Name: Sabastina Ellingsworth

Class: Procurement and Supply Chain Management

Instructors: Victoria Narkon & Dianne Lancaster
Case Study: FlexCon
=====================================================================
Appendix 3:
A quantitative insourcing/outsourcing analysis
Insourcing Costs Outsourcing Costs
Per Unit Year 1 Year 2 Per Uni Year 1 Year 2

Direct Materials Purchasing Cost 12.20 12.20

Semi-Finished 4.29 4.29
Other 0.78 0.78

Direct Labor 2.37 2.44 Transportation 0.10 0.10

Indirect Labor 0.73 .65 New tooling 0.50 0.43

Factory overhead Administrative

and administrative 4.31 3.86 support 0.09 0.08

Preventive Inventory carrying 0.07 0.07

maintenance 0.15 0.14

Machine repair 0.13 0.13 Safety stock 0.18 0.18

Ordering 0.06 0.05 Quality-Related

Costs 0.38 0.38

Depreciation 0.50 0.43 Ordering 0.06 0.05

Inventory Carrying 0.06 0.06 Other costs 0 0

Inbound Total Outsourcing

transportation 0.11 0.11 Costs Per Unit 13.58 13.49

Consumable Total savings (1) 30,000 -124,200

tooling 0.19 0.19

Other costs 0 0 Less: Taxes on

Saving (40%) 12,000 0

Total Insourcing Net outsourcing

Cost Per Unit 13.68 13.13 savings 18,000 0
 1. Perform a quantitative insourcing/outsourcing analysis using the data provided. What
quantitative issues might affect 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 FlexCon should do its family of pistons? Support your arguments with
evidence gathered during your analysis.
=====================================================================
As noted in the case study, FlexCon is a $ 3 billion maker of small industrial engines that
manufactures quality pistons. Currently, the company is producing pistons in-house that are
simple, commodity type pistons and that provide no product differentiation in the marketplace.
The critical components and subassemblies that make a major difference in the performance and
cost of the finished product are currently outsourced to external suppliers. This has led FlexCon to
be faced with the decision to insource or outsource their pistons.

Based on the quantitative analysis, if FlexCon chose to insource its pistons production, it
will incur an inventory cost of $0.06 for both year one and two respectively as compared to
inventory cost for outsourcing which is $0.07 year one and two respectively. Also, the total
insourcing cost per unit for year one is $13.68 and $13.13 for year two, whereas the total
outsourcing cost per unit is $13.58 for year one and $13.49 for year two. Therefore, it would be
wise for FlexCon to insource its pistons production since the totaling cost per unit decreased
drastically in year two. Also, if FlexCon continues to insource its pistons production into year 3,
there is the possibility that the per unit cost for total insourcing will reduce more.

The quantitative analysis also proves that if FlexCon outsources its pistons, it will save
$30,000 before taxes and $18,000 after taxes in the first year. However, in the second year,
FlexCon will lose a significant amount of $124,200. As stated by the experts, once a firm
outsources an item or service, it usually loses the ability to bring that production capability or
technology in-house without committing significant investment. So, the savings brought by
outsourcing the pistons manufacturing in the first year will not be used because it will be used to
cover a part of bringing the manufacturing back in-house.
 Also, the additional cost considerations were not figured within the analysis but should be
considered when performing the cost analysis. Additional costs for outsourcing could include costs
associated with training and hiring of new employees. If FlexCon anticipates that the production
space and equipment used for the pistons will be utilized for either expanding the product line or
supplementing current productions needs, then there may be training costs associated with this
transition. Also, a few engineers threatened to terminate employment if the pistons were
outsourced. If this is the case, FlexCon will have hiring and training costs associated with the
vacated positions.

Another cost for FlexCon to consider if the pistons are outsourced is the vacated machinery
and space is not guaranteed to be filled by another product line. In that event, the amount allocated
to the fixed factory and overhead costs will have to be allocated across the remaining items
produced in the plant, and this could potentially lead to FlexCon being uncompetitive in
comparison with external suppliers.

Finally, even though the quantitative analysis indicates that it is more cost effective to
insource than outsource, there is room for negotiation with the supplier and there are several costs
such as tooling, ordering, factory overhead and administrative costs. Within the quantitative
analysis, the team may feel fluctuate reducing the insourcing savings. As FlexCon has a good
reputation when it comes to its pistons. By choosing to outsource, they are putting the quality of
its product in the hands of their suppliers, which could endanger their name. FlexCon is also known
for their quality pistons and by outsourcing this product, they are giving the opportunity to their
supplier to over the business and dictate of prices. Therefore, it would be in the best interest for
FlexCon to continue with its pistons in-house.

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. Discuss the primary reasons when and why insourcing/outsourcing decisions
occur.
=====================================================================
Before the group commits to negotiations with the external supplier, FlexCon should consider the
following:
First, the company should determine what sort of outsourcing relationship will best meet
its needs. This is because some businesses share strategic decision making with their
suppliers, while others outsource only on a limited, as-needed basis. Also, the firm should
perform an analysis of suppliers which should include the following: price or cost
competitiveness, quality, delivery performance, financial conditions, engineering and
technical competence, management of its own suppliers, management capability, the
ability to work with the customer and potential for innovation.

Next, the company needs to obtain the support of key personnel for the decision to
outsource. Many companies encounter resistance from employees who feel that their jobs
are threatened by outsourcing, a few engineers of FlexCon threatened to terminate
employment if the pistons were outsourced. If FlexCon has a labor union, as they decide
to outsource, the possibility of other employees being affected can result in a strike.
Therefore, to maintain the loyalty and productivity of remaining workers, it may also be
helpful to design programs to assist any workers that may be displaced due to outsourcing.

After employees issues have been addressed, the company can begin contacting potential
suppliers, either formally or informally, and asking specific questions about the services
provided and the terms of the contract. Ideally, the supplier will have experience in
handling similar businesses and will be able to give the client's needs and the priority they
deserve.

Finally, the company should select a supplier it trusts to develop a mutually beneficial
partner relationship. It is important for the company to develop tangible measures of job
performance before entering into an agreement, as well as financial incentives to encourage
the supplier to meet deadlines and control costs. The contract should clearly define
responsibilities and performance criteria, outline confidentiality rules and ownership rights
to new ideas or technology, and include a means of severing the relationship if necessary.
Since the supplier is likely to have more experience in preparing outsourcing agreements
 than the company, it may also be helpful to consult with an attorney during contract
negotiations.

3. Discuss the primary reasons when and why insourcing/outsourcing decisions occur.
=====================================================================
Insourcing is when a business production is performed within an organizational operational
infrastructure, whereas outsourcing enlists the help of outside organizations not affiliated with the
company to complete specific tasks. So, when it comes insourcing or outsourcing decisions,
companies that decide to outsource do so for several reasons which include:
The primary reason is to achieve cost savings or better cost control over the outsourced
function. Companies usually outsource to a supplier that specializes in each function and
performs that function more efficiently than the company could. Anticipated cost savings
sometimes fail to materialize, because the supplier must make a profit and the company
also incurs additional cost that may include transportation cost, tooling charges, ordering
charges and inventory carrying charges in transacting business with the supplier.

Another common reason for outsourcing is to achieve or minimize the discrepancies in

staffing that may occur because of changes in demand for a product or service. Companies
also outsource to reduce the workload on their employees or to provide more development
opportunities for their employees by freeing them from tedious tasks. Firms can also
choose to insource rather than outsource due to some of the major potential disadvantages
to outsourcing which include poor quality control, decreased company loyalty, a lengthy
bid process, and a loss of strategic alignment. There may also be inherent advantages in
maintaining certain functions internally. For example, company employees may have a
better understanding of the industry, and their vested interests may mean they are more
likely to make decisions in accordance with the company's goals than the supplier.

The next reason is some companies insource to eliminate distractions and force themselves
to concentrate on their core competencies. While others outsource to achieve greater
financial flexibility, meanwhile, the sale of assets that formerly supported an outsourced
 function can improve a company's cash flow. A possible pitfall in this reasoning is that
many suppliers demand long-term contracts, which may reduce flexibility. A common
reason for outsourcing computer programming and other information technology functions
is to gain access to new technology and outside expertise.

Company politics is another common reason for outsourcing. For example, some
companies might begin outsourcing initiatives after observing the successful efforts of a
competitor. Others might be wanting to outsource to seek the companys gain or to
eliminate any dysfunctional departments.

Finally, outsourcing provides an attractive option for startup firms as they grow. In these
instances, outsourcing can free the entrepreneur from tedious and time-consuming tasks,
such as payroll, so that he or she can concentrate on the marketing and sales activities that
will enable the firm to make a profit.

4. A major challenge with an insourcing/outsourcing analysis involves gathering reliable

data. Discuss the various groups that should be involved when conducting an
insourcing/outsourcing analysis such as the one presented in this case. What information
can be each of these groups provide
=====================================================================
When it comes conducting an insourcing/outsourcing analysis, it is always important to
involve a team of experts and professionals from different departments of the company and if
possible, consumers should be included. By so doing we can gather large data contents and by
analyzing it they can draw a conclusion. The following groups can be involved in
insourcing/outsourcing analysis:
The most important group is the market research group. They have the professional
marketing background and they are good at negotiating with the suppliers. Expert
knowledge of marketing makes it easier to collect information, such as data from reports,
news, websites etc., which is very important to the company. These kinds of data are of
great significance to the firm in deciding whether to insource or outsource its production.
 Next, the engineering and product development team can provide data about the raw
materials required, their rates and tooling cost and suggest to the company whether to
outsource or insource. The data about in-sourcing and outsourcing gathered could be shared
among the engineering experts and the market research group to efficiently draw a
conclusion about sourcing productions.

The other group is the financial department team who deal with cost management. When
considering insourcing, the following cost analysis can be considered: direct material costs,
direct and indirect labor cost, factory overheads and administrative cost, and inbound
transportation etc. can be included in the firms budget. As far as outsourcing is a concern,
the following cost analysis: ordering cost, quality-related costs, inventory carrying cost and
safety stock requirement can be considered in the budget. The financial department team
can then evaluate both budget/cost for insourcing and outsourcing and determines the one
that best work for the company.

The final group to involve are production workers, customers, and suppliers. Production
workers could be contacted to obtain information about the production of the pistons.
Questionnaires could be sent to them to gather information or a one-on-one interview can
be conducted to gather data on the quality of the production process in making the pistons.
A suggestion box can also be put in the workplace for employees to suggest their ideas and
input to the company. As much as internal data is important to the company so is the
external data. Information can be retrieved by sending questionnaires to the customers and
non-customers. That information can provide the management with ideas about deciding
to insource or outsource. Another way to get data is to invite suppliers, wholesalers, and
retailers who do business with the company.
 5. Discuss the major issues associated with an insourcing/outsourcing analysis and decision.
=====================================================================
When companies are faced with decisions involving insource/outsource, there are
numerous major issues that raise concern and requires a thorough analysis. Before companies can
decide either to insource or outsource, they must first recognize their core competencies at their
present stage and compare to their future strength. They need to define its long-term and short-
term strategic abilities to build a dominant set of technologies or skills that enable to adapt quickly
to the changing market opportunity. Listed are the major issues associated with
insourcing/outsourcing analysis and decision
The first major issue is to consider the need for responsiveness in the marketplace. Thus,
the company should be able to respond to the high demands of their customers and deliver
to their satisfaction. However, if the time to develop a production capability or volume may
exceed the window available to enter the new market or supply the high demands of the
customers, then it is best to outsource the product for a shorter time.

Next, it would also be best for the firm to consider infrastructures when sourcing its
production. A company with limited warehouse could cost a fortune to expand the
warehouse space. Also, the lack of infrastructure, bad roads, break down machinery and
bad weather could limit the companys productivity. If a company experiences this, it is
best to consider outsourcing because it is a cost-effective way to meet and expand
production.

Choosing whether to insource/outsource products is another major issue. With insourcing

options, strategic assessments must be made about the availability, total cost, and amount
of resources needed. Direct and indirect costs from overhead to materials become essential
parts of an insourcing production line. Also, high levels of investment become involved
because all operating stages will be produced by the company itself. The active ability to
be flexible with ones goods and strategies will ultimately define the effectiveness of the
cooperations capability of insourcing products. Within an outsourcing analysis and
decision, the key issue becomes the relationship with the supply partner. Many possibilities
 rest with outsourcing products, but many issues could also arise, that is why choosing
becomes a major issue or problem.

The issue of control loss becomes reality when allowing another company to create a
product. The coordination and communication also become more and more difficult task
to handle when a company does not have full control over a manufactured good. The
personal relationship between companies must be an essential part of execution or neither
company will benefit from the endeavor. All in all, solutions and answers made should
involve all aspects of insourcing/outsourcing analysis key to the process of the product.
Internal and external factors should be displayed and evaluated to determine the best
possible course of action and address the issue at hand.

Finally, quality, delivering performance history, price and location are also major issues
regarding outsourcing. The analysis must identify all internal and external costs and
benefits to make an effective and reasonable decision. Also, within an outsourcing analysis
and decision making, the key issue becomes the relationship between the supplier and the
company since both have an essential part of execution or neither company will benefit
from the contract.

In conclusion, firms must recognize that once they outsource an item or service, it usually loses
the ability to bring that production capability or technology in-house without committing a
significant investment. Therefore, it would be best for firms to know that there is the possibility
of endangering the quality of the product and putting their reputation at risk when they choose to
outsource.