Forest Product Industry Indonesia
• 500,000 m3 of annual demand at $450/ton is reasonable
• Both demand and resources will exist in the long term
• The situation in Indonesia will not change any time soon
• 500,000 m3 is equivalent to 350,000 tons (times 0.7)
This case is about creating a distribution network in Indonesia so IFP can tap into the forest products industry. The difficulty she is facing is understanding how culture and politics play a role when …show more content…
As you can see, the scattered system provides the least profitability, and in fact is not profitable with 22% shrinkage. Both the hub and the hybrid are profitable, but the hybrid is more profitable under these assumptions and eliminates the risk with purchasing logs on auction. Also, by having a bigger presence in Indonesia with 8 saw mills will increase good will into the country which is an immeasurable asset. However, this is under the assumption that IFP won’t be forced into supporting the local infrastructure after resources have been depleted.
Tables 5-7 takes a look at the up front costs and sees if these will be recouped. As you can see, even with shrinkage, these are recouped in both the hub and the hybrid systems, but not in the scattered system. The hybrid system, because it is more profitable, recoup these up front costs faster.
In conclusion, as long as the assumptions above are held true and IFP will not be forced into supporting the infrastructure after resources are depleted, the hybrid system is the most economically viable. However, these assumptions show a big risk by going to the Hybrid system as the Hybrid system is a large investment that requires the buy in of 5 European executives. Hence, to avoid these risks it is advisable to Ms. Daniel’s to begin with the Hub system and move to the Hybrid system as she conducts investigations to verify or mitigate these risks.
Table 1: Variable