Maxwell Company produces a variety of kitchen appliances, including cooking ranges and dishwashers. Over the past several
Question:
DAVID: We need to ï¬nd a way to improve the quality of our products and at the same time
reduce costs. Lee, you said that you have done some research in this area. Would you share your ï¬ndings?
LEE: As you know, a major source of our quality problems relates to the poor quality of the
parts we acquire from the outside. We have a lot of different parts, and this adds to the complexity of the problem. What I thought would be helpful would be to redesign our products so that they can use as many interchangeable parts as possible. This will cut down the number of different parts, make it easier to inspect, and cheaper to repair when it comes to warranty work. My engineering staff has already come up with some new designs that will do this for us.
JEANNIE: I like this idea. It will simplify the purchasing activity signiï¬cantly. With fewer parts, I can envision some signiï¬cant savings for my area. Lee has shown me the designs so I know exactly what parts would be needed. I also have a suggestion. We need to embark on a supplier evaluation program. We have too many suppliers. By reducing the number of different parts, we will need fewer suppliers. And we really don€™t need to use all the suppliers that produce the parts demanded by the new designs. We should pick suppliers that will work with us and provide the quality of parts that we need. I have done some preliminary research and have identiï¬ed ï¬ve suppliers that seem willing to work with us and assure us of the quality we need. Lee may need to send some of his engineers into their plants to make sure that they can do what they are claiming. DAVID: This sounds promising. Kit, can you look over the proposals and their estimates and give us some idea if this approach will save us any money? And if so, how much can we expect to save? KIT: Actually, I am ahead of the game here. Lee and Jeannie have both been in contact with me and have provided me with some estimates on how these actions would affect different activities. I have prepared a handout that includes an activity table revealing what I think are the key activities affected. I have also assembled some tentative information about activity costs. The table gives the current demand and the expected demand after the changes are implemented. With this information, we should be able to assess the expected cost savings.
Handout
Additionally, the following activity cost data are provided:
Purchasing parts: Variable activity cost: $30 per part number; 20 salaried clerks, each earning a $45,000 annual salary. Each clerk is capable of processing orders associated with 100 part numbers. Inspecting parts: Twenty-ï¬ve inspectors, each earning a salary of $40,000 per year. Each inspector is capable of 2,000 hours of inspection. Reworking products: Variable activity cost: $25 per unit reworked (labor and parts). Warranty: Twenty repair agents, each paid a salary of $35,000 per year. Each repair agent is capable of repairing 500 units per year. Variable activity costs: $15 per product repaired.
Required:
1. Compute the total savings possible as reflected by Kit€™s handout. Assume that resource spending is reduced where possible.
2. Explain how redesign and supplier evaluation are linked to the savings computed in Requirement 1. Discuss the importance of recognizing and exploiting internal and external linkages.
3. Identify the organizational and operational activities involved in the strategy being considered by Maxwell Company. What is the relationship between organizational and operational activities?
Step by Step Answer:
Cornerstones of Cost Management
ISBN: 978-1285751788
3rd edition
Authors: Don R. Hansen, Maryanne M. Mowen