Design and analysis of lean maufacturing - Case Study Example

The reputation for quality is what keeps Elba afloat with a select base of customers, albeit with those customers increasingly coming from remote areas relative to the location of the plant. It is the remoteness of the current remaining customer base that has caused the company to incur a growing cost base in inventory as well as in distribution. These two items have grown by 12 percent and 10 percent respectively over the past three years. In absolute terms too, distribution has come to almost equal labor costs and has come to account for the second largest share of costs after labor, and only marginally smaller than labor costs at $11.1 million. Inventory costs, meanwhile, have come to equal materials costs, and with the rate of growth of inventory costs is poised to overtake materials costs.

On the other hand, the move to Southeast Asia would chop 30 percent from distribution costs, and 60 percent from labor costs. Assuming all other costs remain the same, that would translate to savings of about $7 million in labor costs yearly and $3.33 million in distribution costs per year. Given though that clients are distributed in equal measure by volume outside of Asia, there might be minimal to no savings in distribution costs. . It is likely that Elba will lose more customers with the move, and may continue to suffer from a profit squeeze as they lose the quality differentiation.

The question is whether this planned move is wise, or whether a justification can be made to retain the plant that does not entail preserving the status quo but going about rejuvenating the product lines and making use of the available skilled and experienced talent to innovate and come up with higher-margin products (“Case Study 4.8 Elba Electronics” 128-129). II. Background Information From a financial point of view, the current state of affairs at Elba Electronics is unsustainable, and is ripe for change.

That, or the trajectory is for Elba to continually grow its costs for distribution and inventory and therefore go deeper in the red. Earnings have shrunk by five percent over the past three years, and is already thin as of the time of the planned closure of the plant. The move would significantly bolster margins by reducing the biggest cost items in labor and in distribution as stated in the case, by 60 percent and 30 percent respectively, The FCP seems to have established a good case for the plant closure, but their analysis also seems to suffer from a blindside, and that is with regard to the effect of the move on demand, and on margins.

This is an opening that John James can analyze and exploit, to bolster the case for a different kind of plan that does not entail moving manufacturing to Southeast Asia but doubling down on innovation to produce higher margin products (“Case Study 4.8 Elba Electronics” 128-129). III. Problem Statement Does the move to Southeast Asia and the closure of the Elba plant justified by financial and non-financial considerations? How does