Question

The Muenster Pump Company has manufactured high-quality agricultural pumps for over 40 years. The firm's only plant is in the small midwestern city of Muenster. The company is Muenster's largest employer. Bob Dorf, president of the firm, is the grandson of Emil Dorf, the founder. Bob and his family, along with all key personnel, live in or near Muenster. Cordial relations exist between the firm and the city officials. Since its founding, the firm has always been as self-sufficient as possible. Shortly after setting up the business, Emil Dorf established a foundry to cast pump housings and related items. Today, the foundry pro- vides virtually all the required pump housings. Bob's cousin, Terri, is the purchasing manager for Muenster Pump. After graduating from State Uni- versity, Terri worked as a buyer at a large appliance manufacturer in the southwestern corner of the state, but after two years of life in the big city, Terri returned to Muenster. Bob was delighted to have Terri back in town. He established the position of purchasing manager by consolidating the buying functions previ- ously performed by himself and other members of the firm. Terri is an aggressive and conscientious buyer. Materials costs have come down from 60 percent of the cost of sales to 50 percent in the two years since she assumed responsibility for purchasing. Recently a representative of Union Foundry, a firm in the southeastern part of the state, contacted Terri. The rep was aware that Muenster Pump made its own cast pump housings, but he claimed that new developments in casing pouring allowed his firm to offer extremely attractive prices. Terri requested a price on the L-1012 case housing, Muenster's most popular size. The L-1012 represents 60 percent of Muenster's demand for casting housings. The pump that incorporated the L-1012 is sold to distributors for $500. Within a week of the meeting, a letter arrived from Union Foundry, quoting a price of $90 F.O.B. Muenster. Delivery was promised in 120 days after receipt of the first order. Thereafter, delivery would be made in 60 days after receipt of an order. Minimum orders were established as 100 units. Terri contacted two other foundries and obtained quotations for the L-1012 housing. The prices were $94 and $98 F.O.B. Muenster. Terri met her uncle Ned, discussed her findings with him, and asked how much it cost Muenster to produce the casting housings internally in its own foundry. Ned Dorf was not at all enthusiastic about Terri's efforts in this area of the business. He said, "Terri, I appreciate your interest and efforts at reducing cost, but a lot more is involved here than meets the eye. We produce a quality housing that is not equaled in the industry. It's one of the primary keys to our suc- cess! Furthermore, we can respond to requirements much quicker than those city boys." Terri responded, "Ned, let's assume that all your doubts could be overcome. How much does it cost us to make the housings?" Ned replied, “Terri, there is something else involved. We have 16 men working in that foundry. If we stop making our own housings, we'll have to close down the foundry, and there's no other place in the firm where these men could work." At that point, Terri thought that discretion would be the better part of valor. She thanked her uncle Ned for the information and returned to her office. Later that day, her cousin Bob stopped by. In the ensuing conversation, she learned that the L-1012 hous- ing cost Muenster about $180. Total overhead at Muenster was calculated to be approximately 200 percent; hence, direct costs for material and labor for the housings would be about $60. Approximately 70 percent of the overhead is for fixed costs such as depreciation, taxes, and executive salaries. Terri sat in her office debat- ing with herself the political, human, and cost implications of making or outsourcing the casting housing. -

Answer 1

Requirement 2

Muenster Pump is currently making the L-1012 pump housing at practically twofold the cost of their opponents. The key difficulty is whether Terri should outsource the manufacturing of the L-1012 pump housing and possibly lessen cost of making the pumps but also put 16 men out of work or should she abandon outsourcing and keep the manufacturing in-house. Terri must contemplate the political, human and cost implications of making or outsourcing the casting housing.

Requirement 3

A. Muenster shouldn’t outsource to Union Foundry. Adv: 16 men wouldn’t lose their jobs and the relations with the community and city officials will continue to flourish. Disadv: The company could lose a chance to save money in manufacturing costs.

B. Muenster could start bidding with Union and the other foundries. The bidding process should include doing a cost/price analysis. Since Muenster prides themselves on being high quality and matchless they could provide terms. Adv: Could show immediate cost savings and net profits.   Disadv: Run the risk of damaging political relationships with city officials. Also the foundries could inflate their costs in the future.   

C. Instead of outsourcing the manufacturing of the entire casing, Muenster could opt to outsource only a part of the production. Adv: Some savings on parts being outsourced.   Local political relationship remains intact. Disadv: Some of the 16 men would lose their jobs.

Requirement 4

I believe the best choice is for Muenster to relinquish outsourcing at this time until more R&D can be done to conclude more of a better cost/tactical analysis. A company’s viable advantage is often defined as cost control, product differentiation, or focus. It’s important to perform a reasonable analysis before beginning the outsourcing analysis. This analysis will provide a report of the firm’s strategic position relative to the market, the industry and its competitors