Fuyao Industry Group: Company Profile
Fuyao Group is currently a multi-national company, or supplier, which manufactures and ships automotive glass worldwide. It was founded in Fuzhou, China in 1987. Recently, the company established Fuyao Glass America, an American expansion in Moraine, Ohio, to also produce and transport automotive glass products to the customers in North America.
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Case Study Problems / Issues
This case study is asking the readers the ultimate question: For the sake of U.S. customers, should the company place the supplier location in Moraine, Ohio or in Tianjin, China?
If the company chooses Tianjin as the location, Fuyao will have to deal with expensive transportation / packing costs and the additional costs / inventory holdings as shown in Exhibit 16 and 17.
If the company chooses Moraine on the other hand, Fuyao will have to deal with expensive costs that exceeded the target costs and are shown in Exhibit 16.
Critical Analysis Areas
Main Drivers and Complexities of Sourcing Decisions:
The main factor is the ability to have the available cheap labor and the supply of raw materials. The workers should have sufficient experience in performing labor, and they need to have the necessary skills to finish the job. When it comes to a sourcing decision, there would need to be a bidding process; A site would need to be selected a couple years before production could begin. In addition, the factory would need to provide for its customers for a minimum of 6 year which is the product life cycle.
The location of where glass is sourced is important as well since shipping from overseas can incur a large amount of the expenses in the glass production. Shipping rates could vary over time due to the current demand as well as oil prices. Shipments from China could take up to 50 days, so having an extra supply for the capacity would be required in case the shipment does not arrive on time. The causes can include but are not limited to the ocean weather, labor strikes, and other unfortunate events. A fairly large extra supply, if a shipment arrives a month later than expected, would be needed without having shortages of glass required for manufacturing vehicles.
Sourcing between Moraine and Tianjin, Fuyao has to consider the long term costs over the product life cycle of 6 years. The company has to also consider the forecasts regarding the increasing costs for both Moraine and Tianjin.
What Drives the Cost Difference Between Moraine and Tianjin:
The plant in Moraine is newer and is still going through changes to increase productivity. Referring to Exhibit 16, labor cost in Moraine is higher than in Tianjin; Tianjin’s production line has 57 workers who work 25 days per month. Moraine's production line, which has 63 workers, works 22 days per month. There is a huge difference between labor costs in Tianjin and in Moraine, and Tianjin’s production line is more efficient due to requiring less manual effort per line. Another thing that we can look at is the raw material aspect. The Moraine plant has a higher cost for raw material due to being further away from the sand quarries. As a result, it costs more to transport the raw material from the source to the factory.
However, Moraine has one advantage over Tianjin which is packaging and transportation. Viewing Exhibit 16 once again, it costs the Tianjin location 7 times more than Moraine to ship their products into the US. Because Tianjin is located in China, they have to count on the cost of shipping items overseas, which includes better packaging, taxation, longer shipment time, etc. Moraine's location has a lower cost of transportation from the factory to the U.S. customers since the location is within North America.
What the Two Locations Should Do to Become the Source:
Tianjin
Firstly, reducing the cost down for Tianjin even more can be achieved by promoting the Labor and Raw Material. Secondly, Tianjin should push for the local resources and promote working incentives for the locals; This will help bring down the cost for both labor and raw material. The total cost will be significantly less if raw material costs were to decrease.
Moraine
If Moraine were to be a source, they must have their products ready to be shipped by the time the customers come to them; This can be done by increasing the product capacity. The sources providing the raw materials can also provide a forecast on how many products will be expected on demand. Due to the given cost information, Moraine will need to take full advantage of packaging and transportation. To do that, they would need to establish an in-house logistics hub which consists of trucks and vans. The products should be equipped with tracking numbers to determine if the shipping has run into any complications.
Case Study Recommendations
Recommendation #1:
The primary production should be in Moraine, as it is found to be less volatile to increasing trade tariffs in the US-China relationship.
Pro: We estimate that the US-Canada trade agreements will not be a major concern. Under the United-States-Mexico-Canada Agreement (USMCA), tariffs is not to be of concern. Lowering the risk of running into deadlines, by investing more in the Moraine plant, is also a plus.
Con: Except packaging and transportation, Moraine has to pay for expensive costs.
Recommendation #2:
When necessary, Tianjin should send some of their top-quality materials to Moraine.
Pro: The good side behind this recommendation is that this will help to increase and maintain the factory’s capacity in Moraine.
Con: Tianjin will have to pay for the transportation costs as well as any trade actions in regards to raw materials; It will also have to deal with the deadline complaints if the material can not be transferred and/or arrive on time for assembling and manufacturing.
Recommendation #3:
Moraine should search for other raw material sources located within North America.
Pro: By following this approach, there could be a possible reduction for the raw materials sourcing costs if and only if the company wishes to take such an opportunity. It should be noticed that this is a possibility, not a guaranteed milestone.
Con: Moraine will face the challenge of spending money in building a mining plant to get access to the potential raw materials. They will also have to comply with any US regulations and laws related to the environmental issues. Worst case scenario, nothing would have been accomplished.
Recommendation #4:
Providing an in-house transportation system in Moraine is worth considering due to the demand for glass products.
Pro: The company would avoid paying expensive, international shipping fees to send from the US to Canada.
Con: The transportation division has to pay for the periodic costs such as maintenance.
Recommendation #5:
Fuyao should also invest in R&D to increase the chance of working with different types of automobile (i.e. electric or hybrid car).
Pro: It would attract more customers.
Con: Extra training and specialty is required.
Key Learning Points
Learning Point 1:
This case study allows the readers to understand various challenges that an operations manager would face when making sourcing decisions.
Learning Point 2:
This case study demonstrates how an operations manager must interpret, analyze, and evaluate the information needed; This enables them to make effective decisions and strategies for the business.
That concludes this case asset in regards to Fuyao Glass America: Sourcing Decision.
The End.
Credits:
Created with images by OceanProd and W. Shih, casewriter of the case study - "Suction lifters on a windshield to change windscreen" • vladimirnenezic - "Aluminum facade on industrial building" • rh2010 - "Young businesswoman driving a luxury car, view from the outside through the windshield" • Hero Images/Hero Images - "graduate throwing caps in the air"