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STRYKER CORP: IN-SOURCING PCBS

Qstn. 1) State the business case for option #3, the PCB In-Sourcing proposal.

For this case study of Stryker Corporation, it can be seen that option three (to manufacture its own
PCs in its own facility near company headquarters) can be consider as the best alternative to adopt
because of several reasons. At first, if the company adopting in-sourcing option, it able to exercise full
control in their supply chain where it can help to increase the degree of quality along with the delivery
of products in turn. Another reason is related to the transportation and able to reduce the cost of
logistic as the facility will be located near to the companys headquarter. Plus, the manufacturing cost
along with in-housing manufacturing of PCBs will be tax deductible where enable the company to
make its tax obligation lower during the early years of manufacturing. Moreover, the depreciation
applied on capital and IT equipment with respect to the initial investment will also be tax deductible.
Besides that, if the company goes for option number three, then it will be able to achieve efficiency in
terms of production that will increase the profitability of Stryker Corporation in turn.

In short, the benefits that the company will get from this option is better control in quality,
delivery and cost. In addition, it will help to maintain the business stability, supply PCBs to other
Stryker business and able to implement cost shift and avoid tax. Instead of that, there is a few risks
when the company implements the option three where need to carry the inventory, incur a large
capital outlay and sunk cost. Plus, the company has to increase the headcount, payroll and other
expenditures in term of materials, infrastructure, R & D, maintenance and so on. Another one, the
company also has to take risk if the equipment that being used may be outdated.

Qstn. 2) Use the projections provided in the case to compute incremental cash flows for
the PCB project, as well as its NPV, IRR, and payback period

As mentioned, all PCBs would be produced in house start from year of 2006. So, we analyse the

income statement from 2005 to 2006 to see how the sales growth for that moment and predict for the

year 2007 as the company spends more than $10 million.


a) Computation of Cash flow for PCB project

Income Statements 2005 A 2006 A 2007 E1 2007 E2


Net Sales $4,871.50 $5,405.60 $6,000.22 $6,892.22
Cost of sales $1,718.50 $1,848.70 $2,083.88 $2,393.67
Gross profit $3,153.00 $3,556.90 $3,916.34 4,498.55
RD&E expenses $284.70 $324.60 $360.31 $413.87
SG&A expenses $1,853.50 $2,061.70 $2,288.49 $2,628.70
Amortization of intangibles $48.80 $43.60 $48.40 $55.59
In-process R&D $15.90 $52.70 $58.50 $67.19
$950.10 $1,074.30 $1,160.65 1,333.20
Operating income (expenses) $4.50 $29.50 $0.00 $0.00
Earnings before tax $954.60 $1,103.80 $1,160.65 1,333.20
Income taxes $311.00 $326.10 $348.20 $399.96
Net earning $643.60 $777.70 $812.46 $933.24

% increase Ratio to sales


2005- 2006- 2006- 2007
2006 2007E1 2007E2 2005 2006 E1 2007 E2
11% 11% 28%
8% 13% 29% 0.35 0.34 0.35
13% 10% 26% 0.65 0.66 0.65
14% 11% 28% 0.06 0.06 0.06
11% 11% 28% 0.38 0.38 0.38
-11% 11% 28% 0.01 0.01 0.01
231% 11% 28% 0.00 0.01 0.01
13% 8% 24% 0.20 0.20 0.19
556% -100% -100% 0.00 0.01 0.00
16% 5% 21% 0.20 0.20 0.19
5% 7% 23% 0.06 0.06 0.06
21% 4% 20% 0.13 0.14 0.14

The key highlight: The amount of $933.24 reflects an increase by


20% as required by the company as the company has spends more
than $10 Million.
b) Computation of NPV/IRR/Payback Period:

2007 P 2008 P 2009 P 2010 P 2011 P 2012

Revenue $2,883.76 $3,345.16 $3,880.39 $4,501.25 $5,221.45 $6,056.


Less COGS $576.75 $669.03 $776.08 $900.25 $1,044.29 $1,211.
Gross profit $2,307.01 $2,676.13 $3,104.31 $3,601.00 $4,177.16 $4,845.
Operating
Less Expenses $865.13 $1,003.55 $1,164.12 $1,350.38 $1,566.44 $1,817.
Less Depreciation $69.01 $80.05 $92.86 $107.72 $124.95 $144.
PBT $1,372.87 $1,592.53 $1,847.34 $2,142.91 $2,485.78 $2,883.
Less Tax $411.86 $477.76 $554.20 $642.87 $745.73 $865.
PAT $961.01 $1,114.77 $1,293.14 $1,500.04 $1,740.04 $2,018.
Add Depreciation $69.01 $80.05 $92.86 $107.72 $124.95 $144.
Net Inflow $892.00 $1,034.72 $1,200.28 $1,392.32 $1,615.09 $1,873.

Company Growth 20%

-
$2,000.0
0 $892.00 $1,034.72 $1,200.28 $1,392.32 $1,615.09 $1,873.50

10.00% Npv @ 10 % $3,253.81


15.00% Npv @ 15 % $2,396.75
20.00% Npv @ 20 % $1,753.70
IRR 52%
Pay Back Period 2.1 years
Qstn.3) How would you compare this proposal to Options #1 and #2?

OPTION 1 OPTION 2

Benefit: Benefit:

- No capital outlay where to some extent it - This option can improve the quality of

can protect future against disruption with the supplies by increasing the business

lower cost and flexibility. potential with the supplier.

Risk: Risk:

- This option potential to have instability - This option has the possibility of

in quality, cost, delivery and bankruptcy and weak financial

responsiveness. performance of supplier and cause the

sole supplier will strongly affect the

Strykers Corporation performance and

end up cause the coordination problem.

Qstn. 4) Based on your analyses, would you recommend that Stryker Instruments fund
this project?

Based on the above analysis, we derived an apparently positive NPV of the project for the year (2007

2012) when using the discount rate of 10%, 15% and 20%. Plus, there is a much bigger IRR

compared to hurdle rate (15%) where it means that the project is profitable. So, we would recommend

that it would be worth for Stryker Instruments to invest for this project.