The Maine-Barnes Ltd – A Case Study - 1 -

©2015 Anderson Gordon

Introduction

The supply management director of Maine-Barnes Ltd, Josh Purdy, has

to decide whether to make or buy a key component for a new product. Maine-

Barnes Ltd (MBL) finds itself in a highly competitive electronic office products

niche market and thus proposes to launch a new line of rechargeable battery

powered calculators, which, in spite of its higher initial price, has a competitive

operating cost due to the accompanying battery recharger. However, since

the design is not patentable MBL has to look elsewhere for a competitive

advantage and not the way of proprietary design. MBL has a further

complication in that its current manufacturing capacity does not allow it to

meet the required production levels of 100,000 units per year, at least not

while manufacturing the companion recharger units (CRU). Josh and MBL are

therefore faced with a choice of investing in MBL by purchasing new

equipment to increase the manufacturing capacity, or outsourcing the

manufacturing of the CRUs to an appropriate supplier. This paper identifies

and reflects on the issues and factors to be considered in conducting the

aforementioned make or buy analysis. It also identifies the alternatives

available to MBL and proposes a report with recommendations for MBL’s

General Manager with details of the analysis.

Factors to Consider in the Make or Buy Analysis

The seemingly complex analysis to be performed by Josh and MBL

may be simplified by identifying the issues present in this scenario. Essentially

a make or buy decision has to be taken if MBL is to launch its new product

and consequently make a bid to advance its market position. One option is the

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©2015 Anderson Gordon

making of CRUs in-house; this requires consideration of issues such as the

acquisition of new equipment, the cost of manufacturing in-house and the

possible terms of the new labor agreement once the old contract has expired.

The other option of outsourcing the manufacturing of the CRUs requires

consideration of issues such as the selection of a good, trustworthy and

dependable supplier, especially given the fact that the design cannot be

patented and therefore the supplier would be required to demonstrate great

ethics and not reveal the design to MBL’s competitors. Another issue is the

actual comparison of the cost of the two options. These issues are

represented in the table 3.1.2 a below.

Table 3.1.2 a - A Comparison of Issues in the Make or Buy Decision

Decision to Buy = Outsource

recharger production

Decision to Make = produce

recharger units in-house

Basic options 1. Select a supplier each year

2. Select a supplier for a 3-

year period

1. Purchase new equipment

2. Lease new equipment

Important

considerations

1. Selecting the best supplier

2. Trust in the MBL – supplier

relationship

3. The impact of outsourcing

on the labor force and the

union

4. Cost comparison for

outsourcing recharger units

1. Total cost of ownership for the

equipment

2. Cost comparison for making

recharger units

3. The approaching expiration of

the labor contract and the

implications for new terms an

conditions of work

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©2015 Anderson Gordon

Burt, Petcavage & Pinkerton (2010) make it quite clear that “it is

important to perform a competitive analysis before initiating the outsourcing

analysis” (p. 219). According to the information provided in the MBL case,

MBL’s main strength is “its ability to produce high-quality specialty products”

but it has to be aware of being located in the heart of a high-tech

manufacturing community. Additionally MBL has a “profitable niche in the

electronic office products field” but faces the limitation of its manufacturing

shop. These issues strongly suggest that MBL should pursue the

development and launch of its rechargeable battery powered units. However

the make or buy question requires further reflection.

“In considering what to make or buy, the decisions should nurture and

exploit the firm’s core competencies” (ibid). Since product development and

manufacturing is core to MBL it may be suggested that once the cost is not

prohibitive, the production should be done in-house. Burt, Petcavage &

Pinkerton (2010) also quote Michael Porter (2001) who believes that

companies must be aware of “sourcing from people who also supply

competitors”. Since the market that MBL finds itself in is very competitive, it

may once again be suggested that the production be done in-house.

Risk is also a factor to be considered. Bolgar (2010) believes that “the

very nature of outsourcing means you’re going to increase risk, not decrease

it.” Consequently MBL will have to evaluate the risk that will arise if the

outsourcing option is chosen. Apart from the risk of proprietary information

being leaked to competitors MBL will have to manage the risk of supplier’s

production falling behind the demand for product as well as the risk of the

supplier giving less than desirable quality.

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©2015 Anderson Gordon

Yet another factor which must be assessed in MBL’s make or buy

decision is the labor-management climate, especially since the end of the

labor contract is imminent. “A hostile union may seize the opportunity to

irritate management as a result of the decision to buy … [whereas] an

amicable labor-management climate may generate a different reaction” (Burt,

Petcavage & Pinkerton (2010). In the MBL case the labor-management

climate seems more hostile than not making in-house production attractive;

although it must be noted that the information provided on the union is

inconclusive. On the other hand the fact that “wages seemed particularly

important this year” suggests that the estimates for the make option will

naturally be higher than projected if only because the wages will be expected

to rise. The decision is a tough one. MBL will have to decide if it wants to have

an experienced and loyal labor force at a cost potentially higher than the cost

of outsourcing, or if it wants some production to be outsourced and

consequently a potentially unhappy labor force.

The size of MBL also influences the make or buy decision. Burt,

Petcavage & Pinkerton (2010) believe that the stabilizing of the workforce is

more important for small firms since they are more sensitive to the loss if a

few orders. Consequently the make option may be preferable for small firms

like MBL.

Finally, the cost comparison must be done to support data based

decision making. The table 3.1.2 b below, shows the comparisons.

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Table 3.1.2 b: The make or Buy Comparison

Make Option Buy Option

Highest price to produce 50,000

CRUs (Eastern Mfg @ 8.15) =

$407,500

The lowest price to produce only

50,000 CRUs (Boston Electrical @

7.45) = $372,500

Cost of equipment = $84,000

In-houseCRU cost @ 6.77 = $677,000

Excluded are other components of the

total cost of ownership (TCO) for the

new equipment including the

amortization of the new equipment, as

well as expected increase in wages

for labor force

For 100,000 CRUs the cost to MBL

if outsourced will be at least

(Boston @ 6.79) = $679,000

For 100,000 CRUs the lowest cost to

MBL if made in-house will be

$761,000

At least $82,000 cheaper to

outsource100,000 CRUs or $0.82

per CRU

It must be noted though that the cost under the buy option hides the cost of

quality including the training of the supplier staff in the manufacture of the new

product, the cost of risk as well as the additional cost associated with the

decreased morale of the labor force when faced with outsourcing. It is also

worth reflecting on the general administrative and selling expense ($0.62).

This cost seems to be a marketing and sales cost and hence would be

applicable to CRUs whether they were made in-house or outsourced.

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©2015 Anderson Gordon

Overall, cost analysis seems strongly in favor of outsourcing but the

non-mathematical issues, which albeit impact cost, such as the ethical

dealings required from the supplier with respect to the proprietary design

features, the importance of a stabilized workforce, greater control over

production, risk and quality, all point towards in-house production.

Recommendations & Conclusion

MBL enjoys a niche market which it needs to secure and grow. This is

fertile ground to apply the advice of Anderson, Britt & Favre (2007) to “listen to

market signals and align demand planning accordingly across the supply

chain, ensuring consistent forecasts and optimal resource allocation.”

Therefore the projections of the marketing manager need to be more in touch

with the customers and not just at the order of magnitude of comfort.

Another important observation is that the firm has “grown steadily

during the past five years” which is undoubtedly due also to the efforts of the

labor force. The sustaining and building up of employee loyalty should

therefore feature in the make or buy analysis and decision. Furthermore,

given the imminence of new labor negotiations with the union it is

recommended that the potential cost savings derived from outsourcing be

leveraged as a bargaining card to encourage the union to be less hostile and

more amicable. Once this is accomplished the reward to staff should be the

opportunity to earn more, albeit by a reasonable amount, and the securing of

in-house production of the CRUs. Simultaneously, alternatives to make the

production leaner will have to be sought including the consideration of the

leasing of equipment rather than an outright purchase. Furthermore the

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materials side of the supply chain will need attention such as the deepening of

relationships with the materials suppliers. This should also be done with a

view to make the supply chain more lean.

Although it is cheaper to outsource, the benefits of labor loyalty and the

greater control and management of risk and quality, against the backdrop of

the size of MBL, the competitive nature of the market and the need to

leverage the proprietary design features of the calculator as it relates to

outsourcing, tips the balance in favor of in-house production. However it must

be noted that efforts to streamline the supply chain for materials and make the

production of calculators leaner, must be done in tandem with the decision to

make. Failure to do this will result in MBL losing ground in its niche market.

References

Anderson, D.L., Britt, F.F. & Favre, D. J. (2007, April). “The Seven Principles

of Supply Chain Management” Supply Chain Management Review, p.

41-46

Bolgar, C. (2010). Outsourcing offers flexibility, but it comes at a cost”.

Retrieved on July 21, 2010 from website:

http://www.supplychainriskinsights.com/archive/scri-outsourcing

Maine-Barnes Ltd case study. Retrieved on August 13, 2010 from

website:http://highered.mcgraw-

hill.com/sites/dl/free/0073381454/647734/mainebarnes.pdf

Burt, D. N., Petcavage, S. D., & Pinkerton, R. L. (2010). Supply Management.

New York: McGraw-Hill Irwin