Stryker Corporation Deciding whether to keep outsourcing or in-source PCBs Stryker Corporation has 3 different options regarding the supply of needed PCBs. Option 1: contemplates the fact of keeping the same suppliers but with significant changes in order to assure continuous supply of PCBs and quality. No investment is needed. Option 2: establishing a partner with a single supplier. This way there would be a sole supplier for Stryker established in a new facility near them, this would give more certainty and control over continuous supply and quality standards.
Again, no investment is needed. Option 3: in-source the PCB’s, there is a project for investing and owning a plant for producing their own PCB’s, this way they would assure a continuous supply and have 100% control over quality standards. In this case, there is a big amount of capital that should be invested, which is needed to be analyzed in order to see whether it is viable for the company or not.
The case present several information regarding expected production costs for in-sourcing and expected purchases for outsourcing.
Since there is no projected information of Income Statement, then the only cash flow analysis that can be made is by comparing the efficiency gained by in-sourcing the PCBS compared to the costs of keep buying the PCBs. The case contemplates the projected comparison from 2004 to 2009 of the costs of buying PCBs from an external supplier and the costs of making the PCBs. What we will analyze is the positive cash flow that is derived from the cost improvement of making the PCBs compared to outsourcing them.
The sum of these annual savings should be a positive cash flow for the company via a cost reduction.
In Exhibit 2, the case presents the comparison of the costs incurred between outsourcing and in-sourcing the PCBs. The in source cost of production contemplates Depreciation Expense as a part of Fixed Cost, what we will do is subtract out of the Fixed Cost all of the Depreciation Expenses because they are not actually part of the cash flow, Depreciation Expense is only an Expense that is recognized because of the lost of value of Assets as Equipment, but it actually doesn’t imply an outflow for the company.
Another thing to consider is the re investment in Assets such as Furnishings and non-manufacturing equipment, and Communication Equipment and IT infrastructure, both are expected to fully depreciate in 3 years, so there has to be a re investment of both assets. We will calculate the NPV, IRR and Payback Period, but we need to see the cash flow, but first we show the depreciation calculus: Cash Flow The payback period is less than 5 years; we can see it in the next graph, where the line crosses the X axis in the point 4. 7, which is the calculated payback period. We can see that the NPV is kind of low, but having control of the supply chain in terms of timing for the materials and the finished goods is a plus, also the quality would be higher as new equipment is more reliable and precise adding the strict manufacturing methods of Stryker Corporation, would achieve these results. About the IRR we can say that it is high compared to the contemporaneous interest rate data for the year 2003, where the highest interest rate is 6. 8 for Moody’s Baa Long-term investment. This is also a good point for the project. We can conclude that the project for in-sourcing it’s a good option to be implemented as the financial calculation has showed us, Stryker Corporation also has the means to do that investment as 6 million is low compared to the 329 million that the company had in 2002, to avoid sourcing and quality problems in-sourcing is the best option.