Have Lg Produce the Low-End Air Conditioners by Outsourcing

1. Based on the information given in the case estimate for Model A how much of the cost difference for each cost element is driven by each cost driver.  Note that in some case this number can be zero.  Use negative numbers to indicate that the advantage goes to LG and positive numbers to indicate that the advantage goes to Tork.  Please fill out the spreadsheet and include it in your submission.

Please refer to the spreadsheet attached

Q2. Identity the two best options that you think Tork should consider in responding to LG’s offer for Model A.  Justify your options.  Your discussion should be covered in a maximum of two pages double-spaced, with 1 inch margins on all sides.

Optimal solution #1

• Have LG produce the low-end air conditioners by outsourcing

First and foremost, it is apparent that Tork has no competitive advantage with regard to cost related to A/C production as the cost difference between the two companies is $70.06. Taking the four cost drivers, it would be really demanding for Tork to come up with a solid plan to reduce the cost difference. As the spreadsheet attached with the note indicates, the cost driver that seems to be the highest is “Geography” which clearly accounts for $32.06. If Tork continues to produce the air-condition in the States, the influence of this factor will remain the same for a long period of time. Moreover, when it comes to redesigning the A/C units (considered to be the design factor), it would only bring about incremental and insufficient cost reduction, making it sound more absurd. The recent sales volume and demand fluctuation of the A/C implicitly indicate that the utilization rate and scale benefit cannot be increased in a short period of time, proving that the improving space is very limited even though there are some space for facility and execution factor to be improved. However, Tork is expected to reduce the cost of manufacturing the A/C only if they outsource the low-end A/C to air-conditioners, which will engender higher margin.

Optimal solution #2

• Put the money and time saved from partially accepting LG’s proposal to invent a new product Tork’s long-term goal to continuously increase its value can be achieved not just by reducing the cost, but also focusing on developing new technologies. Right now, Tork’s low-end A/C are not seen as high quality products, obviously making customers pay less on purchasing them. However, when Tork produces a new and high-end A/C embedded with high technologies and innovation functions like filtering fine dust while adjusting temperature inside a building or house, customers would be willing to pay more for its products. This can be only done during the transitional period wherein LG is allowed to seep through the A/C market in America and Tork outsource its low-end A/C to LG. It is imperative to keep in mind that the unit air-conditioners comprise only 5% of Tork’s total sales, explicitly suggesting that shifting the production capacity to other products can be an another way to deal with the current situation as a new group of customers will be willing to buy them.

Q3. Use the case data and analyses for Model A to extrapolate your best estimate of Model F for LG. Note that you will have to make some assumptions. Please list your assumptions where appropriate to estimate the cost of Model F for LG.

The following assumptions are needed to estimate the cost of Model F for LG:

• LG should use the same size container for its shipping and the expense for shipping a container remains the same at $5,721

LG can use one container to load 139 units of the A/C [4,000/(2.8*3.2*3.2)=139.5] with the average cost of $41.16

• The expense of Tork’s transportation using trains and trucks remains the same as Model A at $5 per unit.

LG’s shipping cost is $36.16 or higher.

• Material cost is proportional to the unit weight

The product of Tork weighs 3lbs more than that of LG which will bring about additional costs of $2.96