Case 5-3 Alicia Wong Alicia Wong, Corporate Supply Manager, Thain Foods Lim- ited, 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 out- side supplier. She hoped a comprehensive proposal could be prepared in one-month's time for the CEO's approval. 130 Purchasing and Supply Management per liter. GENERAL COMPANY BACKGROUND rinsed for a contractor who took them away. The costs of disposing of the drums in this manner were negligi- Thain Foods Limited (TFL) had been in business for more ble. Other costs and overhead of purchasing were $0.02 than 30 years. Its products included a wide range of syrups, fudges, cone dips, sauces, mayonnaise, and salad dress- ings. Its customers were major food chains, hotels, and SUGGESTED CHANGE: restaurants in North America and Europe. MANUFACTURING MUSTARD TFL believed in continuous improvement to its operations. Over the last two years, it invested more than IN-HOUSE $2 million in plant facilities, the bulk of it new, state-of- The mustard to be produced at TFL would be composed the-art process equipment and process control. All produc- of roughly 60 percent solid, 20 percent water, and 20 tion and process control functions were computerized for percent vinegar. The solid portion was a spice blend, maximum efficiency. consisting essentially of mustard flour, salt, and other TFL employed about 120 people. It had a corporate struc- spices that could be readily bought. Water was not a ture of CEO; president; executive vice president, domestic problem because the city provided a reliable supply. sales; and national account manager and used a network of Vinegar was already a raw material that TFL ordered in food brokers who sold and promoted its products. bulk regularly from suppliers. Alicia therefore believed that it was a simple matter for TFL to make the mustard THE SUPPLY AREA for its own use. TFL only needed to buy the spice blend Alicia was responsible for supply and reported direct- and add water and vinegar in the right proportions. She ly to the CEO. She had an inventory control officer, a approached a supplier who indicated that it could make buyer, and a receiver under her supervision. Purchas- the spice blend at a delivered price of $0.15 per liter for es could be classified into five different types: labels, TFL, including freight. However, it needed time for tests packaging, raw materials, commodities, and MRO sup- to ensure that the blend would be of the right quality for plies. Mustard was an important raw material used in TFL's use. Vinegar cost TFL $0.1875 per liter delivered many of TFL's products. in 15,000 liter lots. And TFL was paying $0.025 per liter for water. Alicia also checked whether production had CURRENT PRACTICE: PURCHASING the time and equipment to make the mustard. Production MUSTARD EXTERNALLY felt that the change would not be too drastic and no ad- ditional workers would be necessary. However, it would Whenever mustard was required, the buyer e-mailed use up more of the existing workers' time. Production the supplier and requested that it prepare the ap- calculated that the change would entail a total labor and propriate amount to be picked up by a truck from overhead cost of about $0.105 per liter of mustard using TFL. The purchase order would be prepared be- standard cost accounting for labor time and overhead fore the truck left for the supplier, normally the next charges. day. The mustard supplier used mustard seed as its Alicia organized an information gathering and discus- raw material and blended in the other ingredients af- sion session involving supply, production, quality assur- ter the seed had been reduced to mustard flour. Ev- ance, and distribution to discuss the proposed change. The ery month TFL purchased 500 drums, or 100,000 li- workers were keen on the idea because this meant that they ters, of mustard. The cost of the mustard itself was would no longer have to haul and rinse the bulky drums $64 per drum. Freight costs were borne by TFL and (water and vinegar could be easily channeled to the mix- amounted to about $8 per drum. TFL operated three ing containers using existing pipes). However, quality as- eight-hour shifts, five days a week. Each worker was surance expressed concern about the quality of mustard if paid about $20 per hour. It took about 10 minutes of produced in-house. Because the mustard was an ingredient a worker's time to handle each drum. This included in many of TLF's products, such a change might adversely pouring the mustard into the processing kettle, making affect the quality and taste of these products. sure other added ingredients mixed well, and rinsing the Alicia wanted her proposal for in-house manufacture of drums. The drums were bulky and, because they could mustard to be in the company's best interest and wondered not be used in the plant for other purposes, had to be how to proceed next