Managerial Decision Making – MHR 3010

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The Case of Plant Relocation

Production costs are rising. Your company can make more money for shareholders by relocating
your plants to a country with lower labor costs and fewer regulations. Using this case, Stan
Raggio, senior vice president for sourcing and logistics at The Gap, and Karen Musalo, then
director of the Markkula Center for Applied Ethics International Human Rights and Migration
Project, discussed the ethical issues companies should consider at an Ethics Roundtable for
Executives.

You are the chief executive of Electrocorp, an electronics company, which makes the onboard
computer components for automobiles. In your production plants, complex hydrocarbon solvents
are used to clean the chips and other parts that go into the computer components. Some of the
solvents used are carcinogens and must be handled with extreme care. Until recently, all of your
production plants were located in the United States. However, the cost of production has risen,
causing profits to decline.

A number of factors have increased production costs. First, the union representing the workers in
your plant waged a successful strike resulting in increased salary and benefits. The pay and
benefits package for beginning employees is around $15/hour. A second factor has been stringent
safety regulations. These safety procedures, which apply inside the plant, have been expensive in
both time and money. Finally, environmental regulations have made Electrocorp’s operations
more costly. Electrocorp is required to put its waste through an expensive process before
depositing it at a special disposal facility.

Shareholders have been complaining to you about the declining fortunes of the company. Many
of Electrocorp’s competitors have moved their operations to less-developed countries, where
their operating costs are less than in the United States, and you have begun to consider whether
to relocate a number of plants to offshore sites. Electrocorp is a major employer in each of the
U.S. cities where it is located, and you know that a plant closure will cause economic dislocation
in these communities. You know that the employees who will be laid off because of plant
closures will have difficulty finding equivalent positions and that increased unemployment, with
its attendant social costs, will result. However, you are aware of many other corporations,
including your competitors, that have shut down their U.S. operations, and it is something that
you are willing to consider.

You have hired a consultant, Martha Smith, to investigate the sites for possible plant relocation.
Ms. Smith has years of experience working with companies that have moved their operations to
less-developed countries to reduce their operating costs. Based on your own research, you have
asked Ms. Smith to more fully investigate the possibility of operations in Mexico, the
Philippines, and South Africa. A summary of her report and recommendation for each country
follows:

Mexico
A number of border cities in Mexico would be cost-efficient relocation sites based on both labor,
and health and safety/environmental factors. Workers in production plants comparable to
Electrocorp’s earn about $3 per day, which is the prevailing wage. There is frequent worker

Managerial Decision Making – MHR 3010

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turnover because employees complain that they cannot live on $3/day, and they head north to
work illegally in the United States. However, a ready supply of workers takes their place.
Mexican health and environmental laws are also favorable to production. Exposure to toxic
chemicals in the workplace is permitted at higher levels than in the United States, allowing
corporations to dispense to some degree with costly procedures and equipment. Mexico’s
environmental laws are less strict than those of the United States, and a solvent recovery system,
used to reduce the toxicity of the waste before dumping, is not required.
The only identifiable business risk is possible bad publicity. The rate of birth defects has been
high in many Mexican border towns where similar plants are in operation. Citizen health groups
have begun protests, accusing the companies of contamination leading to illness.

Philippines
Conditions in the Philippines are more favorable than those in Mexico in terms of labor and
health and safety/environmental factors.
The prevailing wage in the Philippines is about $1/day, and young workers (under 16) may be
paid even less. As in Mexico, the workers complain that the rate of pay is not a living wage, but
it is the present market rate.
The health and safety and environmental regulations are equivalent to those in Mexico, but there
have been no public complaints or opposition regarding birth defects, cancers, or other illnesses.

South Africa
Conditions in South Africa are positive in some respects, but not as favorable in economic terms
as in Mexico or the Philippines. The prevailing wage in South Africa is about $10/day.
Furthermore, there is a strong union movement, meaning that there may be future demands for
increases in wages and benefits.
The unions and the government have been working together on health and safety issues and
environmental protections. Exposure to toxic chemicals in the workplace is not permitted at as
high a level as in Mexico and the Philippines. Although the equipment necessary to reduce toxic
chemicals to an acceptable level is not as costly as in the United States, this expense would not
be incurred in the other two countries. Furthermore, there are requirements for a solvent recovery
system, which also increases operation expenses.

By Karen Musalo, Markkula Center for Applied Ethics
https://www.scu.edu/ethics/focus-areas/business-ethics/resources/the-case-of-plant-relocation/

Read the attached managerial case “The Case of Plant Relocation” which presents a business problem. Your job is to analyze the situation following the steps below and prepare a 3-page report. Format: Times New Roman, font 12.

There are three required headers (in Bold):

Decision-Making Criteria (2 points): (Identity what are the important criteria you want to meet while making this decision. If you prefer, you can weigh the criteria, from a total of 100%.)

Alternative Solutions (4 points): (Suggest multiple feasible solutions, creatively merge or combine different solutions and strategies to identify new and creative solutions that may effectively solve the problem at hand. Go beyond the obvious choices. Be creative and original to find effective alternatives to solve this problem.)

Evaluation of Alternative Solutions & Selection of the Best Solution (5 points): (Evaluate/analyze alternative solutions insightfully and thoroughly by taking into consideration all necessary stakeholders and global implications. A cost-benefit analysis from a stakeholder perspective would be helpful. Do remember that some stakeholders are more important to the corporation than others; reflect this in your analysis.)

Additional Grading Item for the Paper:

Underlying research and knowledge while analyzing and solving the problem (4 points): Throughout your paper, support your analyses and arguments with solid, thorough research from various reliable, credible, and relevant sources. Use multiple citations (evidence, facts, statistics, external sources) to support your arguments.

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In summary, you will write a 3-page report identifying decision making criteria, populating alternative solutions, and evaluating the alternative solutions using a stakeholder perspective. You will remember that, in our February 26 class, I showed an example of how to do a cost-benefit analysis by listing each of the stakeholders (shareholders, customers, suppliers, employees, government, local communities, media, etc.) and each of the decision options. We listed the positive and negative consequences of each decision alternative for each of the stakeholders. This cost-benefit analysis should give us a decent understanding of which decision would be in the best interest of the company and its stakeholders. Therefore, we will utilize this stakeholder analysis under “Evaluation of Alternative Solutions” with a particular focus on the most important stakeholders (in your view)