Question

JUST LIGHTING CASE STUDY ( Domestic and International Sourcing)

Just lighting is an enterprise in London Ontario which currently sells light fitting from various manufactures to a growing market of contractors and developers. It has grown from a $1 million turnover to a $5 million turnover organization. It does not have any borrowing or loans as it has a sound cash flow. Just lighting owns a facility comprising of an office block, a small warehouse and a large packing area for future expansion. The owner of Just Lighting has always been recognized as an honest and religious man and has run his business the same way. However, he retired a year ago and his son-in-law has taken over the CEO position on the board.

One product which is very price sensitive in the market is a fluorescent surface mounted light fitting called the Con fitting, which makes up 30% of their turnover. The largest volume comes from the 4 foot, 2 lamp (36 watt) fluorescent range.

The marketing Manager, Sparky has recently reported that one of their largest customers has just landed a five year contract to refurbish a number of large low cost commercial buildings which need to upgrade their lighting, to meet the new code. The order is pending subject to Just lighting giving a firm price on 500,000 units. The requirements for this project are the same for each year

As Just lighting wants to grow its market share but sees this order as strategic, it has decided to set up a cross functional team made up of the Marketing Manager, Accountant, Inventory and Logistics Manager and the Purchasing Manager, to come up with a plan. The Purchasing Manager, Chris is responsible for compiling a proposal for the CEO recommending outsourcing or insourcing the additional volume of Con fittings.

Sparky has recommended that Just Lighting should continue to purchase the fitting from the existing supplier, Strip Lighting Manufactures. See exhibit for pricing history. Strip Lighting has been the only supplier of the Con fitting range and the relationship has been a good one although the Accountant, Bookie, has been expressed his concerns about the dinners the supplier lays on for the Just Lighitng customers and some senior staff at expensive restaurants. Sparky responded that is how business is done and the new CEO really enjoys his parties. He added, “Besides, if you don’t then you will lose your customers.”

Chris, did some research to ‘feel out the market’. One option, which showed potential, was to import the Con fitting from INCO Lighting in South Africa (See exhibit 2)

INCO Lighting had a good reputation but it would mean having to employ a person to manage the shipments and logistics, not mentioning a potential problem with the existing warehouse space if too many containers come all at once.

The Inventory and Logistics Manager, Sharon, suggested Just Lighting make their own 2 lamp 4 foot Con fittings. Bookie did some calculations with input from Chris to analyze the cost of setting up a fabricating and assembling lines at Just Lighting (See exhibit 3). Sharon became the concerned about how she would cope with all the addition components, volumes as well as the increased value tied up in inventory. However, she remembered about ABC analysis from her Fanshawe College days and she decided to look it up in her textbook.

Strip Lighting had just put on a large Christmas party for all of Just Lighting customers and senior staff and this year gave each wife a Zumba robotic vacuum cleaner. They were surprise that Just Lighting was even considering other options!

Exhibit 1

Details of Strip Lighting are as follows:

Quoted Price: $50.00 FOB Destination (Canadian Dollars)

Quantity Discount Structure: See chart below

Warranty: covers the free replacement of nay faulty product.

Inventory Costs: Strip Lighting uses a Third Party Logistics Provider, which operates a JIT (Just-in-time) process to the customers

Discounts Offered
Amount Spent		Discount offered
Up to	$2,500		2.5%
Up to	$5,000		5.0%
Up to	$7,500		7.5%
Up to	$10,000		10.0%
Up to	$20,000		12.5%
Up to	$30,000		15.0%
Over	$30,000		15.0%

Total Cost Analysis - Outsourcing Local
Cost Description	Unit Cost
Net Price
Quality Costs
Inventory Safety Costs
Inbound Transport Costs
Total Cost

Exhibit 2

Details of INCO Lighting are as follows:

Quoted Price: USD 28.00 CIF INCO Terms 2010

Exchange Rate: 1 Canadian Dollar = 0.80 USD

Additional importing costs including customs clearing, forwarding agents fees and inbound transport is estimated at $4.50 per fitting.

Quantity Discount Structure: $200 per faulty fitting

Supplier’s Defective level: 5000ppm

Inventory Costs: Assume one month’s average stock level, which costs 15% per annum on the value of Inventory.

The additional workload will require one imports controller costing $50,000 per annum plus 30% benefit costs.

Total Cost Analysis - Outsourcing Overseas
Cost Description	Unit Cost
Net Price
Inbound Transport Costs
Quality Costs
Inventory Safety Costs
Additional direct labour
Total Cost

Exhibit 3

The information on the direct material is as follows:

Steel: Pre-Painted Cold Rolled 0.8mm coil from the United States supplier Steel Coils

Price: USD 520/MT FOB Shipping Point (MT = Metric Ton)

Exchange Rate: 1 Canadian Dollar = 0.80 USD

Steel Mass for each fitting: 5kgs

Inbound Transport: $100/MT

Electrical direct materials (Ballasts, Wiring harness, lamp holders and starters) $20 per fitting

Assembly line runs 320 units per day at a cost of $5.20 per unit.

Factory Overheads are estimated at $5.20 per unit

No degreasing or painting is required

Tooling Costs: All tooling costs = $500,000 and will last for 500,000 units.

Depreciation cost: 8 x CNC Punching and bending machines with de-coilers. Life expectancy for each CNC machine is five years. Each CNC machine cost $200,000.

Finance costs were considered not necessary or important to the decision by the team. However, Bookie protested.

Learning Curve

Units	Total Labour Hours	Average Labour Hours	Learning Rate
10	3
20	5.4
40	9.7
80	17.4
160	31.2
320	56
640	100.6
1280	181
Total

Total Cost Analysis - Insourcing
Cost Description	Unit Cost
Steel Direct Material
Electrical Direct Material
Machine Operators
Direct Assembly labour
Factory Overhead
Degreasing and Painting
Tooling Costs
Depreciation of the equipment
Total Cost

Questions:

1. Identify the immediate issues and other issues concerns.

2. Perform the situational Analysis (SWOT, PESTLE and POTERS 5 forces)

3. Determine the all total cost analysis (insourcing & Outsourcing) in briefly manner with all calculation steps.

4. Identify at least three alternatives which are well described and clearly related to the organizational goals and developed from the situational analysis.

5. Make a final recommendation. Identify the risk management processes and its matrix.

6. Make an implementation timeline chart and conclusion.

Answer 1