Case: Hard Disk Drives

You are an OEM $($original equipment manufacturer$)$ of hard disk drives $($HDD$)$ and have a global presence in the HDD market. You have HDD assembly plants in multiple locations around the world and you now intend to set$-$up an assembly plant of HDD in the U$.$S$.$ to cater primarily to the North American market. In doing so you can gain substantial cost savings, mainly on the import duty that was levied on the HDDs$,$ that you were previously importing into the U$.$S$.$ Additionally, you would also gain savings on the logistics$,$ packaging and inventory costs by setting up production closer to the market.

You have found new local suppliers for the different components of the HDDs except for the slider and head subassembly $($which is used to read and write data on to the magnetic storage device$).$ For the slider$-$head sub$-$assembly you would have to either depend upon your global supply base or produce it in$-$house for the U$.$S$.$ market. At present you have $3$ suppliers of the slider and head subassembly. They are based in Thailand, Taiwan and Mexico. There are $3$ main cost drivers for the slider and head subassembly: $(1)$ Materials cost, $(2)$ Manufacturing costs and $(3)$ Other costs. Overall, the per$-$unit cost of slider and head subassembly averages to around $$2\mathrm{.}4.$

A more detailed breakdown of cost are as follows:

Materials costs: $$2$ per unit

Slider material: $$0\mathrm{.}20$

Head material: $$1$

Yield adjustment: $$0\mathrm{.}80$

Manufacturing costs: $$0\mathrm{.}1$ per unit

Assembly: $$0\mathrm{.}07$

Testing: $$0\mathrm{.}03$

Other costs: $ $0\mathrm{.}3$ per unit

Corporate overheads: $$0\mathrm{.}1$

R&D: $$0\mathrm{.}2$

Total costs: $$2\mathrm{.}4$ per unit

Note that these costs are only average cost figures. However, your three suppliers$$ costs might vary. They might incur some additional costs like transportation and duty tariffs. Given below are the costs of your $3$ suppliers:

Thai Supplier:

The material cost of this supplier are $6\%$ less than average. Its manufacturing costs are $10\%$ lower, due to low$-$wage labor. However, this supplier incurs a duty of $3\%($of total cost$)$ on the slider and head subassemblies imported into the US and incurs a logistics cost of $2\%($of total cost$).$

Taiwanese Supplier:

As a result of better production technology and lean practices the Taiwanese supplier incurs $13\%$ less cost on yield adjustments. However, like the Thai supplier, the Taiwanese supplier too incurs duty of $3\%$ and logistics cost of $2\%.$

Mexican Supplier:

Its material, manufacturing and other costs are as listed above. However, the Mexican supplier does not incur any duty cost and its logistics cost are $1\%.$

In the U$.$S$.$ market you sell HDDs with different specs $($e$.$g$.$ storage capacity$),$ however all your HDDs use the same slider and head sub$-$assembly. Your forecast for the sales of hard$-$disk drives in the U$.$S$.$ market is around $100$ million units over the next $10$ years.

Besides sourcing the slider$-$head subassembly from the suppliers you have the option of producing the sub$-$assembly in$-$house. In fact you can bring$-$up a slider$-$head subassembly unit right next to your HDD assembly plant. To build a capacity that can cater to your $10$ year demand of HDDs in the U$.$S$.$ market would cost you about $$5$ million. You estimate that the present HDD technology might have a lifetime of $10$ yrs before it gets replaced by alternate mass storage devices which might not require the slider$-$head subassembly $($e$.$g$.$ flash memory$).$ The advantage of in$-$house production for slider$-$head sub$-$assembly is that you can save on the inventory cost of the sub$-$assembly due to better coordination between your HDD assembly plant and the sub$-$assembly production plant. You estimate these savings to be around $50,000$ slider$-$head subassembly units per year on average $($assume inventory cost at $40\%$ of subassembly cost$).$ Your own production cost would be same as that of the Mexican supplier less the logistics cost and the inventory costs.

Q$1)$ Answer the following questions

A$)$ Would you decide to make or to buy the slider$-$head sub$-$assembly? Give a quantitative explanation for your answer $($assume that you do not discount future earnings$).$