We've discussed the decisions that companies make to maximize their competitive advantages. One of the strategies that companies follow is to determine what activities they will perform themselves and which will be performed by suppliers under contract to the company. Part of this decision making is a make or buy evaluation.
During your Supply Chain career, you may find yourself engaged in supporting the decision making process as your company evaluates whether to make or buy products, assemblies, subassemblies or parts. You work for the Titan Braking Systems company (TBS). Management believes that it may be able to lower its costs by outsourcing some of its braking products. You've been tasked to quote suppliers for making three products. You've received proposals, but recognize the need to assess whether accepting any of these proposals is in TBS' best interests. It's not immediately clear if it's a better financial deal to continue making these products in-house or outsource them. You've compiled all available financial data and are ready to begin preparing an assessment. You have the following goals for your assessment:
1. You need to determine two benchmarks, against which you'd assess supplier quotes:
(1) The net present value (NPV) at which TBS is indifferent on whether to outsource the three products or continue making them in-house.
- Finding this value requires you to come up with a unit price based on the Table 1 Unit Production Cost data and then utilize the (10) year sales forecast to come up with annual aggregate production costs. You would then calculate the net present value of these annual costs. Use a 10% discount rate.
- Tip 1: Remember that NPV tables are accessible through a link in our Module 3 folder.
- Tip 2: Coming up with an annual production cost for each product will require you to allocate overhead to production costs. Overhead can allocated based on labor costs; the sum of unit labor and material; or per unit. You may choose your allocation base.
(2) The NPV at which TBS will realize a 10% reduction in costs. This requires you to reduce the projected unit price by 10% in each year and then follow the same steps to develop an NPV, as outlined above.
2. If all three products are outsourced, it may also be possible for you to close the building housing the factory making these three products and sell the equipment used to produce them. Potential bidders include those suppliers competing to manufacture the parts for the potential outsource. Using company records, you've compiled the financial data shown in Table 2. Using this data, you should be able to determine what the book value for these assets, so that you know the minimum price you can charge the bidders for these assets.
Please prepare and submit a summary of the results of your assessment. The summary should also:
1. Be submitted in Microsoft Word format. Excel files/formats may be pasted into the document as a spreadsheet or object;
2. Show the calculations used to generate the results; and
3. Be submitted by Sunday, 13 September 2015.
Table 1
Sales Forecast and Unit Production Costs
|
|
YEAR
|
|
|
1
|
2
|
3
|
4
|
5
|
6
|
7
|
8
|
9
|
10
|
|
Overhead
|
$1.2 M
|
$1.2M
|
$1.2M
|
$1.2M
|
$1.2M
|
$1.2M
|
$1.2M
|
$1.2M
|
$1.2M
|
$1.2M
|
|
Product A
|
|
Forecast
|
5,000
|
6,000
|
6,500
|
5,500
|
4,400
|
3,900
|
3,500
|
2,500
|
2,000
|
1,000
|
|
Labor/Unit
|
$800
|
$800
|
$800
|
$800
|
$800
|
$900
|
$900
|
$900
|
$900
|
$900
|
|
Matl./Unit
|
$500
|
$500
|
$500
|
$500
|
$500
|
$550
|
$550
|
$550
|
$550
|
$550
|
|
Product B
|
|
Forecast
|
3,500
|
3,500
|
3,500
|
3,500
|
3,500
|
3,500
|
3,500
|
3,500
|
3,500
|
3,500
|
|
Labor/Unit
|
$900
|
$900
|
$900
|
$900
|
$900
|
$900
|
$900
|
$900
|
$900
|
$900
|
|
Matl,/Unit
|
$650
|
$650
|
$650
|
$650
|
$650
|
$650
|
$650
|
$650
|
$650
|
$650
|
|
Product C
|
|
Forecast
|
2,500
|
2,500
|
3,000
|
3,200
|
3,500
|
3,700
|
3,900
|
3,800
|
3,800
|
3,800
|
|
Labor/Unit
|
$500
|
$500
|
$500
|
$500
|
$500
|
$500
|
$500
|
$500
|
$500
|
$500
|
|
Matl,/Unit
|
$250
|
$250
|
$250
|
$250
|
$250
|
$250
|
$250
|
$250
|
$250
|
$250
|
Table 2
Associated Plant and Equipment
|
|
Product A
|
Product B
|
Product C
|
General
|
|
Purchase Price
|
$ 2,500,000
|
$5,000,000
|
$4,000,000
|
$5,000,000
|
|
Salvage Value
|
$200,000
|
$ 750,000
|
$ 250,000
|
$ 1,200,000
|
|
Useful Life
|
14 years
|
10 years
|
15 years
|
17 years
|
|
Age
|
2 years
|
New
|
4 years
|
5 years
|