What is the lowest cost achievable for the production and distribution network prior to the merger? Which plants serve which markets?

SUPPLY CHAIN MANAGEMENT -Chopra & Meindl Chapter 5 Exercise 4
Sleekfon and Sturdyfon are two major cell phone manufacturers that have recently merged. Their current market sizes are as shown in Table 5-9. All demand is in millions of units.
Sleekfon has three production facilities in Europe (EU), North America, and South America. Sturdyfon also has three production facilities in Europe (EU), North America, and the rest of Asia/Australia. The capacity (in millions of units), annual fixed cost (in millions of $), and variable production costs ($ per unit) for each plant are as shown in Table 5-10.
Transportation costs between regions are as shown in Table 5-11. All transportation costs are shown in dollars per unit. Duties are applied on each unit based on the fixed cost per unit capacity, variable cost per unit, and transportation cost. Thus, a unit currently shipped from North America to Africa has a fixed cost per unit of capacity of $5.00, a variable production cost of $5.50, and a transportation cost of $2.20. The 25 percent import duty is thus applied on $12.70 (5.00 + 5.50 + 2.20) to give a total cost on import of $15.88. For the questions that follow, assume that market demand is as in Table 5-9.

TABLE 5-9 Global Demand and Duties for Sleekfon and Sturdyfon.
Market N. America S. America Europe (EU) Europe (Non-EU) Japan Rest of Asia/Australia Africa
Sleekfon Demand 10 4 20 3 2 2 1
Sturdyfon demand 12 1 4 8 7 3 1
Import duties (%) 3 20 4 15 4 22 25

TABLE 5-10 Plant Capacities and Costs for Sleekfon and Sturdyfon
Capacity Fixed Cost/Year Variable Cost/Unit
Sleekfon Europe (EU) 20 100 6.0
N. America 20 100 5.5
S. America 10 60 5.3
Sturdyfon Europe (EU) 20 100 6.0
N. America 20 100 5.5
Rest of Asia 10 50 5.0

TABLE 5-11 Transportation Costs Between Regions ($ per Unit)
N. America S. America Europe (EU) Europe (Non-Eu) Japan Rest of Asia/Australia Africa
N. America 1.00 1.50 1.50 1.80 1.70 2.00 2.20
S. America 1.50 1.00 1.70 2.00 1.90 2.20 2.20
Europe (Eu) 1.50 1.70 1.00 1.20 1.80 1.70 1.40
Europe (Non-EU) 1.80 2.00 1.20 1.00 1.80 1.60 1.50
Japan 1.70 1.90 1.80 1.80 1.00 1.20 1.90
Rest of Asia/Australia 2.00 2.20 1.70 1.60 1.20 1.00 1.80
Africa 2.20 2.20 1.40 1.50 1.90 1.80 1.00

The merged company has estimated that scaling back a 20-million-unit plant to 10 million units saves 30 percent in fixed costs. Variable costs at a scaled-back plant are unaffected. Shutting a plant down (either 10 million or 20 million units) saves 80 percent in fixed costs. Fixed costs are only partially recovered because of severance and other costs associated with a shutdown.
FOR THIS REVIEW QUESTION I NEED TO FIGURE OUT 1-5

1. What is the lowest cost achievable for the production and distribution network prior to the merger? Which plants serve which markets?

2. What is the lowest cost achievable for the production and distribution network after the merger if none of the plants is shut down? Which plants serve which markets?

3. What is the lowest cost achievable for the production and distribution network after the merger if plants can be scaled back or shut down in batches of 10 million units of capacity? Which plants serve which markets?

4. How is the optimal network configuration affected if all duties are reduced to 0?
5. How should the merged network be configured?

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