The quality of chemicals outsourced was in question hence the company had to do something about it. It could choose another company to outsource especially if in sourcing would be expensive.
This would reduce the expense of recruiting new employees, building a new facility and paying for all the permissions and certificates required. It would also save the company operational additional operational cost (Brown, and Wilson, 2005).
Demerits of Continued Outsourcing
The company would continue to experience quality problems and the high cost of transportation would persist.
Merits of In Sourcing
The company would be in control of production hence producing high quality chemicals. In addition, in-sourcing would save the company 75% of chemical processing cost.
Demerits of In Sourcing
First, the company would have to incur building cost of up to $2.5 million. Approvals and certifications would increase the cost by $500,000. This cost would be inflated by the cost of processing equipment, which is $1.5 million. Total cost of expanding the company infrastructure to cater for the new processes would amount to $4.5 million.
The company would also need to cater for other variable costs that would come with in-sourcing such as labor, chemicals, and maintenance.
Merits of Acquisition
Acquisition would allow the company to continue with its operations without halting. It would also improve on its quality as MBM would be responsible for quality control. Additionally, operational cost would be lowered (Dougherty and Fairpo, 2013).
Q2. Quantitative Analysis:
The annual cost for in-sourcing excluding the cost of expanding the company would include
The company would hire 9 additional employees at a cost of $15/hr. They would be working in shifts in groups of 3 for 24-hour operation running for 300 days. According to the formula below, this would amount to $324,000 per year.
9(15x8x300)=$324,000 per year
The second aspect of operational cost is the acquisition of chemicals. The manufacturing plant would consume $250/hr worth of chemicals for 24 hours a day in 300 days. This would amount to a cost of $1.8 million worth of chemicals in a year. The equation below was used to calculate
250x300x24 =$1.8 million per year
The company estimated to hire one maintenance worker at a cost of $30/hr on 8-hour shifts for three hundred days a year. This would amount to $72,000 in salary as shown on the equation below.
30x8x300 = $72,000 per year
- Truck Operation:
The truck operations would reduce as it would be needed for only 6 hours per day. This means the truck operated for
(300x6)/24=75days in a year
Therefore truck operations were at
(0.52x600x75=$23,400 per year
Since the drivers are reassigned, the cost incurred remains the same as shown by the equation
2x25x12x6x50 =$180,000 per year
- Chemical Processing Plant Running Cost
The plant was estimated to consume $15/hr of electricity and $7.50/hr of gas. MBM would also incur the cost of disposing used chemicals at a cost of $35/cubic meter. The plant was estimated to produce 1 cubic meter of waste chemical per hour.
MBM would, therefore, incur addition electricity cost of
15x24x300 =$108,000 per year
Cost due to gas used:
7.5x24x300=$54,000 per year
The cost of disposing waste would amount to
35x24x300 =$252,000 per year
The cost of in sourcing product at MBM would there be equal to the summation of labor, chemicals, maintenance, drivers, truck operations, and running costs.
The following equation gives the sum:
MBM’s payback period=initial investment/annualized savings
Initial investment=Building cost +approvals and certification costs + processing equipment cost
Annualized savings=Outsource cost – in source cost
=5,273,600 – 2,813,400
However, MBM would take 18 months to get all the documents ready. This would push the period to 3.4 years. As such, the investment does not meet the objective of 3 years payback period.
Payback period for purchased company=initial investment/annualized savings
Operating cost=70% of in sourcing cost
=70% of 2,813,400
Payback period= 6,000,000/3,304,220
He should buy the company instead of constructing one.
For outsourcing, MBM would incur extra cost of 500,000 making annual outsourcing cost of 5,773,600.
Annual cost of in-sourcing would increase by $1million adding up to $3,813,400.
New Payback period =4,500,000(5,773,600-3,813,400)
For the purchased company annualized cost would increase by $1million adding up to $2,969,380
New payback period= 6,000,000(5,773,600-2,969,380)
He would still have to buy a company as opposed to constructing one.
Brown, D., & Wilson, S. (2005). The Black Book of Outsourcing: How to Manage the Changes, Challenges, and Opportunities. New Jersey: John Wiley & Sons Inc.
Dougherty, N. & Fairpo, A. (2013). Company Acquisition of Own Shares. New York: Jordans Publishing Limited.
Nitschke, C. (2005). Outsourcing Vs. Insourcing in the Automotive Industry - The Role and Concepts of Suppliers. Germany: GRIN Verlag.