Emily Zhu
Professor Matthews
BUSN1101 8 am
06 April 2017
Polaris Industries Inc.
Polaris Industries Inc. was established in 1954 to manufacture motorsport products like ATVs, Side-by-Sides, and snowmobiles. It covered 20% of the market with approximately $2 billion in sales during the year of 2010 while competing with branded competitors like Yamaha, Honda, Harley-Davidson and others. Most of its target segment was in North America, and other international customers solely came from Europe. All the company’s manufacturing operations were in northeastern Midwest of the U.S. The products were sold through 1,500 distributors domestically and 1,000 distributors globally. In September 2010, the company was deliberating about developing a new plant of manufacturing in countries with low labor costs like China and Mexico. The company must have considered the tradeoffs between these locations before concluding the best-fit.
Qualitative Tradeoffs
(United States)
Before the determination of either staying at its initial location or moving abroad, certain tradeoffs laid out the likely costs and benefits of each choice. By staying in the U.S., would keep its employed workers and saved the cost of starting a new expenditure in another country, which could result in millions of dollars. However, it seemed that the supply of technical workers was decreasing in the U.S., which mean that fewer people were willing to work for the factory or there were not enough professional talents to fulfill the need of these workers. Countries like China and Mexico can solve this problem because technical skills were easier to find in these locations. Labor cost was relatively cheaper in these countries, but this also meant that transportation cost would increase. Because the company hoped to raise its future sales growth from overseas market, it might be best to build a facility there to tap into the foreign market and create more brand awareness, but by staying in the U.S. would create hindrance from doing so. Maintaining the status quo in U.S. could further sell its “Made in America” culture, which could strengthen the credibility of its brand since its made within the country, but this hindered the company from other benefits of operating abroad. Moreover, other qualitative tradeoffs in other nations were significant to understand before recommending the project.
(China)
If the new plant moved to China, a tradeoff includes lower labor cost at the price of higher transportation cost. The company might look further inland to find cheaper labor, but it would increase the length of transportation that typically ranged from nineteen to thirty-three days. Even though the low labor cost cut down the expenses of the company, the product would not reach the distributors until a relatively longer period. If there were a problem after the product has shipped, it would be difficult to return the products back to the plant before sending it back. Because of Polaris’s management style, the company preferred in-person interaction among managers and its business units. So, the time-zones and long distance would hinder an effective communication between both parties. Hypothetically, a change needed to be made with the manufacturing and shipment, the plant would not be able to receive the request and accommodate the change immediately because of the different working hours. This situation could be problematic if any significant alterations occur. There was another tradeoff regarding collaboration with the Chinese factory. Moving the plant to China could establish brand awareness in the country, which could stimulate growth in international revenue. Since the demand for Side-by-Sides would remain flat for the next five years, tapping into the foreign market could drive up revenue and make up the lost from domestic sales. However, culture differences made it difficult to work together. Polaris might not necessarily understand the Chinese culture and its customs, and this could lead to misunderstanding and miscommunication. There were pros and cons when contemplating about operating in China.
(Mexico)
If the company decided to run a new plant in Mexico, there were some advantages of qualitative tradeoffs that China could not offer. For example, managing a facility in Mexico was relatively closer to the U.S. than China. Because of the shorter distance, it was easier to collaborate in-person with the managers and the manufacture faculty. Also, since Mexico is neighboring the U.S, there appeared to be less cultural differences between the two, so there would be fewer impediments from working together. The technical talent was easier to find in South American countries whereas it was harder to employ in the U.S. Mexico had the workers that could supply the demand. Also, diving into the geographic of our target market, most of the demand was in the Southern U.S. with the highest sales volume in Texas and California. Mexico was not far from these locations, so transportation cost would not be as costly as that of China’s. However, under the condition that the plant moved out of the U.S., sixty workers would be laid off at its Roseau plant, but sixty Mexican workers would be employed, which benefitted the Mexican economy.
Quantitative Tradeoffs
As you can see from this graph, U.S. has the highest total costs of operations and shipping throughout the six-year period while China comes in second with Mexico coming last. The less cost, the better, this implied that Mexico had an advantage over other locations.
From this graph, one can conclude that U.S. has the highest production cost per unit and China with the cheapest.
U.S. and Mexico had a higher transportation cost because ground transportation cost was calculated per mile. China’s transportation cost was calculated per unit. Even though China had a lower transportation cost, this did not take account of its 5% tariff for import.
Besides the mentioned costs, other expenses that must also be measured. Mexico had the least capital expenditures, equipment moving costs, and startup costs of $9,500,000 and China with $10,000,000. By staying in the U.S, the company did not need to worry about these additional expenses, but it did not necessarily mean that other costs might not be higher. U.S. had the highest labor cost with $2,995,200 per year while Mexico had the cost of $254,537 per year and China with $218,274 per year. However, the labor cost for Mexico and China did not consider the one-time severance of $20,000 for each of the sixty workers that the company would lay off if the company moved abroad. $20,000 for each sixty workers would result in an expense of $1,200,000. These quantitative tradeoffs played a role in weighing out each location to determine the best recommendation.
Recommendation in 2010
As Krishna considered the data of each location, he should recommend a new plant in Mexico. The qualitative advantages like worker competencies, more technical workers were easier to recruit in an area like Mexico. Since technical talents were becoming difficult to find, moving the operation abroad to Mexico would be beneficial regarding finding more employees to fulfill the need. Because the difference in time-zones between U.S. and Mexico was not as drastic as China’s, the similar work hours allow them to communicate effectively regarding requests and changes. Both Mexico and the U.S. shared cultural similarities that would create a common understanding of the ways of doing business. Based on its geographic location, Mexico was close to Southern U.S., which held the most demand, so that transportation duration would not take as long shipments from China. Operating in Mexico also allowed the company to emerge into the Mexican market to drive more international sales, more revenue could balance the weak economic environment domestically. Next, considering the quantitative advantages, Mexico acquired the least amount of total costs of operations and shipping through the six years. Fewer expenses meant less to deduct from revenue, which could lead to a higher profit. Even though that the production and transportation costs were higher in Mexico than China, the overall number still appeared to be that Mexico had a higher advantage. Such gain might occur because of the economies of scale and the learning curve effect throughout times. To conclude, opening a new plant manufacturing in Mexico was reasonable due to its qualitative and quantitative advantages.
Recommendation in 2016
Because of the recent presidency and the foreign policy, Polaris should not relocate, and it should keep its operation within the U.S. The current president, Trump, is currently trying to renegotiate NAFTA, which is the North American Free Trade Agreement that was signed by Canada, Mexico, and the United States. He wants to bring production back to America and create more jobs. He and his team might try to raise tariffs and change foreign policy that would make operations abroad more challenging. Due to this current political situation, it’s not wise to start a new plant operation outside of the U.S.