¶ … Muenster Pump Company, purchasing manager Terry faces the difficult decision of whether to outsource housings or to continue to produce these parts in house. She must weigh a number of political, human, and financial factors in her decision whether to make the casting housing in-house or to outsource the housing.
In financial terms, the benefits of outsourcing are clear. Terry has learned that it costs Muenster about $180 to manufacture the L-1012 housing. Overhead makes up about $120 of this cost, and 70% of that $120 consists of depreciation, taxes, and executive salaries. The direct cost for the housing is $60 for material and labor. In contrast, Terri has gotten a much lower cost estimate for outsourcing housings. Union Foundry quoted Terri a price of $90 F.O.B. For the L-1023 founding, while two other foundries quoted $94 and $98 F.O.B.
While outsourcing is clearly a more cost-effective than in-house production for the L-1022, there are other considerations to outsourcing brought up by Ned Dorf. Dorf argued that the quality of the in-house foundings...
Union Foundry had promised delivery 120 days after receipt of the first order, while Terri does not know the time for delivery in-house, although it is assumed to be less.
Importantly, Ned rejected Terri's outsourcing idea on ethical grounds. Ned feels that outsourcing would result in the closing of the foundry and the loss of jobs for 16 employees. Ned clearly feels an ethical responsibility for the welfare of his employees that may outweigh financial concern.
Politically, there would be important costs to Terri if she chose to press for outsourcing. Ned is clearly opposed to outsourcing both on ethical grounds involving the foundry employees, and concerns over the quality of outsourced housings, and the potential for slow order filling from outsourced housings. As such, Terri would likely face serious opposition to the idea of outsourcing based solely on price concerns.
If Terri…
