Eastern Waves, Inc. Case Solution

• The next thing which Code C needs to realize is that "Global Outsourcing" does not work this easily. Problems like doubling of prices on inputs are quite a regular thing, but such issues can be easily resolved with a little effort. The proper way to do global outsourcing is to follow a logical procedure. First a separate business unit for Global outsourcing must be established which would then do research on the requirements and needs of the facilities which must be outsourced. Once this is achieved, opportunities and processes must be studied so that proper Standard Operating Procedures can be developed to avoid such occurrences.

• Finally, in order to manage costs, properly the companies must not stop at only categorization. "Strategic cost management" is the real buzzword of today's times. Only 3 steps can achieve this feat. In order to implement it, the first thing must be to reduce immediate and near term costs. In the next phase, cost governance should be bolstered so that sustainable cost reduction methods can be implemented within the organization. In the end, it must be noted that nothing will work if both Code C and Eastern do not develop and transform their operations and strategic think tanks. Unless these companies can optimize non-core competencies while transforming their core capabilities, it will become quite difficult for them to come out from this dilemma.   

2. Which elements of the total cost when sourcing worldwide –as described in Monczka - were evident in this case?

Currently, Code C is suffering from an issue in which Eastern Waves, the provider of fabricated steel to Code C, suddenly increased their prices. This essentially means that the cost reduction and savings of 60% which was being targeted by Code C now appears to be a long shot.

Keeping this scenario in mind, we can assess that in the total cost, the main item which is being affected is the "Direct Material" cost which is variable by its nature. The issue that has created this entire case is a restriction placed on imports to protect the local economy by the Malaysian government. Even though domestic billets are expensive, the Malaysian steel millers had to opt for local product due to import restrictions. However, this slight upheaval is now likely to create a lot of variation between the price of local steel billets and imported goods. This eventually will cause local raw material to become less competitive, and it puts Malaysian steel millers at a disadvantage with Thailand and Indonesia.

Currently, domestic billets are priced at approximately RM 760 per metric ton while international prices range between RM 600 and RM 680 per MT. This implies that on an average every local Malaysian steel miller is at least absorbing RM 80 per MT higher cost (760-680). Therefore, for anyone sitting abroad like Eastern Waves, this higher cost will translate into a higher finished goods sales price. Overall it will not only increase the total cost due to a jump in the raw material cost but it will also make Malaysian inputs much more expensive as compared to competitors. It essentially means that the companies looking for outsourcing partners need to realize that before ordering or establishing a relationship with any country they must understand the country’s political and geographical climate. If they do not do proper homework before starting any ventures, they will keep coming up against such issues where they would become helpless.

3. Which benefits of global sourcing prompted Code C to source from Eastern Wave? Were any barriers encountered, according to the story as related in the case study? Refer to Exhibits 10.2 and 10.3 in your response.

The most obvious benefit which Code C was looking to establish by outsourcing some of its work to Eastern Waves was the cost advantage. As previously stated, there was a celebration at Code C in the prior year when they achieved 60% cost reduction after combining with Eastern Waves. Lower costs are what firms look for when they usually consider global sourcing. This does not mean that the company did not realize that there would be several issues which will crop up once they decide to fully combine with Eastern Waves but they were not fully prepared for all that happened later on.

There were several barriers, or rather issues, which Code C faced during its collaboration with Eastern Waves:

The most important issue is the protectionist attitude of the Malaysian government which is geared towards safeguarding its domestic industries. Its most blatant example can be seen by the higher price of steel prevalent in the domestic market but still the downstream steel manufacturers are being forced to use it which effectively puts them at a disadvantage.

In the past few years, steel prices in Malaysia have skyrocketed. Local companies, like Eastern, previously cut their costs by opting for waste products and using them for downstream production but now they cannot do so. The cost of this scrap material is also now on the rise since no one considers it scrap anymore due to billet price inflation.

Labor issues are also prevalent in Malaysia, which may continue to act as a barrier for Code C. Just like materials policy; Malaysian government has adopted similar strategy in labor issues as well. Since the foreign workers from Indonesia, Thailand, Philippines and Sri Lanka are freely available, and they charge much less than Malaysian workers, employers prefer to take them on board whenever hiring is done. To curb this situation, the government has now imposed an annual levy of Rm 125 – 1500 on each foreign worker and limited their work stay to only two years per permit. This implies additional labor costs for manufacturing firms in Malaysia, which would then be translated to their final selling price, thereby causing inflation in comparison to products from other competing countries.

It is also quite clear that the domestic workers are high in supply, but they come with a lot of baggage. Not only are the labor laws strict but they are also extremely worker friendly. The workers cannot be fired easily, and since employers cannot terminate them when the need for this occurs, the worker ends up taking advantage of this situation. He or she leaves the employer the minute they get a better opportunity which leaves the employer totally unaware and unprepared.

4. What should Eastern Wave do to resolve their purchased material problem? What should Code C do to avoid future sourcing disruption? Elaborate on your ideas, and be sure to support your position.

Some things which Eastern Wave can do to resolve their purchased material problem include the following:

The company should initiate a cost management and controlling function whose sole responsibility should be to allocate resources in the most efficient manner possible. This can be achieved by conducting proper audits and then making an inventory of which costs and items are core and necessary.