Abstract

Solomon Souza is a logistics manager at Rafiki charged with improving operational performance as the company looks to expand to a new region. His department is struggling to keep up with the company's growth and Solomon is trying to decide whether Rafiki should maintain its in-house logistics services or if it should outsource those services to improve operational performance. As he assesses Rafiki's outbound logistics, Solomon determines that the company's operational problem is also a strategic issue. He must evaluate the internal logistics costs and compare them to those of other logistics providers, while also weighing various qualitative elements, in order to make the best make-or-buy decision for his logistics department and his growing company.

Case

Learning Outcomes

By the end of this case, students will be able to:

identify factors that influence make-or-buy decisions;

identify the impact of trade-offs in the outbound logistics field;

analyze the best solutions for companies facing make-or-buy decisions around outbound logistics.

Introduction

Rafiki is a fashion manufacturing company that has successfully grown because of its operational processes. As a result of its accelerated growth, the company now faces a dilemma regarding its outbound logistics services. On one hand, their logistics allow the company to offer a singular delivery time, which is considered to be a competitive factor in Rafiki's corporate strategy. On the other hand, Rafiki risks losing sales if its logistics costs are higher than those of competitors. The company's Chief Operating Officer (COO), Raymond Hess, recently announced that the company planned to expand its activities to a north region. As a result, the topic of outbound logistics has become a priority for Rafiki, and particularly for the logistics department, which must decide if they should outsource outbound logistics or retain the current model of logistics.

The Logistics Department's Potential

After the company's announcement about the new expansion to the north region, Solomon Souza requested a meeting with Mr. Hess to discuss the issues facing his logistics department. Solomon, Rafiki's logistics manager, is worried about the company expansion because his department has reachedand begun to exceedits operational capacity servicing the company's existing south region. His employees are working overtime and complaining about the situation. Moreover, they are demonstrating signals of demotivation and requesting a pay raise. With his current budget, Solomon knows that increasing their salaries will be difficult. Furthermore, he is concerned about potential service problems in the company's new regionspecifically that his department will not be able to deliver to the new north region in a timely or consistent fashion within its current budget. He believes the logistics department will not be able to meet target delivery times because of the limited number of logistics workers and the company's limited fleet capacity. Currently, three employees work under Solomon in logistics but, according to his analysis, five workers would be necessary to reduce any overwork. In order to service both regions, Solomon believes that a total of nine logistics workers would be necessary to meet outbound logistics demand. Thus, the company would need to hire six workers to handle the outbound logistics demand over the next four years. In addition, Rafiki currently uses two company-owned trucks to delivery its products to its south region rather than outsourcing delivery to a separate company. Solomon believes an additional truck will need to be purchased if Rafiki wants to maintain its current strategy of in-house outbound logistics within its expanded territory.

In their meeting, Solomon informs the COO about the issues among his employees as well as the potential service problems in the north region. Mr. Hess recommends that Solomon investigate outsourcing outbound logistics services as a way to attend the company's new region. To inform his decision, Solomon draws together Rafiki's managers of marketing, finance, purchasing and human resources to discuss how to optimize the Rafiki's operational performance and overall success. Solomon is concerned that if the company outsources its logistics he may lose his job, or at the very least, have difficulties managing his subordinates. He wonders if he and his employees would find work in another area of the company if Rafiki chose to outsource its outbound logistics. He hopes his fellow managers will be able to help him answer his core questions: Should Rafiki outsource its outbound logistics services, and if so, which provider should they choose?

Meeting to Assess Strategy, Risks, and Costs

In their meeting, Solomon greets the managers and outlines the issues he is facing in the logistics department. He asks for their opinion about how to optimize the company's potential with the new expansion, and specifically whether outsourcing outbound logistics makes sense for the broader company. Chris Canale, the Chief Marketing Officer, says that all company sales are increasing because of the current speed and consistency of delivery. Customers receive their product approximately two days from the date of their order. Chris argues that while Rafiki's quality manufacturing is its core competency, this delivery model differentiates Rafiki from its competitorsit is also core competency and a vital part of Rafiki's business strategy. Chris makes just one request for the logistics department - whether outbound logistics remain in-house or are outsourcedguarantee that all orders are delivered within two days of placement in order to maintain or increase the performance of the company. The Human Resources Manager, Elizabeth Diez, notes that as Rafiki expands into a new territory, she will not be able to hire workers at the same wage according to the existing position and salary plan. Elizabeth explains that she needs to apply an increase to the base wages in order to hire new workers. Although she is concerned that increasing wages will affect the product cost to consumers and result in lost sales, she acknowledges that it is necessary to hire good professionals and compensate them accordingly. In addition, Elizabeth believes expanding the logistics department staff will exceed her budget, but she notes that with the company's market expansion it is a time to negotiate with her Director for an increase to the human resources budget for the next five years.

In turn, the Chief Financial Officer, Emma Winstead, suggests Solomon conduct a cost evaluation between in-house logistics and outsourcing services, once the economic results would be maximized from a cost reduction. According to Emma, Rafiki's logistics costs are a higher than those of competitors. Emma suggests that, in order to maximize the company's economic results, they should find the best way to reduce the risk of lost sales and also reduce costs. Drawing back to the possibility of outsourcing Rafiki's outbound logistics, Peter Atunez, the Purchase Manager, confirms that he knows some good logistic service providers that can help Rafiki. To wrap the meeting, Solomon asks his fellow leaders for marketing and financial information to conduct a comparative analysis, as well as logistics provider information to be considered to help him decide whether Rafiki should outsource its logistics services.

He receives a marketing forecast from Chris (see Table 1) that shows potential sales for the next five years in their existing south region market and their new north region market.

Table 1: Rafiki Marketing Forecast

Forecast Per Year	Year 1	Year 2	Year 3	Year 4	Year 5
Total Unit	12,000	16,600	23,500	29,400	38,080
South Region	12,000	15,000	19,000	21,700	27,780
North Region	0	1,600	4,500	7,700	10,300

Shortly thereafter, Emma provides Solomon with the pertinent financial data he needs. She notes that her data is for the first year of Rafiki's expansion, and that this data will need to be adjusted for the inflation rates over each year (5% per year in average). She summarizes all costs that Solomon should consider in his calculations (see Table 2).

Table 2: Basic Costs of In-House Logistics

Fuel: $76,000 in the 1st year. He can calculate proportionally by units sold.

Maintenance of company-owned fleet: $2,000 per year for each truck; Rafiki has two trucks, but its capacity of trucks will be limited at 2nd year, then it will be necessary for a new truck to be added in the 3rd year to attend the demand.

Indirect costs: $3,000 per month.

Existent trucks: market value at $38,000 (contrary to inflation rates, trucks depreciate over time; the value will reduce 5% per year);

New truck: estimates to buy a truck in the 3rd year are approximately $50,000 (it reduces 5% per year)

Depreciation: 20% per year, considering its residual value at $20,000 after the fifth year to both trucks.

Workers: 3 workers, each at $1,900 per month at the first year; with a salary increase of 7.5% each year to adjust for inflation. Furthermore, the company would need to consider an increase of 15% on any new workers' salary base. Solomon had a plan to hire six workers during the next four years, 1 in years one to three, and 2 in the fourth and fifth years.

(*This is the human resources plan for the expansion of in-house logistics. If outsourcing is chosen, no new hires would be made and the existing 3 employees would be moved internally within the company.)

Logistics: to attend to the demand of outbound logistics with the new territory, Rafiki will need to extend its cross-docking area around 1,000 square meters at the 3rd year, at an approximate cost of $9,000

Provider B: Their services are evaluated at $8.30 per unit delivered to the southern region and $9.00 to northern region. Their logistic services are recognized for the quality of attendance, traceability, and on-time delivery (up to 3 days from the origin point).

Provider C: Although they are a newer firm in the market, they have consistently demonstrated an ability to deliver packages within 36 hours in Rafiki's south and north regions. Provider C was started when an experienced logistics executive perceived a market opportunity for express delivery. The executive had worked as a manager at high-level logistic services companies for more than twenty years. Their cost per unit is $11.50 in both regions.

Making a Make-or-Buy Decision

Mr. Hess was waiting for Solomon's decision, but he was nervous to begin the comparative analysis. Solomon knew he had the information he needed to make a decision about Rafiki's outbound logistic services, but which decision would most benefit his department and his entire company? If he chooses to outsource outbound logistics services, which provider would be the best fit for Rafiki's growth and strategy?

Discussion Questions

1. What factors should Solomon consider in assessing Rafiki's outbound logistics and the possibility of outsourcing?

2. Solomon needs to assess the logistics costs to make his decision. Determine Rafiki's costs per unit for outbound logistics for both in-house and outsourced service.

3. Conduct a comparative analysis to assess Rafiki's costs and delivery times against those of potential logistics service providers.

4. Considering the cost and delivery time trade-off, should Solomon suggest that Rafiki make or buy its logistics services? If he decides to outsource logistics services, which provider should he choose?

http://dx.doi.org/10.4135/9781526459640