Case Study of Stryker Corporation

1. (1) Option #3 was for Stryker Instruments to manufacture its own PCBs in its own facility near

company headquarters. (2)Benefits for option 3: Better control the quality, delivery and cost;

Maintain the business stability; Supply PCBs to other Stryker businesses; Be able to implement

cost shift and avoid tax; (3) Risks for option 3: Carry the inventory; Incur large capital outlay and

sunk cost; Increase headcount, payroll and other expenditures (materials, infrastructure, R&D,

maintenance, PP&E and depreciation) of Stryker; Bear the risk that the equipment may be outdated;

(4) Compared with option #1: Benefit: no capital outlay; to some extent can protect future against

disruptions with lower cost; flexibility; Risk: instability in quality, cost, delivery and responsiveness;

Compared with option #2: Benefit: can improve quality of the supplies by increasing business with

the supplier; Risk: the possibility of bankruptcy and weak financial performance of supplier; the sole

supplier can strongly affect Strykers performance; coordination problem.

 2. (1) Followings are the key assumptions of our write up: Stryker Instruments incurred all

capital expenditures including (construction and improvements, furnishings and non-manufacturing

equipment, communication equipment and IT infrastructure and capital equipment) in year 2003,

before the implementation of the project. Revenue: We use the projected PCBs purchases as the

revenue, because we can cut the amount of purchases by implementing insourcing production.

COGS: before year 2006, COGS contains the purchases of PCBs and raw materials. After that

COGS solely consist of the cost of raw materials. SGA: SGA of each year consists of variable costs

and fixed costs with one exception. In 2004, Stryker expensed architecture and engineering fee in

addition to variable and fixed costs. Tax: tax rate is 36% Depreciation: All the capital expenditures

mentioned above will be depreciated over their respective lifetime. Capital expenditures: Whenever

the capital expenditures wear out, there will be a new purchase (year 2006, 2009 and 2012 for IT

equipment and other furnishings, year 2010 for capital equipment). We consider the Change in A/P,

new vs. old as our incremental NWC. Thus the change of incremental NWC should be calculated

using the numbers from Change in A/P, new vs. old. Based on the above discussion, we arrive at the

following conclusions of FCF. Chart 1 Year 2003 2004 2005 2006 2007 2008 2009
 Free Cash Flow -6,009,258 -683,048 -301,383 1,830,909 3,083,640 3,698,149 4,462,449 (2)

We notice that manufacture volumes contemplated for 2009 represented 100% of the facilitys rated

capacity, so we assume the real revenue and COGS after 2009 will remain at the same level. Based

on the historical data of the U.S inflation rate before 2003, we assume expected inflation rate after

2003 remains at 2%. For every account except for Less Depreciation in Incremental FCF

Forecast, it will grow at 2% annually. In year 2012, there will be an expected purchase for IT

equipment and other furnishings. In year 2010, Stryker will expect an expense on capital equipment.

Based on the above discussion, we have the following results: Chart 2 Year 2010 2011 2012 Free

Cash Flow 2,239,348 4,968,446 4,720,003 3. Using the FCF calculated in question 2, we come to the

NPV of the project till 2009 with Excel function. The company generally used the hurdle rate of 15%

for net present value calculations. Chart 3 Year 2003 2004 2005 2006 2007 2008 2009 FCF

-6,009,258 -683,048 -301,383 1,830,909 3,083,640 3,698,149 4,462,449 Discount Rate 15%

NPV(2003-2009) -96,294 4. Using the FCF calculated in question 2, we come to the IRR of the

project till 2009 with Excel function.

 Chart 4 Year 2003 2004 2005 2006 2007 2008 2009 FCF -6,009,258 -683,048 -301,383

1,830,909 3,083,640 3,698,149 4,462,449 IRR (2003-2009) 14.64% 5. Yes, we recommend Stryker to

implement this project for the following reasons. According to Chart 3 and Chart 4, the NPV till

2009 is slightly negative compared to scale of the project and IRR is a little smaller than the hurdle-

rate. However, the FCF through 2003 to 2009 is increasing and the projected FCFs through 2010 to

2012 are a steady stream of positive value, as shown in the following chart. (We assume that Stryker

will have a stable performance beyond year 2009). Chart 5 Year 2003 2004 2005 2006 2007 2008

2009 2010 2011 2012 FCF -6,009,258 -683,048 -301,383 1,830,909 3,083,640 3,698,149 4,462,449

2,239,348 4,968,446 4,720,003 Discount Rate 15% NPV(2003-2012) 3,711,473 IRR (2003-2012)

24.21% Using the data from Chart 5, we derived an apparently positive NPV of the project (2003-

2012) and a much bigger IRR compared with hurdle rate, which means the project is profitable. In

conclusion, we recommend the Stryker to invest in the project.

Stryker Corp: In-Sourcing PCBs

Introduction:
Stryker Corporation is engaged in offering various medical equipments worldwide. The company is
known to be one of the leading medical technology companies globally. The company is providing
miscellaneous range of products and services that includes surgical, medical, spine and Neuro-
technology products and reconstructive equipments. The main services and products provided by the
company are accessible all over the world. The main instrument that is used for the manufacturing of
medical products is PCB i.e. printed Circuit Boards. In 2002, the companys recorded revenues and
operating profits of $3 billion and $507 million respectively.
Divisions of the company include surgical and medical equipments, Orthopedic Implants,
International sales and Rehabilitative Medical Services. Three main business units of the company
include Stryker Medical, Stryker Endoscopy and Stryker Instruments. Stryker Medical unit produces
hospital beds and other patient medical handling equipment. In addition, this business unit is also
engaged in providing emergency medical service products. Stryker Endoscopy produces
communications and video imaging equipments along with general and arthroscopic surgery
instruments. Stryker Instruments produces operating room equipments, interventional pain control
products and surgical instruments.
Furthermore, manufacturing facilities of the company are located in Ireland, Puerto Rico and
Michigan. In 2002, the company generated revenues of $430 million worldwide.
Key strategic issues:
Currently, the company is facing various issues with respect to its suppliers and is considering to bring
some change in their sourcing strategy. From the current perspective, the company is doing out-
sourcing on a contractual basis from the manufacturers and has estimated current spending of $10
million in the previous two years. Further, the management of the company has not been completely
satisfied from their contract manufacturers for several reasons.
Firstly, the company is facing problems about the quality of products. Secondly, the company is
facing problems from the current supplier about the delivery timings and responsibility for the
companys products. Consequently, the company is continuously finding new suppliers one after
another for the manufacturing of their products. Another major problem found in contract
manufacturers was that they operate on thin margins along with limited capital.
Options availability:
Right now, there are three options available for the companies to make its supply chain strong from
the suppliers side. The first alternative that is available to the company is to maintain the current
basic sourcing policy by making slight changes in it. The next alternative available to Stryker
Corporation is to enhance consistency by developing strong relationship with a single supplier, and
that supplier will sell their products to Stryker Corporation only. In addition, the last option will be
manufacturing of company facility that is in-sourcing PCBs near headquarter of the company.
Objectives:
As the company has to decide whether they should in-source or outsource the manufacturing facility;
therefore, they can make their decisions based on the objectives set by the company. The companys
initial objective is to reduce the purchase of Printed Circuit Boards and to maximize profit.
Furthermore, another objective of the company is to reduce the risk with respect to suppliers of PCBs.
Next objective of the company is to gain control and empowerment over the supply chain, delivery
and quality of products. Another most important objective of the company is to improve the cash in
terms of liquidity.
Analysis:
It can be seen that option three will be the best alternative for Stryker Corporation to adopt because of
various reasons. First reason is that by adopting in-sourcing option, the company will be able to
exercise full control in their supply chain, which will increase the degree of quality along with the
delivery of products in turn. Another reason is that transportation and cost related to logistic will
reduce as the facility will be located near the companys headquarter. In addition to that, the
manufacturing cost associated with in-housing manufacturing of PCBs will be tax deductible, which
will enable the company to make its tax obligation lower during the early years of manufacturing.
Moreover, the depreciation applied on capital and IT equipments with respect to the initial investment
will also be tax deductible. Furthermore, the company will have elasticity with respect to the accounts
payable span that will increase for the company from 30 to 120 days. This will give an edge to the
company as the company will be able to earn more before even giving payments to their suppliers.
Besides that, if the company goes for option number three, then it will be able to achieve efficiency in
terms of production that will increase the profitability of Stryker Corporation in turn.
In addition to that, if the company goes for the third option then management of the company will be
able to make its vertical integration strong, which will help the company to reduce its cost along with
price. Through this, the company will be able to focus more on its customer
service
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originally done case solution.
Considers the proposed investment in the ability to produce printed circuit boards (PCB) at home
instead of buying them from a third-party contract. Business intelligence tools Stryker Corporation is
considering a proposal in response to the difficulties with existing suppliers. Requires students to
formulate and carry out basic quantitative analysis of the budget of the capital, in particular, to
calculate the net present value (NPV) Internal Rate of Return (IRR) and the payback period. Hide
by Timothy A. Luehrman Source: Harvard Business School 6 pages. Publication Date: May 25, 2007.
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