EFFECTS OF A DECISION TO CLOSE A DEPARTMENT AND OUTSOURCE

Outsourcing has become a common way of reducing costs in many organizations. Such decisions, though, often have repercussions that may not be captured by the numbers. Employee morale, product quality, and vendor reliability are some of the issues that should be considered. Lets revisit the scenario described earlier at the International Chocolate Company. Recall that the Savannah plant manager, Marsha Mello (M), was considering outsourcing the production of gift boxes for the companys fine chocolates. A conventional analysis of the decision pointed toward keeping the production operation in-house. Now lets change the scenario a bit, and consider the following conversation between Dave Mint, plant controller (C), and Jack Edgeworth, supervisor of the gift box production department (SG). The conversation takes place after the two friends weekly tennis game.

1. Mint (C): Well, you took me again, Jack. Im starting to feel old.

2. Edgeworth (SG): It was a close match, Dave. Always is. Fortunately, it looks like well be able to keep our matches up, too.

3. Mint (C): What do you mean?

4. Edgeworth (SG): Im talking about the outsourcing decision Marsha was considering. Fortunately, the analysis showed her that we should keep making our own gift boxes. So my department stays in business. And I wont have to consider a transfer. My wifes very happy about that, with the twins in middle school and all.

5. Mint (C): Uh, Jack, I think theres something you need to know about.

6. Edgeworth (SG): Whats that?

7. Mint (C): Ive been doing some preliminary studies using a technique called activity-based costing. I think it could improve our decision making in a lot of areas.

8. Edgeworth (SG): So?

9. Mint (C): That outsourcing decision is one of the areas where I tried out the new ABC approach. I just finished the analysis yesterday. I was going to schedule an appointment with Marsha and you next week to discuss it.

10. Edgeworth (SG): Im getting queasy about where this is going, Jack. What did your analysis show?

11. Mint (C): It changes the conclusionpretty dramatically, in fact. The ABC study shows that wed save over $40,000 each year by outsourcing.

12. Edgeworth (SG): Is that really all that much, Dave? Among friends, I mean?

13. Mint (C): Its not a trivial amount, Jack.

14. Edgeworth (SG): Look, Dave, I dont think Ive ever asked anything of you before. But cant you bury this one for me? Our family really doesnt need another move. And Ive got people working for me who will probably lose their jobs. Weve done a good job for the company. Our product is top notch. Nobodys ever complained about a thing.

15. Mint (C): I dont see how I can withhold the analysis from Marsha, Jack. She has a right to all the information I have.

16. Edgeworth (SG): But you said you were just doing preliminary studies, Dave. Marsha doesnt know anything about this one, does she?

17. Mint (C): Not yet, Jack, but Ive got a professional obligation to show it to her.

18. Edgeworth (SG): Youre opening a Pandoras box, Dave. What about employee morale if you close my department? And what about product quality, and reliability of the supply?

19. Mint (C): Those are valid issues, Jack. But they need to be addressed on their own merits, in a full and open discussion.

20. Edgeworth (SG): Could you at least share this so-called ABC study with me before you show it to Marsha? Maybe Ill see something youve missed.

21. Mint (C): I dont see why not, Jack. Come by my office tomorrow morningsay about 10:00.

Identify any ethical issues you see in this scenario. How would you resolve them? What should the controller do?