Muenster Pump Case Analysis Muenster Pump Case Analysis MAJOR FACTS: The Muenster Pump Company is in the business of agricultural pumps. The company is known in the market for manufacturing the quality pumps. It has been a philosophy of the firm to make all parts in-house. The company has its own foundry unit to produce pump housing. Direct material and labor cost to manufacture pumps for L-1012 pump housing is $60. When 70 percent fixed cost added (toward depreciation, taxes, salaries of executives) to it, the total cost arrives at $60+$42= $102.
The Union Foundry has quoted the price of $90 FOB for the same housing. Other two manufacturers have quoted the prices at $94 and $98 FOB. It is amply clear that Union Foundry’s quote is most competitive. Moreover, it guarantees to deliver the quality product as they have adopted modern technology. Outsourcing pump housing is in benefit of the company.
2. MAJOR PROBLEMS:
Ned Dorf is not enthusiastic about outsourcing the parts. He is of the view that his company produces quality products and has reputation in the market place. He is a bit conservative and wants to have every parts produced in-house for this reason. The bigger issue is when foundry is closed down and pump housings are outsourced, what would happen to the workers working in the foundry unit?
a). Best Solution:
Currently, industries try to save every cent in material and direct labor cost because that is a key to survive in the long run – in the good and bad market. Market dynamics change rapidly and efficiency is the mantra for any industry to progress in the market place. It is quite likely that someone else might offer pumps at lower cost by employing Union Foundry’s housing and outplay The Muenster Pump Company from its age-old secured business. The cliché ‘Survival of the Fittest’ is equally true in the business too.
In the above perspective and under given circumstances, it is important to outsource L-1012 housing from the Union Foundry. This is critical for the better health of the company in the long run.
The following advantages are envisaged.
a. The Company will reduce its direct cost by more than 10% percent and will save substantially increasing the bottom line. The company can offer more competitive prices to the customers and increase its market share.
b. The company will require less indirect staff for managing the in-housing foundry activities. This will save substantial sum to the company.
c. By closing the foundry, the company will have substantial spare land available and that can be used toward expansion of the existing or any new business.
Only disadvantage with outsourcing is to ensure quality supply of the component outsourced and if Union Foundry fails to deliver the supply in future for the reasons beyond their control what should be done?
b). Alternate Solution:
The alternate solution is to outsource 50% supply from outside and balance from the captive foundry.
The advantage is that the company would be able to judge the quality of Union Foundry in due course of time and then gradually increase the procurement to make it hundred percent. This will give company enough time and leverage to adjust the workers in the other processes or in expansion of the main activities. This will take care of the human adjustment without any undue pressures on company management.
By going ahead in the outsourcing process partly, the company would not get the full benefits of outsourcing.
IMPLEMENTATION OF BEST SOLUTION:
Given the Ned Dorf’s concern on quality aspects, it would be advisable to implement the outsourcing process in stages – starting with 50% of the outsourcing so that transition is smooth without any turbulence in the company. Once Ned is fully satisfied with the quality and supply aspect, the complete outsourcing can be implemented.
Burt, D. N.. Dobler, D.W.. Starling, S. L. (2008). World Class Supply Management: The key to Supply Chain Management. McGraw-Hill, New York. Print.
Bullen, C.. Lefave, R.. Selig, G. (2010). Implementing Strategic Sourcing. Van Haren Publishing, 1st ed. Print.