Question

Case 11-3: Carmichael Corporation

Discussion Questions:

1. What impact will Brisson’s decision to manufacture MS-7 have on the cost structure of Stimgro for Carmichael?
2. Should Amanda Tellford do anything at this stage?
3. What alternatives are open to Amanda Tellford?
4. What are the advantages and disadvantages of each alternative?
5. What is the cost structure for Stimgro and the margin?
6. Since Stimgro is very profitable, with a good margin, why does it matter if the cost of MS-7 increases?

Main Question:

7. As Amanda Tellford, what alternatives would you consider regarding MS-7? Which alternative would you pursue and how would you go about it?

Case 11-3 Carmichael Corporation and farm supply stores, which, in turn, sold to the farmer. For Stimgro the pricing structure through the distribution chain was approximately as follows: Amanda Tellford, purchasing manager for Carmichael Corporation, became increasingly concerned about the purchase of MS-7, a special ingredient used in Stimgro, one of her company's new products. It appeared that a major cost increase might threaten the product's profit- ability, and Amanda was anxious to explore any alterna- tives that promised at least some cost relief. Stimgro Carmichael $360 50 — Distributor $520 Feed $780 → Farmer Store CARMICHAEL CORPORATION Carmichael Corporation was the U.S. subsidiary of Carmichael International, a UK-based producer of veteri- nary products and feed additives. Total U.S. sales were ex- pected to be about $20 million with profits before taxes of about $1.2 million. Carmichael occupied a special niche in the market, offering small-volume specialty products that the bigger producers considered uneconomical. However, if sales of these products grew, the possibility existed that a larger producer might become interested. Carmichael had an exclusive distribution agreement with three distributors who covered all parts of the United States. Each distribu- tor sold Carmichael products to feed stores, cooperatives, The Carmichael plant located in Chicago employed about 70 hourly rated people. The premises were leased and pri- mary activities involved the mixing of ingredients and the bottling and packing of finished products. About half of the $8 million worth of ingredients was imported from the UK parent; the remainder and all packaging were purchased in the United States. The executive team consisted of Tim Paterson, president and treasurer; Charles Godfrey, sales manager; Amanda Tellford, manager of accounting and purchasing; and Andrew Hartwick, plant manager. Carmichael Corporation concentrated on poultry medi- cines and feed additives. Three years earlier, Carmichael had introduced Stimgro, a feed additive for young turkeys, which had shown unusual promise in promoting rapid, healthy de- velopment in birds less than one month old. Shortly there-

case questions

Answer 1

Answer 1:

The decision of Brisson for producing MS-7 will greatly impact Carmichael in terms of the manufacturing cost of Stimgro as Brisson is on the verge of manufacturing MS-7 within its own facility by purchasing its own equipments and as it has its own distribution network, it will also be an added advantage for Brisson in reducing the distribution cost. Availability of MS-7 from the North American source for Carmichael would be at risk since North American source would not get the economies of scale for MS-7 production if Brisson would produce MS-7 in its own facility. If this condition arises, then North American source would supply the MS-7 at the price of 800$ per kilogram (as compared to the current rate of $ 100 per kilogram) which would definitely increase the manufacturing cost of stimgro for Carmichael and hence the selling price of stimgro would have to be increased by Carmichael for making profits. But it would certainly reduce the market share of Carmichael in stimgro product line as compared to Brisson which would be manufacturing MS-7 at its own facility.

Answer 2:

At this stage, Amanda Tellford should analyse the total cost required for the in house production of MS-7. If it comes out to be greater than procurement cost than Amanda Tellford should communicate the same to the management of Brisson and should make them understand the benefits of outsourcing the manufacturing of MS-7 to the North American source which would help in the availability of MS-7 at an affordable price. However, if the cost of in-house production of MS-7 is less as compared to the procurement cost than Amanda Tellford should ask the management of Carmichael to go for the in-house production of MS-7.

Answer 3:

There are two alternatives open to Amanda Tellford. One being that the Carmichael should produce MS-7 within its own facility if its manufacturing cost is less than the procurement or outsourcing cost. Another alternative to Amanda Tellford is that Carmichael should procure MS-7 from North American source if its manufacturing cost is more than the procurement or outsourcing cost.

Answer 4:

Advantage of first alternative (Answer 3):

It will reduce the procurement and transportation cost. It will also reduce the inventory cost and the risk of running out of inventory of MS-7 and lead time will be reduced.

Disadvantage of first alternative (Answer 3) :

The investment is higher for purchasing the equipment and in the future course of time it may have a great impact on the manufacturing cost of stimgro but in current scenario, its impact on the manufacturing cost will be less. Moreover, manufacturing of MS-7 is difficult as it requires careful temperature, pressure and timing control.

Advantage of second alternative (Answer 3):

It will reduce the cost of purchasing the equipment, labour cost and the cost for the provision of the extra facilty for manufacturing MS-7.

Disadvantage of second alternative (Answer 3):

The various companies ordering MS-7 will be required to work in collaboration with each other and any dispute will result into the market share of Carmichael as its business is dependent on a single product of stimgro.

Answer Main Question:

As Amanda Tellford, I would go for the first alternative of manufacturing the MS-7 within the facility of Carmichael. I would first design the facility requirement for the manufacturing the MS-7. I would than make the financial analysis for the equipment purchasing, labour requirement and the requirement for the other sources and would pursue the vendors for the same. For labours, I would either hire them or would contract the key responsibilities to the agency.

For economies of scale, I would try for the mass production of stimgro, reach more customers for sales and would increase the product line or go for the differentiation strategy.