Make or Buy Decision for Futronics Inc

Futronics with its offices in Lexington, Massachusetts, was considering using outside source services and move from using the main office stores. Steve Hastell, who was the supply management manager, was given the responsibility of finding out which services could be efficiently outsourced. Previously the company had been making profits from the sales they made to customers of both products and services but due to competition they had to rethink their strategies.
Outsourcing is quite common in United States; companies are now outsourcing products and services in order to cut costs and make their products more popular. Futronics Inc. have to reduce the cost of office supplies so that they may make profit. (wables13, 2010). Relevant Facts (Data) The company experienced competition from the their business rivals, this in turn led to reduced sales of their products and reduced demand for their services, there was also a reduction on the profits that they had earlier been making. The supply management branch decided to take part in the cost cutting decision.
The main store and the tasks that they performed were reviewed after a proposal was received by the supply management department from two companies suggesting that futronic considers reviewing their operations, and adopt the outside company’s record keeping (futronics, PDF). The main stores were established when an investigation conducted discovered that the company could save a lot of money if they concentrated in buying of products in bulk and sales of stationeries and other supplies. These stores serviced forty-two area sites in Lexington from a warehouse.

The inventory was for $140,000, a list of the products that they had in stock was made after every six months, there were four people working at making sure that every thing was in order. Two people dealt with the products directly, one person worked at data entry of the orders that they were getting, while another person would wrap, label and put the products into the truck. The month of December is when they would have a lot of work but on the other months the work would not be as much, there was a high demand for calendars and other items (futronics, PDF).
Every year the personnel and the business location would cost the company $200,000, with catalogue of 500 products, the delivery of the products would be made everyday using a truck that also delivered letters and also was used to take people from one store to the other. The customer complaints about the delay in the delivery of the products that they had ordered were many; in addition, the stores would take too long to get new products for their customers.
The management had not at that point realized that the system that they had been using for such a long time was not working effectively and that there was need for a new system to be established. The managers had earlier on authorized all departments to find solutions in order for the company to make saving and get profit in the process, the departments were to make reports on the same. It was about the same period when the two companies made proposals to provide services to Futronics.
Some companies in Boston had been using outside services and in the process they had made considerable savings for their companies, Steve Hastell had also heard the same. When he received proposals in June from interested companies, he realized that they would be able to get the same products that they had earlier on been selling, at a cheaper cost and they would be able to make a 6% in savings, and he also realized that the catalogue had 600 products (futronics, PDF). The period that it would take for an order to be delivered would also reduce from about three weeks, which it would earlier take, to be not more than ten working days.
This was according to the proposals that Futronics had gotten. Steve and his partners were apprehensive about the whole issue, among their concerns was about the reduced control they would have, and also about whether or not the proposed system would effectively work. There was also the issue of the amount of money that the outside company would get from the deal. All the outside companies proposed a three year contract with possibility of its renewal after the expiry of the contract. There was also the possibility of the four people in the main stores losing their jobs (futronics, PDF).
Options and Analysis There are several ways that Futronics would be able to cut costs and ensure that they made more profit in the process. The table below offers some suggestions on how to cut cost and the benefits it would have on Futronics as a company. HOW TO REDUCE COST IDEAS AND BENEFITS The lowest purchase saving should be about $48,000 to $50,000 annually. ($900,000 x . 90 x . 06 = $48,600) By doing so, they would be able to make a saving of 6 percent from about 90 percent of products that they would buy. However these products have to be of good quality so that they may sell well in the market.
Do away with the stores operation, the carrying cost of the inventory was of about $42,000 annually ($140,000 x . 30 = $42,000 per year) By doing away with stores operations, the carrying cost would also be eliminated. Reduce the cost of operation including personnel and facilities cost. This would see a cost reduction of about $200,000 annually, provided that after the four people are laid off, their working space would be used for other useful businesses. Offer one of the outside companies a three year contract.
There would be a decrease in the amount of money that Futronics would use in the purchase cost. The customer would therefore be able to make more orders efficiently. Do away with supervision of operations. This would help as more time would be used for purchase work. Increase the number of operating sites when they give a contract to one of the supply house. With the increase of operation sites, the delivery of products to these sites would be expensive and taxing but the supply houses would be able to handle the situation effectively. Cost analysis table.
Outsourcing comments and Concerns There are benefits that come with outsourcing as the above table explains, but on the other hand, there are some concerns that Futronics should have in mind as they consider outsourcing. The table below gives a list of some of the disadvantages of outsourcing according to Fleming. CONCERNS Futronics was in danger of losing the control that they previously had over the products and the services that they offered their customers. Not unless some of their systems were incorporated in the new system, they would not be able to retain control.
The three year period in the contract would be a long time; Futronics therefore had to make sure that they chose the best supplier who would provide good services. Choosing to do away with the stores operation was a huge decision which had to be thought of effectively, the establishment of the same system if need be could be hard and therefore the right decision is vital. The informal records at the sites have to be efficiently monitored in order to ensure that they do not become uncontrollable by the management; Futronics has to therefore make sure that they keep a close eye on all the site records.
Concerns table. Steve Hastell and his team must consider whether the changes that they would implement and the decisions that they were to make would be beneficial for the future of the company. They should decide whether there will be need for different storage systems. Before a proposal from any supply house is accepted, the supplier must be aware of what is expected from his company in terms of how to perform work diligently.
Operating details and the work expectations should be included in the contract, there should also be a statement explaining the reason for an increase in prices, these details are to be put in place before Futronics signed any contract (Fleming). Steve Hastell had to decide the process he would use in assignment of the contract, he had to decide whether the companies would have to bid for the contract or whether he would choose two of the companies whom he felt would offer good service and then reach an agreement with the better of the two.
It would have been better if the four people were to be transferred to other offices if and when Futronics chose to close the stores operations. (Fleming). Conclusion The facts on outsourcing and its advantages far outweighs the disadvantages, by outsourcing, Futronics would realize better sales and profits. They would also be able to cut cost on the personnel and operation. Steve Hastell can therefore do a background check on the interested supply companies in order to ensure that he has chosen the best among the ones who were interested.
They could also decide to use a supply house only for certain products while remaining with the old system for the rest of the items. This will help Futronics to have an idea of how outsourcing works, and to decide whether or not it was effective. Outsourcing Issues In its scope of work the senior management should consider making sure that the supply house that they choose to work with are capable of maintaining Futronics work ethics. The supply house could try to merge their operations with the already existing system for the benefit of both companies.
The contract should also accommodate the both parties involved in order for them to be able to work well together; it should also not be ambiguous. Reference Fleming, E. L. Outsourcing & Make or Buy Decisions-Purchasing and material management http://polaris. umuc. edu/~bgoodale/Admn626w/mod6cp. html FUTRONICS, INC. http://highered. mcgraw-hill. com/sites/dl/free/0072290706/71352/futronics. pdf Wables13 (2010). Futronics http://www. oppapers. com/essays/Futronics/319286