Bmc Global the Entrance of an Automotive

BMC Global

The entrance of an automotive MNE in China

Behemoth Motors Corp. (BMC) is a major manufacturer of automobiles in the United States. BMC has decided to include a Global Positioning System navigator (GPSN) in all of its Sports Utility Vehicles (SUV) beginning with the 2011 model year. Wally Wizard, the GPSN manager, has been approached by Far East Enterprises, Ltd. (FEE) who has offered to outsource these units for MBC. FEE is a three-year-old electronic manufacturing company located in China and has experienced outstanding growth during that three-year period.

These models are just now being delivered and the GPSN units are manufactured in the Detroit BMC facility. Currently and for the foreseeable future, BMC will need 8,000 GPSNs per month. BMC experiences a high level of quality control over these units with only 2% of total production failing quality control testing. At present, 98% of all units manufactured are installed in SUVs.

Due to competitive demand in consumer market pricing, BMC's global interests involve shifting production of units to a lower cost, outsource manufacturer FEE China. The decision to evolve BMC capabilities as a multinational enterprise (MNE) has been prompted by the advantages presented by the offshore partner. Projected challenges to the strategy will be quality of parts and delivery schedule.

1. Your ability to identify the relevant costs in a decision-making situation and make a recommendation

The total manufacturing cost of the GSPN is $425 per unit calculated as follows:

Item

Cost per unit

Direct materials (purchased locally)

$165

Direct labor (6 hours @ $28 per hour)

Factory Floor Space Charges (16,000 sq. ft. At $2.50 per sq. ft. per month allocated over 8,000 units per month)

5

Supervisory labor (monthly cost of $56,000 allocated over 8,000 units per month)

7

General company overhead ($640,000 per month assigned to GPSN allocated over 8,000 units per month)

80

Total Unit Cost

$425

The transfer of the MNE's manufacturing capacity to China involves projected lay off of 100 direct labor employees. Fines of $66,000 per year are under consideration, as the employees union stipulates a 4-year continuance in this obligation. While this is a serious human resource 'equity' in terms to contract, BMC still benefits from the decision to 'go global' as the employee costs are far less than projected cost reductions in the Yuan-based labor market.

Retention of 10 supervisors, each earning $6,000 per month assigned to the project will transfer roles to that of 'project management' staff within BMC toward oversight of outsource channel operations in the United States. Virtual office space enables those supervisors to work via remote at home or at external sites during business travel, and this alleviates costs in the administrative facility.

The same cost cutting benefits will be incurred with half of the factory floor space now used for storage for materials, eliminating the need for rented storage facilities. These rented facilities currently cost BMC $5,000 per month. The remaining factory floor space at $2.50 per sq. ft. charge will continue to be used and accounted for in BMC headquarter factory costs. Energy expenses are set to reduce sharply within the budget, as well as maintenance of machinery and other attendant costs budgeted in the general company overhead.

2. Describe the special relevant costs in multi-national decision-making

FEE has offered to manufacture and deliver to Detroit 8,000 GPSN units at a unit cost of $400 beginning on Jan. 1, 2011. FEE mutual assent requires a two-year contract. The U.S. MNE will benefit substantially in agreement with FEE, as the Yuan continues to escalate, and this is very likely to impact the cost of direct materials are all purchased locally under month-to-month contracts. If BMC is sold on the current value chain of operations (VCO) achieved with FEE, the return will overrule the decision to retain a more limited agreement of no future obligations under the prior agreement. While this may seem counter to flexible models of capitalization, leverage in the partnership is more likely where FEE's projections are reliant upon that relationship.