AutoEdge: Supplier of the Engines - Essay Example

AUTO EDGE CASE STUDY
INTRODUCTION
AutoEdge is a leading supplier of engines and transmission parts to the leading auto-manufacturer of the USA. Established in 1976, the company has a long history of being a well-established brand which contributes to the purchase decision of auto-buyers. Five years back the decision of the company to shift the production to South Korea for cost advantage has now called for revision as the products have failed to clear the quality test.

The companies are now available with the option to move back the production to the USA. Therefore, the underlying report is an assessment of the short and long-term fixed and variable costs in case of shifting the production, cost and financial risks to stakeholders to be borne in case of continuing operations in South Korea.

DATA COLLECTION SOURCE
Businesses are affected by a combination of costs (Arnold, 2008; Mankiw, 2009). Understanding the impact of these costs on taking back manufacturing from South Korea to the USA is necessary.

SHORT-RUN LONG RUN
FIXED Opportunity cost, sunk cost, rent, utilities, the net change in costs due to regulation difference of both countries Infrastructure and facilities cost (in the USA after establishment)

VARIABLE Setup cost, transportation and inventory cost, union, labor productivity, overtime cost, production network expertise Direct labor, overhead, union, operations cost, technology, quality management,

All these costs have been identified from general economic perspectives. Related information is taken from the various sources defining the working habits of the South Korean market and the USA market (Kramer, 2013).

DISCUSSION OF FINDINGS
Moving back to the USA will require assessing the above-mentioned factors. For instance, according to the research, the workers in South Korea are more productive nearly 14% than USA workers. Hence, the cost of direct labor is expected to increase. Men in South Korea can be regarded as stronger as compared to the USA as men in SK are trained for two months which has a positive impact on productivity (Kramer, 2013). Also in South Korea, there can be high parity of salaries which also offers a competitive advantage over labor. Contrary, it is also noticeable that daily grocery expense in South Korea is much higher than that of the USA and so the major portion of laborers’ earnings is expected to contribute to food requirements. In such a case, the direct labor cost is expected to undergo many variations in the USA as the daily expenses are lower and will provide laborers an opportunity to enhance their standard of living which will have an incremental effect on the labor cost.

This dominant impact will, however, will have to nullify impact from the savings in terms of saving from transportation, technological safety from leakages, closeness with the actual market, expected ease on regulation such as taxes by the government in order to increase the contribution in jobs from the manufacturing sectors. Hence, benefits, in the long run, are much more than short-term cost pressures that will arise from the shift.

Staying in SK will have short-term positive implications in terms of saving but the long-term costs will be much higher. It will not only affect the market share but heavy loss to brand name will require much more cost to revive. The associated features of the AutoEdge brand being quality, dependability, and reliable products are already at stake. Despite fact that production in SK has also provided Auto Edge with profitability in the past five years, the outsourced product may have been consistently fallen and the current situation is the final reflection that product quality has declined to the level for cost-saving that it is now unable to provide desired standard quality.

The share price of the company has already dropped from $51 per-share stock has fallen to $4 per share. Though, the decline in price is also attributed to the termination of the CEO, the ultimate concern of investors has originated from the declining value that the market associates with the share. Hence, the case if the company continues performing in the SK it may lack to attract further finance for investment, or if the case worsens it may end up in the withdrawal of investments (BBC, 2013).

CONCLUSION
AutoEdge is on the stage where top-level management is required to take strategic imperatives that enable the company to turn around the company model from cost efficiencies dominant model to more emphasis on the quality that was once the identity of the company product. Furthermore, the cost assessment has also revealed that despite short-term benefits that can be generated from the foreign markets the long-term benefits are more centered on setting up manufacturing units in proximity to markets under direct supervision and control. This proposition is also justified companies of the USA bringing back business from China as the cost parity has continued to decline (BBC, 2013).