McMichael Inc. Case 11-2

What should Art Flynn do?

Remain with the current supplier or switch to OSA Inc.?

Math showing the solutions would be appreciated!

Art Flynn, packaging buyer for McMichael Inc. (MI), was own molding shop. It depended heavily on automotive working on an import substitution project involving a local contracts, a situation Bert Wood wished to correct by minority supplier. He was concemed, however, that his ef- acquiring more nonautomotive business. In conjunction forts would be fruitless because his original proposal had with MI's engineers, Bert Wood had worked out a mold been flatly rejected by the plant manager as too expensive. design for the cream dispenser and included several sug- McMichael Inc., a medium-sized company, had over the gestions for minor improvements. The cost of the mold years specialized in prescription skin-care products, a mar- was $56,000, an investment Bert Wood was in no posiket niche in which it had developed an excellent reputation. tion to make and that MI would have to absorb up front. About three years ago, after extensive testing, MI had intro-_ Bert Wood quoted a unit price of $0.27 based on purduced a new facial cream in a special package that allowed chase quantities of 30,000 units at a time and an annual for precise measurement of the quantity dispersed. The volume estimated at 300,000 units. Bert Wood had subcontainer, manufactured by a French firm for a different ap- mitted a cost breakdown of this quote as follows: plication, was fairly expensive at an FOB MI's factory cost of $0.36. What concerned Art Flynn even more, however. were the quality and delivery problems encountered. Communications with the manufacturer were difficult, and Art 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, engineering. production, and quality control personnel. Art had found a local minority supplier who appeared capable of meeting MI's requirements. This custom molding firm, 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 packbetter 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 informagroup to check if different production quantities could be tion would have on his original proposal. He knew that ordered. Bert Wood had been adamant about his $0.27 quote. Bert When Art talked to the marketing people, he found Wood had said, "I know I am classified as a minority supout that the package was ideal for another product to be plier. But 1 don't want to hide behind that fact. I want no introduced shortly and with an annual demand estimated special favors from any of my customers. Nor am I in a at 100,000 units. Marketing had been uneasy about using position to make special gifts to anyone else. I have had to the French package because of the difficulties encoun- borrow at what I consider to be ridiculously high interest tered with it and assured Art that if he could get a reliable rates to buy this company. Now I have to make it pay off. domestic source, this option would be highly attractive. My $0.27 price is as low as I can go, as far as I can see." Art Flynn, packaging buyer for McMichael Inc. (MI), was own molding shop. It depended heavily on automotive working on an import substitution project involving a local contracts, a situation Bert Wood wished to correct by minority supplier. He was concemed, however, that his ef- acquiring more nonautomotive business. In conjunction forts would be fruitless because his original proposal had with MI's engineers, Bert Wood had worked out a mold been flatly rejected by the plant manager as too expensive. design for the cream dispenser and included several sug- McMichael Inc., a medium-sized company, had over the gestions for minor improvements. The cost of the mold years specialized in prescription skin-care products, a mar- was $56,000, an investment Bert Wood was in no posiket niche in which it had developed an excellent reputation. tion to make and that MI would have to absorb up front. About three years ago, after extensive testing, MI had intro-_ Bert Wood quoted a unit price of $0.27 based on purduced a new facial cream in a special package that allowed chase quantities of 30,000 units at a time and an annual for precise measurement of the quantity dispersed. The volume estimated at 300,000 units. Bert Wood had subcontainer, manufactured by a French firm for a different ap- mitted a cost breakdown of this quote as follows: plication, was fairly expensive at an FOB MI's factory cost of $0.36. What concerned Art Flynn even more, however. were the quality and delivery problems encountered. Communications with the manufacturer were difficult, and Art 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, engineering. production, and quality control personnel. Art had found a local minority supplier who appeared capable of meeting MI's requirements. This custom molding firm, 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 packbetter 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 informagroup to check if different production quantities could be tion would have on his original proposal. He knew that ordered. Bert Wood had been adamant about his $0.27 quote. Bert When Art talked to the marketing people, he found Wood had said, "I know I am classified as a minority supout that the package was ideal for another product to be plier. But 1 don't want to hide behind that fact. I want no introduced shortly and with an annual demand estimated special favors from any of my customers. Nor am I in a at 100,000 units. Marketing had been uneasy about using position to make special gifts to anyone else. I have had to the French package because of the difficulties encoun- borrow at what I consider to be ridiculously high interest tered with it and assured Art that if he could get a reliable rates to buy this company. Now I have to make it pay off. domestic source, this option would be highly attractive. My $0.27 price is as low as I can go, as far as I can see