Kavango Blocks: A Second Site at Rundu?
Kavango Blocks manufactures cement blocks and pavers in Windhoek's northern industrial area. It sells 70% of its output to builders in Windhoek and 30% to customers in Rundu. A low-cost housing contractor in Rundu has offered a three-year contract for 75 tonnes of product a month, provided each delivery arrives within 48 hours of the order. The Windhoek site's rent is N$18,000 a month; a serviced site in Rundu would cost N$9,500. Sending product from Windhoek to Rundu costs N$95 a tonne.
Rundu suffers frequent power cuts, so a generator would be needed at about N$12,000 a month in fuel and servicing. Only two of the company's nine skilled machine operators would relocate; recruiting and training local replacements would cost about N$60,000. Cement must be cured under controlled moisture for the blocks to reach the strength the contractor's engineers require, and the Rundu site has no covered curing area.
1. Calculate the monthly cost of serving the Rundu contract from Windhoek and from a new Rundu site, and find the contract volume at which a second site would break even.
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Serving the contract from Windhoek: 75 tonnes x N$95 = N$7,125 a month in transport. The Windhoek rent is unchanged, so it is not part of this decision.
Opening a second site at Rundu adds:
- Rent: N$9,500
- Generator: N$12,000
- Training spread over the three-year contract: 60,000 / 36 = N$1,667
- Transport saved: N$7,125
Net effect of a second site: 7,125 - (9,500 + 12,000 + 1,667) = 7,125 - 23,167 = -N$16,042 a month. The Rundu site is more expensive, because opening it adds rent and power costs while the Windhoek site and its rent continue.
Break-even volume for a second site: 23,167 / 95 = 244 tonnes a month. The contract offers 75 tonnes, about a third of that.
A different question is whether to move the whole business to Rundu. Then the Windhoek rent of N$18,000 would be saved, extra costs would be 9,500 + 12,000 + 1,667 - 18,000 = N$5,167, and break-even would be 5,167 / 95 = 54 tonnes a month, before counting the transport saved on the existing 30% of sales to Rundu. On that basis the move could pay, but the Windhoek market would then be served from 700 km away.
2. Discuss the non-financial factors Kavango Blocks should consider before deciding.
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Delivery reliability: the contractor requires delivery within 48 hours. Windhoek to Rundu is a long road journey, manageable in the dry season but risky in the rainy season when gravel sections and flooding can delay trucks. A Rundu site solves distance but not reliability if power cuts stop the block machine.
Quality: blocks must be cured under controlled moisture to reach the specified strength. The Rundu site has no covered curing area, so either investment is needed or quality will suffer, which matters more than cost on a three-year contract with engineers testing the product.
Skills and labour: losing seven of nine skilled operators is a serious capability loss. Training local replacements may work well, but during the first months output and quality will dip, and the company may have to pay more to attract experienced staff to a remote town.
Risk concentration: one contractor for three years is a large share of output. If the housing project is delayed or the contractor switches supplier, a new plant becomes an expensive liability.
Local goodwill and procurement: a local plant may win favour with the town council and other Rundu builders, and being visibly Namibian-based can help with tenders. Water availability and dust control also need checking.
Strategic fit: growth into the north is attractive, but the company should not commit capital until it has more than one Rundu customer.
3. Recommend what Kavango Blocks should do, with conditions.
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Do not build a second plant for 75 tonnes a month. The figures show a monthly disadvantage of N$16,042, and the break-even volume is around 244 tonnes, more than three times the contract. Building now would turn a profitable business into one carrying an underused asset.
Recommendation: serve the contract from Windhoek and test the market cheaply.
- Negotiate a 72-hour delivery window or a price premium to cover the risk of late delivery in the rainy season.
- Rent a small covered depot and stockist in Rundu rather than a factory. Blocks can be cured in Windhoek and held in Rundu for immediate delivery, which protects the 48-hour promise at modest cost.
- Use the depot to sell to other Rundu builders and measure demand over six to twelve months.
- Collect firm orders before each truck leaves, so transport is charged to real demand.
Conditions for revisiting a plant: confirmed Rundu demand above 244 tonnes a month, or a decision to close Windhoek and relocate entirely. Before either step, secure a second customer, cost a covered curing area and water supply, and check whether the power utility can guarantee supply or whether solar with battery backup is cheaper than diesel generation. Set a review date and a demand trigger in writing so the decision is not made on optimism.