Analysis & calculations
- Allocating interior fitting in Switzerland does not require any investment but implies higher labor cost of €M 14.6 (= 25% * €M 58.6) versus module production
The percentages shown in Diagram 1 refer to the labor share in hours (NOT the total cost share). In addition one can discuss whether it is reasonable to assume that total labor required is equal across all production sites. Sites may have a higher degree of automation and thus require less labor.
- All other value creation steps require a higher share of expensive labor cost in Switzerland and/or additional re-tooling investments
- Accordingly, it is advisable to allocate all value creation steps up to final assembly in Italy and then trail the cars to Switzerland for interior fitting
- Total manufacturing cost in this scenario is €M 73.2 (25% * €M 117.1 + 75% * €M 58.6)
- Fixed cost is €M 21.2 (lease + dismantling)
- New total profit is €M 79.6, new total profit margin is 13%
With production and final assembly in Italy and interior fitting in Switzerland, the project meets the customer’s specification on local value creation and the company’s minimum margin requirement
The analysis is divided into three parts; the interviewee should present a conclusion in each section based on the information available, and then refine his calculations based on the findings and new information shared by the interviewer. The interviewee should actively ask for the assumptions and data that are needed to run the analysis.
Pitfalls include: € vs. CHF currency, cars vs. trains