Case Emerson Electric Company

Emerson Electric Company

Company Background • Emerso Emerson n is a diversif diversified ied US US Fortun Fortune e 100 congl conglome omerat rate e consisting of over 50 autonomous divisions • It has has 200 manu manufac factur turing ing loca locatio tion n worldw worldwide ide & 76 76 of  them locate in 15 countries outside US • Accord According ing to Forb Forbes es magazi magazine’ ne’s s industr industry y analysis analysis,, 83% of Emerson products held the no. 1 or 2 position in their  domestic markets • To implem implement ent its its strategi strategic c move towar towards ds global global produ products cts & markets, Emerson redesign existing product lines & create new products to meet world market requirements while maintaining domestic market dominance • Goal Goal – increas increase e share share of new produc products ts to to 20% 20% of tota totall sales

Company Background • Emerson’s 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 Emerson’s 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 Emerson’s fans - $100-175

 Air Comfort Products Division ACP Product Line

• Northwind  – a lower end model assembled by an independent Taiwanese vendor & shipped complete to ACP’s 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 

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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 

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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

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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

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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 Mexico’s 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?