High Tech Compounds Corporation: Make-Bry Decision You are a supply analyst for High Tech Compounds (HTC) Corporation. HTC is a Michigan-based producer of highly specialized materials for application in a number of industries including automotives, aeronautics, sports, constructions, and transport. The company has 375 employees and an annual revenue of roughly $850 million. You work for the composite materials group. Composites are made from two or more constituent materials with significantly different physical or chemical properties that, when combined, produce a new material with characteristics different from the individual components. HTC produces a range of composite materials. Composites are made to customer specifications, which change depending on their use. HTC is particularly well known for producing high quality glass reinforced with polymers. HTC uses these reinforced glass composites to create airplanes windows. Production requires rigorous quality standards in line with US Federal Aviation Administration Order 8110.22 which governs aviation parts manufacturers. Over the last five years, HTC has established itself as an industry leader in the production of airplanes windows. A large part of the reason HTC has become an industry leader in this market segment is because of the innovative process that it uses to create its products. This process has served the company well up to this point. But now, increasing demand and more stringent regulatory requirements have begun to put a strain on HTC production process. HTC has just won a multi-million dollar contract to service the new line of Airbus A350 aircraft. Total orders for the aircraft have reached 858 , with each aircraft requiring about 100 windows of different sizes, and delivery schedules are tight. These orders will not hit all at once. However, it does mean that HTC should see about 7% year-on-year growth in demand over its current volume of about 210,000 windows per year for the next two years and 5% year-on-year growth for the next three years after that. The new Airbus A350 is expected to incorporate a number of innovations and will have to keep up with quick changing regulations. Key to winning the contract was HTC's commitment to Airbus that the company would be able to keep pace with any changing requirements. At the same time, a number of high profile parts failures have led the FAA to increase oversight of aviation parts manufacturers like HTC. As a result, HTC has needed to modify its original process several times, adding productions steps and machine switches to insure quality. Overtime these changes have created a situation where HTC's highly streamlined approach to making glass composites airplane windows now has many additional steps and is much less efficient. The upshot is that HIC's current process will not be able to meet changes. Theresa, the head of the composites group for which you work, is very worried about both the capacity constraints and quality mandates facing HTC. She has been advocating for an end-to-end process renewal that would build in quality checks, expand production, and ultimately lower the variable costs associated with producing windows. In fact, she thinks there is room for substantial efficiency gains starting after the first two years as operations and the continuous improvement team cuts waste from the process. Her proposal, however, requires a substantial investment in new equipment and technology, which would raise the overall fixed costs of the process. Theresa has been coming under pressure from Joe, the chief financial officer, to cut costs and so her new proposal is a hard sell. Therefore, she has also been loaking for potential suppliers that can produce reinforced glass composite airplanes windows. She hopes to find a supplier to whom HTC could completely outsource window praduction. She has found two potential suppliers. - Specialty Chemicals Corp. is a Grand Rapids-based producer with annual revenues of $150 million. The company does not have the capacity to meet HTC's annual volume requirements, but has indicated it would be willing to work with HTC on customizing its production process to suit HTC's changing needs. - Chemicals Group LLC. is a Belgium-based conglomerate with annual revenues of roughly $10. billion. Chemicals Group LC. offers a wide range of offerings from a predetermined schedule of products. The company mainly services European markets. Products are therefore geared to meeting EU regulatory standards. The company does, however, produce a window that meets current industry standards and FAA regulations. It is also willing to provide a quantity discount for volume over 250,000 units per year. As the supply analyst for composites group, Theresa has tasked you with making a recommendation as to what HTC should do. You have collected the information below and are required to do the following: - Determine the profitability of each option over the next five years - Lay out a plan for how HTC should approach the decision to re-design and/or outsource manufacturing of airplane windows. Be very structured in your approach. Be sure to consider the full context of the case. Quantity (Current 210,000) Expected Growth \begin{tabular}{ccccc} Year 1 & Year 2 & Year 3 & Year 4 & Year 5 \\ \hline 224,700 & 240,429 & 252,450 & 265,073 & 278,327 \\ 7% & 7% & 5% & 5% & 5% \end{tabular} Expected Revenue Per Window $150$150$150$150$150 In-House Costs to Make with New Process Fixed Annual Fixed Defe Overhead $1,200,000$1,200,000$1,200,000$1,200,000$1,200,000 Variable Direct Materials Direct Labor Variable Dff Overhead $20$45$15$20$45$15$20$45$15$20$45$15$20$45$15 Outsource Cost to Buy specialty Chemicals Corp Chemicals Group LLC. $75587$75$87$75$81$75$81$75$81