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I would like to get some help with my case study, please refer to the attached sheet. Answers must be at least two paragraphs in compliance with the sample of solution provided attached. Thank you.


Running Head: DONLEY BROTHERS CASE STUDY Donley Brothers Case Study

 

Your Name

 

Global Issues in Supply Chain Management

 

Your Professor's Name

 

Date Paper Submitted 1 DONLEY BROTHERS CASE STUDY 2 Donley Brothers Case Study

 

The purpose of this case is to explore the question of make versus buy ? ?focusing

 

particularly on the contribution to overhead that is involved in a make-buy decision.

 

Discussion

 

The case states that the reason for considering buying rather than making is the present

 

12 percent% defective rate. A supplier that machines its own castings could have a lower rate of

 

defects than Donley Brothers has; thus, the firm could quote a lower price, however, it is entirely

 

possible that the supplier will have a higher defect rate (Burt, Petcavage, & Pinkerton, 2010).

 

The prospective supplier is a foundry. There is some question as to whether using a

 

supplier for work in which it is not expert is good idea. Supply management history is replete

 

with supply managers who learned, to their sorrow, that just because a company excels in one

 

line of work, no guarantee exists for its excelling in a different line. One of the primary reasons

 

for buying instead of making is to take advantage of the specialty supplier and its proven ability

 

in a specialized field (Burt, et al., 2010).

 

Many presume that Donley Brothers can only buy or make. Actually, many companies

 

make part and buy part of their requirements for the same item (Burt, et al., 2010). In such

 

cases, the outside supplier becomes an accurate cost barometer for the firm?s internal

 

manufacturing operation. The answer to the sole-source question in this case could easily be that

 

the second source could be Donley itself. With present production at 90% percent of capacity,

 

partial use of an outside source might be a very practical solution.

 

Question 1: Should Bob Donley contract with Akron Foundry for finished castings?

 

Before Bob decides whether or not to contract with Akron, he should first investigate the

 

cause of the defective castings (Burt, et al., 2010). It may be that by means of new DONLEY BROTHERS CASE STUDY 3 manufacturing and inspection methods, Donley Brothers can stop or at least reduce the rejection

 

rate. If Donley Brothers finds ways to lower the rejection rate, it will stand to gain.

 

Donley Brothers, in cooperation with its supplier, should call in specialists to examine the

 

existing patterns, the methods of pouring, inspection methods employed, ability to detect

 

failures, and so forth. In short, a full-scale study should be made to be sure that all of the recent

 

developments in casting technology are being applied to this problem (Burt, et al., 2010). If this

 

full-scale study discloses that advanced casting technology is being fully exploited, then it is

 

proper for Bob Donley to start his consideration of the make-or-buy make or buy question.

 

The make-or-buy make or buy consideration should start with the most elementary

 

computations (Burt, et al., 2010). The cost of making 1,000 good castings is based on three

 

principle elements of cost: materials, labor, and overhead. One thousand and one hundred forty

 

(1,140) raw castings must be purchased and machined in order to provide the 1,000 good

 

finished castings required by Donley Brothers each year.

 

Table 1

 

Annual Cost to Make 1,000 Finished Castings

 

Materials (raw

 

$600 x

 

= $ 684,000

 

castings)

 

Labor 1,140

 

$156 x = $ 177,840 Overhead 1,140

 

$156 x = $ 177.840 1,140

 

= $1,039,680

 

Note: The cost to purchase 1,000 good finished castings is $1,000 x 1,000 $1,000,000.

 

On the face of things, it appears that purchasing the annual requirement of 1,000 finished

 

castings is less expensive ($1,000,000) than making the finished castings ($1,039,680).

 

However, such a conclusion overlooks the contribution to overhead resulting from making the DONLEY BROTHERS CASE STUDY 4 castings. Overhead at Donley Brothers currently is 100 percent% of direct labor, or $156 per

 

casting. Fifty percent of this overhead is fixed and 50 percent is variable. Thus, the true variable

 

(out-of-pocket) cost of making 1,000 good castings is:

 

Table 2

 

Annual Variable Cost to Make

 

Materials

 

$600 x 1,140 = $684,000

 

Labor

 

$156 x 1,140 = $177,840

 

Variable Overhead $ 78 x 1,140 = $ 88,920

 

= $950,760 Thus, the variable cost of making is less ($950,760) than buying ($1,000,000). A contribution of $49,240 to fixed overhead results if Donley Brothers makes the castings ? ?

 

provided that the firm is operating below capacity.

 

This analysis ignores any real costs of production disruptions and lost sales.

 

Investigations must be conducted into whether such costs are emotional or a real problem (Burt,

 

et al., 2010); . Iif real, then estimates should be made as to their size. The investigation should

 

also determine if any such costs could be avoided by maintaining a buffer stock of finished

 

castings.

 

Question 2: Would there be any dollar savings by contracting with Akron if Donley

 

Brothers?s machine shop were operating at full capacity?

 

This is a difficult question whose answer is it depends. If Donley Brothers were operating at full capacity but not turning down potentially profitable work, then making the

 

castings would still provide a contribution to fixed overhead. Under these conditions, if Donley DONLEY BROTHERS CASE STUDY 5 were to buy the finished castings, total fixed overhead would remain the same, resulting in other

 

production items being assessed a higher fixed overhead rate. This in turn would result in each

 

of these items becoming less profitable.

 

However, if as a result of buying the finished castings Donley Brothers can apply its

 

productive resources (plant, equipment, labor, and management) to items which yield a higher

 

contribution to fixed overhead and, hopefully, to profit, then it is in the firm?s best interest to buy

 

finished castings (Burt, et al., 2010).

 

Question 3: What are the dangers involved if Akron becomes the sole source for

 

Donley Brothers?

 

If Akron becomes the sole source for the castings, there are two major problems (Burt, et

 

al., 2010).:

 

? Donley Brothers is tied to Akron; t. They are locked in. If Akron fails to perform, then

 

Donley Brothers is in trouble.

 

? Donley Brothers will have an obligation to Akron that may be difficult to break. Akron

 

may tie its future to Donley Brothers, and loss of Donley Brothers' business may

 

financially bankrupt Akron.

 

As mentioned in the discussion section, a possible second source could be Donley Brothers itself.

 

Question 4: Who is responsible for the make-or-buy decision?

 

The make-or-buy decision is principally a management decision (Burt, et al., 2010). The

 

chief executive officer (CEO) of a small or medium-size firm normally would make the decision.

 

In larger firms, in some industries, the decision is sometimes made at a level below the CEO, yet

 

at an organizational level high enough to insure that the financial well-being of the firm is

 

properly considered. The decision maker should have reliable input from production, finance DONLEY BROTHERS CASE STUDY 6 (on the true cost of making), and supply management.

 

Question 5: What other suggestions can you make for improving the situation at

 

Donley Brothers?

 

It is possible that the terms and conditions of the purchase order under which the raw

 

castings presently are purchased are deficient (Burt, et al., 2010). Quality standards, the right of

 

source inspection (monitoring of the supplier?s production and quality control processes),

 

provision for damages, etc., all need to be covered in the purchase order.

 

Donley Brothers may find it cost effective to have a casting engineer review the present

 

supplier?s production process. Perhaps the number of holes and cracks can be reduced. Frequently, an industrial customer will find it to be in its best interests to provide technical

 

assistance to its suppliers.

 

Some of Donley?s present problems in the area of production disruptions could be

 

reduced or avoided were an adequate buffer stock of finished castings available (Burt, et al.,

 

2010).

 

Why select a casting shop to machine the castings? It appears possible that Bob Donley, the

 

supply manager, will not have done an adequate job of sourcing (Burt, et al., 2010). The

 

machined casting appears to be an excellent candidate for value analysis. What does the finished

 

casting do? What else would do the job? What would be the alternative cost? Are the

 

tolerances realistic? Are commercially available substitutes available? DONLEY BROTHERS CASE STUDY 7 DONLEY BROTHERS CASE STUDY 8

 

References Burt, D.N., Petcavage, S. D., & Pinkerton, R. L. (2010). Supply management (8th ed.) New York,

 

NY: McGraw-Hill/Irwin.

 


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