Discussion board kenneth c holmes

KENNETH C HOLMES

ECON616-1601B-02

PROFESSOR KENRETT JEFFERSON-MOORE

MARCH 9, 2016

SWOT ANALYSIS FOR PRODUCTION RELOCATION TO THE U.S.

Introduction:

The time has come to make the decision whether to return auto parts production back to the U.S. or keep producing in South Korea. The first monthly activity report was just completed, and is ready for submission. In addition, management has requested a SWOT analysis pertaining to the decision of returning manufacturing back to the U.S., and the information will prove essential for the board to make the most informed decision. The following document discloses all research and findings, as well as the full SWOT analysis.

Auto Edge’s 4 decades of experience manufacturing automotive engines and transmission part, over 3 decades of supplying the top three U.S. auto manufacturers, and their previous high industry loyalty are the driving forces behind why Auto Edge must turn the situation around, and produce their products to U.S. industry standards.

After the termination of the CEO, Fred McFadden, and products failing U.S. quality standards tests, Auto Edge is faced with a diminished industry reputation that must be regained to be accepted in the auto parts industry. An investigation should also be conducted regarding why quality dropped after the previous CEO was fired. Was the CEO to blame, or did the lack of controls without the CEO cause the quality control problems?

Returning production to the U.S. would enable Auto Edge to regain quality control, use their own experienced and well trained managers and workers, and reestablish themselves as a manufacturer of quality, durable, and dependable auto parts. This move would create added costs, but Auto Edge must realize those costs support production, profitability and growth, and will raise their quality back to U.S. industry standards. Additionally, this move would bring management and production jobs back to the U.S., would raise the U.S. GDP, provide much needed stimulus to the economy, and take advantage of the current low interest rates on business loans [NA1614].

Auto Edge outsourced because of high labor costs, rigid U.S. regulations, and increased competition, and those elements are still present. Additionally, since Auto Edge was found guilty of supplying auto parts that failed quality tests, and cause the recall of millions of automobiles, their brand suffered a major reduction in acceptance by the auto industry as a whole, and by their most loyal customers. These factors must be overcome to achieve acceptance and prominence in the auto part industry.

South Korea is a strong industrial Eastern nation with a high GDP, low unemployment and inflation, and a currency (Won) that has lost value to global currencies that keeps costs low. Maintaining production in South Korea would take advantage of their low inflation rate, their reduced valued Won which keeps costs low, their existing highly educated and skilled workforce that excels in technologies, and Research and Development, and the free trade agreement with the U.S., which keeps tariffs on products shipped from South Korea low. Additionally, since South Korea offsets their high labor costs caused by strict government regulations with tax deductions and identical treatment for internal firms, their tax costs are low [NA124].

The major weakness for producing in South Korea pertains to their strict government regulations which cause high labor and real estate costs, but this is offset by tax deductions and identical treatment for internal firms.

Auto Edge keeping their manufacturing in South Korea offers many opportunities including: Auto Edge could maintain the third party facility, reinstitute and reinforce their requirements of specific product quality, and ensure compliance through routine product testing. This would enable Auto Edge to maintain their lower cost, and higher profit margins, and still produce to U.S. standards. Auto Edge could also build their own facility, managed by their own qualified and experienced management team, and hire local skilled and experienced workers. This move would ensure the quality of production necessary to meet U.S. standards. Building a new facility would create added costs, but Auto Edge must understand that costs drive revenues, and can be part of the solution when managed properly.

Because Auto Edge lost control of their quality, the third party facility started producing parts that did not pass U.S. quality tests. This must be corrected for Auto Edge to regain its standing as a producer of quality, durable, and reliable products. The South Korean Won’s reduction in value has cause many investors to pull their investments, but has not caused any major problems yet. This could be a blessing in disguise for Auto Edge, especially if foreign auto parts manufacturers leave South Korea, and lessens the competition.

In 2005, Auto Edge decided to close their Detroit production plant and outsource production to prominent South Korea facility. The reasons were simple: Auto Edge was facing high labor costs, rigid American regulations, and increased competition from other engine and transmission parts suppliers. The transition was successful, and Auto Edge achieved its goal of reducing costs and government regulations. But in 2005, Auto Edge was found guilty of supplying auto parts that failed quality tests, triggered the recall of millions of automobiles, and caused a dramatic stock value drop, and the loss of their quality reputation and loyal customers.

Top management and the Board of Directors sees the problem as the South Korea production facility, but the facility produced quality, dependable, and reliable parts for five years, until the CEO was fired. The real problem lies in quality control, and the absence of strong monitoring, testing, and maintaining of quality control guidelines.

As the analyst hired to help in the determination to stay in south Korea or return production back to the U.S., the research conduction has provided several recommendations. Auto Edge should first start with the third party production facility. Auto Edge management needs to sit down with facility management and reconfirm their quality requirements. Auto Edge should have their own management on staff to ensure all staff are performing their duties to established standards, perform product quality tests to ensure quality meets required standards, and to maintain those standards for the long term.

Auto Edge could establish their own facility in South Korea, run by their own skilled and experienced management, and hire local skilled workers. This would enable Auto Edge to establish and maintain their standard of quality, and provide continuous supervision to ensure all aspects of products meet cost and quality input and output standards. Additionally, this would take advantage of South Korea’s tax breaks, and free trade agreement with the U.S., that keeps tariffs on South Korean imports to a minimum, and keeps costs down.

Auto Edge could reestablish their production in the U.S., again run by their own experienced and skilled management team, and hire skilled U.S. workers. This move would accomplish several things including: putting more U.S. workers back to work reducing the unemployment level, increase the U.S. GDP, and reestablish Auto Edge as the industry leader of quality, durable, and reliable auto parts.

Auto Edge must understand that in either scenario, building a plant in South Korea or the U.S., that costs will be incurred, and that costs are the driving force behind revenues. Both scenarios will require a full cost analysis including NPV, IRR, and WACC. The decision will come down to whether the third party facility will be able to return production to the level of quality necessary to meet U.S. standards. If this cannot be accomplished, then building a production facility in South Korea or the U.S. must be considered.

Auto Edge also needs to secure an experienced and qualified CEO to reestablish their quality standards, ensuring those standards are adhered to and maintained, and manage the growth of Auto Edge. The absence of a CEO put Auto Edge in danger of not reestablishing their required levels of quality, and not regaining their position as a producer of quality, durable, and reliable auto parts. These goals are essential for Auto Edge to regain their reputation.

A price increase would not be recommended until Auto Edge has consistently produced auto parts to U.S. quality standards, and would not likely be instituted for several years. It would be unwise to push a price increase, as Auto Edge needs to reprove itself, and rebuild its loyal auto industry customer base.

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