Making or Outsourcing Pump Housings
The Muenster Pump Company has manufactured high-quality agricultural pumps for over 40 years. The firm’s only plant is located in the small midwestern city of Muenster. The company is Muenster’s largest employer. Bob Dorf, president of the firm, is the grandson of Emil Dorf, the founder. Bob and his family, along with all key personnel, live in or near the city of Muenster. Cordial relations exist between the firm and the city officials. Since its founding, the firm has always been as self-sufficient as possible. Shortly after setting up business, Emil Dorf established a foundry to cast pump housings and related items. Today, the foundry provides virtually all of the required pump housings. Bob’s cousin, Terry, is the purchasing manager for Muenster Pump. After graduating from State University, Terry worked as a buyer at a large appliance manufacturer in the southwestern corner of the state. But after two years of life in the big city, Terry returned to Muenster. Bob was delighted to have Terry back in town. He established the Burt−Dobler−Starling: World Class Supply Management, Seventh Edition IV. Strategic Sourcing 14. Outsourcing: To Make or To Buy © The McGraw−Hill Companies, 2003 CHAPTER 14 Outsourcing: To Make or To Buy 303 position of purchasing manager by consolidating the buying functions previously performed by himself and other members of the firm. As seen in Figure 14.1, Terry reports to her Uncle Ned, who is the vice president of manufacturing. Terry is an aggressive and conscientious professional. Materials costs have come down from 60 percent of the cost of sales to 50 percent in the two years since she assumed responsibility for purchasing. Recently a representative of Union Foundry, a firm located in the southeastern part of the state, called on Terry. The rep was aware that Muenster Pump made its own cast pump housings. But he claimed that new developments in casting pouring allowed his firm to offer extremely attractive prices. Terry requested a price on the L-1012 case housing, Muenster’s most popular size. The L-1012 represents 60 percent of Muenster’s demand for cast (or pump) housings. The pump that incorporated the L-1012 is sold to distributors for $500. Within a week of the meeting, a letter arrived from Union Foundry, quoting a price of $90 F.O.B. Muenster. Delivery was promised in 120 days after receipt of the first order. Thereafter, delivery would be made in 60 days after receipt of an order. Minimum orders were established as 100 units. Terry contacted two other foundries and obtained quotations for the L-1012 housing. The prices were $94 and $98 F.O.B. Muenster. Terry met her Uncle Ned, discussed her findings with him, and asked how much it cost Muenster to produce the cast (or pump) housings internally in its own foundry. Ned Dorf was not at all enthusiastic about Terry’s efforts in this area of the business. He said, “Terry, I appreciate your interest and efforts at reducing cost, but a lot more is involved here than meets the eye. We produce a quality housing that is not equaled in the industry. It’s one of the primary keys to our success! Furthermore, we can respond to requirements much quicker than those city boys.”
Muenster Pump Company President and Chief Executive Officer Robert A. Dorf V.P. Engineering Samuel Dorf V.P. Manufacturing Nathanial Dorf (Ned) Comptroller Judy Dorf V.P. Sales James Dorf Operations Theodore Dorf Purchasing Terry Dorf Receiving Judy Dorf Quality Anneta Dorf
REQUIRED:
Present a clear analysis of the relevant costs of make or buy to assist in the decision. You must analyze the true marginal costs of making in house. Marginal costs are those costs that would go away if they are outsourced. In the short run, only these marginal costs are important in the decision. Compare those costs to the bid price. Generate a good list of the advantages and disadvantages of both the make and buy situations.