Case Study: Gian Auto Corporation
BACKGROUND OF THE CASE
Gian Auto Corporation is a manufacture and supplier of components for manufacturers and suppliers of parts for automobiles, van and trucks. The company maintains an excellent track record with over 10 percent increase in sales in each year. One of the critical success factors of company's business strategy is the location of its plants in favorable business environments and areas with lower wage rates. One of GianAuto's earliest plant is the Denver Cover Plant, which basically prepares and sews coverings, mainly leather and upholstery fabrics. The person who was in charge of operating the Denver Cover Plant was Ted Vosilo.
ISSUES OF THE CASE
GianAuto Corporation found an external supplier, which can provide coverings at a lower price than the Denver Cover Plant. The budget for Denver Cover Plant's budget was set at $82 million, whereas GianAuto can purchase those coverings from an external party at the price of $60 million.
DENVER COVER PLANT
Budget and Operating Cost for Year ending December 31, 2004 (000s omitted)
Materials $32,000
Labor
Direct $ 23,000
Supervision $ 3,000
Indirect plant $ 4,000 $30,000
Overhead
Dep- Equipment $ 5,000
Dep.- Building $ 3,000
Pension Expense $ 4,000
Plant manager $ staff $ 2,000
Corporate allocation $ 6,000 $ 20,000
Total Budgeted Cost $ 82,000
However, there are additional factors that should be considered before making the decision to shut down the Denver Plant:
1. Blanket order had been placed with major suppliers to ensure sufficient supply for the coming year.
Disadvantage: if order were cancelled due to the closing, termination charges of 15 % of direct material or $4,000,000 would have to be paid off.
2. 400 plant employees would be laid off
Disadvantage: Employees may not be able to find a handsome rewarding job matching Denver, which is the highest in the area and Denver has the obligation to source for new employment for its employee that could cost additional $ 1 million.
3.
Gian Auto Corporation is a manufacture and supplier of components for manufacturers and suppliers of parts for automobiles, van and trucks. The company maintains an excellent track record with over 10 percent increase in sales in each year. One of the critical success factors of company's business strategy is the location of its plants in favorable business environments and areas with lower wage rates. One of GianAuto's earliest plant is the Denver Cover Plant, which basically prepares and sews coverings, mainly leather and upholstery fabrics. The person who was in charge of operating the Denver Cover Plant was Ted Vosilo.
ISSUES OF THE CASE
GianAuto Corporation found an external supplier, which can provide coverings at a lower price than the Denver Cover Plant. The budget for Denver Cover Plant's budget was set at $82 million, whereas GianAuto can purchase those coverings from an external party at the price of $60 million.
DENVER COVER PLANT
Budget and Operating Cost for Year ending December 31, 2004 (000s omitted)
Materials $32,000
Labor
Direct $ 23,000
Supervision $ 3,000
Indirect plant $ 4,000 $30,000
Overhead
Dep- Equipment $ 5,000
Dep.- Building $ 3,000
Pension Expense $ 4,000
Plant manager $ staff $ 2,000
Corporate allocation $ 6,000 $ 20,000
Total Budgeted Cost $ 82,000
However, there are additional factors that should be considered before making the decision to shut down the Denver Plant:
1. Blanket order had been placed with major suppliers to ensure sufficient supply for the coming year.
Disadvantage: if order were cancelled due to the closing, termination charges of 15 % of direct material or $4,000,000 would have to be paid off.
2. 400 plant employees would be laid off
Disadvantage: Employees may not be able to find a handsome rewarding job matching Denver, which is the highest in the area and Denver has the obligation to source for new employment for its employee that could cost additional $ 1 million.
3.