Case Study On Using The Figures Provided In The Case Study The Build And Buy/Purchase Cost Can Be Calculated As Follows:
The total build cost can be calculated using the following formula
Total build cost = Resin cost + labor costs + molding unit cost + additional costs
The resin cost is equal to:
Resin cost per unit = $1
Resin /unit = 455g
Total resin cost = 1 * 250,000
Total resin cost = $ 250,000
The labor cost is equal to:
Labor cost per employee per hour = $18
Work hours/year = 2083.00
Total labor cost per year = 2083 * 2 * 18
Total labor cost per year = $ 74,988
Molding unit costs = $ 285,000
The additional costs equal to = (carrying cost + management employee cost + property taxes)
Carrying cost = $ 19,500
Management employee = $ 80,000
Property taxes = $ 2,925
Total cost = $ 250,000 + $ 74,988 + $ 285,000 + $ 19,500 + $ 80,000 + $ 2925
Total build cost = $ 712, 413
The purchasing costs = (total housing purchase cost + Total cost for orders released annually + Receiving and inspection cost)
Housing units purchased per year = 250,000
Cost per unit = $ 3
Total cost = 250,000 * 3
= $ 750,000
Cost per order released = $ 50
Order released per year = 100
Total cost for orders released annually = $ 5000
Receiving and inspection cost = $ 35,000
Total purchase cost per year = $ 750,000 + $ 5,000 + $ 35,000
= $ 790,000
Assuming that the housing design will be changed at the end of one year and therefore the molding unit will become obsolete, it is financially better for the company to make the housing units. This is mainly because despite the molding unit changing the cost of building (which includes the cost of buying a new molding machine) is lower as compared to the buying cost. Therefore, the company should consider building as opposed to buying since it can buy a new machine every year and still operate at a lower cost.
Question 2: What are some of the hidden costs of outsourcing that might apply to this case that are not part of the above calculation? How might those costs affect the make or buy decision?
Some of the hidden costs of outsourcing that might apply to the case are transportation costs. When one outsources, transportation costs may add to the overall cost of production. This is mainly because the goods or parts have to be transported or shipped from the point of outsourcing to the company’s warehouse. This may significantly increase the build cost, hence, influencing the make or buy decision (Rushton & Walker, 2007).
Other costs resulting from outsourcing that might apply to this case include retained workforce and labor costs. In most cases, organizations outsource in order to downsize labor. However, the company may retain some of the labor further increasing its cost of operation as well as production. In most cases, organizations are forced to retain some of the labor in order to ensure excellent internal transition of the outsourced goods (Hira, 2008).
Lastly, another cost applicable in this case is retirement costs. When organizations outsource they are forced to retire some of its in-house labor. There are costs directly associated with retiring a workforce. Organizations have to pay benefits to the employees being retired. This will in turn increase the organization’s operation cost.
Question 3: Assume that there are no viable domestic sources for the housing. What additional costs might be incurred by sourcing the housings from Asia? How might those costs affect the make or buy decision?
Exchange rates and currency differences are additional costs that might be incurred by sourcing the housings from Asia. These costs may result due to the differences in exchange rates since the two countries have different currencies. Such costs greatly result due to currency fluctuations within the global market environment.
As stated earlier, transportation is an additional cost that might be incurred by sourcing the housing from Asia. This is mainly because the goods or parts have to be transported or shipped from Asia to America in this case. This may significantly increase the build cost, hence, influencing the make or buy decision. Furthermore, the handling costs will increase since the goods have to be stored in warehouses before and after shipping (Hira, 2008).
The company will also experience additional custom charges and costs. This is mainly because it will have to import the parts from Asia into America and hence paying custom and import duty and charges. Any additional custom or duty charges will also affect the overall cost of production for the company (Vitasek, 2011).
Hira, R., & Hira, A. (2008). Outsourcing America: The true cost of shipping jobs overseas and what can be done about it. New York: AMACOM.
Rushton, A., & Walker, S. (2007). International logistics and supply chain outsourcing: From local to global. London [etc.: Kogan Page.
Vitasek, K. (2011). The vested outsourcing manual. New York: Palgrave Macmillan.