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Luca

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1

Interior fitting in Switzerland

I was wondering whether somebody could explain me a little bit better why allocating the "interior fitting" in Switzerland is the best choice in the final part of the case (and not, for instance, the first part of the process "Module Producion")

Thank you

I was wondering whether somebody could explain me a little bit better why allocating the "interior fitting" in Switzerland is the best choice in the final part of the case (and not, for instance, the first part of the process "Module Producion")

Thank you

1 answer

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Hello Giovanni,

The answer to your question is clearly stated in the text:

All other value creation steps require a higher share of expensive labor cost in Switzerland and/or additional re-tooling investments

The reason is that producing in Switzerland is more expensive because of the labor costs and of the re-tooling investments needed. Anyway, you have to consider thefollowing assumption:

In the discussion of your findings with the client’s management, the Head of Sales notes that the state-owned Swiss rail operator will require a share of local value creation (= share of work to be done in Switzerland) of at least 20% in the contract

In order to have the minimum cost of production, your objective is to have the minimum value of the sum of re-tooling investments + Increase in labor cost. Let's compare the choice that you were mentioning:

  1. Do the "Module production" in Switzerland:
    • Labor cost increase = Cost of labor in Switzerland - Cost of labor in Italy = 20% (117.1 M€ - 58.6 M€) = 11.7 M€
    • Re-tooling investment = 6.0 M€
    • Total= 17.7 M€
  2. Do the "Interior fitting" in Switzerland:
    • Labor cost increase = Cost of labor in Switzerland - Cost of labor in Italy = 25% (117.1 M€ - 58.6 M€) = 14.7 M€
    • Re-tooling investment = 0 M€
    • Total= 14.7 M€

Does it make sense?

Best,
Luca

Hello Giovanni,

The answer to your question is clearly stated in the text:

All other value creation steps require a higher share of expensive labor cost in Switzerland and/or additional re-tooling investments

The reason is that producing in Switzerland is more expensive because of the labor costs and of the re-tooling investments needed. Anyway, you have to consider thefollowing assumption:

In the discussion of your findings with the client’s management, the Head of Sales notes that the state-owned Swiss rail operator will require a share of local value creation (= share of work to be done in Switzerland) of at least 20% in the contract

In order to have the minimum cost of production, your objective is to have the minimum value of the sum of re-tooling investments + Increase in labor cost. Let's compare the choice that you were mentioning:

  1. Do the "Module production" in Switzerland:
    • Labor cost increase = Cost of labor in Switzerland - Cost of labor in Italy = 20% (117.1 M€ - 58.6 M€) = 11.7 M€
    • Re-tooling investment = 6.0 M€
    • Total= 17.7 M€
  2. Do the "Interior fitting" in Switzerland:
    • Labor cost increase = Cost of labor in Switzerland - Cost of labor in Italy = 25% (117.1 M€ - 58.6 M€) = 14.7 M€
    • Re-tooling investment = 0 M€
    • Total= 14.7 M€

Does it make sense?

Best,
Luca