Leasing versus purchasing decision analysis for Arrowvale Electronics

Leasing and Purchasing are two major options available to most of the organizations when it comes to acquisition of fixed assets especially capital resources. At the same time these decisions are tricky to be made and therefore require that not only quantitative but also qualitative factors are taken into account.

Arrowvale Electronics is one of the leading Electronics manufacturer and Electronic solution provider in the United Kingdom. The company is located in Worcestershire and was established in 1985. Since then it has seen a phenomenal growth in the electronics industry. Arrowvale offers a broad spectrum of services. It holds an outstanding track record with respect to providing rail safety equipment. The company manufactures a wide range of electronic products including Printed Circuit Board Assembly, Loom and Wiring Harnesses, Pneumatic Assembly, Global Positioning Systems and Driver's Safety Devices.

Arrowvale's electronic products are manufactured under strict assurance of quality management and efficiency. Since it is a Business to Business entity, the products are delivered directly to customer's product line on ship to stock basis. Manufacturing electronic products involves manufacturing assembling of many smaller components like motor assemblies, engines, circuits and turbines. Even the smallest of these components has an integral and important role to play in the functioning and reliability of the final product. As innovation is the key in businesses dealing with electronics, Arrowvale is critically concerned that the innovation and quality is ensured in the smallest of the components. Recently, Arrowvale developed its new product line for Rail Safety equipments. This product line requires a certain type of motor assembly to be installed. Arrowvale is considering whether to outsource and purchase the required motor assembly from another manufacturer or supplier, or to manufacture the motor assembly in the company's own factory. This is a critical decision as there are many crucial factors that need to be taken into account such as quality, cost efficiency, reliability and above all safety standards, as the motor assembly in question has to become a part of an important rail safety equipment. As a member of the production department at Arrowvale, I have been assigned a task of evaluating as to what would be a more beneficial decision.

Scope of Activities

In order to reach a more sound and accurate decision, both qualitative and quantitative elements are needed to be taken into account. A thorough cost benefit analysis will also be required. Taking all relevant customer relationships is also very vital. It is important that opinions from all functional departments must be considered.

With the global market getting more competitive each day lease or buy decisions have become very crucial for the company. These decisions require the firm to review and consider its technology and processes and the costs pertaining to those processes. This is because the firm also has to keep room for strategic growth along with operational growth. If in house manufacturing of components that can be out sourced is consuming the finances that could otherwise be invested in achieving strategic objectives, then the firm needs to reconsider its operational cost and out sourcing might be a better option. Apart from that, outsourcing the motor assembly from a renowned and reputable vendor might also help improving sales revenue for that particular product line. On the other hand, outsourcing an important motor assembly would mean that the final product is not a pure Arrowvale product. However, this requires critical consideration of both the opportunity cost and the firm's operational and strategic objectives. Along with that, incorporating all commercial relationships is also important. It is important that the firm takes into account that how much secrecy does it want to maintain as far as the financial and monetary information is concerned and what amount of financial information is it ready to disclose to other stake holders.

Lease or Buy Analysis and Theoretical Application

The lease or but analysis with respect to the motor assembly for Arrowvale's new line of rail safety equipment requires a thorough study of both quantitative and qualitative elements. These elements are discussed under the following sections.

Qualitative Analysis

While the quantitative analysis gives an idea about how financially feasible a lease or buy decision would be, however, qualitative elements must also be taken in to account. These qualitative elements may come from both external and internal influences.

If the quantitative results reflect that it would be more financially desirable to outsource or buy the motor assembly then a lot of critical issues must be taken into consideration. Firstly, if the motor assembly is being imported from another country all the issues pertaining to government trade policies and regulations of both the trading country must be taken into account. Sensitive issues related to custom clearance must also be considered. Next, it is important to consider the probability of broken or damaged units.

There are certain qualitative elements with respect to outsourcing that are needed to be taken into account irrespective of the fact that the motor assembly is being imported or is being purchased from a supplier within the United Kingdom. The first element that is very crucial is the quality of motor assembly provided by the supplier. The quality of the motor assembly will have to be studied from two different angles. Firstly, since this motor assembly will have to be installed in rail safety equipment, it should be noted that a lot of passenger lives will be at stake. Under such circumstances any negligence or compromises over quality of motor assembly must not be made as any malfunctioning of the motor assembly may lead to serious railway accidents. Another angle with respect to the quality of motor assembly that is needed to be considered is that what Arrowvale's own quality standards are. It must be taken into account whether or not the outsourced motor assemblies are up to Arrowvale's quality standards. This is important because a quality compromise in such an important component of Arrowvale's final product may lead to a bad reputation for the company. It must be noted here, that the supplying company might also be as concerned about the overall quality of Arrowvale's final product. This is because any shortfalls in the overall quality of Arrowvale's final product might raise a question mark on the quality of the motor assembly that is being outsourced. In this case strong utilization of commercial relationship between the supplier and Arrowvale is required. Any trust deficits between the two parties must be resolved on urgent basis.

Apart from quality issues, there are various other qualitative elements that are needed to be considered. The first and foremost thing that Arrowvale must consider before making an outsourcing decision is that whether Arrowvale is already working at its core competency. This means that Arrowvale should consider whether all its factors of production are already fully and efficiently employed. If that is not the case, then it implies that there is some mismanagement of resources. Identifying and fixing those mismanagement issues will minimize wastage and might lease Arrowvale able to manufacture the motor assembly in its own production line in a more cost efficient manner.

Secondly, it is important to consider whether Arrowvale is willing to disclose its proprietary information related to its outsourcing dealings. This of course, depends on the mutual understanding of the two parties. If the supplier demands that Arrowvale must disclose that the motor assembly is outsourced, then it will further require taking other factors into account. Arrowvale will have to consider that what difficulties the Marketing department will face in marketing the final rail safety equipment. This is important because many customers who would want to purchase Arrowvale's product due to the company's name, reputation and quality standards, might be reluctant to buy the product once they find out that an important component is not manufactured by Arrowvale itself. Again, to what extent the marketing of the final product will be affected depends on how much brand loyalty and market share does Arrowvale already has.

Another important element that Arrowvale needs to consider is the impact of the lease or buy decision on Arrowvale's workforce, especially on those who are working in the production line. The fact that Arrowvale has started to outsource the components might be demotivating for workers as they might think that they now have lesser contribution in the product. Moreover, they will also have job insecurities as they might not be needed on the production line in future if more components will be out sourced.

Conclusion

When making the final decision, it is important that Arrowvale must ensure that all the quantitative and qualitative elements must justify each other. Tilting the focus on only one of the elements might lead to a wrong decision. All the stakeholders such as suppliers, marketing department, production and procurement department, research and development department, the human resource, and the potential customers must be taken into consideration. The last thing that Arrowvale must consider before finalizing the decision is that to what extent its decision is flexible and reversible. This is important because in case after taking the final decision, Arrowvale feels that it has made a wrong decision, it might want to switch to an alternative.

The bottom line is besides considering safety issues, the business must consider factrs such as term of requirement, cash flow liquidity, frequency of up gradation etc. In order to make a strategically feasible decision.