UIVI=UIIrleseyualMXN=MexicanpesoUSD=U.S.dollar Exhibit 6: Map of Polaris Locations in 2010 - Polaris's senior management placed a high value on ease of communication with its manufacturing plants and believed that in-person interaction among managers, design engineers, and production staff was a key driver of the company's long-term product innovation. - If Polaris moved production of Side-by-Sides abroad, the company planned to lay off sixty workers at its Roseau plant. Each worker would be paid a one-time severance of $20,000. - Given the weak economic environment, Polaris assumed that demand for Side-by-Sides would remain flat for the next five years. Data on labor costs, production costs, transportation costs, capital expenditures, and exchange rates for each location are included in Exhibit 2 through Exhibit 5. China Polaris's senior executives were excited about the low costs in China, but labor costs had been rising in the manufacturing-heavy eastern region; over time the company would likely have to look further inland to find low-cost labor, which would further increase the length and variability of product transportation. Polaris also had concerns about its ability to successfully collaborate with a Chinese factory due to time-zone differences and cultural dissimilarities. Operating a factory in China would require Polaris to hire sixty new employees on location. It also would result in a one-time charge of $10 million for capital expenditures, equipment moving costs, and startup costs. Polaris would have to pay a 5 percent tariff on all production and transportation costs when importing products into the United States. Side-by-Sides made in China would be transported to the United States on container vessels, with each container holding twenty-six vehicles. The cost to ship one vehicle to the United States from China was $190 per unit, or $4,940 per container. Although shipping companies claimed the containers would reach the United States in about twenty days, in practice shipping time was highly variable, with a range of nineteen to thirty-three days. Mexico Polaris's senior management saw several qualitative advantages to operating a foreign manufacturing facility in Monterrey, Mexico. (See Exhibit 6 for map.) Monterrey was relatively close to the United States, which would allow for easier in-person collaboration between the manufacturing facility and Polaris's staff. In addition to geographical proximity, managers believed cultural familiarity would make collaborating with a Mexican workforce easy. Lastly, although Polaris believed that long-term sales growth would come from emerging markets in Asia, it also believed that near-term growth would occur in the United States - particularly in the southern United States, an area close to Monterrey. A factory in Mexico would require hiring sixty new employees, the same as in China. Sideby-Sides would be shipped to the United States by truck in batches of twenty-six units at an Polaris Industries Inc. In September 2010 Suresh Krishna, vice president of operations and integration at Polaris Industries Inc., a manufacturer of all-terrain vehicles (ATVs), Side-by-Sides, 1 and snowmobiles, sat in his office in Medina, Minnesota, deliberating the recommendation he was developing for a new plant to manufacture the company's Side-by-Side vehicles. (See Exhibit 1 for pictures of Polaris vehicles.) The economic slowdown in the United States had put considerable pressure on Polaris's profits, so the company was considering whether it should follow the lead of several of its competitors and open a facility in a country with lower labor costs. China and Mexico were shortlisted as possible locations for the new factory, which would be the first Polaris manufacturing facility located outside the Midwestern United States. By the end of the year Krishna needed to recommend to CEO Scott Wine and the board of directors whether Polaris should build a new plant abroad or continue to manufacture in its American facilities. Polaris Industries Inc. Established in 1954, Polaris was a manufacturer of high-performance motorsport products, including ATVs, Side-by-Sides, and snowmobiles. (See Figure 1 for Polaris sales by product.) With nearly $2 billion in sales in 2010 , it was a strong player in the $10 billion power sports market alongside competitors Yamaha, Honda, Arctic Cat, Ski-Doo, and Harley Davidson. Polaris's customers were primarily located in North America (85 percent); its international customers were concentrated in Europe. Foreign markets were becoming increasingly important to Polaris; international revenue had grown 21 percent in 2010, and was forecasted to grow even more in 2011. Polaris products were sold through 1,500 distributors in the United States and 1,000 distributors in the rest of the world. the U.S. border and deliver the products in two days, in practice it took between two and seven days. Capital expenditures, equipment moving costs, and startup costs for a Mexican factory would total $9.5 million. Under the provisions of NAFTA (North American Free Trade Agreement), Polaris would pay no tariffs on imports from Mexico into the United States. United States A third option for Polaris's senior management was to maintain the status quo for production of Side-by-Sides without incurring additional costs. Polaris had traditionally been associated with a strong "Made in America" culture, and management believed that the company's employees and customers were proud that all Polaris products were manufactured in the United States. In addition, the proximity to headquarters and product development facilities enabled managers to collaborate quickly and easily with design engineers and technical staff in the manufacturing plants. Recommending a Solution As Krishna reviewed the data for each option, he knew he needed to consider qualitative as well as quantitative factors to find the best solution for Polaris. Should he recommend keeping production in the United States, or should he recommend siting a new plant in either Mexico or China? Populate ALL of the cells shaded in yellow. Based strictly on the financials, which country would you choose to locate your manufacturing facility? Enter location here Name ASSUMPTIONS Labor Assumptions Used by Polaris \begin{tabular}{|l|c|r|} \hline & $/hour & 26 \\ \hline \#.S. hourly wage & & 12 \\ \hline Avg hoursing months per year & # & 2,080 \\ \hline & hours/year & \\ \hline U.S. employee severance cost & & \\ \hline \# of U.S. employees laid off & \$/worker & \\ \hline \end{tabular} assume this is constant across all countries Operating Metrics \begin{tabular}{|c|c|c|c|c|c|c|} \hline & \begin{tabular}{c} Production \\ Cost \\ Currency \end{tabular} & Production Cost & \begin{tabular}{c} Transportation \\ Cost Per Unit \end{tabular} & & & \\ \hline United States & $ /unit & 400 & & & \multicolumn{2}{|c|}{ Use information from Exhibt 3&4} \\ \hline Mexico & MXN/unit & 4,560 & & & \multicolumn{2}{|c|}{ Use information from Exhibt 3&4} \\ \hline China & CNY/unit & 1,950 & & & \multicolumn{2}{|c|}{ Use information from the case } \\ \hline \multicolumn{7}{|l|}{ Capital investment } \\ \hline United States & $ & & & & & \\ \hline Mexico & $ & & & & & \\ \hline China & $ & & & & & \\ \hline Annual demand for Side-by-Side & units/year & & & & & \\ \hline Tariffs (imports from China) & & 5% & \multicolumn{4}{|c|}{ Applied to production and transportation costs only } \\ \hline \multicolumn{7}{|l|}{ Expected Exchange Rates } \\ \hline Pesos & 10.00 & Pesos/\$ & \multicolumn{4}{|c|}{ Assume both exchange rates hold constant across the 5 years } \\ \hline Yuan & 6.25 & Yuan/\$ & & & & \\ \hline \multicolumn{2}{|l|}{ Projected Annual Wage Growth } & 2008 Wages & \begin{tabular}{c} These are \\ 2008 wages !! \end{tabular} & & \multirow{2}{*}{2008 Wages } & Mexico \\ \hline Mexico & 7.1% & 25.3 MXN & & & & \\ \hline China & 12.4% & 11.6CNY & & & 2009 Wages & \\ \hline & & & & & 2010 Wages & \\ \hline \end{tabular} \begin{tabular}{|l|r|r|r|r|} \hline DC & \begin{tabular}{r} Units \\ Demanded \end{tabular} & \begin{tabular}{r} Trucks Needed for \\ Transportation \end{tabular} & \begin{tabular}{r} Roseau Total Transport \\ Cost \end{tabular} & \begin{tabular}{r} Monterrey Total \\ Transport Cost \end{tabular} \\ \hline Tacoma, WA & & & & \\ \hline Los Angeles & & & & \\ \hline Irving, TX & & & & \\ \hline Total Transportation cost & & & & \\ \hline Cost per Unit & & & & \\ \hline \end{tabular} Normal Rounding whole \# of Trucks Do NOT round when calculating reflect in $ and cents DO NOT CHANGE THE FORMAT OF THIS PAGE !! All other components were sourced through more than 450 global suppliers. In 2010 Polaris sourced almost 40 percent of its components and materials from outside the United States, up from 30 percent in 2008. The company was also increasing low-cost country (LCC) sourcing, almost doubling its LCC spend to approximately 24 percent in 2010. To support its production capabilities in and around the northern United States, Polaris had three warehouse facilities in Minnesota for raw materials, export processing, and distribution. When demand for parts, apparel, and accessories exceeded the company's warehouse capacity in 1997, a new distribution center was opened in Vermillion, South Dakota. In addition to its U.S. locations, Polaris also owned and operated regional sales and distribution centers in Winnipeg, Canada, and in Northern Europe and Australia. Redesigning the Supply Chain Krishna had to consider the tradeoff between manufacturing and transportation costs when redesigning the supply chain for Side-by-Side products. On one hand, manufacturing in markets with low labor costs could result in significant savings. Although labor rates in traditional LCCs such as China were rising, U.S.-based labor was still more costly. On the other hand, with oil prices rising steadily, Krishna knew transportation costs would be far lower if he kept production close to customers. Senior management at Polaris was also concerned about a manufacturing talent gap in the United States. Over the past twenty years, decreased funding for community colleges and trade schools had resulted in technical workers becoming increasingly difficult to find. Moreover, young trade school graduates were less interested in moving to the locations where Polaris operated, which were small towns with only one large employer. By comparison, well-trained technical talent was relatively easy to find in many South American and Asian countries. Lastly, Polaris expected much of its future sales growth would come from overseas markets, particularly emerging markets. There were multiple ways to enter these markets, including acquisitions and joint ventures, but building a facility in an emerging market could potentially help Polaris capture future demand. Choosing a Manufacturing Location Krishna and his team considered several options for optimizing the manufacture of Side-bySides and the design of the supply chain. They concluded that the best options were either to continue production in existing American factories or to build a new plant in China or Mexico. Beyond the specific pluses and minuses of each location, Krishna needed to consider the following in making a final decision: - The majority of demand for Side-by-Sides was in the southern United States. The states with the highest share of sales volume in 2010 were Texas and California. - Side-by-Sides were high volume-to-weight/low value-to-weight products, which meant that shipping costs accounted for a large fraction of their retail price. Exhibit 3: Operatina Metrics bv Plant Location assume production costs are held constant through all 5 years across all countries assume that labor costs remain constant across all 5 years for the US only assume transportation costs are held constant through all 5 years across all countries assume tariff costs are held constant through all 5 years where applicable Figure 1: Polaris Sales by Product Polaris's heritage was deeply rooted in the power sports industry. The company introduced its first snowmobile in the 1950s and its first ATV in 1985. Between 1985 and 2010 Polaris sold more than two million ATVs. In 1992 Polaris entered the personal watercraft market, but it lacked a sustainable distribution system and exited the business in 2004. In 1998 the company introduced the first Side-by-Side off-road vehicle (ORV), which was expected to surpass ATV sales during 2011. Also in 1998, Polaris entered the parts, accessories, and apparel segment, which grew significantly over the next decade. Finally, Polaris also introduced its first on-road vehicle in 1998 - a motorcycle with the brand name "Victory"- to compete with Harley Davidson. Combined, these products were forecasted to bring in \$2.2 billion revenue in 2011. Polaris's total revenue grew more than 20 percent in 2010 and was expected to grow 8 to 11 percent in 2011. Polaris was the dominant player in the ORV market based on market share. In 2010 ORVs accounted for 69 percent of Polaris's sales, with Side-by-Sides comprising the majority of sales in this segment. Looking ahead, the company was excited by the potential growth in emerging markets. From Latin America to Asia, Polaris had begun to invest heavily in marketing to increase awareness of its brand. For example, in China the company placed off-road image advertising in racing and extreme sports enthusiast publications. Similarly, in Latin America Polaris was leveraging its brand in the utility vehicle space to penetrate the substantial agricultural industries. Manufacturing In 2010 all of Polaris's manufacturing operations were located in the northern Midwest. In addition to its corporate headquarters in Medina, Minnesota, and product development and innovation center in Wyoming, Minnesota, Polaris operated three manufacturing facilities in Roseau, Minnesota; Osceola, Wisconsin; and Spirit Lake, Iowa. Roseau, the birthplace of the Polaris snowmobile, housed research, development, and manufacturing for the snowmobile, ATV, and Side-by-Side divisions. Roseau also included a small state-of-the-art injection molding plant that produced plastic parts for the Roseau and Spirit Lake factories. As demand grew for ATVs and on-road vehicles, Polaris established an additional manufacturing facility in 1994 at Spirit Lake. This facility produced select ATV, watercraft, and Victory motorcycle models. Osceola was primarily an engine and components supplier for the other two facilities