THE FLEXCON PISTON DECISION

STUDY CASE
Insourcing/Outsourcing

BA:234 PRINCIPLES OF SUPPLY CHAIN MANAGEMENT

March 15, 2017

Authored by: Martina K. Vannevel
 Introduction

To outsource/insource is a complex strategic decision whether a business should

produce a component, assembly it and service, or buy the product, assembly, and

service by an outside supplier. This is often irreversible decision and it does take years

to come up with a plan. This decision process does typically include a thorough full

examination of a company's competency and expenses, alongside quality, delivery,

technological innovation, responsiveness, and constant updating requirements to follow

trends in supply chain management. The decision whether to insource/outsource is a

very critical decision that adds additional responsibility on management during and after

the decision-making process Single groups that do not operate with all insight

knowledge and data therefore further learning and analyzing of data is required to make

successful insourcing/outsourcing choices.

Question 1
THE FLEXCON PISTON DECISION STUDY CASE | 3/15/2017

Perform a quantitative insourcing/outsourcing analysis using the data

provided. What qualitative issues might af fect your final decision? Identify
any costs or issues that are not part of your analysis that might affect your
decision. What is your recommendation regarding what Flex Con should do
with its family of pistons? Support your arguments with evidence gather ed
during your analysis.

FlexCon as a company do take a pride on providing reliable high quality product

(pistons). The company has been in manufacturing for over half the century and build

very good reputation among customers and vendors. FlexCon monetary value is about

$ 3 billion USD and depends heavily on outside suppliers. When companies do

deciding about changing their strategy and outsource, one of their main concern is if

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they will still be able to produce such a high-quality product that their customers are

used to or if the decision will ruin their reputation.

"If you want something done right, do it yourself"

The qualitative factor that contributes against outsourcing is possible negative

customers’ responses. FlexCon does take a pride in providing high-quality product and

the customers are aware of it. Coming up with a new supplier for the pistons might

jeopardize the company’s reputation which can transparently show in decreasing in

sales. To build a good reputation is long-term process and requires more than just

cheap product or interesting advertising. Brand reputation entirely depends on public

opinion about company and company’s corporate activities.

When companies are undergoing the process of deciding whether to outsource or

insource, there are six main trends that can influence the decision process:

1. The need to use production services more efficiently.

THE FLEXCON PISTON DECISION STUDY CASE | 3/15/2017

2. The consideration to invest into a (new) process or (new) technology.

3. The need to look at what the company excels at and evaluate the ones they don’t

have

4. expertise in.

5. The need to fix costs and assets that are relevant to suppliers.

6. The need to have the tools to forecast and compare different sourcing

possibilities.

Like it was mentioned above outsourcing/insourcing is often irreversible decision and is

comparatively costly process. Following are the data available in case study completed

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 with additional calculations for all expenses. When deciding to outsouce/insource all

expenses should be considered and analyzed.

THE FLEXCON PISTON DECISION STUDY CASE | 3/15/2017

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By utilizing two years of forecasted production and expenses compared to previous

year, the next step is to calculate and propose insourcing and outsourcing expenses for

the company.

INSOURCING AND OUTSOURCING EXPENSE FORECAST

Insourcing Cost Factors (Table 1)
Year 1 Year 2
Direct Material 4.29 4.29
Semi finished 0.78 0.78
Direct Labour 2.36 2.43

THE FLEXCON PISTON DECISION STUDY CASE | 3/15/2017

Indirect Labour 0.73 0.65
Factory Overhead and
Administrative 4.31 3.86
Preventive Maintenance 0.15 0.14
Machine Repair 0.13 0.13
Ordering 0.06 0.05
Depreciation 0.5 0.43
Inventory Carrying 0.06 0.06
Inbound transportation 0.12 0.12
Consumable Tooling 0.19 0.19
Total Insourcing Cost Per Unit 13.68 13.13

Outsourcing Cost Factors (Table 2)

Year 1 Year 2
Purchase Cost 12.2 12.2
Transportation 0.1 0.1

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 New Tooling 0.5 0.43
Administrative Support 0.09 0.08
Inventory Carrying 0.07 0.07
Safety Stock 0.18 0.18
Quality Related Costs 0.38 38
Ordering 0.06 0.05
Total Outsourcing Cost per
Unit 13.58 13.49
Total Savings (1) 30000 -124000
Less: Taxes on Savings (40%) 12000 0

Net Outsourcing Savings 18 -124000

Insourcing Cost Per Unit (Graph 1)

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Outsourcing Cost Per Unit (Graph 2)

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As it is seen on graph 1 and graph 2, the cost to produce pistons would not change

dramatically in neither one of the scenarios (Outsource/Insource) in both Year 1 and

Year 2. However, comparison of Table 1 and Table 2 shows that FlexCon could save

$18, 000 per year 1, but in year 2 they would face $ 124,000 loss.

In year 1 and 2 the demand and therefore production of pistons will slightly rise which

THE FLEXCON PISTON DECISION STUDY CASE | 3/15/2017

would offset production cost if insourced. That is why there is a slight decrease in cost

per unit in year 1 and year 2 ($13.68 Year1 - $ 13.13 year 2 = $ 0.55 cost decrease per

piston).

Recommendation:

Considering these figures, it would be to FlexCon's greatest advantage to proceed with

its insourcing. While a one-year change to outsourcing would bring about additional

profit of $18,000, it would bring about a considerably more protuberant loss of $124,000

over a time of two years.

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 Question 2
Assume your group decided to outsource the pistons to the external supplier.
Identify a plan that would enable FlexCon to carry out this recommendation.
Be as thorough as possible.

Outsourcing is usually preferred method for manufacturing industries. It allows business

between other countries that are capable and sometimes better equipped and having

better ability and resources to produce comparable product for the fraction cost of the

in-house made product.

The top management would be responsible to create dynamic and clear communication

between company’s branches and also between top management and the new

outsourced supplier. The top management must have clear understanding of what

impact does the outsourcing has on the company they will be capable to create and

action plan. Outsourcing pistons would lower FlexCon production cost, the possible

quality of the item is being jeopardized. Start-up expenses of outsourcing might be

high, and when the future productivity is unsure that even adds the risk.
THE FLEXCON PISTON DECISION STUDY CASE | 3/15/2017

Question 3
Discuss the primary reasons when and why insourc ing/outsourcing decisions
occur.

To have the capacity to survive and be profitable in current globalization time,

organizations tend to utilize outsourcing. The reasons why companies do consider

outsourcing is to engage their business center, relieve risk of not meeting demand

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needs, progressive manufacturing elsewhere, to specialized abilities and access free

assets for the corporate management.

The competency to manufacture and deliver product on time is crucial for further

business surviving and delays could disturb distribution, cause retails and other

manufacturers delays in their schedules and this often leads to loosing contracts and

leaves competitors to take over.

Outsourcing is the way toward exchanging the obligation regarding a particular

business work. Organizations can give better customer benefit, create a superior item,

present their products better and be more effective when they decide to outsource their

non-center business work.

Question 4
A major challenge with an insourcing/outsourcing analysis involves gathering
reliable data. Discuss the various groups th at should be involved when
conducting an insourcing/outsourcing analysis such as the one presented in
this case. What information can each of these groups provide?

THE FLEXCON PISTON DECISION STUDY CASE | 3/15/2017

One of the ways how to look at data is to hire external consultant who is an expert in the

industry and who specialize in certain markets. Company can use internal data and

perform total cost analysis (like it was done in Question 1 of this report). Secondary data

can be collected from databases, websites, and reports, but I would not recommend to

depend solely on them as these data might be outdated or created not to provide

specific information. After all, business need to protect their trade and manufacturing

secrets and not let everyone access them freely on the internet. If the company is really

considering outsourcing/insourcing they should create a special team for the purpose of

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 market research, and let the team to collect and evaluate information. All information

obtained from various sources should be cross referenced and the probability of the

success for a process should be more, so that it can be successfully implemented.

Question 5
Discuss the major issues associated with an insourcing/outsourcing analysis
and decision.

When a company is undergoing decision whether to outsource/insource, the decision

process and following decision are probably what matters the most for the future of the

company. Therefore, this process should never be done under a pressure and without

extensive and thorough analysis. To consider insource the company should perform

strategic assessments related to availability, total cost and amount of resources that will

be needed. For insourcing production line the key would be to know direct and indirect

cost of material usage, and the forecast of industry and products for new few years.

Impact in this analysis should be on forecast of the industry, what their major
THE FLEXCON PISTON DECISION STUDY CASE | 3/15/2017

competitors are and what seems to be their next couple of years in the industry, finding

trends, but also what new methods and procedures might be. Is there even going to be

demand for our product? The Risk analysis is crucial to be able make the final decision.

If the company is inclining towards outsourcing, the relationship with new supplier is

absolutely a key for further surviving. There are many possible issues with a product

assembly that could arise. However, the company will loss full control over the

manufactured product once outsourced. This is often irreversible decision so companies

should really take time to make the right decision.