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Emerson Electric Company ACP Division The Fan Subpack Sourcing Decision Case Solution

Solution Id Length Case Author Case Publisher
1723 1623 Words (7 Pages) Edward W. Davis, Keith L. Page Darden School of Business : UV0420
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Air Comforts Products which is a subsidiary of Emerson Group was beginning to face increasing cost pressures due to the industry entering the maturity stage. The market size has shrunken which has made the competition very fierce throughout the industry placing increasing pressures on the companies to reduce costs to stay competitive. Because Air Comforts Products sourced its materials from different suppliers, most of which were based in Taiwan and then shipped in a sub pack to its US outlet to be assembled, this posed a problem of comparatively higher costs than competitors. However, the stage in which the business is in requires it to be very cost effective to stay in the market as the emergence of new foreign players in the market greatly threaten its market share. 

Following questions are answered in this case study solution

  1. Problem / Opportunity Statement 

  2. Key Issues

  3. Alternatives

  4. Recommendations

  5. Implementation Plan

Case Analysis for Emerson Electric Company ACP Division The Fan Subpack Sourcing Decision Case Solution

The company has an opportunity to enter into new developing countries to benefit from lower cost supplies to boost profitability. Apart from this, there are many external problems associated that may adversely affect the company’s cost structure. Locating to a favourable location will help widen the company's supplier base and provide it with an opportunity to benefit from lower costs of factors of production including labour wage, transportation costs, warehouse rentals etc. 

2. Key Issues

  • The United States Dollar has weakened against the Taiwanese currency. This is an external factor over which the business has no control. Excessively relying on Taiwan can deprive it of the benefits it could enjoy by sourcing its operations in those countries against whose currency, the US dollar is strong.

  • The quality of sub-packs is an important consideration as the efficient functioning of the business operations, and sales are highly dependent on timely delivery and better quality of the sub-packs from the country where they are sourced. Failure of timely delivery may delay all the operations causing the business to lose the market share to its increasing number of competitors.

  • The sub packs are being damaged during the transit due to the packaging not being up to the mark and rough roads further deteriorating the situation. 

  • The unstable political environment, including unfavourable government policies in the country where the sourcing is done from, can increase cost. In Taiwan, the political situation is quite uncertain which can have a detrimental impact on its operational cost in the country.

3. Alternatives

1. The company can set up its assembly site in Mexico as US currency is stronger in Mexico which would help reduce the total costs of the business. 
Pros
  • The lower labour costs in the country will decrease the firms' costs it incurred in getting its raw material packed and transported to the US.

  • The presence of border plants called maquiladora would reduce transportation costs due to its proximity with the US.

  • The chances of receiving sub packs with scratched and defective items will be reduced due to shorter distances.

  • Stable political situation and favourable government policies including NAFTA agreement will further help eliminate any potential duties or taxes that may have arisen (Mole & Bramley, 2006). 

  • The cost of tooling is lower which will help reduce the fixed costs.

  • Furthermore, inventory control is easy to be exercised as assembly would be done in the same country giving the company an option of choosing just in time methods for efficient production planning and inventory control (Disney, et al., 2016).

Cons
  • Costs might rise as the raw materials will still have to be shipped to Mexico as the supplies are not available in the country.

  • Labour skillset is low, and there is a high turnover which can again increase costs.

  • Excessive handling of parts from importing country may increase the chances of raw materials and parts getting damaged.

2. Air Comfort Products Ltd should set up its assembly plant in the United States and source its sub packing within the United States only.
Pros
  • This would help reduce the costs as the cost of materials in Taiwan were roughly the same as those in the United States. Thus, with this decision, the transportation costs of the sub-packs will be able to be reduced. 

  • The issues of late delivery will be addressed as the sub packing will be done in the country of distribution only.

  • The company will have a greater level of control on the quality of its products

  • The company will have a benefit and opportunity to explore cheaper options in different developing countries for its material and can buy lower cost parts from multiple countries, thus attempting to reduce its total cost of materials (MacCarthy & Atthirawong, 2003).

Cons
  • The labour cost is high in the United States which can have a detrimental impact on the overall costs.

  • By sourcing in the US, the company would not be able to benefit from the strong dollar in relation to the other countries.

  • American tooling is five to six times higher than Taiwanese tooling which would again adversely affect the fixed costs associated with undertaking the sub packing activity.

  • Apart from this, by having various parts being shipped from different suppliers to the US before assembly in the box, the costs would substantially rise, due to tariffs being paid separately on each item on a standalone basis (Milner, et al., 2000).

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