A “Space Widget” is produced (100025 per year) in one of your organization’s mor

Question

A “Space Widget” is produced (100025 per year) in one of your organization’s more advanced (and expensive) manufacturing cells. The subject cell uses the latest in CNC machining equipment and is underutilized from a technology capability standpoint when making the Space Widget. The space widget production consumes 1000 of the 3000-total potential operational hours per year of the cell.

In recent days, your organization management has asked that outsourcing be investigated for the Space Widget—in the search for more internal efficiency (use of the cell internally on items that require the high-tech capabilities of the cell has the potential of also lowering the costs of overall production) AND incremental cost savings ($). Restated, your management would like to investigate the use of the internal cell for “other” activities within the production process that utilize the high-tech capability of the equipment/cell, AND would like to save money on each Space Widget via outsourcing.

The current “Space Widget” total cost to your organization is $1080 inclusive of ALL costs (Materials, Labor, Management, Shipping, Overhead, etc).

For potential outsource suppliers, in addition to a demonstrated unit/part cost savings, it is made clear that all vendors must pass a QC and supply audit (guarantee lead times of 21 days) to be considered. Further, if the decision is made to outsource, ALL additional potential costs to your Company associated with receiving the outsourced products, inspecting the outsourced product, and managing the outsource vendor are to be identified and accounted for.

You are given the project to determine the best path for the manufacture of the “Space Widget”—continue to make inside, or outsource. You send a drawing package to three potential vendors as identified by your purchasing group. Vendor 1 quotes $942.00 +$101.00 shipping and passes the QC audit, but fails the logistics audit (32 days lead time); Vendor 2 quotes $928.50 + $98.00 shipping and fails the QC portion of the audit; Vendor 3 quotes $949.00 + $126.00 and passes the QC, logistics, and lead time audit. Keep in mind that the cell is a fixed cost. The costs to the organization per hour are the same whether the cell operates or not. Moving the Space Widget to an outsourced must be accompanied by actual internal replacement use of the advanced cell.

Write your recommendation BELOW.  

Explanation / Answer

Let us first look at our Problem statement:

As production of Space widget (100025 units/year) consumes 1000 of the 3000-total potential operational hours per year of the manufacturing cell. Hence because of underutilizing the equipment we have, We thought of outsourcing this product and doing other activities accompanying by actual internal replacement use of advanced cell.

Our Conditions for outsourcing:

1) Vendor must pass QC & Supply audit (guarantee lead time of 21 days)

2)If decision is made to outsource, All additional costs to the company are to be identified and accounted for.

Our options for Outsourcing:

Vendor 1 :

Products Cost = $942 ;

Shipping Cost = $101 ;

Passes QC audit

Fails supply audit (32 days lead time).

Vendor 2 :

Products Cost = $928 ;

Shipping Cost = $98 ;

Fails QC audit.

Vendor 3 :

Products Cost = $949 ;

Shipping Cost = $126 ;

Passes QC audit

Passes Supply audit.

Recommendation:

The Total cost to organisation for it's own production = $1080 inclusive ALL costs.

As Vendor 1 and Vendor 2 doesn't meet our requirements,Our only option remain to think of is Vendor 3.

Vendor 3 Total cost = $949+$126 = $1075.

It is less than our own production.

But we need to identify the additional costs that are accountable.

If we managed to utilise our equipment with other activities and additional costs are less than $5. Then we can outsource with Vendor 3 otherwise not.

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