Case 2

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Operation Management (Universitas Gadjah Mada)
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Case Study: Finding a Location from Electronic Component Manufacturing in Asia
1. Background
ACM is an electronics component manufacturer that has been located in Singapore
since 1991, supplying original equipment manufacturers (OEMs) with quality components. In
the past several years, ACM has experienced increasing pressure from other manufacturers
located in other countries. In Singapore, while labor remains quite inexpensive, there has
been a relatively steady increase in labor costs. In addition, utility costs – most notably water
and energy costs – have led the firm to contemplate moving operations elsewhere in Asia in
an attempt to make the firm more competitive.
ACM remains profitable, but margins have shrunk, and management is interested in
ensuring that the firm remains competitive in the medium term to long term against other
component manufacturers. A team of senior management has formed a committee to reach a
decision regarding possible relocation. The committee has identified two additional locations
as possible candidates for relocation: Hong Kong (People’s Republic of China [PRC]) and
Kuching (Malaysia). Hong Kong’s main attractions stem from the fact that since 1997, when
its sovereignty was transferred back to the PRC, labor costs have decreased as access to labor
has increased. Hong Kong enjoys a large seaport and very good transportation infrastructure,
and this is important in moving in raw materials and moving out finished components to
customers.
Senior management believes that an increasing number of OEMs will move to the
PRC in the next several years, as has been the case in the past decade. Twill only increases
the attractiveness of locating the manufacturing facility in Hong Kong. Kuching is located in
the Malaysian province of Sarawak, on the island of Borneo. It is the fourth largest city in
Malaysia and home to a population of around 650,000. Several points make Kuching
attractive to the relocation committee.
First, locating here would give access to natural resources and other production
inputs. Second, the transportation infrastructure is good, and the city hosts a deep sea port for
moving raw materials in and finished good out. That said, the port is not as large or
accessible as those of Hong Kong or Singapore, and several committee members have
expressed concern about the frequency of ship visits to Kuching. If the port does not receive
regular service from container ships, transportation costs to ship components to OEMs will
doubtlessly stable and inexpensive in Malaysia.

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The committee has contracted the government of Singapore to elicit possible

incentives to not relocate to another country. Singapore is offering a fiveyear exemption on
taxes for ACMif the plant remains in Singapore. The government will also assist by partially
subsidizing labor, water, and energy costs for five years. Committee members realize that the
Singapore plant, which has been operating for years, has already been amortized, and opening
a new plant would require additional capital costs.
That said, opening a new factory would also provide an opportunity to upgrade
production equipment to more productive and energy efficient alternatives.
2. Problem Statement
1) What advantages and disadvantages does each potential location offer?
2) What other relevant factors that are not mentioned in the case study might play a role
in this decision?
3) Why is transportation infrastructure so important in this decision?
4) This is a long Term, strategic decision: What Factors might change in the next 10 to
20 year? How will this influence the decision?
5) Which alternative would you recommend? Under which circumstances?
3. Analysis
Country Advantage(s) Disadvantage(s)
Singapore Relatively cheap labor Increasing of labor and utility costs
Good transportation infrastructure Old plant/factory which is less productive and energy-
Government incentives if stay : efficient
5-year of tax exemption
Subsidizing labor, water and energy cost for 5
years
No need to build new plant
Malaysia Easy access to raw materials and vast natural Concern with frequency of ship visits as Kuching port is not
resources as ‘well-known’ as Singapore and Hong Kong port.
Inexpensive labor
Transportation infrastructure is good and has a
deep sea port for moving in and out the goods
Hong Consistently cheap labor Need to build the plant/factory on an expensive land as Hong
Kong Good transportation infrastructure (busiest Kong is an island with most densely populated area in the
port) world.
1) What advantages and disadvantages does each potential location offer?
After distinguish advantage and disadvantages from each option, I would look for other
factors that have not been described in this case, which may influence in choosing the
location has to offer. For example, labor costs, utility costs, raw material costs , transport
costs , exchange rates and political stability will impact the profitability. In this case I prefer

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Hong Kong as a place suitable for the relocation of the ACM, because Hong Kong has a good
transport infrastructure and cheap labor. While Singapore has labor and utility costs are high,
and Malaysia have a little visit.
2) What other relevant factors that are not mentioned in the case study might play a role in
this decision?
Since ACM is reliant on logistics for raw materials and transporting final product to
customers, transportation costs current and expected development of the costs will surely
have a large impact on the decision
The other factors that might play a role in the decision making are:
a) Education of the workforce (both current workforce and future generations). This

includes labor talent and attitudes towards the work.
b) Political stability of each country
c) Exchange rates and currency risk
3) Why is transportation infrastructure so important in this decision?
ACM rely on the logistics in order to move in the raw materials and move out the final
product to customer. The transportation cost the incurred will definitely give bigger impact
on the decision of relocating to new location. ACM can easily transport their product to other
country or to customer within stipulated time given. Currently, Hong Kong enjoys a large
seaport and very good transportation infrastructure, and this important in moving raw
material and moving out finished good to customers. The customers are geographically
dispersed, making access to a seaport very important in delivering goods to customers.
4) This is a long term, strategic decision: What Factors might change in the next 10 to 20
year? How will this influence the decision?
Since the plant will pay-for-itself over a long period of time, the decision relevant to costs

must be examined not only at their current level but also how this is expected to develop over
the years. For next 10 to 20 years several criteria need to be considered such as:
 Changing political stability
 Local economy stability

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 The rise of income of poverty
Aside to that, the plant will pay over a long time horizon, Decision relevant cost must be
examine, not only at their current level but also how this is expected to develop over the
horizon. Example of the costs which are likely to change and whose change would make a
break the decision would include labor costs, utility costs, raw material costs, transportation
costs, also others which are difficult to predicts, such as exchange rate and political stability
will impact the profitability.
4. Solution
5) Which alternative would you recommend? Under which circumstances?
I would probably recommend Singapore as a place suitable for the ACM, because we do
not need to rebuild and still got a lot of benefits from the government. Then after all of
the benefits in the Singapore is expired, ACM probably need to move and make another
choice of location, except ACM got some compensation from the government. Moving
big plant would probably have high cost and the assets left behind would go to waste.

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lOMoARcPSD|5379234

Operation Management (Universitas Gadjah Mada)

StuDocu is not sponsored or endorsed by any college or university

Case Study: Finding a Location from Electronic Component Manufacturing in Asia

Downloaded by Ryle Timog ([email protected])

The committee has contracted the government of Singapore to elicit possible

1) What advantages and disadvantages does each potential location offer?

Downloaded by Ryle Timog ([email protected])

a) Education of the workforce (both current workforce and future generations). This

Since the plant will pay-for-itself over a long period of time, the decision relevant to costs

Downloaded by Ryle Timog ([email protected])

Downloaded by Ryle Timog ([email protected])

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