Question

1. Company has determined that they can increase their profitability by $80,000 per year if they outsource the production of some parts used to build their most popular product. A significant amount of the cost savings will come from reduced labor force. This includes some long-term employees that served as quality-control inspectors. The parts being outsourced are difficult to manufacture and critical to the performance of the machine where they get installed. The inspectors were highly paid and very proficient at their job. The analysis assumes that space cleared as a result of this outsourcing will be rented to another company for storage. The vendor that would provide the parts has an excellent reputation for precision parts and has experienced dramatic growth in the last few years. They have not produced these particular parts before, but have committed to the price for at least 2 years. Assume the computational analysis was done correctly. List 2 non-quantitative considerations worth discussion before they commit to this outsourcing arrangement. Please list how you do the calculation.

Answer 1

A. Risk of Failure to produce required quality by outsourcing arrangmenet vendor :

The new vendor though having excellent repuation for precision parts does not guarantee success in producing critical parts for the organisation. Company have to carefully consider this point while making decision & should also make effort to test the sample or trial period etc.

In numerical terms it will be loss of profit for failure to produce requisite quality part Vs expected saving

B. Future bargaining position with supplier / Perceptions regarding possible future price changes :

The new vendor have committed to same price for next two year which is reasonable long period. However Company should also consider that whether after expiry of two year company would be in bargaining position since they will be totally dependant on outsourced vendor. The perception of possible future price would also be important factor to determine outsourcing decision.

In numberical terms evaluate future saving considering estimated price of future.