Case Study

Make versus buy

ABC

$,$

Ltd It is a manufacturing company specialling in manutacturing valves. They have been working in this field for

$3$

$$years and have marufactured only one type of valve. They initialy staried their business with sales of

$1$

$0$

$,$

$0$

$0$

$0$

$$valves per month and now they have increased the volume to around

$5$

$0$

$,$

$0$

$0$

$0$

$$valves per month. They purchase all the raw materials for the valve and do all the manutacturing inhouse.

$-$

They have now established themselves in the market and are planning to expand and produce ditterent types of valves. They have their factory in the main city and the fotal area of the factory is

$5$

$0$

$.$

$0$

$0$

$0$

$$square feet. Now it they want to expend and continue doing all the required manufacturing activities of all items in the company, they will need another

$5$

$0$

$,$

$0$

$0$

$0$

$$square feet in the aree. Recently, land prices in the aree have doubled over the past three years and land is still available with great difficulty. MrMohan He is the head of production forABC Lid. He has sucoeeded in production and the level is constantly increasing. But recently, it has been faced with the problem of quality complaints, which have risen from an average of

$0$

$.$

$2$

$\%$

$$in the past two years to

$0$

$.$

$5$

$\%$

$$this year. it was also found that there was a high level of dissatistaction among workers regarding workload as well as salary levels. Workers regularty complain about overwork. Aithough Mr Mohan, It is found that workers spend a lot of time on tea breaks Junch breaks and even between production periods, they spend a lot of time talking to each other

$.$

$$But due to insufficient workers and employees, he is unable to take strict action and the workers take advantage of this situation. To complete the work and deliver the products on time, he has to hire workers for overtime and the cost of overtime has increased by

$3$

$$times$.$ MrMchan is womled about the management's new expansicn plan and fears where the new workers will come from as he already finds a shortage of workers for the current job. He has asked the management not to expand immediately and consider improving and enhancing the existing setup. He sent his request foMc. Kumar Operations. Manager.

Kumar, took note of MrMohan's request and called a meeting of all department heads and explained the situation to all concerned. The marketing manager expressed a very optimistic outlook on the companys growth and said that the company should benefit from the growing economy and the company's welestablished brand image and is definitely heading for expansion. The CFO also expressed that this will

$,$

$$lead to economies of scale for the products and will increase the proftablity of the products. MrMohan expressed Once again its problems regarding availablity of manpower as wel as production control and impact on quality and productivity. The marketing manager asked the production manager abost the

outsourcing option, MrMahan Skeptical about the outsourcing option because he feil the outside agancy would always charge more because he would be trying to make his own protis as well, he was alse

$,$

concerned about potential problems with deliveries. MrKumar asked MrNaresh who is the Purchasing Manager for his vews. He said that since suppliers are also interested in doing business. they do nol want to delay as they also incur loss with delay. The CFO said we can look at the cost comparison of procurement versus inhouse manufacturing.

$\_$

$-$

After listening to al opinions, MrKumar informed. MrMohan Calculates the production cost for future sales according to the forecasts provided by the marketing department. He also asked MrNaresh to collect detals of future requirements to obtain the procurement cost for few components of the valve.

MrMohan

$.$

and Mr Naresh, collected their own data and presented the data at the meeting called by Mr

$.$

$$Kumar to review the plan. First, Marketing Head Mr

$.$

$$Suresh preserted kis market forecant, then Mr

$.$

$$Mehan introduced Report and explain Details are as follows

$.$

One superisor with a monthly salary of

$5$

$,$

$0$

$0$

$0$

$$rupees$,$ with an expected increase of

$1$

$0$

$$

$$annually

The direct wages of the worker are Rs

$4$

$$per unit. With a

$1$

$0$

$$

$$reduction in the second year, no change in the third year and an increase of

$1$

$0$

$\%$

$$in each subsequent year.

The cost of materials is Rs

$1$

$4$

$$per unit, increasing by

$1$

$0$

$\%$

$$every year.

The cost of energy and fuel is Ris

$2$

$$per unit, increasing by

$1$

$0$

$\%$

$$every year,

Indirect labor is

$5$

$0$

$\%$

$$of direct labor

They will have to buy a new machine at a cost of Rs

$5$

$$lakh with a usable lite of

$5$

$$years

MrNaresh Purchasing Manager, explained its detals as follows

$,$

The price of the component from the suppler is

$2$

$0$

$$rupees in the first two years, with a

$1$

$0$

$5$

$$increase for each subsequent year.

The transportation co