1. State the Business Case for #3
Option# 3 has several benefits that make it the most viable option of all. Here are the following benefits: * This option promises a higher degree of control over quality and delivery. These developments will help reduce the logistic losses. * The initial expenditure (manufacturing costs) will be tax deductible, enabling Stryker to lower its tax obligation in the initial years of in-house manufacturing. * The depreciation factor of initial investment will also be tax deductible.
* Accounts payable span has increased from being 30 to 120 days due to new negotiations with suppliers. This means that Stryker will mostly make money of the customer before it has to pay back to its suppliers. * Having an in-house manufacturing unit will enable Stryker Corporation to change the amount of production quickly, efficiently and according to the changing demand to maximize the profitability. * A vertical integration of the company will lead to price reduction and attentive customer service. * With the insourcing unit put in place, Stryker will be fully equipped to meet its future growth needs. * The current PCBs suppliers are often not reliable as they operate on very scant profit margin and have chances of running into bankruptcy.
2. Compute Capital Budgeting Decision Criteria. Discuss what they mean NPV: Cost of the current sourcing method has a NPV of $-32.67M over a period of 6 years(2004-2009). Cost of the In-house manufacturing method has a NPV of $-31.8M over a period of 6 years (2004-2009). This means taking this project has a positive NPV of $870,000. According to this analysis, manufacturing in-house will work out to be cheaper.
IRR: 37.9%, having such a high IRR signifies that there is good error margin in the cost of capital. In simple words, even if the cost of capital went up from 15% to 37.9%, NPV will only become 0. Therefore, Option#3 is the good investment compared to the current option. Payback Period: I calculated a payback period of 3.11 years (starting at beginning of 2004) that means at 3.11 years the project will reach its breakeven point and after this point it will start generating profit.
3. How would you compare this to options 1 & 2 This is a better option than #1 and #2. Option #1 has following drawbacks: * Acquiring safety stock and instituting dual sourcing of all electronic assemblies would lead to higher cost of inventory. * This would lead to more expensive and complex inventory management system. The Option #2 has its own drawbacks like:
* Having a single supplier can give supplier more bargaining power. * This option will definitely improve the reliability criteria but will also mean hopeless dependency on a single supplier for all kinds and amounts of PCBs which can be dangerous as any failure to meet the material demands by the supplier may mean unmanufactured products.
4. Would recommend funding this project? I would definitely suggest funding this project just not because it’s NPV (Cost of option#3) is less in absolute value than the NPV(Cost of current option) which means it is relatively cheaper to produce PCBs in-house. This option should also be preferred because this project will enable Stryker to have greater control over its production processes. Having not being dependent on any outside sources for PCBs supply will save Stryker from unseen and unwanted losses. The manufacturing units of PCBs can be adjusted according to the sales and can be highly flexible with the insource manufacturing set up.