Bharata Manufacturing Inc. - Make or Buy Decision ader Bharata Manufacturing Solutions (BMS) is a producer of high-pressure valves for use in a number of industrial settings. BMS has been in business for five years and has been manufacturing only one type of valve. The company started with sales of 60,000 valves a year but has grown steadily and now sells 145,000 valves a year Over that time, the company has built a reputation as a key supplier to oil and gas companies. These companies need very high-quality valves to manage the extreme pressure build-up that occurs during extraction processes. To date, the company has been buying raw materials from a variety of suppliers, while manufacturing all valves in-house. But now that they have established themselves in the market, the company is planning to expand and diversify their product offerings. The main manufacturing facility is located in Kolkata, India. The total area of the plant is 75,000 square feet and can accommodate a maximum capacity of 200,000 units annually using the current process. aider Mohan is the head of production at BMS. He has been with the company since its founding. In fact, he designed the original process the company still uses to produce its current line of valves. Recently though, Mohan has been concerned with quality problems. Customer complaints have gone up and rejects from customers have increased from an average of 0.2% two years ago to 0.5% this year. These trends are very troubling, as a malfunctioning valve could potentially damage customer equipment and even lead to worker Injuries. At the same time, Mohan is finding that there is a high level of dissatisfaction among BMS employees regarding workload and salary levels. Because of the tight labor market in Kolkata, qualified line workers and staff are hard to find. And although Mohan has found that employees spend a lot of time on tea breaks, lunch breaks, and even talking to each other between production runs - they qualified line workers and staff are hard to find. And although Mohan has found that employees spend a lot of time on tea breaks, lunch breaks, and even talking to each other between production runs - they still complain about being overworked and forced to work overtime. All this makes Mohan worried about the new plans for expansion. He wonders where the necessary space and employees will be found to support the expansion. He has requested management not approve the expansion immediately- but to look at improving and consolidating the production process at the existing plant. In fact, Mohan has developed a blueprint for a new process that he thinks will be able to produce valves more profitably than the current process. The new process could accommodate up to 250,000 units annually, with greater quality assurance. However, the new process would have higher fixed costs relative to the current process because the new process would require a substantial investment in equipment and technology Mohan is not the only person at BMS worried about the planned expansion. The company's supply manager, Sunil Kuhfar, has been feeling pressure from BMS's suppliers. The company's supply base in Kolkata is comprised mainly of small, local companies. These companies have been able to supply BMS with raw materials and component parts over the last five years. But now suppliers are telling kumar that they are reaching their capacity limits and will not be able keep up with BMS's increasing needs. Already, BMS has faced shipping delays and canceled orders from suppliers who are under strain. In fact, two of BMS's most important suppliers recently told Kumar that they will be unable to meet BMS's needs beyond 200,000 units per year. Kumar worries that unless new suppliers can be found, the lack of adequate material resources will constrain BMS's growth. From his perspective, Kumar thinks the easiest way to overcome this constraint is to outsource production of BMS valves altogether. Thus, on his own initiative, Kumar has gone out and found three potential companies that could act as third-party outsourced vendors. Bharata Manufacturing Inc. - Make or Buy Decision ader On Tuesday, Mohan and Kumar found themselves walking down the same hall to the CEO's office. As it turns out, the CEO had organized a meeting of top executives to talk over the very issues that have been troubling both Mohan and Kumar. At the meeting, the head of marketing presented a number of very bullish trends. She thinks that starting with a baseline of 145,000 units this year, BMS can achieve an annual growth rate of 15% each year over the next five years. From her perspective, BMS is perfectly positioned to take advantage of the company's established brand image and India's growing economy. She thinks the market will bear a price of $35 per valve for the company's current offering and is strongly in favor of doing whatever it takes to capture the current market opportunity The finance manager, while not quite as enthusiastic about the growth potential, also favors expansion as increased rates of production would result in economies of scale and therefore greater profitability. Mohan again expressed his concerns regarding availability of qualified employees as well as the need for production control to maintain quality. He then presented his plans for the new process. At that point, however, the conversation became a bit muddle because the finance manager began questioning the fixed cost investments needed to support the new process. Finally, Kumar presented his three options in terms of vendors to whom BMS could potentially outsource production of its valve. While not necessarily opposed to the idea outsourcing, Mohan and the marketing director once more raised the issue of quality Ultimately, the CEO ask everyone to submit their information to his office and he would have his son, Raynesh, analyze the data and make a recommendation, Raynesh is doing his MBA at the Indian Institute of Management and is looking forward to entering the family business. Put yourself in the place of Raynesh. Prepare an analysis of the data below. 1. Determine which manufacturing option - Current Process, New Process, Vendor 1, Vendor 2, or of Management and is looking forward to entering the family business. Put yourself in the place of Raynesh. Prepare an analysis of the data below. 1. Determine which manufacturing option - Current Process, New Process, Vendor 1, Vendor 2, or Vendor 3 - is most profitable over the coming five-year period. 2. Discuss how these options may be combined to maximize profitability over the coming five-year period. 3. Work through the make-buy decision framework discussed in class. Make a recommendation on whether - or how - BMS should go about outsourcing production of its current product line. Be sure to specifically address points raised in the case by the various players involved Expected Annual Sales 145,000 Expected Growth Rate 15% Revenue/Unit $35 In-House Costs Current Process New Process Variable Cost Per Unit S18 $15 Annual Fixed Cost $ $ 275,000 400,000 Outsource Costs (dependent on number of units outsourced) Variable Cost