MBB Second Round - TitanTrail - "Made in the USA" Operations Outsourcing

We will first calculate the cost to reproduce a low-quality backpack in the US. We can then take this figure and calculate the profit per backpack made in the US. If we repeat this set of calculations for backpacks made in Cambodia, we can compare the overall profit per backpack made in the US versus Cambodia.

Step 1 - Cost to reproduce low-quality backpack in the US

$35 + $25 = $60

Step 2 - Profit per backpack made in US

$100 - $35 - $25 - $10 - (1/20 * $60) = $27

Step 3 -  Cost to reproduce low-quality backpack in Cambodia

$20 + $5 + $10 + $5 = $40

Step 4 -  Profit per backpack made in Cambodia

$100 - $20 - $5 - $10 - $5 - (1/5 * $40) = $42

Conclusion:

Therefore, profit per backpack is $15 higher if made in Cambodia than if made in the US. From a cost perspective, outsourcing is better.

The interviewee may ask for 10-15 seconds to structure her thoughts – this is recommended. Remember to the interviewee (if needed) that profit per back in US is $27 in US and  $42 in Cambodia.

Step 1 - Total profit if made in US:

$27 * total customers (x) = $27x

Step 2 - Total profit if made in Cambodia:

$42 * (total customers - 35% of total customers) = $42 * (x – 0.35x) = $27.3x

Step 3 - Change in profit:

($27.3x - $27x) / $27x = 1.11% increase in profits

Conclusion:

Outsourcing to Cambodia still results in ~1% higher profits. However, the incremental profit is small and may not justify the risks of outsourcing.

The interviewee may ask for 10-15 seconds to structure her thoughts – this is recommended. Encourage the interviewee to brainstorm top down, starting with a little structure to generate more ideas.

• Economic downsides
  • Economic downsides may include higher working capital costs since cash will be tied up in inventory that takes six months to be delivered
  • Potentially higher likelihood for lost products since these backpacks are in production and transit for so long
• Operational downsides
  • Requires forecasting customer demand at least 6 months in advance since lead times are 6 months
  • Slower reactivity to swings in customer demand; if customer demand is too high or too low, it will be difficult to adjust production levels quickly
  • Slower reactivity to production defects since the company won’t know until 6 months later when the product arrives

HOLDING COST

Step 1 -  Holding costs of 300 leftover backpacks:

($1 * 200) + ($2 * 100) = $400

Step 2 -  Holding costs of 400 leftover backpacks:

($1 * 200) + ($2 * 100) + ($3 * 100) = $700

Step 3 -  Holding costs of 500 leftover backpacks:

($1 * 200) + ($2 * 100) + ($3 * 100) + ($4 * 100) = $1,100

Step 4 - Average holding costs:

(25% * $400) + (50% * $700) + (25% * $1,100) = $725

Step 5 - Average holding cost / backpack ordered:

$725 / 1,000 backpacks = $0.725
 

Conclusion:

Therefore, the average holding cost per backpack ordered is $0.725.

IMPACT ON PROFIT

Step 1 - Total profit of backpacks made in US:

$27x (x = number of customers)

Step 2 - Total profit of backpacks made in Cambodia:

($42 - $0.725) * (x - 0.35x) = $26.8x (rounded)

Step 3 - Change in profit: 

($26.8x - $27x) / $27x = -0.6%

Conclusion:

Therefore, once we take into account holding costs, it no longer makes sense to outsource to Cambodia. Costs would be higher and profits would decrease by 0.6%.

Recommendation: TitanTrail should not outsource to Cambodia.

• Reason 1: Outsourcing would reduce profits. While production costs are lower in Cambodia, higher holding costs and lost customers offset those savings. In fact, profits would drop by 0.6% if TitanTrail outsourced.
• Reason 2: Cambodia’s 6-month lead time is far longer than the 1-month lead time in the US. This creates problems like higher working capital costs and slower responses to customer demand or production issues.

Risks of Inaction:

• Competitor Advantage: If competitors successfully outsource while maintaining quality, they may offer lower prices or achieve higher margins, leaving TitanTrail at a disadvantage.
• Scaling Challenges: As TitanTrail grows, operational costs will increase. Without addressing this challenge now, the risks and costs associated with inaction could become even greater over time.

Next Steps:

• Explore other countries with lower outsourcing costs.
• Benchmark against competitors to align production strategies.