task 2 sourcing decision for solarpower description solarpower an aust
Task 2: Sourcing Decision for SolarPower
SolarPower, an Australian manufacturer of solar panels, sells its products in Australia
and New Zealand. At present, the annual demand of 40W 12V monocrystalline solar
panels is 90,000 units, each sells for AUD 70. Although demand for solar panels is
expected to grow rapidly due to rising electricity bill in recent years, there are some
downslides risks if the economy slides. From one year to the next, demand may
increase by 20%, with probability of 0.7, or decrease by 20% with probability of 0.3.
SolarPower can either build a plant in Australia or China. In either case, SolarPower
plans to build a plant with an average capacity of around 100,000 panels. The fixed
and the variable costs of the two plants are shown in Table 1. It needs to be note that
the fixed costs are given per year rather than as a one-time investment. The
Australian plant is more expensive but has volume flexibility. The plant can increase
or decrease production in the range of 60,000 to 130,000 panels while maintaining
its variable cost. So, theoretically it can match exactly the demand within this range.
The Chinese plant is cheaper to build and run but has no volume flexibility and can
produce only at designed capacity which is 100,000. If the Chinese plant is built,
SolarPower will incur variable cost for 100,000 panels even if demand drops below
that level and will lose sales if demand increases above that level. The same applies
to the Australian plant but with a greater volume flexibility (i.e., between 60,000 and
130,000 units) the impact will be much smaller. To simplify the matter, it is assumed
that the holding cost of the unsold solar panels is exorbitant and therefore they will
be scrapped and not stored for use in the following year. Exchange rates are volatile.
At present, the exchange rate is five Chinese yuan to one Australian dollar. Owing to
the rising economy in China for the last three decades, the Chinese yuan would likely
maintain its strong position in the international money market. Each year, the
Chinese yuan is expected to rise by 10%, with a probability of 80%, or a drop by
10%, with a probability of 0.2. It can be assumed that the sourcing decision will be in
place in the next two years and the discount rate used by SolarPower is k = 0.1. All
costs and revenues are assumed to accrue at the beginning of the year. So, the
current year with a demand of 90,000 panels and an exchange rate of 5 yuan/AUD
can be regarded as period 0 and the following two years as periods 1 and 2.
A Potential Hybrid Strategy
SolarPower is also considering a potential hybrid sourcing strategy which combines
the lower cost of production in China and the flexibility of local sourcing. Under this
strategy, the company will still set up a plant in China as in the offshoring option but
only produce 80,000 panels every year. If the demand exceeds 80,000, SolarPower
will purchase the panels from other local suppliers at a price of AUD70 per unit
(including ordering and shipping cost). With such a high unit cost the company will
not make profit for anything above 80,000 panels but such arrangement can help
keep the customers and not losing the market shares to competitors.
a) Draw a decision tree in the report reflecting the uncertainty over the next two
periods. Identify each node in terms of demand and variable cost (affected by
the fluctuations in exchange rate) and the transition probabilities. Use two
decimal points in your notation of variable cost, if needed. (8 marks)
b) If management at SolarPower is to either build a plant in China or Australia as
planned, which one would you recommend? What is the NPV of the expected
profit over the next two periods for each of the two choices? (6 marks)
c) What do you think about the hybrid strategy? Is it worth doing it? Evaluate the
NPV of the expected profit over the next two periods for the hybrid option. (6
d) Conduct your own research and find out how the decision tree methodology can
be applied to the solar panel manufacturing industry. As planning of activities in
the upstream, midstream, and downstream of a solar panel supply chain
requiring the use of the decision tree methodology can vary, you may wish to
discuss the application in the different aspects of the supply chain operation
based on the uncertainties involved.
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