Supply Chain Management: In-Sourcing and Outsourcing Decision - Essay Example

10 August Supply Chain Management @ Trail Frame Chassis: In-sourcing Outsourcing Decision Trail Frame Chassis (TFC) is an established name in market for being the largest supplier of chassis for motor home and van market which is distinctive due to its design, customization, technology and premium cost. Target audience for motor home is increasing in age bracket of 40s to 60s, which are willing to pay premium for added comfort and innovations. Recently they entered into an agreement with Gulf Stream to produce low-end low priced chassis for mass market. This step was taken since management at TFCs is suspecting fast pace change in the industry that may hamper their continued success if they continue over old grounds. Hence they have decided to face changing times by offering a low cost version of their product and introducing a new target audience. TFCs key strengths are their extensive experience in the field of chassis for motor homes, their technological adaptability & advancement, quality designs, marketing knowledge and design development on time exactly as per customer preference. TFC’s management has recognized the opportunity which lies in expanding their product portfolio to low priced product to cater to price sensitive audience. Low priced items have always posed threat to high end customized item especially when the economy is receding; hence diversity in product portfolio is always a balancing act (a safe bet for survival) for the company during all times. While expanding the product portfolio TFC faced a weakness for the first time that is delay in lead time of building chassis. Commonly a chassis would have been designed, customize and made ready in less than 30 days. However due to restrained capital available they could not meet all customer demands on time while catering two product types. Main area of time lag occurred at the designing stage as identified by the team. At this scenario TFC was approached by Computer-Images a design house in another estate proposing to become an outsourced designing outlet for low end chassis line working electronically only upon specifications provided by TFC. This approach was proposed with a key to keep TFC’s focus on high end chassis (TFC’s star product) while meeting demand for both high end and low end chassis. Now TFC has two options either to accept Computer-Image’s proposal to have low end product outsourced or increase current capacity to overcome time delay in designing and remain an in-sourced organization enjoying control over time, design and delivery. De Looff (1996) uses key 6 goals in his book defining outsourcing / in-sourcing decision making / analysis to arrive at the sourcing decisions, first goal is of cost. Costs for TFC seems low and beneficial in the outsourcing option since the entire setup required for designing and making a low cost product line is borne by Computer-Image. Further the cost per design is expected to reduce to $225 per chassis if outsourced where as in-sourced option would cost $490 per chassis, a whooping 1.18 times higher cost due to overheads and direct labor costs. Further onetime cost / investment for the entire setup would be $ 300,000 in case of outsourced option to establish computer linkage, inter-networking, computer systems and training for TFC’s existing staff enabling them to interact and communicate design specifics to Computer-Image electronically without any time lag. Computer-Image further requires at least 6 months training from TFC’s designers to equip themselves with the standards of TFCs. Similarly if TFC remains in-sourced it would require expansion in existing capacity of both workforce as well as work premises since existing capacity is resulting in time lag especially in designing area of operations. Such expansion is estimated to cost $ 200,000 and requires 6 to 8 months delay till start up. Time to market is another criterion which measures the time it takes for a company to convert customer specifications into actual result / product. If outsourced Computer-Image would require a lead time of less than 2 working days for sending specifications to receipt of new design whereas the same would take 5 to 10 working days if the decision stays to in-source. This was the main weakness of the previous setup and might result in sales downturn and customer loss. However in TFC’s remaining an in-sourced company unit delivery can be made immediately once the design is finalized and materialized where as it would take at least 3 months time if outsourced from Computer-Image that is from Michigan to Indiana. Further expansion in existing capacity of TFC would require at least 6 -8 months that can result in opportunity lost and might worsen the situation on account of time delays leading to substantial loss of market share. Quality is a renowned factor gauging products success. TFC has already set its flag on this attributes and is renowned for its innovative technology and good quality high end products. TFC’s designs speak of their designer’s creditability. Whereas for Computer-Image their quality is to be verified via computer simulations and further requires feasibility certificate. Flexibility of TFC would be reduced if outsourced option is chosen, since Computer-Image would be running on its own principles although bound by specific contractual clauses for both parties yet limitations in flexibility would remain. For example Computer-Image would be a multiple outsourcing company catering to other chassis builders as well. They would have rights over the designs produced by them and can have a replica with minor changes made being developed and supplied to a competitor. Hence contract clauses need to be strict regarding design rights in order to enable TFC to maintain its competitive advantage in the market. As discussed earlier TFC will have to withdraw certain amount of control it enjoys over the process of producing a customized chassis, which is a positive aspect since they are entering into a mass market of low priced chassis that does not require specific controls and intervention. Hence they can rely on Computer-Image for producing their specific designed chassis to cater to low priced market and concentrate fully on their star product that is high end customized chassis for somewhat affluent class. Further, they need to rely on simulations and verification certificates for quality instead of being hundred percent sure, however design specifications would always remain in TFCs hands, yet all designs generated by Computer-Image shall be under their proprietary rights and not TFCs. Continuity goal is being best met under outsourcing option since it is removing the time lag weakness, providing a low cost product for mass market, adding a new target market keeping TFC in line with changing trends and most of all allowing TFC to concentrate its resources on its star product to further improve upon its operations; be it better operations or improved products at reduced lead time. Hence as per the above concept out sourcing option from Computer-Image provides a low cost and long term solution to enter into a new market with a new product while keeping resources focused on the star product, where product expertise is best and uncompromised. Major weakness that was projected to bring about loss of opportunity would be eliminated and time delays would not be witnessed while customer demand shall be met as per expectation. The initial setup cost would be high to equip the TFC staff with necessary equipment and attributes to perform online communication with the outsourcing company, but in the longer run 1.18 times reduced cost per chassis would cover up for the initial investment in the near future. Initial investment would also be in line with TFC’s internal strength of being technological advanced and adaptable and can pave way for future outsourced productions as well. In-sourcing would firstly require investment to expand capacity and work force which would take at least 6 to 8 months to take off only. This long time lag might result in huge opportunity loss and might also affect TFC’s reputation in the market if the weakness of time delays become a known attribute and TFC looses customers based on that. Further, TFC’s focus would be split into two different market concepts and designs. Most importantly the cost of producing the item would be 1.18 times more costly than having it outsourced, which in the longer run would erode profit margins. Hence keeping in mind the above arguments and in-sourcing / outsourcing analysis it is recommended that outsourcing option is chosen with short term contracts of 3 years at least and stringent control over design duplication. Works Citied Bumatay, Emie G., and Van Deusen, Richard E. Outsource or Insoursce king the right choice. Communications Media Production, 1996. Web. 10 August 2011. De Looff, L. Information Systems Outsourcing Decision Making: A Managerial Approach. London: Idea Group Publishing, 1996. Print. Steenbeek, Wouter, Wijngaert, Lidwien Van de, Brand, Mischa Van de, Brinkkemper, Sjaak and Harmsen, Frank. “Sourcing Decision-Making.” London School of Economics, 2005. Web. 10 August 2011. Read More