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Sample Case Study : ACC Inc#

Disclaimer: This is a model case study which has been purely developed for Academic purposes. Any resemblances to any actual company is purely coincidental. This case study was developed by Dr Arunachalam Narayanan of Texas A&M University.

ACC Inc., a leading UPS (Uninterrupted power supply) manufacturer in the world is reevaluating its supply chain structure. Their current supply chain involves assembling all components at its Philippines plant and shipping to customers in US and Asia. For the US markets, the customers are served from the Philippines plant via a DC in Los Angeles. Over the years the demand for UPS systems has risen throughout the world and ACC’s is struggling to meet the customer demand from its single facility in Philippines. The demand in US represents 50% of ACC’s revenue while Asian countries represent the other half. ACC also has a lot of inventory in transit since the products are shipped through slow moving ocean containers. Air shipment is not an option as these products are very heavy. The high demand along with rising shipping costs, forecast inaccuracies requiring expedited shipments, and a desire for greater flexibility are forcing the company to reevaluate its supply chain network. They are looking at a number of alternative scenarios, one of them is to increase the capacity at its Philippines facility and the other one is to set up another plant in Mexico to serve the US market.

Here are some detail numbers about the company’s current supply chain network

ACC sells about 10 million UPS units, 50% of which is sold in US and the rest in Asian countries. The demand in US is split across all the 50 states by population. The demand across the Asian nations is listed in the table below.

Asian Country Demand Distribution among Asian countries

China 30%
India 20%
Japan 20%
Malaysia 10%
Philippines 10%
Singapore 10%

UPS’s Bill of Material
The system is assembled using materials from Philippines and other Asian countries. The system needs four distinct units, namely a battery, an AC Unit, a controller and four fuses. The inventory value, weight in lbs and items per pallet (A traditional pallet can carry about 6000 lbs) are provided in the table below.

Product Name Inventory Value Weight (lbs) Items Per Pallet
Battery 20 6 1000
AC Unit 10 1 6000
Controller 5 0.5 12000
Fuses 0.5 0.05 120000
The final assembled unit has an inventory value of $60 and weighs about 10 lbs and 600 items can be fitted in a pallet.

Flow of products in Supply Chain
The AC units are manufactured in a plant in Malaysia; the batteries are manufactured in China and the fuses are sourced at a plant in Philippines. All of them are shipped to the ACC plant in Philippines through appropriate transportation modes (ocean and full truck load/FTL). The controllers are manufactured at the ACC plant itself, so there is no need for transportation. The finished units are shipped as full truck load (FTL) to markets in Philippines and by ocean carriers to other markets in Asia. For US, the customers are served from Philippines via a DC in Los Angeles. The finished units are shipped from the DC by FTL mode to different states in US.

The material cost and labor cost (Value Add Manufacturing cost /VAM) at the various facilities are provided in the following table.

Facility Location Product Name Material Cost VAM
Malaysia AC Unit 5 2
China Battery 12 3
Philippines Fuses 0.2 0.1
Philippines* Controllers 2.5 1
Philippines* UPS 20 8
'*'Same facility

The warehousing costs in different countries are as follows
Activity Malaysia China Philippines US
Dispatching Storage Unit (Pallet Out) $3.12 $2.86 $2.80 $5.21
Monthly Cost per Storage Unit $7.84 $7.27 $7.00 $13.22
Reception of Storage Unit(Pallet In) $2.00 $1.83 $1.80 $3.33

The fixed yearly costs (not the actual cost) of the facilities which ACC pays for are as follows
Facility Location Product Name/Services performed Facility Cost
Philippines Controllers and UPS $300,000
US DC $120,000

Customs Duties
In Philippines, if the product is manufactured and shipped within any Asian countries, there is no need to pay custom duties when transporting the products. ACC would have to pay about 15% duty in US on units received from any Asian country.

Transportation Cost and Times
The appropriate (indicative) transport rates, hubbing costs and times should be used. (SimFlex Lite automatically updates these values based on the current market scenarios)

Inventory costs
ACC assumes an inventory rate of 15% which covers capital and non-capital costs (including obsolescence, mark-downs, depreciation and insurance). We already account for storage and taxes. (Note: This cost could be changed by clicking on “Model properties” and changing the Capital cost percentage)

ACC follows lean manufacturing strategies and has very strict safety stock requirements in its supply chain. They stock only one week supply of AC unit, battery, fuses, controllers and finished UPS units at the Philippines factory. All manufacturing facilities should have one week worth of safety stock. Ten days worth of finished UPS units is stocked in the forward DC in Los Angeles.

Alternative Scenario
ACC is now considering supplying US market from a new plant in Mexico. The finished UPS units in the Mexican Plant would be sold to markets in US, while the Philippines plant would continue supply the Asian market. All products necessary for manufacturing UPS unit in Mexico are been imported in Mexico by ocean routes. The ACC’s Mexican Plant, like Philippines, would also manufacture the control units for the product. The custom duties for products imported into Mexico from Asia are about 6% and there are no custom duties for products transferred within NAFTA countries. ACC expects the initial fixed yearly cost of facility in Mexico to be about $300,000. The products from Mexican Plant are directly shipped to US DC in full truck loads. The material cost at the Mexican facility is about 10% higher than the Philippines counterpart because of transportation and additional custom duties; on the other hand the VAM costs are lower by about 15%. ACC maintains 10 days’ supply of inventory of all products at the Mexico site and the same inventory standards at other facilities, with the exception of US DC where the inventory drops to just 2 days. The warehousing costs of this new facility Mexico are as follows: $2.92 (Pallet Out), $9.97 (Monthly Storage) and $2.27 (Pallet In).

1) All safety stock entries in SimFlex Lite are in days, use the appropriate values. 2) ACC is looking at the entire market (Asia and US) together and the analysis should also be done in the same way. 3) The short term cost of closing and opening a new facility is not a major cost component for ACC Inc. and all currency fluctuations are considered to be negligible in this analysis. 4) Make necessary assumptions if needed. If you have additional questions do not hesitate to contact me.

Key Question:
Should ACC continue supplying the US market from Philippines or should they open a new assembly facility in Mexico? Justify the answers with both qualitative and quantitative reasons.