IB B&M Outsourcing Questions 2011

1. Safepac is a small European engineering company, manufacturing and supplying shops with
metal display units. Their present factory has a production capacity of 20 000 display units.
Safepac has been approached by one of its major customers to supply an additional 12 000
display units, with a possibility of more orders to follow. The Production Manager presents the
following data to the owner of the business:

Price per display unit $28.00

Raw material cost $4800 per batch of 1000 metal sheets
Direct labour per unit $6.4
Fixed costs $252 000
Present output/sales 18 000 display units
N.B. One metal sheet is needed for each display unit.

To manufacture the extra output, Safepac will need an extra factory, offering increased
production capacity of 15 000 cases, but adding $200 000 to fixed costs. The owner of Safepac
has recently discussed transferring manufacture of the finished display units to an Indian
subcontractor, which would provide the finished product to Safepac at 840 Indian rupees per
display unit. The present exchange rate is 40 Indian rupees for each $changed, although this has
fluctuated by 10% over the last year. This would transform Safepac into a wholesaler, rather
than a manufacturer, and would reduce its fixed costs to $140 000. Inflation is falling in Europe
and the Central Bank is thinking of cutting interest rates below that of most countries, and
certainly below that of India.

Evaluate the option of subcontracting manufacture to the Indian firm.

(Total 5 marks)

2. Human Resource Management

As the economic environment becomes increasingly global and competitive, company culture
and organization become more and more important. The way people are employed is changing
rapidly. Rather than a career for life, employees are likely to be faced with a series of projects,
rather than jobs. Companies will put more emphasis on outsourcing, contract work and
consultants, and a workforce willing to re-skill, retrain and respond to a fast moving
environment.

Customers are getting used to doing business whenever they want. Just about every major
company is reviewing its products, services and delivery mechanisms in the light of the 24 hour,
seven day, instantaneous accessibility of the “world wide web”. If organizations are to be
flexible and agile, it follows that people must be flexible and agile too. Companies need to take
responsibility for this by providing an environment that encourages and empowers their
workforce.

Human Resource Report

[Source: Adapted from “People Pressure” and “Employees all over the place”. The Observer 23 Aug 2000]

Explain what is meant by outsourcing or subcontracting. Suggest activities in a firm which

might be suitable for outsourcing or subcontracting, and explain why. (Total 5 marks)

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 IB B&M Outsourcing Questions 2011

3. Scoot-by plc

Scoot-by plc is a respected manufacturer and distributor of leisure scooters and regarded as the
market leader. At present its products only retail in its own chain of shops. Its strong brand
image was established through strict production controls, a focus on quality and a reputation for
safe and rugged products.

The scooter market is becoming increasingly competitive as cheaper, poorer quality imports
flood the domestic market. Scoot-by plc is considering sub-contracting the production of its
scooters to a very large industrial manufacturer located in the Far East, starting with its premium
product and main seller, the Scoot-X17. This will allow Scoot-by plc to concentrate more on the
marketing and distribution of its product range. Fewer examples will be required as a result.

The following production data for the Scoot-X17 has been provided to the board of directors:

Current production If production is sub-contracted

Current output: 20 000 units per year Potential output: 30 000 units per year
Selling price: $250 per scooter Selling price: $250 per scooter
Variable costs: $150 per scooter Variable costs: $170 per scooter
Fixed costs: $1 500 000 Fixed costs fall to: $1 100 000

One other change under consideration is the selling of the scooter range through a website on the
Internet. Some directors are concerned about maintaining brand image, following the proposed
changes in production, marketing and distribution.

Analyse the arguments for and against subcontracting production of the Scoot-X17 model
and recommend to the board whether production should be sub-contracted. Justify your
choice, if necessary suggesting measures to safeguard Scoot-by plc’s position as market
leader.
(Total 9 marks)

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