CON LIGHTING CASE STUDY Con Lighting is an enterprise which currently sells light fittings from various manufactures to a growing market of contractors and developers. It has grown from a $1 million turnover to a $5 million turnover organization within five years, as at the end of December 2018. It does not have any borrowing or loans as it has a sound cash flow. Con Lighting owns a facility comprising of an office block, a small warehouse and a large parking area for future expansion. The Owner of Con Lighting has always been recognized as an honest and religious man and has run his business the same way. However, he retired a year ago and his son-in-law has taken over the CEO position on the Board. One product which is very price sensitive in the market is a Fluorescent surface mounted light fitting called the Channel fitting, which makes up thirty percent of their turnover. The largest volume comes from the 4 foot, 2 lamp (36 Watt) fluorescent range.

In the February 2019 management meeting the Marketing Manager, Sparky, has recently reported that one of their largest customers has just landed a five year contract to refurbish a number of large low cost commercial buildings, which need the lighting upgraded to meet the new code. The total order is pending subject to Con Lighting giving a firm price on 500,000 units over the five years. The requirements (i.e. quantity) for this project start in January 2020 and are the same for each year. As Con Lighting wants to grow its market share but sees this order as strategic, it has decided to set up a cross functional team made up of the Marketing Manager, Accountant, Inventory and Logistics Manager and the Purchasing Manager, to come up with a plan. The Purchasing Manager, Chris, is responsible for compiling a proposal for the CEO recommending outsourcing or insourcing for the additional volume of Channel fittings. Sparky has recommended that Con Lighting should continue to purchase the fitting from their existing supplier, Strip Lighting Manufacturers. See Exhibit 1 for pricing history. Strip Lighting has been the only supplier of the Channel fitting range and the relationship has been a good one although the Accountant,Bookie, has expressed his concerns about the dinners the supplier puts on for the Con Lighting customers and some of the senior staff at expensive restaurants. Sparky responded that that is how business is done and the new CEO really enjoys his parties. He added, besides, if you dont then you will lose your customers. Chris, did some research to feel out the market. One option, which showed potential, was to import the Channel fitting from INCO Lighting in India (See Exhibit 2). INCO Lighting had a good reputation but it would mean having to employ a person to manage the shipments and logistics, not mentioning a potential problem with the existing warehouse space if too many containers come all at once. The Inventory and Logistics Manager, Sharon, suggested Con Lighting make their own 2 lamp 4 foot Channel fittings. Bookie did some calculations with input from Chris to analyse the cost of setting up fabricating and assembly lines at Con Lighting (See Exhibit 3). Sharon became concerned about how she would cope with all the addition component volumes as well as the increase in value tied up in inventory. Bookie was concerned about all the additional suppliers and the extra workload in his department. Chris responded by saying that he needed more staff if there is more suppliers and work volumes. The CEO stated that the decision would be made once he received sufficient information to make an informed decision. He added, no more support staff are to be employed. Chris was ready to get his resume ready when he remembered something about spend analysis or ABC Analysis from his Fanshawe College days and decided to look it up in his textbook. Quantitative analysis was considered not necessary or important to the decision by most of the team, except Bookie. After the meeting Bookie remembered studying make vs. buy decisions and something about learning and experience curves at Fanshawe College, and decided to read up on what he had learned in college. Strip Lighting had recently put on a large post Christmas party for all of Con Lightings customers and senior staff and this year gave each wife a Zumba robotic vacuum cleaner worth $1,200. Strip Lighting was surprised that Con Lighting was even considering other options!

EXHIBIT 1 Details of Strip Lighting are as follows; Quoted price: $50.00 FOB Destination. Quantity Discount Structure: See chart below Operating capacity: 80% Warranty: covers the free replacement of any faulty product. Inventory Costs: Strip Lighting uses a Third Party Logistics Provider, which operates a JIT process to the customers.

Discounts Offered
Amount Spent		Discount offered
Up to	$2,500		2.5%
Up to	$5,000		5.0%
Up to	$7,500		7.5%
Up to	$10,000		10.0%
Up to	$20,000		12.5%
Up to	$30,000		15.0%
Over	$30,000		15.0%

Total Cost Analysis - Outsourcing Local

Cost Description

Unit Cost

Net Price=?

Quality Costs=?

Inventory Safety Costs=?

Inbound Transport Costs=?

Total Cost=?

EXHIBIT 2 Details of INCO Lighting are as follows; Quoted price: USD 28.00 CIF INCO Terms 2010 Operating capacity: 98% Additional importing costs including customs clearing, forwarding agents fees and inbound transport is estimated at $4.50 per fitting. Quality related costs: $200 per faulty fitting Suppliers Defective level: 5000ppm Inventory Costs: Assume one months average stock level, which costs 15% per annum on the value of Inventory. The additional work load will require one Imports Controller costing $50,000pa plus 30% benefit costs.

Total Cost Analysis - Outsourcing Overseas
Cost Description	Unit Cost
Net Price
Inbound Transport Costs
Quality Costs
Inventory Safety Costs
Additional direct labour
Total Cost

Exhibit 3

The information on the direct material is as follows:

Steel: Pre-Painted Cold Rolled 0.8mm coil from the United States supplier Steel Coils

Price: USD 520/MT FOB Shipping Point (MT = Metric Ton)

Exchange Rate: 1 Canadian Dollar = 0.80 USD

Steel Mass for each fitting: 5kgs

Inbound Transport: $100/MT

Electrical direct materials (Ballasts, Wiring harness, lamp holders and starters) $20 per fitting

Assembly line runs 320 units per day at a cost of $5.20 per unit.

Factory Overheads are estimated at $5.20 per unit

No degreasing or painting is required

Tooling Costs: All tooling costs = $500,000 and will last for 500,000 units.

Depreciation cost: 8 x CNC Punching and bending machines with de-coilers. Life expectancy for each CNC machine is five years. Each CNC machine cost $200,000.

Finance costs were considered not necessary or important to the decision by the team. However, Bookie protested.

Learning Curve

Units	Total Labour Hours
10	3
20	5.4
40	9.7
80	17.4
160	31.2
320	56
640	100.6
1280	181
Total

Total Cost Analysis - Insourcing
Cost Description	Unit Cost
Steel Direct Material
Electrical Direct Material
Machine Operators
Direct Assembly labour
Factory Overhead
Degreasing and Painting
Tooling Costs
Depreciation of the equipment
Total Cost

I need to complete informations about Exhibit 1:

Total Cost Analysis - Outsourcing Local
Cost Description	Unit Cost
Net Price
Quality Costs
Inventory Safety Costs
Inbound Transport Costs
Total Cost