MakeVersusBuyCase

ABC Ltd. is a manufacturing company engagedin the manufacturing of valves. Theyhave been in the business for last 3 years and have been manufacturing only one type ofvalves. They started their business initially with sales of 10,000valves per month andnow they have grown the volume to about 50,000 valves per month. They have beenbuying all the raw material for the valve and were doing all the manufacturing in house.Now they have established themselves in the market and are planning to expand andproduce different varieties of valves. They have their plant in the main city and the totalarea of the plant is 50,000 sq. ft. Now if they want to expand and continue doing all theactivities of manufacturing of all the varieties in house, they would need another 50,000sq.ft. of the area. In the recent times, the land prices in the areahavemore than doubledin the last 3 years and still land is available with great difficulty. Mr. Mohan is theproduction head of ABC Ltd. and has been successful with the production and the level iscontinuouslyincreasing.Butinrecenttimes,heisfacingtheproblemofqualitycomplaints which have gone up from average 0.2 %in previous 2 years to 0.5 % thisyear. Also, he is finding that there is a high level of dissatisfaction among the workersregarding workload as well as salary levels. The workers are regularly complaining aboutthe over work.

Although, Mr. Mohan has found that the workers have been spending lot of time on teabreaks, lunch breaks and even in between the production spending lot of time talking toeach other. But, due to insufficient workers and staff, he is unable to take strict action andtheworkersaretakingadvantage ofthissituation.Forcompletingtheworkanddelivering the products timely, he has to employ workers on overtime and his overtimecost has also increased 3 times. Mr. Mohan is worried about the new expansion plan ofthe management and is worried where the new workers would come from as he is alreadyfinding shortage of workers for the existing job. He has requested the management not togo for expansion immediately and look atimproving and consolidating the existing setup.Hehassenthisrequest toMr.S.KumarDirector-Operations.

Mr. Kumar has gone through the request of Mr. Mohan and called a meeting of all thedepartment heads and explained the situation to all concerned. The marketing managerhasexpressedverybullishprospect aboutthecompany's growthandsaidthatthecompany should take advantage of growing economy and established brand image of thecompany and definitely gofor expansion. The finance manger also expressed that thiswill result in economy of scale for the products and will further increase the profitabilityof theproducts.Mr.Mohanagainexpressedhisproblemsregarding availabilityofmanpower as well as production control and effect on quality and productivity.TheMarketing manager askedtheProduction manager abouttheoptionofoutsourcing.Mr.

Mohan is skeptical about the outsourcing option as he felt that the outside agencywill always charge more as he will try to make his profitas well and alsoisworried aboutthe possible problems of deliveries.Mr.Kumaraskedthe Mr.Naresh whois the Purchase manager abouthis views.He said thatsince thesuppliers would also be interested in doing the business, they would not like todelay as with delay they alsoincur loss. The Finance manager said that we canlookatcostcomparison forbuying againstinhousemanufacturing.

After listening to all the views, Mr. Kumar told Mr. Mohan to work out the cost ofproduction for future sales as per the forecast given by the Marketing department.He also told Mr. Naresh to collect the details of the future requirements to get the purchase costdetailsforfew componentsofthevalve.

1. Based onthisdata,state theparametersneeded to takethedecision?

1. Stateother factorsshouldABCLtd. lookatformakingthis decision?