The Value Chain
Zeigler Electronics is a manufacturer of cell phones, a highly competitive business. Zeigler’s phones carry a price of $99, but competition forces the company to offer significant discounts and rebates. As a result, the average price of Zeigler’s cell phones has dropped to around $50, and the company is losing money. Management is applying value chain analysis to the company’s operations in an effort to reduce costs and improve product quality. A study by the company’s management accountant has determined the following per unit costs for primary processes.
Cost per Unit
Research and development
To generate a gross margin large enough for the company to cover its overhead costs and earn a profit, Zeigler must lower its total cost per unit for primary processes to no more than $20. After analyzing operations, management reached the following conclusions about primary processes.
? Research and development and design are critical functions because the market and competition require constant development of new features with “cool” designs at lower cost. Nevertheless, management feels that the cost per unit of these processes must be reduced by 10 percent.
? Six different suppliers currently provide the components for the cell phones. Ordering these components from just two suppliers and negotiating lower prices could result in a savings of 15 percent.
? The cell phones are currently manufactured in Mexico. By shifting production to China, the unit cost of production can be lowered by 20 percent.
? Most cell phones are sold through wireless communication companies that are trying to attract new customers with low-priced cell phones. Management believes that these companies should bear more of the marketing costs and that it is feasible to renegotiate its marketing arrangements with them so that they will bear 35 percent of the current marketing costs.
? Distribution costs are already very low, but management will set a target of reducing the cost per unit by 10 percent.
? Customer service is a weakness of the company and has resulted in lost sales. Management therefore proposes increasing the cost per unit of customer service by 50 percent.
1. Prepare a table showing the current cost per unit of primary processes and the projected cost per unit based on management’s proposals for cost reduction.
2. Manager Insight: Will management’s proposals for cost reduction achieve the targeted total cost per unit? What further steps should management take to reduce costs? Which steps that management is proposing do you believe will be the most difficult to accomplish?
3. Manager Insight: What are the company’s support services? What role should these services play in the value chain analysis?