Case Studies

Abstract

Sheila Austin, a buyer at Autolink, a Detroit-based producer of subassemblies for the automotive market, has sent out requests for quotations for a wiring harness to four prospective suppliers. Only two of the four suppliers indicated an interest in quoting the business: Original Wire (Auburn Hills, MI) and Happy Lucky Assemblies (HLA) of Guangdong Province, China. The estimated demand for the harnesses is 5000 units a month. Both suppliers will incur some costs to retool for this particular harness. The harnesses will be pre-packaged in 24 × 24 × 6-inch cartons. Each packaged unit weighs approximately 10 pounds.

Appendices

Appendix 1: Year 1 Inventory Carrying Charges Outsourcing Option

	Beginning inventory	Ending inventory	Average inventory	Inventory carrying costs
January	30,000	0		$
February	30,000	0		$
March	30,000	0		$
April	27,000	0		$
May	25,000	0		$
June	25,000	0		$
July	23,000	0		$
August	21,000	0		$
September	22,000	0		$
October	23,000	0		$
November	23,000	0		$
December	21,000	0		$
			Total inventory carrying costs

Appendix 2: Year 2 Inventory Carrying Charges Outsourcing Option

	Beginning inventory	Ending inventory	Average inventory	Inventory carrying costs
January	34,000	0		$
February	34,000	0		$
March	34,000	0		$
April	31,000	0		$
May	28,000	0		$
June	28,000	0		$
July	27,000	0		$
August	25,000	0		$
September	25,000	0		$
October	27,000	0		$
November	27,000	0		$
December	25,000	0		$
			Total inventory carrying costs

Supplier Capacity

The team has concluded that the supplier has available capacity to satisfy FlexCon’s total piston requirements.

Appendix 3 provides a worksheet to help in the insourcing/outsourcing cost analysis.

Appendix 3: Insourcing/Outsourcing Cost Factors Worksheet

Insourcing cost per unit	Year 1	Year 2	Outsourcing cost per unit	Year 1	Year 2
Direct materials   Semi-finished   Other			Purchase cost
Direct labour			Transportation
Indirect labour			New tooling
Factory overhead and administrative			Administrative support
Preventive maintenance			Inventory carrying
Machine repair			Safety stock
Ordering			Quality-related costs
Depreciation			Ordering
Inventory carrying			Other costs
Inbound transportation			Total outsourcing costs per unit
Consumable tooling			Total savings (1)
Other costs			Less: Taxes on savings (40%)
Total insourcing cost per unit			Net outsourcing savings

1. Total Savings = (Total Insourcing Costs − Total Outsourcing Costs) × (Total volume)
2. Note that the total savings could be negative if the analysis shows that outsourcing costs are greater than insourcing costs

Assignment

• 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 FlexCon should do with its family of pistons? Support your arguments with evidence gathered during your analysis.

• 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.

• 3. Discuss the primary reasons when and why insourcing/outsourcing decisions occur.

• 4. A major challenge with an insourcing/outsourcing analysis involves gathering reliable data. Discuss the various groups that 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?

• 5. Discuss the major issues associated with an insourcing/outsourcing analysis and decision.

Endnotes

The 14$ figure is less than the 18% figure applied to safety stock carrying charges. The supplier does not receive payment until at least 4 weeks after FlexCon receives the pistons. This makes FlexCon’s working capital committed to financing production inventory somewhat less than the capital committed to financing safety stock.