Outsourcing vs. Making

¶ … 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 is superior, and this quality is an important component of company success, and that the in-house production of the L-1022 allowed for quick response to customer demand. 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 decides that price is the most important consideration, and decides to press for outsourcing of housings, it would be to her advantage to address some of Ned's concerns. Concern over housing quality and the speed of filling orders could likely be addressed relatively easily. Ensuring top quality from outsourced parts and quick availability may result in increased price.

However, given the fact that outsourced housings were originally priced at less than half of the in-house housings, it is likely that even with assurances of top quality and quick availability, outsourced parts will remain more cost-effective than in-house parts. Assuming that Terri can alleviate Ned's concern over quality and availability, and retain a cost advantage to outsourced parts she faces Ned's ethical objections to putting the 16 foundry workers out of work.

One solution would be to attempt to find other employment for the men, even though Ned's original assertion was that this was not possible. Another solution would be to keep one person on to ensure the quality of the outsourced housings, and act as a liaison to the other foundries. However, the other 16 employees would need to be laid off. At first glance, there is no easy.