Fashion Designs International, Inc (FDI) is an organization that manufactures and distributes women's clothing to retailers worldwide. The company’s brand name is RossiDesigns. It is headed by Rossi, an award-winning and Italian-educated fashion designer. Rossi is a perfectionist who makes sure that all her products are excellent and quality. The company was started in 2001; it has steadily grown to realize $2.25 million in annual sales in 2016. While the company experiences a considerable amount of sales every year, it faces multiple challenges in profitability. Rossi’s goal was to have an annual net cash payout of approximately $600,000. However, the company's current cash payout is about two-thirds of the money, amounting to $267,811 in 2016. Riley, the Chief Financial Officer of FDI, considers that shifting its production overseas will be more profitable. This qualitative and quantitative analysis shows that moving production overseas will be more beneficial but could result in ethical issues.
Evaluation of Production
The current production activities of FDI are located in North America. Fabric production takes place in Canada, while the sewing takes place in the United States. Moving the production unit overseas where the cost of labor and other production is cheap will reduce the overall production costs. Riley estimates that there will be a significant reduction in variable costs of fabric, cutting, sewing, brand labels, and threads by 50%. It is also estimated that wage expenses will decrease by 20%. However, such a move will result in increased shipping and freight costs by 300%, increased insurance costs by 250%, increased legal fees by 200%, increased licensing and permit by 75%, increased repairs and maintenance by 20%, and an increase in travel expenses by 400%. When moving overseas, an organization should consider that there could be an increase in unanticipated costs such as travel and shipping (Vanchan et al., 2018). These costs should be considered when calculating the overall costs. From the given analysis, the decrease in the variable costs will outweigh the increased travel expenses.
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Quantitative Analysis
The quantitative analysis showed that the company’s current fixed and variable costs are significantly high. The total variable cost was $1,178,016, while the total fixed cost was $689,227. While the company made a significant amount of sales in 2016, the huge costs resulted in a considerable reduction in its profits. Shifting the production overseas will reduce the firm’s recurrent expenditure and boost its profit margin. The number of units sold for the year 2016 was 36,200. The contribution margin per unit was calculated to be $29.61 and the unit sales to break even was 23,278. The company has a desired cash payout of $600,000. To meet this objective, the company should target 44,990 in sales. By reducing the variable costs, the company can reduce the target sales required to achieve its goals. FID can also boost its production to realize its objectives.
Qualitative Analysis
Qualitative analysis involves an analysis of the prospective country. Apart from having low labor costs, other variables that should be considered include the political climate, trading requirements, proximity to the target market, and raw materials availability (Hansen et al., 2019). A poor political environment can lead to a halting in production at some parts of the year leading to a decline in sales and profits. The absence of raw materials and a distant location will increase shipping and freight costs for the raw materials and the final productions. There are legal trading requirements that the organization should consider before setting up its production overseas. The company will succeed in its overseas production if it analyzes all the given issues critically.
Ethical Factors
FDI will also face ethical issues as it shifts to overseas. By opting for cheap labor, the workers could experience poor working standards. There might be possibilities of human rights violations and child labor (Wiesmann et al., 2017). To prevent any such issues, the organization should first undertake thorough research of the overseas production company. From the given analysis, Rossi is a perfectionist, and a shift in production overseas could mean that she has less control over the production process. The result could be that there will be a decline in the company’s production quality. Nevertheless, when properly managed, the organization should avoid any such issues due to a shift to overseas production.
Conclusion
The quantitative and quantitative analysis and analysis of various ethical factors showed that Fashion Designs International, Inc. should shift its production overseas. The quantitative analysis showed that such an option would decrease variable costs, which will likely reduce the number of units required to reach the target sales. The qualitative factors that should be considered are the geographic location, labor costs, and political climate. Additionally, the consideration of ethical factors such as working conditions and quality of products and how to improve on these issues will result in a successful shift to the overseas market.
References
Hansen, C., Mena, C., & Aktas, E. (2019). The role of political risk in service offshoring entry mode decisions. International Journal of Production Research , 57 (13), 4244-4260. https://doi.org/10.1080/00207543.2018.1518601
Vanchan, V., Mulhall, R., & Bryson, J. (2018). Repatriation or reshoring of manufacturing to the US and UK: dynamics and global production networks or from here to there and back again. Growth and Change , 49 (1), 97-121. https://doi.org/10.1111/grow.12224
Wiesmann, B., Snoei, J. R., Hilletofth, P., & Eriksson, D. (2017). Drivers and barriers to reshoring: a literature review on offshoring in reverse. European Business Review . https://doi.org/10.1108/EBR-03-2016-0050
