Emerson Electric Company

Company Background
Emerson is a diversified US Fortune 100 conglomerate consisting of over 50 autonomous divisions It has 200 manufacturing location worldwide & 76 of them locate in 15 countries outside US According to Forbes magazines industry analysis, 83% of Emerson products held the no. 1 or 2 position in their domestic markets To implement its strategic move towards global products & markets, Emerson redesign existing product lines & create new products to meet world market requirements while maintaining domestic market dominance Goal increase share of new products to 20% of total sales

Company Background
Emersons CEO adopts pay-as-you-go principle if a division anticipates a shortfall in its annual sales goal of 15% growth, it has to implement cost-cutting program to protect profitability He also develops Best Cost Producer Strategy achieving the lowest cost consistent with highest attainable quality & performance 3 major Emersons product categories industrial & commercial components, consumer products, defense/government components

Air Comfort Products Division

Air Comfort Products (ACP) Division a small division in consumer products category established in 1895 to provide a variety of ceiling, exhaust and ventilation fans to a network of independent wholesalers & retailes in US Domestic Ceiling Fan Market The market surged during the oil shocks of the 1970s as consumers used ceiling fans to circulate air & cool their homes & offices in an energy-efficient manner At the peak, 18 million fans sold at a price over $75/unit Due to stabilization of oil prices & raising competition, the market becomes seasonal & mature The current market demand ranges from 11-13 million at an average retail price of under $40/unit

Air Comfort Products Division

Domestic Ceiling Fan Market Retailers orders placed in early spring for coming summer months All ceiling fans sold are partially assembled & require minor on-site assembly ACP Product Line ACP markets 2 ceiling fan lines Northwind & 1985 All ACP fans are marketed with superior features such as heavy-duty motor for longer life-time, metal hanging system for extra safety Price range for Emersons fans - $100-175

Air Comfort Products Division

ACP Product Line Northwind a lower end model assembled by an independent Taiwanese vendor & shipped complete to ACPs DC a full-time ACP auditor is assigned to the vendor facility to assure quality & timeliness of shipments 1895 model a high end model assembled in US due to cost pressure, many components purchased from Hong Kong & Taiwan most of the parts are gathered together & shipped to ACP assembly plant in a kit referred to as subpack

Subpack Production
A subpack consists of a polyfoam package containing the fan outer housing, flanges, & hanging system While many vendors may be involved in supplying various part sin the subpack, the lead vendor is responsible for supplying the subpack in specified quantities ACP assign an auditor to the lead vendor to monitor quality standards & minimize sourcing disruptions Typical subpack shipment size 2000 to 4000 units Subpack demand for the current year is 30000 units Given acceptable quality, ACP select the lead vendor based on the delivered cost, which is the sum of purchase cost, shipping & insurance cost & import duties

3 Major Concerns on Current Sourcing

Subpack quality 4 weeks shipment transit time from Taiwanese vendor to US assembly plant Occasionally experience missing & defective components in subpacks which cause product delays Sourcing flexibility ACP exposes to some degree of political risk in Taiwan as majority of foreign outsourcing concentrated in there Currency exchange rates USD has been weakening against Taiwan dollar (NTD) & contracts are paid in NTD Appreciating NTD - 40-to1 in 84 rose to 31-to1 in 87

Sourcing/Production Alternatives
There are alternatives for sourcing 1895 model fans All of them involve a vendor switch, ACP need either to build inventory to a level high enough to last until the alternative source can produce acceptable subpacks, or to continue orders with the current vendor on asneeded basis Current seasonal inventory levels sufficient for 6 months wholesalers orders

Sourcing/Production Alternatives
1. Continue with current Taiwanese vendor The current vendor is a family owned, controlled & managed company Lack of sophistication & control manual plating line As a lead vendor purchase parts from other Taiwanese companies to produce the subpacks Transportation mode shipment sent in containers by sea & then by rail to ACP Quality problems colour variations, scratches in the painted & plated parts of the housings Quality problems alone not serious enough to justify switching to an unproven vendor

Sourcing/Production Alternatives
2. Change to Alternative Taiwanese vendor Another Taiwanese vendor has shown keen interest in supplying subpacks to ACP It is a much more vertically integrated & centralized company with an automated plating line Currently running well below its capacity - has sufficient capacity for subpack production Its quotation is about 15% lower than that of the current vendor

Sourcing/Production Alternatives
3. Integrate the Assembly Process in America Unused space available in ACP US plant for production Materials contributed the great majority of cost in the manufacturing of subpacks Material costs in US & Taiwan are roughly the same US labour cost is about 3-4 times of Taiwan cost To estimate the benefits of this option, ACP needs to Estimate the productivity differences Determine whether loss of subpack volume change the shipping rate of other ACP imports from Taiwan Estimate savings on pipe-line inventory, & on inspecting & auditing vendor

Sourcing/Production Alternatives
4. Establish Sourcing in Mexico ACP has a sister division running assembly operations in a free trade zone along US-Mexico border Mexican sources for subpack materials are either nonexistent or extremely expensive => ACP need to purchase & ship them over to Mexico US labour cost is about 9 times of Mexicos labour cost Mexico workers paid in peso & ACP has to purchase peso at government-controlled exchange rate which can be very different from the market rate Sharp peso depreciation drop from 201-to1 in 84 to 1344-to-1 in 87 High inflation rate in Mexico

Case Discussions
Why ACP outsource the subpacks?

What are the critical issues that ACP needs to consider in its outsourcing decision?