Brian Wilson, materials manager at B&L Inc. in Lancaster, Pennsylvania, was considering a proposal from his purchasing agent to outsource manufacturing for an outrigger bracket. It was the end of April and Mr. Wilson had to evaluate the proposal and make a decision regarding whether to proceed. B&L Inc. Manufactured trailers for highway transport trucks. The company comprised three divisions: the Trailer, Sandblast & Paint, and Metal Fabricating Divisions. Each division operated as a separate profit center, but manufacturing operations between each were highly integrated.
The Metal Fabricating Division produced most of the component parts of the trailers, the Trailer Division performed the assembly operations, and the Sandblast & Paint Division was responsible for completing the sandblasting and final painting operation. B&L manufactured approximately 40 trailers per year, with about two-thirds produced during the period from November to April. The outrigger bracket, part number T-178, was an accessory that could be used to secure oversized containers. The bracket consisted of four component parts welded together, and each trailer sold by B&L had 20 brackets per 10 per side. The Metal Fabricating Division was presently manufacturing the outrigger bracket. The subassembly parts are T-67, T-75, T-69, and T-77 were processed on a burn table, which cut the raw material to size. Although the burn table could work with eight stations, this machine had only been operating with one station. The final assembly operation, T-70, was performed at a manual welding station. Manufacturing lead time for the outrigger bracket was two weeks.
However, the Metal Fabricating Division had been able to coordinate supply and production with assembly operations. Consequently, finished inventory levels of the outrigger bracket were kept to a minimum. B&L's inventory holding costs were 20 percent per annum. In an effort to reduce costs, the purchasing agent, Alison Beals, who reported to Brian Wilson, solicited quotes from three local companies to supply the outrigger bracket. Mayes Steel Fabricators (Mayes), a current supplier to B&L for other components, offered the lowest bid, with a cost of $108.20, FOB B&L. Brian met with the controller, Mike Carr, who provided a breakdown of the manufacturing costs for the outrigger bracket. Looking at the spreadsheet, Mike commented: "These are based on estimates of our costs from this year budget. Looking at the material, labor, and overhead costs, I would estimate that the fixed costs for this part are in the area of about 20 percent. Keep in mind that it costs us about $75 to place an order with our vendors." Numbers below provides B&L's internal cost breakdown and details from the quote from Mayes.
Parts Mayes Steel Fabricators B&L Manufacturing Costs
T-67 $14.60 $17.92
T-75 $21.10 $17.92
T-69 $18.50 $45.20
T-77 $13.00 $10.37
T-70 $41.00 $58.69
Total $108.20 $150.10
Brian expected that B&L would have to arrange for extra storage space if he decided to outsource the outrigger bracket to Mayes, who had quoted delivery lead time of four weeks. Because Mayes was local and had a good track record, Brian didn"t expect the need to carry mush safety stock, but the order quantity issue still needed to be resolved. B&L was operating in a competitive environment and Brian had been asked by the division general manger to look for opportunities to reduce costs. As he sat down to review the information, Brian knew that he should make a decision quickly if it was possible to cut costs by outsourcing the outrigger bracket.
Question:
What is your recommendation for purchasing based on the Annual Manufacturing Cost and the annual savings from purchasing?
Calculations already known are as follows:
Annual Manufacturing Cost: $144,096
Outsourcing Cost: $86,560
Savings by Outsourcing: $57,536