Sourcing a Wire Harness from Happy Lucky

1) What is the total cost for each option? How much cheaper (total $) is outsourcing to China over the 3-year lifecycle of the Auto Part?

Total cost for supplying from Original Wire (1-month delivery):

$6000 = fixed tooling cost

$30 * 5,000 units = $150,000 total unit price

$0.75 * 5,000 units = $3,750 total packing cost

10 pounds * 5,000 units * $5.20 / 100 pounds = $2,600 total freight cost

TOTAL: $162,350 for one-month delivery.

Over 3-years (36 months) lifecycle:

$6000 = fixed tooling cost

$30 * 5,000 units * 36 months = $5,400,000 total unit price

$0.75 * 5,000 units * 36 months = $135,000 total packing cost

10 pounds * 5,000 units * $5.20 / 100 pounds * 36 months = $93,600 total freight cost

TOTAL: $5,634,600 for 3-years delivery.

Total cost for supplying from Happy Lucky Assemblies:

I’ll find the cost per unit first:

Unit Price: $19.50

Packing costs:             $ 2.00

Inland Transportation Port to Port (03 containers/month): 200 * 3 *12 *3)/ [(5000*12) *3] = $ 0.12

Freight Forwarder’s fees: 100/5000 = $ 0.02

Ocean Transport: (4000 * 3)/5000 = $ 2.40

Marine Insurance: 19.5*0.5/100 = $ 0.1

US Port Handling: 1200 * 3/5000 = $ 0.72

Custom duty: 0.05 * 19.50 = $ 0.98

Customs Broker fees: 300/5000 = $ 0.06

Transportation from L.A to Detroit: 18.60/10 = $ 1.86

Warehouse in Detroit: (24*12*6)/1728 * 1 = $ 1.00

Cost associated with committing corporate capital: 1 * (0.15/52) *4 = $ 0.01

Hedging currency: (400 x 3)/5000 = $ 0.24

Admin Time: (4*25)/5000 = $ 0.02

Travel to China: 20,000/(5000*12) = $ 0.33

Total cost per unit: $29.36

Total cost for one-month delivery: ($29.36 * 5000) + $6000 = $152,800

Total cost for 3-year delivery: ($29.36 * 5000 * 12 *3) + $6000 = $ 5,290,800

In light of the above calculation;

$5,634,000 – $5,290,800 = $344,000

So, it’d be $344,000 cheaper if they outsource from China over the 3-year lifecycle.

2) Are there any other risks that you need to consider other than cost when deciding to outsource to China? Can you quantify that added risk?

There are other risks to consider, we can sum up those risks under the name of Inventory Holding Costs which include housing costs, opportunity costs, obsolescence, quality, pilferage costs, etc.

These risks cannot be quantified, but the buyer should take them into account if decides to outsource the auto parts from China.

3) What is your decision? Why?

I’d go for Original Wire, American option. It’s less headache, less complicated, the risk is more obvious, not too vague as in the Happy Lucky Assemblies.

The difference between the quotes is $344,000 for 3 years, which is $115,000 for 1 year. In my opinion, annual saving of $115,000 doesn’t worth to go for Chinese option and undertake the high ambiguity. If one shipment goes wrong, it may cost more than $115,000 anyway.