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Indian Institute of Management Bangalore

Supply Chain Management


Fuyao Glass America

Submitted by:
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Questions:
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.
The comparison is given as follows: detailed explanation given in Appendix A

Tianjin Moraine
A Raw material 13.28978 22.84815
B Labor 4.78 9.98

C Electricity 1.51125 1.28375


D Depreciation 1.623932 4.479544
E Other mfg cost 0.898925 1.986296
F SGA 6.129032 9.185185
Packaging and
G transportation 14.68612 2.13
H Total 42.91513 51.89205

Delivery Costs
Tianjin Moraine
Paper packaging 2.9 0

Repackaging labor 1.856117


Transportation
Tianjin to Plymouth 5.83
Moraine to Plymouth 1.67
Tariffs and customs (6%) 3 0
Inventory carrying cost 1.1 0.46
Total 14.68612 2.13

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 above formula used to calculate inventory carrying cost doesn’t reflect the accurate
figure. In this formula we have taken value of inventory as $50 per unit (estimated target
production price of one windshield) for both countries which actually is different for
different facilities. Also, inventory held in warehouse is in different forms i.e. Raw material,
processing stock and finished goods, and for different number of days. Hence, if we
calculate the inventory carrying costs individually at different stages for different form of
materials, we would get the more realistic Inventory carrying cost.
Ways to correct the formula-
a. Given holding cost rate (5%) is taken to be same for both countries, while it should
depend on country where warehouse is located. Holding rate is proportional to real estate
prices where warehouse is located. As in US real estate prices are high in comparison to
China, hence holding cost rate should also be higher in US.
b. As raw material (costing $13.28 in Tianjin vs $22.84 in Moraine) is held in inventory for 46
days and looking at significant price difference of raw materials for both countries,
calculating inventory holding costs using given formula overestimates the holding cost for
Tianjin while underestimates the holding cost at Moraine production facility. Hence
calculating holding cost at different stages would give more accurate figure. Suggested
formula is given below
Inventory carrying cost = Raw material carrying cost + Processed stock carrying cost +
finished goods carrying cost
c. Here the value of inventory for both plants is taken at $50 per unit whereas it should be
taken at their actual cost of production i.e. $42.92 for Tianjin and $51.89 for Moraine. If we
use actual production costs in Inventory carrying cost formula, the inventory carrying cost
for Tianjin would reduce and for Moraine, it will increase. Hence, we will get more accurate
figure of carrying cost and will enable us to take better strategic decision.

3. Would you consider shipping plate glass from China to Moraine plant to reduce raw
material cost? Why or why not?
No, I wouldn’t consider shipping raw material plate glass from China to Moraine Plant due
to the following 2 reasons:
a. Landed cost of RM for plate glass imported from Tianjin exceeds the RM cost in Moraine
plant
The cost of RM for plate glass at Tianjin and Moraine plants will be $13.29 and $22.85
respectively three years from now. The RM cost of $13.29 is ex-factory cost and therefore
packing, transportation and clearance charges are to be added in-order to get true cost of
RM at Moraine plant which totals to $27.98 ($13.29+$14.69) which is costlier than $22.85 of
RM cost at Moraine plant. Therefore, the best course would be to not import plate glass
from China for Moraine operations.
b. Packaging cost for plate glass shipments will increase tremendously
Plate glass is more brittle in comparison to laminated or tempered glass and it has less
impact resistance. So, the packaging needs be strengthened by either changing packing
material or packaging standard to protect the plate glasses. Also, the material handling
system at Moraine plant would have to be equipped to handle such consignments. These
activities will increase the overall RM cost of plate glass sourced from China thereby making
it non-lucrative.
4. If you were Wen Li, which of the two sourcing options would you recommend to Cho?
Justify your answer.
We would recommend that for the time being, importing from Tianjin does seem like a good
idea. As we estimated, after 3 years, there is a significant difference ($51.98 in Moraine -
$42.92 in Tianjin = $9.06) in per unit cost of production of windshield owing to the learning
curve effect. Hence, we believe that Mr. Wen Li should suggest her boss Mr. Cho to keep on
importing windshields from Tianjin for US markets until Moraine’s cost of production per
unit doesn’t come below Tianjin’s.
However, having said that, we also need to keep an eye on macroeconomic factors. For
example, we need to keep an eye on labour wage costs which are increasing in China and
decreasing in US, so at a certain point, producing in China won’t make sense.
Further, any increase in tensions between US and China owing to Trade Agreements can
affect our cost of production severely in China. For example, US can increase anti-dumping
duties or any other kind of customs and tariff.
In the long-run, Fuyao should look into enhancing the capacity at manufacturing facility in
US or can setup a new production facility to cater to the needs of US and Canada.
Appendix A
Tianjin MoraineRemark
Raw material cost has been extrapolated as per
production yield. Raw Material for Tianjin =
Raw material 13.28978 22.84815 13.01*0.95/0.95
This is given by Total Salary divided by total
B Labor 4.78 9.98 production in a month

No. of electricity units(P)*Unit rate/Total


C Electricity 1.51125 1.28375 Production in a month(L)
Extrapolated using yield and output per shift.
Tianjin=1.55/(780*0.93)*800*0.95; Moraine
D Depreciation 1.623932 4.479544 =3.17/(650*0.81)*0.93*800
Extrapolated as per production yield. Tianjin =
E Other mfg cost 0.898925 1.986296 0.88*0.95/0.93; Moraine =1.73*0.93/0.81
F SGA 6.129032 9.185185 Extrapolated as per production yield.
G Packaging and transportation 14.68612 2.13 Calculated in Appendix B
H Total 42.91513 51.89205

As per case data. Further, we have assumed that


Moraine plant has not been able to develop
I Yield 95% 93% rework capability in 3 years
J Output per shift 800 800 As per case data
Tianjin = 5000*(1.3^3)/6.9*57; Moraine = 25*((1-
0.0945)^3)*8*22*50 Increase/Decrease in wage
K Total Salary per month 90745.65 163338.3 rate is as per case data
L Total Production per month 19000 16368 Total saleable output excluding defective parts
M No. of Workers per line 57 50 As per case data

Electricity
Total Electricity Consumed in Tianjin = =1.55*780*25*0.93*6.9/0.69; Moraine
N a month (Current) (KwH) 281092.5 305019 =1.58*650*0.81*22/0.06
Total Electricity Consumed in Electricity consumption has been extrapolated as
P a month(After 3 years) (KwH) 287137.5 350207 per production yield
Appendix B
Delivery Costs

Tianjin Moraine Remark


Paper packaging 2.9 0 Assuming there will no change in unit paper packaging cost
Since Repackaging is done at Plymouth, the cost has been
calculated as per US labor rates. Given by
Repackaging labor 1.856117 6*25*((1-0.0945)^3)*8/(12*40)

Transportation

Tianjin to Plymouth 5.83 Assuming the shipping rate per container stays at $7000
Moraine to Plymouth 1.67 Assuming the shipping rate stays constant

Tariffs and customs


(6%) 3 0 Assuming no changes in customs and tariff

Inventory carrying cost 1.1 0.46 Assuming target cost stays at $50

Total 14.68612 2.13