Jaguar Electronics, Inc. is a specialized electronics firmlocated in Charleston, South Carolina in the United States. Thecompany was founded in 1965 and has enjoyed success and modestgrowth as a supplier of components to large manufacturers ofspecialty electronic-mechanical devices. Recently the company'smanagement has decided to begin manufacturing and marketing aproduct called the 'Airflow'. The Airflow is manufactured byassembling two component parts:

(1) mechanical assemblies (MA), which are purchased from acompany in Belgium; and

(2) electronic assem­blies (EC) manufactured by JaguarElectronics at its Charleston facility.

Jaguar Electronics has manufactured and supplied the electronicassemblies to several national manufacturers of products similar tothe Airflow for several years. Most of the consumer demand for thefinal products comes from areas enjoying a relatively warm climatethroughout the year. Accordingly, the manu­facturers of thoseproducts have sold their goods with great success throughout thesouthern and southwest­ ern United States. The population andeconomic growth in these areas have contributed greatly to thesuccess of this type of consumer product.

The man largely responsible for Jaguar Electronics' proposedmove into manufacturing and marketing Air­ flow is the companypresident, Mr Smith. He has spent his entire career in theelectronics industry and was with Jaguar Electronics for severalyears before becom­ ing its president. His reign as president hasbeen very successful. However, he has viewed the impressive salesgrowth of EC units with mixed feelings. As a supplier of ECcomponents, Jaguar Electronics has prospered from the growth insales of products such as Airflow. However, Smith has always feltthat his company was not reaping all of the benefits available insales to the consumers. At the same time he felt that JaguarElec­tronics did not have the resources to compete success­ fullywith the large firms that dominate the US market. Smith employed aconsultant to determine where increasing consumer demand forAirflow-type prod­ucts would approach a level sufficiently high tojustify entering these smaller markets. After reviewing theconsultant's recommendations, Smith decided that Jaguar Electronicsshould target two of the higher-income countries in Latin America,Country 1 and Country 2. These nations, because of the incomelevels in particu­ lar cities, had the potential to be lucrativemarkets for Airflow. The consultant estimated the potential demandfor Airflow to be 20,000 units per year in Country 1, and 40,000units per year in Country 2.

The consultant had also recommended four options available toJaguar Electronics as to how the widgets could be produced anddistributed to these markets:

1. Assemble the widgets in Charleston and distribute them fromthat point.
2. Assemble them in Country 1, and distribute them from thatpoint.
3. Assemble them in a free trade zone in Country 2.
4. Assemble them in a free trade zone in another coun­try, Country3, which had no significant potential domestic market for Airflow,but a lower labor cost.

Smith held a meeting to brief his production manager, Daphne R.Feldblum, and his distribution manager, Karl Q. Winklepleck, on theproposed Airflow venture and the consultant's recommendations. Bothhad been with the company for several years.

After briefing the two managers, Smith asked: 'What course ofaction would you recommend?' Feldblum replied: 'We should probablyassemble them where the labor cost would be lowest.' Winklepleckcommented: 'We should also consider transportation rates, insurancerates, import duties, and free trade zones.' Smith decided thatFeldblum and Winklepleck should work together to compile theinformation nec­essary for making the best possible decision.

Two weeks later the information shown in Tables 13.2 and 13.3had been compiled.

With the data available, Smith had a meeting withFeldblum,Winklepleck, and a member of the corporate legal staff to discusswhat should be done. The meeting went poorly. Feldblum stillbelieved that the company should locate assembly in the place withthe lowest labor cost. Winklepleck realized that he should haveprovided a spreadsheet indicating total costs associated with eachapproach.

Table 13.2 Cost, demand,weight, and tariff data

Annual demand in Country1              20,000 units

Annual demand in Country2               40,000 units

Labor costs for assembly

inCharleston                                 $5.00/unit

in Country1                                   $4.50/unit

in Country 2 free tradezone           $4.00/unit

in Country 3 free tradezone            $3.75/unit

Cost of components

MA,FOB Brussels{Belgium)           $25.00/unit EC, FOBCharleston               $30.00/unit

Product weight

MA                                                  60 lb/ unit

EC                                                  40 lb/ unit

Airflow                                          100 lb/ unit

Import duties as apercentage of price paid)

United States	5%
Country 1	10%
Country 2	10%
Country 3	25%

Table 13.3 Combined rates for transportationand insurance between respective points

(Note: Projected sales volumes would justify shipping bycontainer load. Though shipping rates would actually be charged percontainer load, for ease of calculation the rates below are shownas dollar costs per hundred pounds ($/cwt). If products wereshipped in less­ than-container loads, rates would be muchhigher.)

From	To	Rate, $/cwt
Belgium	us	1.65
Belgium	Country 1	3.50
Belgium	Country 2	3.00
Belgium	Country 3	3.75
us	Country 1	2.50
us	Country 2	2.25
us	Country 3	3.00
Country 1	Country 2	1.25
Country 2	Country 1	1.25
Country 3	Country 1 or 2	2.00

Footnote by Winklepleck: Ocean freight shipments from Belgium toCountry 3 are very infrequent.

The total cost figures for assembling in Charleston and Country3 appeared to be very close. If it was possible to obtain some typeof free trade area in Charleston, or if the US government couldrefund duty on the component MA when the finished product wasexported, Charleston would actually be less expensive. In anyevent, figures for all of the combinations should be carefullycalculated.

Winklepleck also had some questions in his mind that he wonderedif he should raise. They seemed to be important, but the presidentmight not be pleased to have them brought up. If assembly were tobe done overseas, how would quality be controlled? Should thecompany consider making a product for export that it thought itcouldn't market successfully in the United States? Did the companyhave the resources needed and was it prepared to make the effortrequired to begin marketing internationally: establishing market­ing channels, product promotion, etc.? How Jong would it take toreach the projected sales overseas, and what would be needed topromote the product? How sure could they be that they could eversell the expected number of units in each of the two overseasmarkets?

Questions to be Answered: Try Solving UsingExcel

1. Calculate the total costs if the Airflow is assembledin Country 1 vs. Country 2, vs. Country 3. Note that Country 2 and3 have a foreign trade zones and Country 1 does not. Note also thatcalculations should be done for total sales to supply the twocountries.
2. Which country should they select to assemble theAirflow to maximize profit?
3. If the duty rate for Country 2 increases to 20%, howwould this change your answer in question #2?