EXECUTIVE SUMMARY

Danshui Plant No.2 was one of the contract manufacturers assembling electronic products in
southern China. In China, there were many manufacturers like Danshui that assembling parts for
the companies to save their labor costs. Danshui was called to assemble the Apple iPhone 4.
They agreed to assemble 2.4 million iPhones in Plant No.2 with the expected high demand of
this product in 2010. The process of assembling was complicated and its required almost
entirely based on handwork for more than 100 components. The iPhones 4 was the most
successful product of Apples as more than 1.7 million units were sold in the first 3 days they
were launched. The expected monthly production is 200,000 units. However, in the first three
month, the plant is unable to assemble the phones with the number that they targeted and was
operating at a loss.
The issue in this case is underproduction and they were unfavorable performance by using
standard budgeting system. These issues happen because of lack of qualified workers that
responsible for this underproduction problem. This is because the complexity in the assembly
process was extremely high. Besides, the problem with Samsung flash memory installation may
also lead to Danshuis underproduction problem.
In order to prevent these issues to arise, Danshui may consider engaging in outsourcing. Danshui
may engage the outsourcing contract with the company that has experienced workers, technical
expertise, and also specific equipment so that they may complete the tasks effectively in a quick
way with better quality product. Upper management of Danshui also must play their role on
tighten the supervision on the work of the employees.

Contents
1.0 INTRODUCTION..................................................................................................... 3
3.0 CAUSES OF THE PROBLEM..................................................................................... 5
4.0 DECISION CRITERIA AND ALTERNATIVE SOLUTIONS.............................................7
5.0 RECOMMENDATION SOLUTION, IMPLEMENTATION AND JUSTIFICATION............12
6.0 CONCLUSION....................................................................................................... 13
7.0 EXTERNAL SOURCING......................................................................................... 14
8.0 APPENDIX A......................................................................................................... 15
9.0 APPENDIX B......................................................................................................... 16

1.0 INTRODUCTION
Danshui Plant No.2 (Danshui) was one of the contract manufacturers in China that able to
assemble electronic products for those companies wishing to save labor costs in southern China.
The cost saving advantage and high expected demand of iPhone 4 let Apple entered a 12-month
contract which begin from June 1, 2010 until May 31, 2011with Danshui Plant No.2 in year
2010. The purpose of the contract is to assemble 2.4 million iPhone 4 units in that period. In
other words, Danshui should be able to assemble 200,000 iPhone 4 units per month. On account
of being a profit center, the plant was credited for each iPhone produced and shipped.
The assembly of iPhone 4 was not same as the assembly of hard drive where Danshui did at the
end of May, 2010. The process of assembling each iPhone 4 unit was complex. It involved
around 140 steps and more than 100 components in the process. Also the process was almost
entirely based on handwork and handled by 325 workers for each iPhone 4 unit during five day
required only. But, Danshui was really assured that its workers could adapt to the new tasks and
extra workers could be hired and trained as needed.
Unfortunately, in the first three months of the contract, the plant could managed to produce only
180,000 iPhone 4 units out of 200,000 iPhone 4 units per month as stated in their contract. This
caused Danshui was operating at a loss. Thus, the manager of Danshui, Wentao Chen was
anxious on receiving summary of the monthly operation performance for August as soon after
the end of month as possible. Plant controller, Jianye Ma done some investigation and evaluation
activities. From the result, a lack of qualified workers and fragile Samsung flash memory was the
problems which return in underproduction problem. Also, the comparison of the budget prepared
is not accurate and reasonable. So Danshui should prepare a new flexible budget based on real

production unit that was 180,000 units as to get the actual cost incurred and actual performance
of the plant.

2.0 STATEMENT OF THE PROBLEM

The main problem in Danshui Plant No.2 (Danshui) is underproduction. The plant should
produce 200,000 units of iPhone 4 per month as expected in the manufactured contact. In fact, a
shortage of 20,000 units or 10% of the iPhone 4 happened for first 3 continuous months of the
contract. In fact, only 180,000 units of iPhones 4 were produced per month. This was worrying
Wentao Chen who act as a manager of Danshui. He is responsible to find ways to improve
workers productivity and speed up plants production.
Besides, underproduction is a serious issue for manufacturing company. In short term view, it
brought to a loss about $672,000 rather than budgeted profit $100,000. This loss might can be
cover by other revenue which derived from other business involved by Danshui. However, if this
problem could not be solved immediately and if the plant was still unable to achieve the targeted
production units, Apple will have the perception that Danshui is breaking the contract with them.
Then as to protect own right, Apple could place a lawsuit toward Danshui. Involving in such
lawsuit may damage the image of Danshui. The public and community would lost confidence on
Danshuis services once reputation declined. Loss of sales transaction is affecting the profit of
the company. Moreover, creditworthiness of the company would decline. The suppliers and
distributors would not giving credit or loan or extending the debt repayment period of the
company. Consequently, Danshui may facing financing problem and lacking of cash available to
operate its daily operation. Then the company may facing going concern issue in future.

3.0 CAUSES OF THE PROBLEM

There are two possible causes that lead to the problem of underproduction in Danshui Plant No.2
(Danshui).
Firstly, lack of qualified workers be responsible for this underproduction problem. This is
because the complexity in the assembly process was extremely high. Without sufficient quantity
of qualified workers, these 325 semiskilled workers have to focus on more than one tasks in a
short period of time as each phone will moved along an assembly line towards the completion.
Their job satisfaction might decrease due to overload. Loss of job satisfaction may direct impact
their performance. Their productivity is lower than those satisfied workers. And they will feel
hard to handle pressure when the production deadline is coming to the corner. Other than that,
they might careless in the assembly process which caused higher chances of production errors.
At the same time, it increased the burden of supervisors as they have to spend more time on
guiding and supervising workers. Wastes in term of time and money would be happened. Even
though the plant raised its salary by nearly 30%, but it was still unable to attract and hire enough
new qualified workers in the plant.
Secondly, the problem with Samsung flash memory installation may lead to Danshuis
underproduction problem. In August, 1000 Samsung flash memories were damaged by heat
during installation. To ensure the quality of output, additional time needed to carry out the
inspection and replacement of flash memories for each unit of iPhone 4. This directly affected
the progress in the assembly process. Not only that, for damage prevention, the flash memory
must be installed with a shield and the additional cost covered by Danshui. As the result, the
overall cost per unit of the product increased by $2.00.

The effect of underproduction in Danshui which caused by problems regarding the shortage of
qualified workforce and Samsung flash memory installation can also be explained in quantitative
way. Two quantitative analysis such as flexible budget and standard costing (variance analysis)
may give a further and clearer view in a quick way on the effect toward financial performance of
Danshui.
1. Flexible budget

4.0 DECISION CRITERIA AND ALTERNATIVE SOLUTIONS

According to the situation in Danshui Plant No.2 (Danshui), the plant is facing a main and
serious issue that was underproduction which caused by the lack of qualified workers and
problem with Samsung flash memory installation. Effective alternative solutions should be
determined as to solve the problems and at the same time complete the term and condition of the
contract before the deadline.
1. Outsourcing
Danshui may consider to engage in outsourcing. Danshui may engage the outsourcing contract
with Foxconn, a division of Hon Hai Group of Taiwan. Foxconn was the largest contract
manufacturer in China with more than 800,000 workers employed. And the most important
concern is Foxconn have entered contracts in order to supply Apple. Since Danshui have
trouble with the quantity of qualified workers and problem with Samsung flash memory
installation, the plant may outsource professional workers from Foxconn.
The pro of outsourcing with Foxconn is Danshui may enjoy the expertise of Foxconn.
Foxconn has experienced workers, technical expertise, and also specific equipment. It is
believed that the labor force of Foxconn able to achieve a better manufacturing performance
than semiskilled workers of Danshui. They may complete the tasks effectively in a quick way
with better quality product. Less wastage will be happen. This can be significant cost savings.
Moreover, based on the past work experience with Apply, Danshui need not to worry about
quality standard of incompatible with Apple. By this way, Danshui not only can solve the
problem and achieve the targeted volume on time.

Meanwhile, the disadvantage of outsourcing is hidden cost. It could be a hidden cost while
signing the contract. Danshui may facing the risk of exposing confidential company
information to Foxconn. This may hurt Danshui in future. Furthermore, outsourcing
negatively affect morale, loyalty and productivity among the semiskilled workers in Danshui.
They might express lack of interest or lack of quality at work since they need not to work hard
as to find way to rush for the production deadline of the contract. Absenteeism might increase
as low morale among workers. Or misunderstanding between workers of Danshui and
Foxconn might occurred. This may direct impact productivity negatively.
2. Providing professional training for semiskilled workers
In order to boost and enhance the skills level, Danshui should provide some trainings or
workshops for the workers to ensure that they can achieve the target (production level).
Danshui can reap the rewards of providing training for their employees because well-trained
workers could help increase productivity and profits. Investing in employee training should
improve worker retention rates, customer satisfaction and creativity for new product ideas.
The pro of providing the training is job satisfaction. Job satisfaction generally increases and
self-esteem improves when employees better understand the workings of the company.
Training can also enhance morale on the job and loyalty to the company. Workers who believe
their company offers excellent training opportunities are generally less likely to leave their
companies within a year of training than employees with poor training opportunities,
according to Howard Community College in Maryland, which points to a poll of employees
by Louis Harris and Associates.

The cons of providing the training are it needs a lot of cost and time consuming. Basically, to
produce a well-trained worker, Danshui need a lot of money to provide a seminar, workshop,
training, and so on. Besides that, it could take a long time to finish the training session, and
along the training session it would incurred some cost especially for trainer wages.
3. Increasing wages of workers
Foxconn, competitor of Danshui currently increased their paying up to 35% and at the same
build new plants elsewhere where unemployment is high to attract and recruit new potential
labors. As to compete with Foxconn, Danshui may consider to raise the workers wages to
35% instead of 30%. This is essential to attain the existing workers and also attract job
application from new workers. According to Janet Yellen (1984), higher wages will reduced
shirking by employees due to a higher cost of job loss, lower turnover, an improvement in the
average quality of job applicants and improved morale.
The pros of increasing the wages of workers are it can reduce disciplinary problems and
absenteeism rate in the plant. Cappelli and Chauvin (1991) documented that in plants where
pay was higher relative to the local labor market, fewer disciplinary actions were required.
Higher wages attract more capable and productive workers. The evidence that higher wages
attract more high quality applicants for new jobs is voluminous. Offering higher salaries
yielded an applicant pool with a higher IQ and with personality scores and motivation that
made them a better fit for the advertised jobs. Moreover, the first firm to offer higher wages is
more likely to attract and retain more productive workers. (Dal Bo et al., 2013).

However, increasing the wages of worker will increase the labor cost of company. This will
caused the growth of net loss in flexible budget and the labour rate variance become more
unfavourable than previous.
4. Implementing Overtime (OT) Scheduled Plan
Danshui also can implement OT scheduled plan for those workers who work above normal
working hours. A higher overtime pay for hours should be given. Through the payment of
overtime, it is believe that the workers will have the passion and more likely to work for extra
time. This is because, think by logically, individuals is interested to get extra and higher
payment. Thus Danshui able to extend the working hours as to achieve the target of
production of the iPhone4 as required by Apple.
But, can Danshui assure that the quality of the product produced on OT scheduled plan remain
the same or increased? Because when employees work longer than usual they tend to burnout
which is tired of their work too quickly and it will be more stress-inducing. It will also affect
the production whether they will produce less or the quality of the product will be reduced and
what is worst is that the cost of the company have to support is rising up.
5. Increase Supervision
Upper management must play their role on tighten the supervision on the work of the
employees and often check on their work regularly such as daily, weekly and so on. This is to
ensure that the workers do their job properly, efficiently and effectively. Tighten the
supervision not only can help manager to keep updated with the progression of the worker, but
it also can help them to keep track if there is any problem with the production and corrected

mistakes if any so that they can produce better quality of product and achieve targeted level of
production.
The problem with this solution is that it involve with the disciplinary of the upper
management such as manager. Company must invest on some seminar or courses in order to
train the manager so that they can have enough knowledge in supervising the workers
effectively.
Among these solutions, the manager of Danshui, Wentao Chan should immediately held a
meeting with the key management in the plant to determine several appropriate key decision
criteria. These key decision criteria are important to Danshui in evaluating the sustainability of
each alternative recommend and make a selection among these them. The four key decision
criteria that should be used to measure, evaluate and analyze each alternative solutions which
are:
1.
2.
3.
4.

Meet the term and condition within the next 9 months of contract
Solve the problem of lack of qualified workers
Deliver quality product to apple
Improve profitability

By referring to Appendix B, the table is showing the comparison among 5 solutions regarding to
4 key decision criteria. A tick means that particular solution may gaining high likelihood to
achieve particular key decision criteria. A solution with more ticks is favorable. From the result,
outsourcing, increasing wages of workers and increasing supervision is considered as favorable
solutions. However, Wentao Chen should make decision on selection of alternative solutions not
only based on the achievement of key decision criteria, but also consider all the pros and cons of
each alternative solutions.

5.0

RECOMMENDATION

JUSTIFICATION

SOLUTION,

IMPLEMENTATION

AND

6.0 CONCLUSION
As conclusion, in order to prevent underproduction that Danshui faced, they can outsource some
of the part of components from other company so that they could focus on the assembling the
process only. They also can organize more training program for their workers to increase their
skill in assemble iPhone since the worker have more skill in assembling computer hard drive.
Besides, supervision on the work of the employees must be tightening from upper management
to ensure that the workers do their job properly, efficiently and effectively. This can help
management to make sure that the works that have been done being followed with the schedule
that have been made so that they can achieve targeted level of production.

7.0 EXTERNAL SOURCING

1. Yellen, Janet L. 1984. Efficiency Wage Models of Unemployment. American Economic
Review 74, no. 2: 200-205.
2. Cappelli, Peter, and Keith Chauvin. 1991. An Interplant Test of the Efficiency Wage
Hypothesis. Quarterly Journal of Economics 106, no. 3 : 769-87.
3. Bo, Ernesto Dal, Frederico Finan, and Martin A. Rossi. 2013. Strengthening Stae
Capabilities: The Role of Financial Incentives in the Call to Public Service. Quarterly
Journal

of

Economics

128,

no..3

1169-218.

Retrieved

https://piie.com/blogs/realtime-economic-issues-watch/higher-wages-low-incomeworkers-lead-higher-productivity

from

8.0 APPENDIX A

9.0 APPENDIX B
No
.

1
2

Improve

and condition

problem of

quality

profitability

within the

lack of

product to

next 9 months

qualified

apple

of contract

workers

Outsourcing
Providing professional

training for semiskilled

workers
Increasing wages of

workers
Implementing

Meet the term

Key decision criteria

Solve the
Deliver

Overtime (OT)

Scheduled Plan
Increase Supervision

Note:
- high likelihood
X - low likelihood