In making a decision regarding the strategic plan of an international company, the management needs not rely on emotional judgment alone. Rather, a rigorous process of assessment and analysis in which the decision maker weighs different options. In this case scenario, a decision regarding the location of the company’s largest factory has to be made with three options. Currently, the company has its main factory within the Midwestern United States with a capacity of 700 direct employees. In addition, the same company has 3000 other employees employed within the larger United States. The company has the options of either retraining the location of the factory in the US or moving it to either Canada or Ireland. This essay implores the three options that the company has at its disposal and the viability of each. Eventually, it suggests the best decision based on a thorough analysis of the feasibility of each of the three choices.
Although there are three options, the decision of whether or not to move is only limited to the location where it should be moved to. The current location has proved not to be the most productive due to a number of prevailing concerns. This is quite evident in the relatively lower net present value (NPV) of having the factory located in the US. At an NPV of one million dollars in the US, it is quite obvious that relocating the factory to either Canada or Ireland is more productive. A study of the three locations has revealed that Ireland provides the highest NPV of $35,000,000 and Canada has an NPV of $10,000,000. Net Present Value is a key metric in analyzing the profitability of a projected investment or project (Collier, 2016). It is the difference between the present value of cash inflows and the present value of outflows. In making decisions regarding investments, investors compare the NPVs and use that to ascertain the future trends. The study clearly reveals positive NPVs for each of the three options therefore making all of them viable. However, relocating the factory to Ireland has the highest NPV and therefore the highest potential for productivity.
Labour costs are another metric in the decision of whether or not to move a capital asset in an organization. The relocation of the factory requires the transfer or factory operations from the current location in the United States to either Ireland or Canada. Although Ireland has relatively lower labor costs compared to those in Canada and the United States, the accumulated costs of general labor are projected to remain the same. Ideally, the cost of training new employees in the new country will be offset by the replacement of highly paid employees with junior employees. Therefore, although moving the factory will incur huge training costs, the same can be catered for by the money saved through lower wages. However, laying off the employees also has the cost of retirement and in some cases there will be costs due to termination of contracts. It is expected that some employees will file suits against their contract termination therefore adding another cost implication on the company. Regardless, the company can enter into an agreement with these employees for an out of court settlement. Overall, and in the long run, the benefits of relocating will supersede the cost of the same.
The decision to move the factory into Ireland is driven by the fact that it is not currently competitive in the international market. Moreover, the tax regime in the US is not helping matters at 35%. This percentage is relatively high compared to that of Ireland and Canada at 15% and 20% respectively. In addition, the performance of the factory is currently below par and threatens the sustainability of the company in entirety. Even if the company were to maintain the location in fear of loss of jobs of the current employees, the jobs would ultimately be lost due to non performance. It is therefore better to move the factory location when the company still can and get new employees to steer the success of the organization. The company also has the option of renovating the factory o meet the current market standards. Indeed, the process of renovation is most viable and even cheaper than relocation as it will maintain the current employees. However, an analysis of the same process reveals that the renovated factory will not attain the same levels of efficiency as the relocated factories. This means that the NPV of the capital investments in the factory remain the same across the three countries. By extension, it means that labor costs and factory renovation have no bearing impact on the decision of relocating the factory.
The decision of the location of the factory is not an isolated process to be made by the manager alone (Lusardi, 2015). On the contrary, all stakeholders involved have to give their own recommendations and their insights before any concrete decision is made. The employees are the first stakeholders because the relocation of the company involves their jobs. Although most of the employees feared the loss of their jobs in the process of relocation, some of them would be retained in the new location. In addition, the relocation of the factory was far better in terms of job retention than maintaining the same location. The shareholders have their best interest in profitability and their immediate recommendation was the relocation of the factory. Ideally, moving the factory to Ireland would mean the highest profits and therefore the highest return on their capital. The community was also a large stakeholder that depended on the success of the company. Although their main interest would be retention of the factory, it would be of no great use having a factory that is operating in losses.
The decision to relocate the factory to Ireland is based principles of financial management. Specifically, the decision supports the principles of stewardship and integrity in the management of the company. The manager has the responsibility of managing the property of the company in the best way through effective stewardship. By choosing relocation over retention of the factory, the manager is keen on making more profits for the company through responsible stewardship. The manager does not just rely on emotional judgment in making managerial decisions but responsibly analyzes each option before embarking on a decision. In addition, integrity is pivotal in the decision by the manager as it is honest and is based on projected trends. The manager is not inclined to a specific decision for their own gain but chooses one in which they will be forced to relocate even though they would have been more comfortable with retention. In the execution of the decision, therefore, the manager employs the principles of responsible stewardship and integrity.
Collier, P. M. (2016). Risk and Financial Decision-Making. Fundamentals of Risk Management for Accountants and Managers, 131-141. doi:10.1016/b978-0-7506-8650-1.00011-0
Lusardi, A. (2015). Numeracy, financial literacy, and financial decision-making. doi:10.3386/w17821
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