Case 9
Eastern Waves, Inc.

Summary

Mr. Patton, vice-president of purchasing for Code C, Inc., is concerned about a price increase from a Malaysian supplier. Last summer Code C was celebrating a 60 percent cost reduction based on replacing their major specialty steel supplier with Eastern Waves, in Kuantan, Malaysia. Eastern Waves is a small steel manufacturing company in Malaysia. It has several plants in Malaysia and China and produces various downstream steel products such as angle steel, I-beam, and round bar. The angle steel plant is located in Kuantan, Malaysia. The production method of the angle steel is called continuous rolling, and the key raw material ingredient for angle steel production is billets. When operating …show more content…

Direct costs (labor and materials) are what make foreign products attractive. Exclusive foreign costs and administrative costs tend to be fixed in nature and are more often absorbed in the final sale of the product.

As an example, the labor force at Eastern Waves consisted of 40 employees, and the Eastern Waves cost structure consists of the following components:

1. Absentee costs (exclusively foreign)
2. Airfare costs for foreign workers (exclusively foreign)
3. Hiring and firing costs (administrative and common)
4. Living expenses (exclusively foreign)
5. Taxes (common and foreign)
6. Turnover costs (exclusively foreign)
7. Wages (common)

As can be seen, the cost structure for both local and foreign employees is complex. Local employees have higher absentee cost than foreign workers. However there are airfare costs associated with foreign workers. There is no cost associated with firing foreign workers. Hiring costs for foreign workers are five times higher workers. Living expense is provided for foreign workers. Taxes are levied on all foreign employees. There are no taxes levied on local workers. Turnover cost is the cost of replacing either foreign or local employees. Turnover costs are in addition to hiring and firing costs. Finally, each employee is paid RM 1500 per month.

2. How can Code C avoid future sourcing disruptions?

A plant visit would have been an excellent method for