Discussion Response (150 words each)

Using expected value, is it economically better to make or buy the component?

Using expected value calculations, it is economically better to make the component. Let’s look at how we arrive at this recommendation.

The total costs to purchase the component would be $720,000 ($72 per component x 10,000 units). The cost to manufacture the product would be $758,000 ($100,000 setup + $400,000 raw material + $258,000 defect fixing). Thus, the company would save $38,000 in costs if were to manufacture instead of purchasing the component from the market.

 

2   Strategically thinking, why might management opt for other than the most economical choice?

In this particular case study, one of the reasons that the management might opt to purchase instead of manufacture, even though manufacturing is the most economical choice, is because of the lack of experience it has in manufacturing this component. Lack of expertise in manufacturing presents great risks, especially when considering new products. Even though the manufacturing team expects low defects that is probably a quantitative analysis that has not factored in the lack of manufacturing experience and probably needs a more detailed analysis. (Bragg, 2018) The other reason that the management might choose to buy instead is that manufacturing is not their core competency. If the company is known as an expert in building products rather than manufacturing components, and if there are already competitors in the market for that component that have economies of scale and manufacture at a much lower cost, then the management might just choose to purchase instead. Also, since this is a new product that the company has been asked to design and build, maybe that component is something that would only be used for this product and has now viability for any of the other regular projects that the company works on or the products that it builds. It is only a one-time contract after all. This would also prompt the company from not investing in setup costs if the machines that they purchase could not be used for manufacturing any other components or would not be used for anything else. A key factor that has not been considered in this case study is the timeline for building the new product. If the contract calls for building the product in a short time and the manufacturing team would not be able to produce the required quantity in that time, then irrespective of the cost savings, the company would not be able to meet the deadlines and thus would lose face in front of the client. The management team should use a risk matrix to identify the risks, assign risk ratings, and prioritize risks based on those ratings to identify the impacts on the manufacturing process. (Kerzner, 2013)

 

References:

Kerzner, H. (2013). Project Management: A Systems Approach to Planning, Scheduling, and Controlling. (pp. 894-896). John Wiley & Sons, Inc.

 

Bragg, S. (2018, May 2). Make or buy analysis. AccountingTools.  https://www.accountingtools.com/articles/make-or-buy-analysis.html