8d9608fa-5150-4fa7-9def-419503410b5e FlexCon Decision Rondeeda Magby

1. Quantitative Analysis. Insourcing Vs. Outsourcing

Insourcing Yr 1 Yr 2 Outsourcing Yr 1 Yr 2
Direct Materials Purchase Cost 12.20 12.20
Semi-Finished 4.29 4.29 Transportation 0.10 0.10
Other 0.78 0.78 New Tooling 0.50 0.43
Direct Labor 2.37 2.44 Administrative Support 0.09 0.08
Indirect Labor 0.73 0.65 Inventory Carrying 0.07 0.07
Factory Overhead 4.31 3.86 Safety Stock 0.18 0.18
And Administrative Quality Related Costs 0.38 0.38
Preventative Maintenance 0.15 0.14 Ordering 0.06 0.05
Machine Repair 0.13 0.13 Other Costs 0 0
Ordering 0.06 0.05 Total Outsourcing Cost Per
Depreciation 0.50 0.50 Unit 13.58 13.49
Inventory Carrying 0.06 0.06 X 288,369 288,369
Inbound Transportation 0.11 0.11 3,916,051.02 3,890,097.81
Consumable Tooling 0.19 0.19
Other Costs 0 0 Total Savings $30,000.00 -$124,200.00
Insourced Cost Per Unit 13.68 13.13 Less 40% Taxes on Savings 12,000.00 0
X 288,369 288,369 $18,000.00 -$124,200.00
3,944,887.92 3,786,284.97

What are Qualitative issues that will play a role in my final decision of whether to insource or outsource pistons?

When you look at Year 2 of outsourcing you see a deficit of -$124,200. In yr 2 of insourcing, you see that the costs for indirect
labor and factory overhead assist in lowering the cost per unit. Cost considerations favor the buyer. Product design is specific to
FlexCon and trade secrets are valued as FlexCon is a producer of high quality pistons. FlexCon should be concerned that
outsourcing may create or encourage a new competitor. If FlexCon chooses to outsource its pistons, they will lose direct control
over production and quality. FlexCon experienced a 30% gain in quality and a 20% gain in productivity after shifting to work cells
and creating cross-trained teams. If FlexCon continues to participate in continuous improvement activities, Flexcon can continue
to reduce the cost of production and costs per unit. Lastly, the pistons are the foundation of the business and seasoned workers
are threatening to leave the company if they are outsourced. Poor moral can spread fast and affect the overall productivity in a
negative manner as well as increasing turnover which leads to increased labor costs during training, as well as risks to quality
until new employees are properly trained.

2. Identify a plan to Carry out Outsourcing

First I believe that you need to know what you are striving for. What do you expect to gain when you outsource?
Defined Objectives and Measureable Goals: A successful outsourcing strategy begins with clearly defined objectives and
measurable goals. Objectives state the reasons for outsourcing and provide a framework for making decisions. Having
measurable goals and metrics that can be used to monitor progress, take corrective action, and project future performance, will
set the foundation of the transition.

Secondly, have you accounted for everything and set reachable goals?
Realistic Expectations: Make sure goals can be met. Take your time and make sure you establish a solid foundation for future
production by beginning small with a single order or project. As the supplier acclimates to the new business they should gain
experience and skill. Communication between the buyer and supplier should occur regularly to talk about any ongoing concerns
and needed improvements. A cautious, realistic set of expectations ensures a smoother transition while the new supplier is
ramping up.
Have you thought of everything that “could” happen?
Actively Manage Risk: Prioritize and aggressively manage risks based on expected impact. Keep mitigation plans in place,
actively monitor risk development, and take proactive measures to ensure that risks do not materialize. If risks do appear, act
quickly to implement the mitigation strategy or fallback plan for that particular risk. Fishbone diagrams work well within a
brainstorming session that includes a wide cross-section of stakeholders, from senior management to front-line developers.
After the risks are carefully defined, described, and categorized, their potential impact and mitigation plans should be
documented. Selecting the right vendor, negotiating a favorable contract, receiving high-quality products, and controlling cost
are well within a company’s control through careful planning, management, and adoption of an aggressive risk-mitigation
strategy.

Are Goals being met? Continuous monitoring will be necessary to assure that the plan is being followed. Is the plan working, or
does a contingency plan need to be put in place? Are you receiving quality products, on-time, and within cost agreed upon?
When doing the review you should include a well rounded group of experts to compile and analyze data to be sure goals are
being met and the transition is successful.

3. Primary reasons for when and why insourcing/outsourcing occurs.

Cost Reduction - Outsourcing, especially to other countries can have a positive financial affect on a company. It is much cheaper
to pay wages of employees in other countries than in the United States. The ability to employ workers at a fraction of the cost of
labor in America is a very compelling motivation. A company can then spend its money saved on wages, on a new advertising
campaign, new equipment, research into new products, and on refurbishing its facilities. Outsourcing to other countries also
saves the company on government fees and taxes. Outsourcing can create faster turnaround time and free up floor space and
resources for new product lines or expansion. Outsourcing can be right for some companies especially if they take the time to
structure an agreement that includes cost reduction, clearly defines the scope that meets the company’s needs, and allows the
company to focus on core competencies. A well planned strategy will provide substantial benefits to an organization.

Specialization In Product and Process Technology - Specialization implies focused investment in a process or technology which
contributes to greater cost differentials between firms.

Focus on what they excel at - Formal defining of core competencies to help guide the insourcing/outsourcing effort affects
decisions concerning what businesses should be selected.

Responsiveness - Shorter cycle times encourage greater outsourcing. The time to develop production capability or capacity may
exceed the window to enter a new market.

Wall Street rewards firms with higher ROI/ROA - Insourcing usually requires fixed assets and increased personnel. Avoiding fixed
costs and assets and relying on the assets of the supplier is motivating to many firms.

Improved forecasting - New technology has allowed for more accurate forecasting and comparisons for decision making.

4. Who should be involved when conducting an insourcing/outsourcing analysis

A cross-functional team of a process engineer, a cost analyst, a quality engineer, a procurement specialist, a supervisor, and a
machine cell employee, will comprise a well rounded team of individuals who are knowledgeable in their specific area as it
pertains to the product being produced. If you leave one out, you create a hole in the plan that could result in costly results or
even failure.
The process engineer will be able to assess the process and interpret data. They will be able to assist in developing best practices
and solutions to help improve production rates and quality of product. The process engineer will also be helpful when managing
cost, time restraints, and can perform risk assessments as well as provide process documentation and operating instructions.

A cost analyst can assist in planning and collecting data to determine cost of business activity such as raw materials, inventory,
and labor. A cost analyst can analyze data and changes in product design, raw materials, and manufacturing methods, and
determine effects on cost. A cost analysis can provide the team with reports specifying and comparing factors affecting prices
and profitability.

A quality engineer can analyze data by completing hypothesis and process capability analysis test. A quality engineer can also
prepare reports by collecting, analyzing, and summarizing data.

A procurement Specialist can understands costs associated with the purchase of supplies. Procurement Specialists are
knowledgeable with source of supply, and places orders with appropriate bidder(s). They are familiar with the cost of supplies,
materials, and equipment, and will be able to analyze data when making decisions to outsource vs. insource.

A supervisor and a machine cell employee can provide first hand information about the production process that the others on
the team may not realize. The Supervisor and the work cell employee are considered experts in the manufacturing process.

5 . Discuss major issues with an insourcing/outsourcing analysis and decision.

A major issue that could be problematic in outsourcing is quality. Once you accept the part and include it in your production
process, your customer will place the quality concern on you and not your supplier. Start up with the new supplier could take
many months to start smoothing out and even longer for the supplier to build confidence in the buyer. Constant monitoring
should be done to make sure the new supplier is progressing and sending quality products, on-time.

Risk analysis is a major issue with the decision to insource/outsource. Knowing what your risks are and having a contingency
plan is critical. Most plans look good on paper but implementation can be very different. Having contingency plans for each
identified risk shows you are prepared to manage the risk.

Not involving the right people in your decision could be costly. Composing a cross-functional team with various skills and
experiences will help make sure that all bases are covered and the decision making process is made with good information and
not assumptions.

I would recommend that FlexCon continue to produce their pistons in house. In the big picture, I think the risk is greater than
the reward