Resposta de referência
After jotting down the prompt, we can rely on some of the concepts listed above to formulate a framework for the case.
Step 1: Cost Shifting – What's the cost impact of Chinese production?
Our client is going to save on the cost of labor and potentially gain access to cheaper raw materials given their closer proximity to industrial centers. The trade-off? It will cost more to transport our goods to their end destination if they are no longer made in Canada.
Let's say that our goods cost $725 to produce and retail for $1,000 with the present supply chain configuration. It costs an additional $25 to transport them to their final destination for a total of $750, with a gross profit margin of 25% or $250. As discussed above, the cost of production will decrease, let's say to $500, but the cost of transportation increases, let's say to $100. Net-net the new cost of production is $600. The new gross margin is $400, so the cost analysis presents favorably towards outsourcing, but make sure to consider all potential impacts before forming a recommendation.
Step 2: Operational Stability – What's the operational impact of producing in China?
We may want to consider the risks of outsourcing to China. Recently tensions have increased between the U.S. and China with the potential for escalation. We will want to consider the possibility of additional tariffs and the impact of conflict in the region.
These aspects may be difficult to quantify, but they are important for the client to consider as they evaluate the total impact of this decision.
Step 3: Brand Erosion – What's the brand impact of producing in China?
Finally, our client needs to consider how this change can impact their public image and thereby their sales. Competitors may even capitalize on our shift to highlight their competitive differentiation if they are still domestically produced.
In our case, let's say our client was selling 100,000 units prior to outsourcing the goods. When they were making $250 per unit, they made $25M per year. Now, our client is making $400 per unit, but, let's imagine our client expects to lose a significant portion of their sales, ~35%, because their value proposition centers heavily on being a domestic producer of high-quality furniture. Calculating their new gross profit, 65,000 * $400 we find that profit from out-sourcing totals $26M.
Step 4: Recommendation
Synthesizing these analysis we recommend that our client should not go through with outsourcing their production. While the proposition yields significant cost savings, after accounting for lost sales we find that profit will only increase by 4% for quite a bit of incremental risk and complexity. Next steps might involve finding alternatives to outsourcing, maybe considering a plant in Mexico or focusing on optimizing existing operations.
(You can also recommend that the client proceed with the outsourcing – the profit does increase by 4% after all. Most cases are less about yes vs. no and more concerned with the evidence and logic the candidate uses to support their choice).
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