Administrative Costs Administrative costs of foreign sourcing include identification, qualification, program development, travel, broker fees and others that are not directly involved with the product. Some of these costs are common to both the domestic and international aspects of sourcing. 2. Exclusively foreign costs Exclusively foreign costs are those that would not be incurred if a domestic source were used. Examples of these costs are duty charges, customs fees, import fees and currency exchange costs.
Ocean and air freight could be mentioned, but these are part of the transportation costs off good that would be incurred from any source. In the case of Eastern Waves, exclusively foreign costs are established by governments and are very difficult to avoid. 3. Common Costs Finally, there are those costs that are common to both global and domestic sourcing. Direct labor and materials costs, lead-time costs, transportation costs and inventory costs are a part of both domestic and offshore sourcing. Transportation costs, inventory costs, and lead-time costs tend to be higher when sourcing globally.
On he other hand, labor and materials costs are often lower for firms in developing countries. These costs must be covered when making sourcing decisions. Direct costs (labor and materials) are what make foreign products attractive. Exclusive foreign costs and administrative costs tend to be fixed in nature and are more often absorbed in the final sale of the product. As an example, the labor force at Eastern Waves consisted of 40 employees, and the Eastern Waves cost structure consists of the following components: 1 . Absentee costs (exclusively foreign) 2. Airfare costs for foreign workers (exclusively foreign) .
Hiring and firing costs (administrative and common) 4. Living expenses (exclusively foreign) 5. Taxes (common and foreign) 6. Turnover costs (exclusively foreign) / wages (common) As can be seen, the cost structure for both local and foreign employees is complex. Local employees have higher absentee cost than foreign workers. However there are airfare costs associated with foreign workers. There is no cost associated with firing foreign workers. Hiring costs for foreign workers are five times higher workers. Living expense is provided for foreign workers. Taxes are levied on all foreign employees. There are no taxes levied on local workers.
Turnover cost is the cost of replacing either foreign or local employees. Turnover costs are in addition to hiring and firing costs. Finally, each employee is paid ARM 1500 per month. 2. How can Code C avoid future sourcing disruptions? A plant visit would have been an excellent method for collecting data to evaluate Eastern Waves prior to doing business with them. Usually, standardized forms consisting of standard operating and administrative check lists are performed at an on-site visit. This information should then be evaluated to see if the overall administrative and operating environment is compatible with Code C.
If an on-site audit had been conducted at EWE, all of the complex labor and materials issues would have easily uncovered. The problem at Code C could have easily been avoided. When sourcing offshore it is especially important to maintain a domestic supplier. Multiple sources also can guarantee an undisrupted supply of items. If something should go wrong with one supplier, such as a strike or a major breakdown or natural disaster, the other supplier(s) can pick up the slack to deliver all the needed items without a disruption.