STRYKER CORP: IN-SOURCING PCBS

INTRODUCTION:

Basically, Stryker Corporation is a company that offering a lot of medical equipment

worldwide and it is also well known to be one of the top medical technology companies globally. The
medical equipment that providing by this company includes surgical, medical, spine and Neuro-
technology products and reconstructive equipment. The main services and products provided by the
company are accessible all over the world. The main instrument that is used for the manufacturing of
medical products is PCB (Printed Circuit Boards). A printed circuit board (PCB) is mechanically
supports and electrically connects electronic components using conductive tracks, pads and other

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features etched from copper sheets laminated onto a nonconductive substrate. In 2002, the company

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show a good revenue and operating profit where estimate about $3 billion and $507 million.

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The divisions that a part of the company include surgical and medical equipment, orthopaedic

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implants, International sales and Rehabilitative Medical Services. There are three main business of the
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company include Stryker Medical, Stryker Endoscopy and Stryker Instruments. In Stryker Medical
unit, it is preparing for hospital beds and other patient medical handling equipment. Moreover, this
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business unit is also engaged in providing emergency medical service products. While in Stryker
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Endoscopy unit produces communications and video imaging equipment along with general and
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arthroscopic surgery instruments. Plus, in Stryker Instruments unit come out with operating room
equipment, interventional pain control products and surgical instruments.
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THE PROBLEM:
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Recently, the company is facing with a lot of issues regarding the suppliers and make the
company has to bring some change in their sourcing strategy. From the current perspective, the
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company is doing out-sourcing on a contractual basis from the manufacturers and has estimated
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current spending of $10 million in the previous two years.

The management of the company is not so satisfied with the contract of manufacturers for
some reasons. At first, the company is actually facing problems about the quality of products.
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Secondly, the company also facing the problem with the current supplier in term of the delivery
timings and responsibility for the company’s products. Consequently, the company is continuously
need to find new suppliers one after another for the manufacturing of their products. Another big
problem found in contract manufacturers is due to the operation where based on small margins along
with limited capital.

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 THE THREE OPTIONS:

Due to the problems, there are three options available for the company to make its supply
chain strong from the suppliers’ side. The first option that is available to the company is to keep the
current basic sourcing policy by making only a slight changes in it. The next alternative available to
Stryker Corporation is to enhance consistency by developing strong relationship with a single
supplier, and that supplier will sell their products to Stryker Corporation only. In addition, the last
option will be manufacturing of company facility that is in-sourcing PCBs near headquarter of the
company.

As the company has to decide whether they should in-source or outsource the manufacturing

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facility; therefore, they can make their decisions based on the objectives set by the company. The

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company’s main objective is to reduce the purchase of Printed Circuit Boards and to maximize profit.

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Furthermore, another objective of the company is to reduce the risk with respect to suppliers of PCBs.

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Next objective of the company is to gain control and empowerment over the supply chain, delivery
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and quality of products. Another most important objective of the company is to improve the cash in
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terms of liquidity.
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THE SOLUTION:
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For this case study of Stryker Corporation, it can be seen that option three (to manufacture its
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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
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exercise full control in their supply chain where it can help to increase the degree of quality along
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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 company’s headquarter. Plus, the
manufacturing cost along with in-housing manufacturing of PCBs will be tax deductible where enable
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the company to make its tax obligation lower during the early years of manufacturing. Moreover, the
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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
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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

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 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.

COMPARISON WITH OTHER OPTION:

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.

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Risk: Risk:

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

in quality, cost, delivery and bankruptcy and weak financial

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responsiveness. performance of supplier and cause the
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sole supplier will strongly affect the

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Stryker’s Corporation performance and

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end up cause the coordination problem.

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REASON WORTH IT TO MANUFACTURE ITS OWN PCBs OR NOT

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INCOME STATEMENT (YEAR 2005 – 2007):

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As mention, all PCBs would be produced in house start from year of 2006. So, we analyse the income
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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. (Refer to Stryker Corporation Annual Report

2005 & 2006 taken from http://phx.corporate-ir.net/phoenix.zhtml?c=118965&p=irol-reports).

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 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

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Net earning $643.60 $777.70 $812.46 $933.24

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% increase rs e Ratio to sales
2005- 2006- 2006- 2007
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2006 2007E1 2007E2 2005 2006 E1 2007 E2
11% 11% 28%
8% 13% 29% 0.35 0.34 0.35
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13% 10% 26% 0.65 0.66 0.65

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14% 11% 28% 0.06 0.06 0.06

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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
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13% 8% 24% 0.20 0.20 0.19

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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
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21% 4% 20% 0.13 0.14 0.14

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

20% as required by the company as the company has spends more
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than $10 Million.

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 CALCULATE 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.

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Less Tax $411.86 $477.76 $554.20 $642.87 $745.73 $865.

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PAT $961.01 $1,114.77 $1,293.14 $1,500.04 $1,740.04 $2,018.

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Add Depreciation $69.01 $80.05 $92.86 $107.72 $124.95 $144.

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Net Inflow $892.00 $1,034.72 $1,200.28 $1,392.32 $1,615.09 $1,873.

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Company Growth 20%
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$2,000.0
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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
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20.00% Npv @ 20 % $1,753.70

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IRR 52%
Pay Back Period 2.1 years
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From above, we derived an apparently positive NPV of the project for the year (2007 – 2012) when
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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, in conclusion there is a worth it to invest
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for this project.

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