POLARIS CASE STUDY

MGSC 876 MODELS IN SUPPLY CHAIN MANAGEMENT

TEAM MEMBERS:
NISHI GAUTAM
TOM KEATING
YU CHE LIN

Problem Definition
The Vice President (VP) of Operation and Integration at Polaris Industries Inc. had a
deadline deliverable due to his Chief Executive Officer (CEO) and the Board of Directors. He
was to make a recommendation on whether or not Polaris should keep the production of their top
selling product in the United States (US) or reorganize the supply chain for siting a new plant in
locations outside the US. He was to use supporting qualitative and quantitative factors to
influence his final recommendation.
Proposed Alternatives
There were three proposals concluded as most viable. They were as follows:
1) Though suffering an economic slowdown that impacted sales Polaris would remain
status quo with production of this product within the current manufacturing plant in Roseau, MN.
2) Polaris would make a capital investment to build a new manufacturing plant and
reorganize the supply chain in China capitalizing on low cost labor.
3) Polaris would make a capital investment to build a new manufacturing plant and
reorganize the supply chain in Monterrey, Mexico capitalizing on low cost labor.
Discussion of Issues
Polaris Industries Inc. is a stalwart corporation within the $10B Power Sports Industry.
As early as 1954, Polaris was manufacturing and selling quality snow mobiles in the US. They
would remain a snow mobile manufacturer for roughly 30 years before introducing their version
of a four wheeled All-Terrain Vehicle (ATV) in the mid-1980s. The ATV was a big seller for
Polaris and satisfied their product entry in the Off Road Vehicle (ORV) market. By the late
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1990s, they had a second four wheeled vehicle, the Side-by-Side (SBS), also sold as an ORV.
Polaris ORV products, by 2010, made up roughly 69% of their overall sales with the majority of
sales coming from the SBS.
In 2010, Polaris customer base was made up primarily in North America and to a much
lesser degree Europe. The future, however, included a few emerging foreign markets in Asia and
Mexico. Polaris was concerned about the negative impact from an economic slowdown in the US
that had already hurt their company profits. The company was considering whether or not to
make the capital investments overseas and/or across borders to offset the economic downturn
affects by capitalizing on lower labor costs.
There were several considerations that made the existing SBS supply chain within the US
subject to reconsideration. First, the main sales market for the SBS was located primarily in the
Southwestern US and was supported by distribution centers in Irving, TX (1,267 miles from
manufacture plant) and Los Angeles, CA (2161 miles from manufacture plant). This distance
was costly when transportation costs were factored. Additionally, Polaris was paying 60
employees on average $26/hour for full-time employment. Polaris had additional concerns
regarding the workforce within the US noting inflexibility and decreasing numbers of specialized
artisans needed for manufacturing. There were some downsides to moving the SBS production,
however. A move would force Polaris to lay-off 60 US workers at their Roseau plant. A decision
of possible strategic consequences if it upset a prideful labor force that still believed there was
importance behind a made in the USA product. And, lastly, a move requires an upfront capital
investment cost on new facilities that would not be necessary if they remained in the US.
China was enticing to Polaris because of its long term emerging market prospects and the
idea that international sales would likely increase significantly. Polaris did have concerns,
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however, with China as a plant site. The obvious being the $10M investment in capital costs to
build a factory. The trend in China had industries searching inland and further away from
expensive port cities for low cost labor. This phenomenon presented the challenge of where to
build a new plant. The further inland the plant, the more the transportation costs go up.
Financially, the US Dollar had demonstrated a steady depreciation against the Chinese Yuan
from 2000-2010. The cost of shipping from China would be higher than transportation via trucks
from either origin; Mexico or the US plant in Roseau. Additionally the price of oil has been
steadily rising. Inventory lead time is a factor as well with the shipping time somewhere between
19-33 days. Forcing the SBS supply chain to trade internationally would be inclusive of a 5%
tariff on production and transportation costs associated with the inbound inventory. Lastly, the
drastic difference in time zones and crossing the date line and the significant cultural
dissimilarities would add challenges to good operations.
Polaris was targeting the city of Monterrey, Mexico as a possible site for the new SBS
plant. And, despite being south of the US border it was geographically closer to the distribution
centers in Irving, TX (437 miles from Monterrey, Mexico) and Los Angeles, CA (1,505 miles
from Monterrey, Mexico). Polaris was additionally excited about Mexico as an emerging sales
market in the near term. The North American Free Trade Agreement (NAFTA) favored trade
between the two neighboring countries that eliminated the call for a tariff. Another advantage is
the low labor costs. Financially, though erratic fluctuations took place in the exchange rate
during 2000-2010 the US Dollar ultimately appreciated against the Mexican Peso reducing
anticipated costs associated with a new build. Lastly, communication challenges with the Mexico
investment would be reduced due to time zone similarities and cultural/language familiarity.

Recommendations
Team Safety Stock would recommend that Polaris move their SBS manufacturing to a
new plant site in Monterrey, Mexico. From a qualitative perspective the argument is supported
through the overwhelming arguments made in the discussions section. Quantitatively, however,
in reference to (Exhibit 1) it shows clearly from a financial perspective how the same conclusion
is drawn. Financially, leaving the SBS manufacturing in the US would be the least profitable
solution. And, in fact, the net present cost in comparison shows Mexico at an annual savings of
more than $3M when compared to the no change option. At that rate, the cost of the new plant
would be recovered with an additional $2.99M in profit after 5 years. Polaris thinks that the
demand will remain flat for at least 5 years which is a consideration that further justifies the
decision. China is also, from a profitability standpoint, an acceptable solution. Making the
assumptions that were made by the case and despite the considerable disadvantages identified in
the China option the cost of the new plant would be recovered with an additional $1.87M in
profit after 5 years. China is appealing to Polaris because of long term emerging market
projections. But, considering the immediate need to satisfy the US growing demand and a near
term Mexican market a new build in Mexico is the faster and a more profitable investment and is
therefore the better decision between China and Mexico.
Plan of Action
Polaris should proceed immediately with the capital investment in Monterrey, Mexico. They
should ensure that the plant is functioning and able to satisfy demand from Monterrey. Once they
have this ability, Polaris should start a considerate close process on the Roseau SBS production.

Exhibit 1:
ASSUMPTIONS
Labor Assumptions Used by Polaris
U.S. hourly wage
# of working months per year
Avg hours per year

$/hour

26

#
hours/year

U.S. employee severance cost

# of U.S. employees laid off
# of foreign employees hired

12
2,080

$/work er
work ers
work ers

20,000
60
60

Operating Metrics

United States
Mexico
China

Production
Cost
Currency
$/unit
MXN/unit
CNY/unit

Capital investment
United States
Mexico
China

$
$
$

Annual demand for Side-by-Side

Tariffs (imports from China)

Production
Transportation Transport Cost
Cost
Cost
Multiplier
400 $
158.75
1
4,560 $
125.21
1
1,950 $
190.00
1

9,500,000
10,000,000

units/year

14,500
5%

Expected Exchange Rates

Multiplier

Pesos
Yuan

11.92 Pesos/$
6.47 Yuan/$

1
1

Multiplier
7.1% 1
13.4% 1

Projected Annual Wage Grow th

Mexico
China

ANALYSIS SUMMARY (in US$). We assume that Year 1 starts in 2011.

US
Mexico
Capital investment
9,500,000
Severance
1,200,000
One-time expense in Year 0
10,700,000

China
10,000,000
1,200,000
11,200,000

Production cost
Labor cost
Transportation cost
Tariffs
Annual Cost Year 1

5,800,000
3,244,800
2,301,862
11,346,662

5,546,980
325,679
1,815,540
7,688,199

4,370,170
327,349
2,755,000
356,259
7,808,777

Production cost
Labor cost
Transportation cost
Tariffs
Annual Cost Year 2

5,800,000
3,244,800
2,301,862
11,346,662

5,546,980
348,942
1,815,540
7,711,462

4,370,170
371,286
2,755,000
356,259
7,852,714

Production cost
Labor cost
Transportation cost
Tariffs
Annual Cost Year 3

5,800,000
3,244,800
2,301,862

5,546,980
373,866
1,815,540

11,346,662

7,736,387

4,370,170
421,120
2,755,000
356,259
7,902,548

5,800,000
3,244,800
2,301,862

5,546,980
400,571
1,815,540

11,346,662

7,763,091

5,800,000
3,244,800
2,301,862

5,546,980
429,184
1,815,540

11,346,662

7,791,704

4,370,170
541,752
2,755,000
356,259
8,023,180

United States
28.6%
20.3%

Mexico
4.9%
23.5%

China
5.4%
34.8%

Mexico
40,015,174
2,997,603

China
41,143,953
1,868,824

Production cost
Labor cost
Transportation cost
Tariffs
Annual Cost Year 4
Production cost
Labor cost
Transportation cost
Tariffs
Annual Cost Year 5

Labor cost / total cost

Transport cost / total cost
Discount rate for Net Present Value

4,370,170
477,643
2,755,000
356,259
7,959,071

10%

Results
Net present cost (US$)
Savings vs. United States

United States
43,012,777
0