THE FLEXCON PISTON DECISION STUDY CASE

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1 THE FLEXCON PISTON DECISION STUDY CASE Insourcing/Outsourcing BA:234 PRINCIPLES OF SUPPLY CHAIN MANAGEMENT March 15, 2017 Authored by: Martina K. Vannevel

2 Introduction To outsource/insource is a complex strategic decision whether a business should produce a component, assembly it and service, or buy the product, assembly, and service by an outside supplier. This is often irreversible decision and it does take years to come up with a plan. This decision process does typically include a thorough full examination of a company's competency and expenses, alongside quality, delivery, technological innovation, responsiveness, and constant updating requirements to follow trends in supply chain management. The decision whether to insource/outsource is a very critical decision that adds additional responsibility on management during and after the decision-making process Single groups that do not operate with all insight knowledge and data therefore further learning and analyzing of data is required to make successful insourcing/outsourcing choices. Question 1 Perform a quantitative insourcing/outsourcing analysis using the data provided. What qualitative issues might affect your final decision? Identify any costs or issues that are not part of your analysis that might affect your decision. What is your recommendation regarding what Flex Con should do with its family of pistons? Support your arguments with evidence gather ed during your analysis. FlexCon as a company do take a pride on providing reliable high quality product (pistons). The company has been in manufacturing for over half the century and build very good reputation among customers and vendors. FlexCon monetary value is about $ 3 billion USD and depends heavily on outside suppliers. When companies do deciding about changing their strategy and outsource, one of their main concern is if 1

3 they will still be able to produce such a high-quality product that their customers are used to or if the decision will ruin their reputation. "If you want something done right, do it yourself" The qualitative factor that contributes against outsourcing is possible negative customers responses. FlexCon does take a pride in providing high-quality product and the customers are aware of it. Coming up with a new supplier for the pistons might jeopardize the company s reputation which can transparently show in decreasing in sales. To build a good reputation is long-term process and requires more than just cheap product or interesting advertising. Brand reputation entirely depends on public opinion about company and company s corporate activities. When companies are undergoing the process of deciding whether to outsource or insource, there are six main trends that can influence the decision process: 1. The need to use production services more efficiently. 2. The consideration to invest into a (new) process or (new) technology. 3. The need to look at what the company excels at and evaluate the ones they don t have 4. expertise in. 5. The need to fix costs and assets that are relevant to suppliers. 6. The need to have the tools to forecast and compare different sourcing possibilities. Like it was mentioned above outsourcing/insourcing is often irreversible decision and is comparatively costly process. Following are the data available in case study completed 2

4 with additional calculations for all expenses. When deciding to outsouce/insource all expenses should be considered and analyzed. 3

5 By utilizing two years of forecasted production and expenses compared to previous year, the next step is to calculate and propose insourcing and outsourcing expenses for the company. INSOURCING AND OUTSOURCING EXPENSE FORECAST Insourcing Cost Factors (Table 1) Year 1 Year 2 Direct Material Semi finished Direct Labour Indirect Labour Factory Overhead and Administrative Preventive Maintenance Machine Repair Ordering Depreciation Inventory Carrying Inbound transportation Consumable Tooling Total Insourcing Cost Per Unit Outsourcing Cost Factors (Table 2) Year 1 Year 2 Purchase Cost Transportation

New Tooling 0.5 0.43 Administrative Support 0.09 0.08 Inventory Carrying 0.07 0.

05 Total Outsourcing Cost per Unit 13.58 13.

6 New Tooling Administrative Support Inventory Carrying Safety Stock Quality Related Costs Ordering Total Outsourcing Cost per Unit Total Savings (1) Less: Taxes on Savings (40%) Net Outsourcing Savings Insourcing Cost Per Unit (Graph 1) Outsourcing Cost Per Unit (Graph 2) 5

As it is seen on graph 1 and graph 2, the cost to produce pistons would not change dramatically in neither one of the scenarios (Outsource/Insource) in both Year 1 and Year 2.

7 As it is seen on graph 1 and graph 2, the cost to produce pistons would not change dramatically in neither one of the scenarios (Outsource/Insource) in both Year 1 and Year 2. However, comparison of Table 1 and Table 2 shows that FlexCon could save $18, 000 per year 1, but in year 2 they would face $ 124,000 loss. In year 1 and 2 the demand and therefore production of pistons will slightly rise which would offset production cost if insourced. That is why there is a slight decrease in cost per unit in year 1 and year 2 ($13.68 Year1 - $ year 2 = $ 0.55 cost decrease per piston). Recommendation: Considering these figures, it would be to FlexCon's greatest advantage to proceed with its insourcing. While a one-year change to outsourcing would bring about additional profit of $18,000, it would bring about a considerably more protuberant loss of $124,000 over a time of two years. 6

8 Question 2 Assume your group decided to outsource the pistons to the external supplier. Identify a plan that would enable FlexCon to carry out this recommendation. Be as thorough as possible. Outsourcing is usually preferred method for manufacturing industries. It allows business between other countries that are capable and sometimes better equipped and having better ability and resources to produce comparable product for the fraction cost of the in-house made product. The top management would be responsible to create dynamic and clear communication between company s branches and also between top management and the new outsourced supplier. The top management must have clear understanding of what impact does the outsourcing has on the company they will be capable to create and action plan. Outsourcing pistons would lower FlexCon production cost, the possible quality of the item is being jeopardized. Start-up expenses of outsourcing might be high, and when the future productivity is unsure that even adds the risk. Question 3 Discuss the primary reasons when and why insourc ing/outsourcing decisions occur. To have the capacity to survive and be profitable in current globalization time, organizations tend to utilize outsourcing. The reasons why companies do consider outsourcing is to engage their business center, relieve risk of not meeting demand 7

9 needs, progressive manufacturing elsewhere, to specialized abilities and access free assets for the corporate management. The competency to manufacture and deliver product on time is crucial for further business surviving and delays could disturb distribution, cause retails and other manufacturers delays in their schedules and this often leads to loosing contracts and leaves competitors to take over. Outsourcing is the way toward exchanging the obligation regarding a particular business work. Organizations can give better customer benefit, create a superior item, present their products better and be more effective when they decide to outsource their non-center business work. Question 4 A major challenge with an insourcing/outsourcing analysis involves gathering reliable data. Discuss the various groups th at should be involved when conducting an insourcing/outsourcing analysis such as the one presented in this case. What information can each of these groups provide? One of the ways how to look at data is to hire external consultant who is an expert in the industry and who specialize in certain markets. Company can use internal data and perform total cost analysis (like it was done in Question 1 of this report). Secondary data can be collected from databases, websites, and reports, but I would not recommend to depend solely on them as these data might be outdated or created not to provide specific information. After all, business need to protect their trade and manufacturing secrets and not let everyone access them freely on the internet. If the company is really considering outsourcing/insourcing they should create a special team for the purpose of 8

10 market research, and let the team to collect and evaluate information. All information obtained from various sources should be cross referenced and the probability of the success for a process should be more, so that it can be successfully implemented. Question 5 Discuss the major issues associated with an insourcing/outsourcing analysis and decision. When a company is undergoing decision whether to outsource/insource, the decision process and following decision are probably what matters the most for the future of the company. Therefore, this process should never be done under a pressure and without extensive and thorough analysis. To consider insource the company should perform strategic assessments related to availability, total cost and amount of resources that will be needed. For insourcing production line the key would be to know direct and indirect cost of material usage, and the forecast of industry and products for new few years. Impact in this analysis should be on forecast of the industry, what their major competitors are and what seems to be their next couple of years in the industry, finding trends, but also what new methods and procedures might be. Is there even going to be demand for our product? The Risk analysis is crucial to be able make the final decision. If the company is inclining towards outsourcing, the relationship with new supplier is absolutely a key for further surviving. There are many possible issues with a product assembly that could arise. However, the company will loss full control over the manufactured product once outsourced. This is often irreversible decision so companies should really take time to make the right decision. 9

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