Alicia Wong
Alicia Wong, Corporate Supply Manager, Thain Foods Lim- ited, wanted to prepare a proposal to manufacture mustard in-house. Mustard, an important ingredient in many of the back-office operations. He indicated that the typical fee was approximately $3.00 per kit, including mailing costs. The purpose of the meeting on Tuesday was to see if there was interest from Kara in pursuing the proposal; at that time Kara would need to provide David with details regarding annual volumes and materials involved.
Kara could see the advantages of outsourcing manage- ment of the storeroom operations and kit assembly. Of- fice space was at a premium at Marshal, and the storeroom could easily be converted to other uses. The headaches associated with ordering materials and maintaining inven- tory records could be eliminated.
However, Kara did have concerns. First, she was suspi- cious that Gilmore was looking to take over all the printing business for MAC. Although an important supplier, Gilmore was currently responsible for approximately 30 percent of the printing purchases for MAC. Under the outsourcing arrangement proposed by David, Gilmore would take over existing contracts with Marshall suppliers, but as these contracts expired, it would be up to Gilmore to decide who would do the printing.
Secondly, timely processing of client membership cards and kits was critical. The expectation was that these materials would be processed within 24 hours. Kara was worried about maintaining service levels under an outsourcing arrangement with Gilmore. Furthermore, client information was confiden- tial, and Kara had concerns about security and ensuring that Gilmore did not use the MAC client database for other pur- poses, such as advertising and promoting products and ser- vices for other customers.
PREPARING FOR THE MEETING
Kara felt that the proposal from David had merit and she wanted to give it careful consideration. As she ex- amined the information he had left with her, Kara won- dered how to proceed. Were the risks worth the potential problems? What questions should she ask at the meeting on Tuesday? And were there any conditions she should place on the arrangement with Gilmore if they were to proceed?
company’s products, was currently purchased from an out- side supplier. She hoped a comprehensive proposal could be prepared in one-month’s time for the CEO’s approval.
GENERAL COMPANY BACKGROUND
Thain Foods Limited (TFL) had been in business for more than 30 years. Its products included a wide range of syrups, fudges, cone dips, sauces, mayonnaise, and salad dress- ings. Its customers were major food chains, hotels, and restaurants in North America and Europe.
TFL believed in continuous improvement to its operations. Over the last two years, it invested more than $2 million in plant facilities, the bulk of it new, state-of- the-art process equipment and process control. All produc- tion and process control functions were computerized for maximum efficiency.
TFL employed about 120 people. It had a corporate struc- ture of CEO; president; executive vice president, domestic sales; and national account manager and used a network of food brokers who sold and promoted its products.
THE SUPPLY AREA
Alicia was responsible for supply and reported direct- ly to the CEO. She had an inventory control officer, a buyer, and a receiver under her supervision. Purchas- es could be classified into five different types: labels, packaging, raw materials, commodities, and MRO sup- plies. Mustard was an important raw material used in many of TFL’s products.
CURRENT PRACTICE: PURCHASING MUSTARD EXTERNALLY
Whenever mustard was required, the buyer e-mailed the supplier and requested that it prepare the ap- propriate amount to be picked up by a truck from TFL. The purchase order would be prepared be- fore the truck left for the supplier, normally the next day. The mustard supplier used mustard seed as its raw material and blended in the other ingredients af- ter the seed had been reduced to mustard flour. Ev- ery month TFL purchased 500 drums, or 100,000 li- ters, of mustard. The cost of the mustard itself was $64 per drum. Freight costs were borne by TFL and amounted to about $8 per drum. TFL operated three eight-hour shifts, five days a week. Each worker was paid about $20 per hour. It took about 10 minutes of a worker’s time to handle each drum. This included pouring the mustard into the processing kettle, making sure other added ingredients mixed well, and rinsing the drums. The drums were bulky and, because they could not be used in the plant for other purposes, had to be
rinsed for a contractor who took them away. The costs of disposing of the drums in this manner were negligi- ble. Other costs and overhead of purchasing were $0.02 per liter.
SUGGESTED CHANGE: MANUFACTURING MUSTARD IN-HOUSE
The mustard to be produced at TFL would be composed of roughly 60 percent solid, 20 percent water, and 20 percent vinegar. The solid portion was a spice blend, consisting essentially of mustard flour, salt, and other spices that could be readily bought. Water was not a problem because the city provided a reliable supply. Vinegar was already a raw material that TFL ordered in bulk regularly from suppliers. Alicia therefore believed that it was a simple matter for TFL to make the mustard for its own use. TFL only needed to buy the spice blend and add water and vinegar in the right proportions. She approached a supplier who indicated that it could make the spice blend at a delivered price of $0.15 per liter for TFL, including freight. However, it needed time for tests to ensure that the blend would be of the right quality for TFL’s use. Vinegar cost TFL $0.1875 per liter delivered in 15,000 liter lots. And TFL was paying $0.025 per liter for water. Alicia also checked whether production had the time and equipment to make the mustard. Production felt that the change would not be too drastic and no ad- ditional workers would be necessary. However, it would use up more of the existing workers’ time. Production calculated that the change would entail a total labor and overhead cost of about $0.105 per liter of mustard using standard cost accounting for labor time and overhead charges.
Alicia organized an information gathering and discus- sion session involving supply, production, quality assur- ance, and distribution to discuss the proposed change. The workers were keen on the idea because this meant that they would no longer have to haul and rinse the bulky drums (water and vinegar could be easily channeled to the mix- ing containers using existing pipes). However, quality as- surance expressed concern about the quality of mustard if produced in-house. Because the mustard was an ingredient in many of TLF’s products, such a change might adversely affect the quality and taste of these products.
Alicia wanted her proposal for in-house manufacture of mustard to be in the company’s best interest and wondered how to proceed next.
Questions
1. Should it be supply’s role to suggest insourcing?
2. What benefits would accrue to TFL from making mustard in-house?
3. What risks are there for TFL?
4. What would by your analysis of the feasibility of making mustard in-house?
5. What major topic areas would you address in your proposal to the CEO and what would be your main arguments?