Case 11-2 McMichael Inc. Art Flynn, packaging buyer for McMichael Inc. (MI), was working on an import substitution project involving a local own molding shop. It depended heavily on automotive minority supplier. He was concerned, however, that his ef- contracts, a situation Bert Wood wished to correct by forts would be fruitless because his original proposal had acquiring more nonautomotive business. In conjunction been flatly rejected by the plant manager as too expensive. with MI's engineers, Bert Wood had worked out a mold McMichael Inc., a medium-sized company, had over the design for the cream dispenser and included several sug- years specialized in prescription skin-care products, a mar- gestions for minor improvements. The cost of the mold ket niche in which it had developed an excellent reputation. was $56,000, an investment Bert Wood was in no posi- About three years ago, after extensive testing, MI had intro- tion to make and that MI would have to absorb up front. duced a new facial cream in a special package that allowed Bert Wood quoted a unit price of $0.27 based on pur- for precise measurement of the quantity dispersed. The chase quantities of 30,000 units at a time and an annual container, manufactured by a French firm for a different ap- volume estimated at 300,000 units. Bert Wood had sub- plication, was fairly expensive at an FOB MI's factory cost mitted a cost breakdown of this quote as follows: of $0.36. What concerned Art Flynn even more, however, Resin were the quality and delivery problems encountered. Com- Labor munications with the manufacturer were difficult, and Art Overhead* had the impression the manufacturer did not seem to care much about MI's business, which, as Art knew, was only a small proportion of their total volume produced. With the cooperation of MI's marketing, engineer- *Overhead breakdown: ing, production, and quality control personnel. Art had Power Depreciation found a local minority supplier who appeared capable of Interest meeting MI's requirements. This custom molding firm, Space, insurance, light and heat, taxes, supervision 3c OSA Inc., was owned by Bert Wood, a bright engineer, who had purchased the firm several years earlier when the previous owner wished to retire. OSA Inc. had its When Art submitted this quote along with the request for own tool and die manufacturing operation as well as its a $56,000 mold investment up front, the plant manager and treasurer both turned it down, arguing that the 24-month pay- The scheduling group, for a number of years, had used a back on the mold was far too long and that the company had modified MRP system. When Art discussed the new pack- better investment opportunities with a 12-month payback. age idea with them, they told him that if the new product Art was disappointed, because he had hoped this proj- and the older one were to be packaged in the same package, ect would assist in helping him meet his savings target a total package requirement of about 40,000 units would for the year. When he talked the idea over with his man- make sense and that the master production schedule could ager, Louise Moffat, she suggested he give it another try. easily be adjusted to run the two products in conjunction. She said, "I am sure that if you can get the mold pay- Art also discussed the situation with the resin supplier, back down to 15 months, you will get a warmer reception. who indicated that his quote to Bert Wood had been based There are not that many deals around this company that on the lot size of 30,000 packages, but that a 40,000 unit pay for themselves in one year." She also suggested that lot would fall into a new price bracket 5 percent lower Art talk to marketing to see if some other products could than the originally quoted price. use the same packaging, and to the production scheduling Art wondered just what effect all of this new informa- group to check if different production quantities could be ordered. tion would have on his original proposal. He knew that When Art talked to the marketing people, he found Bert Wood had been adamant about his $0.27 quote. Bert out that the package was ideal for another product to be Wood had said, "I know I am classified as a minority sup- introduced shortly and with an annual demand estimated plier. But I don't want to hide behind that fact. I want no at 100,000 units. Marketing had been uneasy about using special favors from any of my customers. Nor am I in a the French package because of the difficulties encoun position to make special gifts to anyone else. I have had to tered with it and assured Art that if he could get a reliable borrow at what I consider to be ridiculously high interest domestic source, this option would be highly attractive. rates to buy this company. Now I have to make it pay off. My $0.27 price is as low as I can go, as far as I can see