Sands Corporation

...

Problem statement

Which site between Kimberley and Hampton should Sands Corporation select so that order can be delivered on time with minimum risks and maximum gains.

Alternatives

- Option A: Select Kimberley as new plant location and increase the labor wage rate (by 5(average increase) + 5(additional)=10%) to prevent strike

- Option B: Select Hampton for setting up a new plant and poach workers from industries in nearby towns by giving them higher wages (5% more than the current rate)

Criteria For evaluation

CRITERIA

WEIGHTAGE

- Effect on timely delivery of defence contract (i.e.10th April)

0.5

- Cost of setting up new plant

0.3

- Effect on Product line expansion

0.2

Evaluation of options

- Option A: Cost and effort of setting up a plant is less in Kimberley owing to cheaper utilities and surplus labor. But the formation of union in new plant is a threat as it could lead to strikes and affect timely delivery of contract. To prevent strikes, we can increase the wages in March 1962 (when 1-year contract ends) by additional 10% as shown in table below.

Assume 250 working days

wages

Total cost

Skilled

300

2.47

185250

Semi-skilled

150

2.035

76312.5

Unskilled

150

1.65

61875

Total

323437.5

Hence the total cost of setting up plant is 323437.5+77578=1099222.5$. Kimberly plant can be of limited use for product line expansion as there is only 2 acres of land available with limited scope for expansion.

- Option B: Costs and effort required in setting up a plant in Hampton is high due to non-availability of labor which might affect delivery due date. Absence of worker union eliminates risk of strikes. Labor problem can be solved by poaching workers from nearby towns by giving them higher wages (5% higher than current rate). From table A, total cost setting up Hampton plant is 1249980$. Area of Hampton plant is 10 acres with large scope for product line expansion.

RECOMMENDATION

Total cost

Option A (Kimberley plant)

1099222.5

Option B (Hampton plant)

1249980

Opportunity cost

1249980-1099222.5=150757.5

The opportunity cost of choosing Hampton as the plant location is 150757.5$ which could have been saved if Kimberley was chosen. But this additional cost can be offset by net income of 1400000$ in 1961 (refer exhibit 1). Long term benefit of selecting Hampton is more owing to product line expansion, Government support, absence of union, cheaper wage rates and more bargaining power with the company as it is the sole manufacturing unit. Hence selecting Hampton as the plant location is recommended.

Action plan

- Give2% incentive (i.e. 2% of 600000=12000$) to the contractors to finish plant construction within 4 months (i.e. december).

- Provide training to available workers in Hampton who do not have experience in machine tools operation in branch plants.

- Hire skilled workers working in nearby large cities by giving higher wages (5% more than current rate).

contingency plan

Contingency plan is to depute workers from branch plants in Hampton plant in case we are not able to poach skilled labor from nearby cities. Production volume needs to be lowered in branch plants for short term to provide more labor for fulfilling government contract.

exhibit 1

year

net sales

net income after taxes

1942

19000000

781000

1943

24114000

605232

1944

24091000

702401

1945

22091000

480223

1946

20245000

472403

1947

20110000

503527

1948

20102000

662153

1949

19022000

292078

1950

24052000

1200042

1951

27187000

1417984

1952