Case Study 1

Make Versus Buy Case

ABC Ltd. is a manufacturing company engaged in the manufacturing of valves.
They have been in the business for last 3 years and have been manufacturing
only one type of valves. They started their business initially with sales of 10,000
valves per month and now they have grown the volume to about 50,000 valves
per month. They have been buying 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 and produce different varieties of valves.
They have their plant in the main city and the total area of the plant is 50,000
sq. ft. Now if they want to expand and continue doing all the activities of
manufacturing of all the varieties in house, they would need another 50,000
sq.ft. of the area. In the recent times, the land prices in the area have more than
doubled in the last 3 years and still land is available with great difficulty. Mr.
Mohsin is the production head of ABC Ltd. and has been successful with the
production and the level is continuously increasing. But in recent times, he is
facing the problem of quality complaints which have gone up from average 0.2
% in previous 2 years to 0.5 % this year. Also, he is finding that there is a high
level of dissatisfaction among the workers regarding workload as well as salary
levels. The workers are regularly complaining about the over work.

Although, Mr. Mohsin has found that the workers have been spending lot of
time on tea breaks, lunch breaks and even in between the production spending
lot of time talking to each other. But, due to insufficient workers and staff, he is
unable to take strict action and the workers are taking advantage of this
situation. For completing the work and delivering the products timely, he has to
employ workers on overtime and his overtime cost has also increased 3 times.
Mr. Mohsin is worried about the new expansion plan of the management and is
worried where the new workers would come from as he is already finding
shortage of workers for the existing job. He has requested the management not
to go for expansion immediately and look at improving and consolidating the
existing set up. He has sent his request to Mr. S. Kazmi Director – Operations.

Mr. Kazmi has gone through the request of Mr. Mohsin and called a meeting of
all the department heads and explained the situation to all concerned. The
marketing manager has expressed very bullish prospect about the company’s
growth and said that the company should take advantage of growing economy
and established brand image of the company and definitely go for expansion.
The finance manger also expressed that this will result in economy of scale for
the products and will further increase the profitability of the products. Mr.
Mohsin again expressed his problems regarding availability of manpower as
well as production control and effect on quality and productivity. The
Marketing manager asked the Production manager about the option of
outsourcing. Mr.

Mohsin is skeptical about the outsourcing option as he felt that the outside
agency will always charge more as he will try to make his profit as well and
also is worried about the possible problems of deliveries. Mr. Kazmi asked the
Mr. Suresh who is the Purchase manager about his views. He said that since the
suppliers would also be interested in doing the business, they would not like to
delay as with delay they also incur loss. The Finance manager said that we can
look at cost comparison for buying against in house manufacturing.

After listening to all the views, Mr. Kazmi told Mr. Mohsin to work out the cost
of production for future sales as per the forecast given by the Marketing
department. He also told Mr. Suresh to collect the details of the future
requirements to get the purchase cost details for few components of the valve.

Mr. Mohsin and Mr. Suresh have collected their data and they have presented
the data in the meeting called by Mr. Kazmi to review the plan. First the
marketing head Mr. Suresh presented his market forecast and then Mr. Mohsin
presented his report and explained the details as follows.

One supervisor with monthly salary of Rs. 5000 with expected increase of 10 %
per year. Direct wages of worker as Rs. 4 per unit. With 10 % reduction in
second year, no change in 3rd year and increase of 10 % every subsequent year.
Material cost of Rs. 14 per unit with an increase of 10 % every year.

Power and fuel cost of Rs. 2 per unit with increase of 10 % every year.
Indirect labor as 50 % of direct labor.
They will have to buy a new machine with a cost of Rs. 50 lac. With usable life
of 5 years

Mr. Suresh explained his details as follows:

Component price from supplier at Rs. 20 for the first 2 years with an increase of
10 % every subsequent year.
Transportation cost of Rs. 2 per unit for the first year with increase of Rs. 0.20
every subsequent year.

Inventory cost ( storage cost ) as 5 % per year of the basic material cost.
The Marketing manager has given the sales forecast for next 5 years as follows:

Year 1 2 3 4 5
Sales Quantity 300000 500000 700000 900000 1000000
Questions

1. Based on this data, is it economical for ABC Ltd.to go for buying the
product from market or manufacturing in house.

2. What other factors should ABC Ltd. look at for making this decision?

Case Study 2 Logistics Operations

ABC Ltd. is the country’s largest manufacturer of spun yarn with well-established market.
ABC Ltd. has good reputation for quality and service. Their marketing department identified
that the potential for global market is expanding rapidly and hence the company undertook
exercise for expansion of the capacity for export market.

The company formed team of Marketing and Materials department to study the global
logistics possibilities. After extensive study, the team came up with a report on global
logistics and submitted that global logistics is essentially same as domestic due to following
similarities:

 The conceptual logistics framework of linking supply sources, plants, warehouses and
customers is the same.
 Both systems involve managing the movement and storage of products.
 Information is critical to effective provision of customer service, management of

inventory, vendor product and cost control.

 The functional processes of inventory management, warehousing, order processing,

carrier selection, procurement, and vendor payment are required for both.

 Economic and safety regulations exist for transportation.

The company had very economical and reliable transportation system in existence.
For exports as well they decided to evaluate capabilities of their existing transporter
and entrusted them with the job of transport till port. For customs formalities they
engaged a good CHA after proper cost evaluation and entered into contract for freight
with shipping company agent.

The response for company’s export was very good and the company could get as
many as 15 customers within first two months and reached to a level of USD 250,000
per month by the end of first half of the year. Based on this response the export
volumes were expected to grow to a level of USD 400,000 per month by the end of
the year. When the review was made at the end of the year, company found that
 export volumes had in fact come down to the level of USD 120,000 which was much
lower than it had reached in the first half of the year.

The managing committee had an emergency meeting to discuss this and the export
manager was entrusted with the task of identifying the reasons for this decline. Mr.
Ganesh decided to visit the customers for getting the first hand information. When he
discussed the matter with the customers, the feedback on the quality and price were
good but the customers were very upset on the logistic services due to delayed
shipments, frequent changes in shipping schedules, improper documentation,
improper identifications, package sizes, losses due to transit damages etc.

After coming back, the export manager checked the dispatch schedules and found that
production and ex-works schedules were all proper. Then he studied the logistics systems and
found that the logistics cost was very high and all the logistics people were de motivated due
to overwork and were complaining of total lack of co-ordination and the system had become
totally disorganised.

Questions

1. Explain the problems experienced by ABC Ltd. What is the main cause of these
problems?
2. What logistics model should the company go for to ensure proper operations of the
company?