*Need a discussion thread between 170-240 words while answering the question*
The Pi3 Company is an electronics and communications equipment manufacturer that is headquartered in Bethesda, MD. It has annual sales of $500,000,000 and a workforce of 11,000 people worldwide. Manufacturing sites are in the US, Italy, and Malaysia. It has sales, after-sales support, and warehousing in two locations on each continent, serving those markets as local markets. Research and Development and product development however, are conducted only in the United States in Maryland and California, where the company enjoys strong support from local universities in both states. It has a mid-tier position in the US market and a high-tier to mid-tier position around the world. There are several competing companies that have better branding and name recognition; however, Pi3 is still considered a leader worldwide. It has a large breadth of product line, but is considered dominant in only one or two product areas.
Pi3 has invested in a new product line, where it can develop and sell a new consumer communication product and related products and services that service providers would purchase to support it. Sales forecasts are not finalized, but the company has invested heavily in what is now referred to internally as Project Maryland or PM. Product 1 is a specialized electronics board that would fit into existing cell phones manufactured by Apple, Samsung, and others. Product 2 is the communications bridge (mostly software) that phone and data carriers (such as Verizon, Sprint, T-Mobile) worldwide would procure to communicate with the device. The Product 1 device is slated to be an option that individual consumers would purchase, when they buy a standard cell phone. Once the product becomes mature, which Pi3 expects to be in 3-5 years, Product 1 will be included as standard equipment in every cell phone.
Product 1 has a bill of materials of 314 parts. About 250 parts are considered common parts and are shared in other Pi3 products. They represent about 50% of the total cost to manufacturing. The remaining 64 parts are the key elements, including a special board and amplifier, which are proprietary to Pi3. The 62 parts represent about 40% of the cost of Product 1, with the board and amplifier representing between the remaining 10% of the total cost of manufacturing. The board and amplifier are manufactured in the US only, although potential competing sources may exist in Europe and Asia.
Pi3 expects that it will be first to market with this technology, but that other competitors will follow and offer competitive products within 12 months of the initial product launch. Therefore, it has about a year where it will be the only company that is offering product throughout the world. All production and manufacturing are expected to be performed in US factories and the product will then be shipped overseas for final sales.
The company has formulated an overall strategy, where it will offer the product at a 50% gross margin for the first 6 months and then reduce the price to an industry-standard of 25% GM by month 13. As more Product 1 is manufactured and volumes increase, the gross margin should settle to about 30-35%. This assumes that production costs will decline, amortized development costs will have been recovered, and the company will have found some less expensive ways to buy its unique 64 parts.
The offices outside of the US are concerned that too much of the development and manufacturing activities are centered in the US. Further, they have warned that the behavior of nonUS consumers is different from what the company has defined, will result in less acceptance of Product 1, and that the sales forecasts may be too optimistic. The offices outside the US would like to see some of the final development activity be performed in their regions in order to offset their costs. Because Product 1 has been based on investments from the US Federal government and the governments of the states of California and Maryland, Pi3 is reluctant to move any research and development and any initial productization overseas at this time. It plans to do so after Year 3. Local offices are not happy about this, as they feel that this is another example of the US-centric nature of the company at a time when the company needs to position itself as more international. The prevailing political mood in the US and the investments received so far lead the company’s management to continue on its current path. Nonetheless, several overseas offices have asserted that they could supply much of the bill of materials at lower costs, which if correctly implemented, could give the company some addition flexibility on price in the future.
- You are a director of procurement at Pi3, and your boss has assigned you the task of putting together a high-level plan on how to address the procurement issues. What issues will be at the top of your priority list?
- You have substantial international experience and you sense that much of what the overseas offices are advising is correct. How do you introduce their concerns in a way that demonstrate the advantages of international supply chains and international manufacturing?