Suppose that a manufacturer of men's shirts can produce a dress shirt in its Houston, Texas, plant for $8 per shirt (including the cost of raw materials). Chicago is a major market for 100,000 shirts per year. The shirt is priced at $15 at Houston. Transporta¬tion and storage charges from Houston to Chicago amount to $5 per hundredweight (cwt.). Each packaged shirt weighs 1 lb.
As an alternative, the company can have the shirts produced in Taiwan for $4 per shirt (including the cost of raw materials). The raw materials, weighing about 1 lb. per shirt, would be shipped from Houston to Taiwan at a cost of $2 per cwt. When the shirts are completed, they are to be shipped directly to Chicago at transportation and storage cost of $6 per cwt. An import duty of $0.50 per shirt is assessed.
a. From a logistics-production cost standpoint, should the shirts be produced in Taiwan?
b. What additional considerations, other than economic ones, might be considered be¬fore making a final decision?
Re b -- How many US workers would lose their jobs if option b is chosen?
To determine whether the shirts should be produced in Taiwan from a logistics-production cost standpoint, we need to compare the total cost of producing and transporting the shirts from both locations.
Let's calculate the total cost of producing and transporting the shirts from Houston and Taiwan:
Production and Transportation Cost from Houston:
Production cost per shirt in Houston = $8
Transportation and storage charges from Houston to Chicago per cwt. = $5
Weight of each packaged shirt = 1 lb
Total cost from Houston = (Production cost per shirt + Transportation cost per lb * Weight per shirt) * Number of shirts
Total cost from Houston = ($8 + $5/100 * 1) * 100,000
Production and Transportation Cost from Taiwan:
Production cost per shirt in Taiwan = $4
Transportation and storage charges from Taiwan to Chicago per cwt. = $6
Import duty per shirt = $0.50
Weight of each packaged shirt = 1 lb
Total cost from Taiwan = (Production cost per shirt + Transportation cost per lb * Weight per shirt + Import duty per shirt) * Number of shirts
Total cost from Taiwan = ($4 + $6/100 * 1 + $0.50) * 100,000
Now, let's calculate the total costs for both locations:
Total cost from Houston = ($8 + $5/100 * 1) * 100,000
Total cost from Taiwan = ($4 + $6/100 * 1 + $0.50) * 100,000
After calculating these costs, we can compare them to determine which location has a lower total cost. The location with the lower total cost would be more cost-effective from a logistics-production standpoint.
b. In addition to economic considerations, other factors that might impact the decision could include:
1. Quality: Are the shirts produced in Taiwan of comparable or better quality than those produced in Houston? The manufacturer needs to ensure that the quality standards are maintained.
2. Lead Time: How quickly can the shirts be produced and delivered to Chicago from both locations? If one location has a significantly shorter lead time, it may be preferred to meet customer demand.
3. Supply Chain Risk: Are there any potential risks associated with transportation or production delays from either location? Considering factors such as natural disasters, political stability, and supply chain disruptions is essential.
Considering these factors in conjunction with the logistics-production cost analysis can help the manufacturer make an informed decision.