MT433 Unit 8 Nearshoring Proposal Example

Thirty-Seven Cents Dearer, About $18,000 Better: An MT433 Unit 8 Nearshoring Proposal for Hotel Towels

[Student Name]

Purdue University Global

MT433: Global Supply Chain Management

Unit 8 Nearshoring Proposal

[Instructor Name]

[Date]

Catawba Linen Supply, the Puebla mill, the hotel contracts and every cost are composite, as of one quote date; duty-free entry depends on the towels qualifying under the trade agreement, and the sources cited are real.

Summary for the Owner

The hotel line, 92,400 towels a year, is the part of the business where lateness costs the most. Moving it to Puebla raises the landed cost from $4.91 to $5.28 a towel but cuts the lead time from about 52 days to about a week. That speed removes, on recent experience, three air shipments and $19,000 of hotel penalty credits a year, for a net gain of about $18,095. It also frees about $72,000 of inventory as one-time cash. The gain depends on one condition: the towels must count as originating goods under the trade agreement with Mexico and Canada. If they fail that test, Unit 9 shows the duty would erase the gain several times over.

Landed Cost on the Same Rows

The comparison uses the same cost rows for both sources, since adding carrying cost to one side and forgetting it on the other would flatter the result.

From Faisalabad, as in Unit 2, the towel costs $3.47 at the mill and lands at $4.91 after ocean freight, drayage, duty at 9.1 percent, the 19 percent surcharge recorded on the quote date, entry fees and 73 days of carrying cost at sea and in safety stock.

From Puebla, the mill quotes $4.90 a towel delivered to its dock. Twelve partial truckloads a year of 7,700 towels each cost about $2,600 per truck to Charlotte, 33.8 cents a towel. Duty is zero if the towels qualify under the agreement, and qualifying goods are also exempt from the merchandise processing fee. Carrying cost falls to about a week in transit and a week of safety stock, 4.0 cents a towel. Landed cost is $5.28.

The difference is about 37 cents a towel, or about $33,905 a year on 92,400 towels.

What Speed Is Worth

The hotel contracts require Catawba to keep each property's par stock filled within five days of an order. With 52 days of lead time from Pakistan, a demand spike or a late vessel leaves Catawba short, and it has two choices: fly towels in, or pay the contract's fill-rate credit to the hotel.

Over the past year, three air expedites were needed, at about $11,000 each, and $19,000 of fill-rate credits were paid. With a one-week truck lane, an unexpected order can be covered by the next truck, and the analysis assumes both costs fall to near zero. Those two lines total $52,000.

Net of the $33,905 premium, the move is worth about $18,095 a year.

Proximity earns its keep here only because late towels are already costing Catawba $52,000 a year.

The One-Time Cash Release

The shorter lane also releases inventory. At 73 days of pipeline and safety stock from Pakistan against 14 from Mexico, the hotel line would carry about $72,000 less inventory at any time. That is reported separately as one-time cash, not as annual savings, since it is freed once and not again each year. Fisher (1997) argued that products with unpredictable demand need a responsive supply chain rather than the lowest-cost one, and hotel replenishment, with demand that spikes with occupancy and renovations, fits that description better than the retail line does.

The Origin Condition

The whole case rests on duty-free entry. Under the agreement's textile rule for towels, the yarn must be formed in the region, a rule often called yarn forward, and only a small share of non-originating yarn, measured by weight, is allowed (Office of the United States Trade Representative, 2020). The Puebla mill weaves and finishes in Mexico, but its standard terry uses pile yarn from several countries. If the pile yarn comes from outside North America, the towels do not qualify, they pay the 9.1 percent duty and, under the 2025 measures, an additional duty on Mexican goods that do not qualify, recorded on the quote date at 25 percent. At that point Mexico would land at well over $6 a towel.

The proposal therefore asks the mill to confirm, before the first order, which of its yarns are spun in Mexico or the United States, and to sign a certification of origin for each blanket period.

Why Not Move Everything

If proximity is worth so much on the hotel line, a natural question is why not move the retail line too. The answer is that the retail line has none of the costs proximity removes. Its orders are planned eight to twelve weeks ahead, there are no fill-rate credits in the retail contracts, and no retail order has needed an air shipment in two years. Moving it would add about 37 cents a towel, about $79,100 a year on 215,600 towels, with nothing to offset it. The proposal therefore splits the business by the cost of being late, not by a target share.

Other Conditions

Two further conditions apply. The Puebla mill has not yet produced towels to the hotel specification, so a trial order should be inspected before the contract is signed. And the truck lane through the Laredo crossing can be delayed by inspections and border congestion; Chopra and Meindl (2019) note that a shorter but more variable lead time can require nearly as much safety stock as a long, steady one, so delivery times should be tracked for the first six months.

What Stays in Pakistan

The retail line, about 70 percent of standard towel volume, stays in Faisalabad. Its demand is steadier and planned weeks ahead, so the long lead time costs little, and Faisalabad's lower landed cost is worth more there than speed. Ghemawat (2001) warned against treating distance as a single cost; here it matters a great deal for one line and very little for the other.

How Success Will Be Measured

The trial and the first year will be judged on four figures: the share of hotel orders filled within the five-day contract window, the number of air expedites, the fill-rate credits paid and the landed cost per towel as actually invoiced. If the first two improve as expected and the landed cost stays within five cents of $5.28, the move has worked. If fill rates do not improve, the premium is buying nothing and the line should return to Pakistan at the next contract year.

Recommendation

Approve a trial order of one truckload from Puebla for the hotel line, conditional on written confirmation of yarn origin and a signed certification of origin. If the trial towels meet specification and origin is confirmed, move the hotel line to Puebla for the next contract year and keep the retail line in Faisalabad.

References

Chopra, S., & Meindl, P. (2019). Supply chain management: Strategy, planning, and operation (7th ed.). Pearson.

Fisher, M. L. (1997). What is the right supply chain for your product? Harvard Business Review, 75(2), 105-116.

Ghemawat, P. (2001). Distance still matters: The hard reality of global expansion. Harvard Business Review, 79(8), 137-147.

Office of the United States Trade Representative. (2020). Agreement between the United States of America, the United Mexican States, and Canada: Chapter 6, textile and apparel goods.