Assignment Alicia Wong
1.What benefits would accrue to TFL from making mustard in-house?
2.What risks are there for TFL?
Answer this two questions, each question around 120-150 words, due in 24 hours.
Chapter 5 Make or Buy, Insourcing, and Outsourcing 133
and the rest in overhead, including expenses such as taxes,
energy, maintenance, and charges from corporate office.”
GREVEN E-COATING
Glenn had been approached by an enterprising local ven-
dor several months back, inquiring about Rondot’s paint-
ing requirements. Cathy Stirling, representing Greven
E-Coating Company (Greven) proposed that she prepare
samples for each family of housings and provide cost esti-
mates to Glenn. Eager to explore cost savings opportuni-
ties, Glenn readily agreed.
Electrocoating, or e-coating, uses a system whereby a
DC electrical charge is applied to a metal part immersed
in a bath of oppositely charged paint particles. The metal
part attracts the paint particles, forming an even film over
the entire surface, until the coating reaches the desired
thickness. E-coating was generally considered more cost
efficient compared to traditional wet paint systems.
Samples from Greven were sent to Rondot’s quality
control department for testing and the results seemed
encouraging. The tests indicated that parts for five of
the six families of housings, representing approximately
60 percent of the Jackson plant’s housing volume, could
be converted to e-coating using Greven at a cost of 15¢
each. One family of housings failed the tests because of
problems with the method of adhering a magnet to the
housing. Rondot’s assembly process required a magnet
to be attached to the top inner portion of each housing
using either a cold or hot bonding adhesion process. The
use of either method was dependent on product design,
and engineering specified the adhesion method used. The
one family of housings that used a cold-bond adhesion
process had failed the test, while the other five fami-
lies, which used a hot-bond process, passed the testing
process.
As part of the data-gathering process for this project,
Glenn also talked to Betty McKinley, from production
planning, and John Underwood, in manufacturing engi-
neering. Betty figured that she would need to add another
two weeks’ worth of inventory if painting operations were
to be outsourced. She reminded Glenn to expect to pay
3¢ per part for transportation and packaging.
John was delighted at the prospects of eliminating the
paint line, indicating: “In the not-too-distant future, we are
going to have to spend some money to upgrade our sys-
tem or pull the line out completely. These old wet-based
systems are less efficient compared to other technologies
available today, in terms of both cost and environmental
performance.”
PREPARING FOR THE MEETING
Glenn was aware that Terry Gibson and Dick Taylor were
under significant pressure to reduce costs at the Jackson
plant and he felt that outsourcing painting operations rep-
resented a good opportunity. However, this was his first
major project and Glenn wanted to make sure that he had
taken all the necessary issues into account and developed
a strong case for his recommendations before his meeting
the following week.
Case 5–3
Alicia Wong
Alicia Wong, Corporate Supply Manager, Thain Foods
Limited, wanted to prepare a proposal to manufacture
mustard in-house. Mustard, an important ingredient in
many of the company’s products, was currently purchased
from an outside supplier. She hoped a comprehensive
proposal could be prepared in one-month’s time for the
CEO’s approval.
GENERAL COMPANY BACKGROUND
Thain Foods Limited (TFL) had been in business for
more than 30 years. Its products included a wide range of
syrups, fudges, cone dips, sauces, mayonnaise, and salad
dressings. Its customers were major food chains, hotels,
and restaurants in North America and Europe.
TFL believed in continuous improvement to its
operations. Over the last two years, it invested more than
$2 million in plant facilities, the bulk of it new, state-of-
the-art process equipment and process control. All pro-
duction and process control functions were computerized
for maximum efficiency.
TFL employed about 120 people. It had a corporate
structure of CEO; president; executive vice president,
domestic sales; and national account manager and used
a network of food brokers who sold and promoted its
products.
joh77899_ch05_120-134.indd 133 6/9/10 9:13 PM
134 Purchasing and Supply Management
THE SUPPLY AREA
Alicia was responsible for supply and reported directly to
the CEO. She had an inventory control officer, a buyer and
a receiver under her supervision. Purchases could be clas-
sified into five different types: labels, packaging, raw ma-
terials, commodities and MRO supplies. Mustard was an
important raw material used in many of TFL’s products.
CURRENT PRACTICE: PURCHASING
MUSTARD EXTERNALLY
Whenever mustard was required, the buyer e-mailed the
supplier and requested that it prepare the appropriate
amount to be picked up by a truck from TFL. The pur-
chase order would be prepared before the truck left for
the supplier, normally the next day. The mustard supplier
used mustard seed as its raw material and blended in the
other ingredients after the seed had been reduced to mus-
tard flour. Every month TFL purchased 500 drums, or
100,000 liters, of mustard. The cost of the mustard itself
was $64 per drum. Freight costs were borne by TFL and
amounted to about $8 per drum. TFL operated three eight-
hour shifts, five days a week. Each worker was paid about
$20 per hour. It took about 10 minutes of a worker’s time
to handle each drum. This included pouring the mustard
into the processing kettle, making sure other added ingre-
dients mixed well, and rinsing the drums. The drums were
bulky and because they could not be used in the plant for
other purposes, had to be rinsed for a contractor who took
them away. The costs of disposing of the drums in this
manner were negligible. Other costs and overhead of pur-
chasing were $0.02 per liter.
SUGGESTED CHANGE:
MANUFACTURING MUSTARD
IN-HOUSE
The mustard to be produced at TFL would be composed
of roughly 60 percent solid, 20 percent water, and 20 percent
vinegar. The solid portion was a spice blend, consisting es-
sentially of mustard flour, salt, and other spices that could
be readily bought. Water was not a problem because the
city provided a reliable supply. Vinegar was already a raw
material that TFL ordered in bulk regularly from suppli-
ers. Alicia therefore believed that it was a simple matter
for TFL to make the mustard for its own use. TFL only
needed to buy the spice blend and add water and vinegar
in the right proportions. She approached a supplier who
indicated that it could make the spice blend at a delivered
price of $0.15 per liter for TFL, including freight. However,
it needed time for tests to ensure that the blend would
be of the right quality for TFL’s use. Vinegar cost TFL
$0.1875 per liter delivered in 15,000 liter lots. And TFL
was paying $0.025 per liter for water. Alicia also checked
whether production had the time and equipment to make
the mustard. Production felt that the change would not be
too drastic and no additional workers would be necessary.
However, it would use up more of the existing workers’
time. Production calculated that the change would entail a
total labor and overhead cost of about $0.105 per liter of
mustard using standard cost accounting for labor time and
overhead charges.
Alicia organized an information gathering and dis-
cussion session involving supply, production, quality as-
surance, and distribution to discuss the proposed change.
The workers were keen on the idea because this meant
that they would no longer have to haul and rinse the
bulky drums (water and vinegar could be easily chan-
neled to the mixing containers using existing pipes).
However, quality assurance expressed concern about
the quality of mustard if produced in-house. Because the
mustard was an ingredient in many of TLF’s products,
such a change might adversely affect the quality and
taste of these products.
Alicia wanted her proposal for in-house manufacture
of mustard to be in the company’s best interest and won-
dered how to proceed next.
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