MICROFUSE, INC.24 Time: 3:42 p.m. Date: Thursday, April 22, 2009 Place: Office of the VP for Manufacturing Val, Our orientation has always been one in which control is a critical part of maintaining our market leadership position, hence vertical integration. The guiding belief throughout the company is that, by being able to say that we actually make the products, we imply a certain level of proficiency and expert knowledge. In addition to using our vertical structure as a marketing tool, we at Microfuse also regard ourselves as the best providers of quality manufacturing because of our long-standing quality and reliability tradition. Such control translates into greater power, especially in terms of profits, yet it comes at a cost. I understand that our inventory levels are too high. High inventory levels are a price we pay for us to add value to our vertically integrated business model. It should be noted that Microfuse operates a very efficient inventory system, but there is always room for improvement in this area. Although, in general, the company is open to outsourcing, our vertically integrated orientation will remain intact until a supplier comes along that can provide equal or better value to our products and the company. So, you and Bob James are to develop a business case for a limited outsourcing strategy involving some of our non-core products with this guideline in mind. I would like a report on my desk by May 1. As stated, Tom Cecil, VP of Microfuses manufacturing division, asked Valerie (Val) Simmons, purchasing manager, to investigate the implementation of an outsourcing approach to solve a problem that had rapidly become the center of attention of the companys operating executives. Ms. Simmons would be working with Bob James, the plant superintendent. The problem is as follows. The current industry trend is to have costs cut by outsourcing more than 40 percent of their manufacturing capabilities, which is being done by all of the major competitors. In the past year alone, XFfuse, Micofuses closest competitor, has reduced their labor force by 50 percent. The Microfuse Industry In order to truly understand the operational decisions Microfuse makes, it is necessary to be familiar with the industry. Microfuses primary industry, which is driven by technology, is the production of circuit-protection products. It is a highly competitive industry in which firms from around the world compete, and survival is a matter of competing not just on quality and value-added functions but also on price. This translates into a need to be innovative and competitive at the same time. There is always a threat of becoming viewed as a commodity product; thus, the goal of many companies is to provide unique and valuable products that attract and retain customers. Obsolescence is the norm for the industry. Company Background Microfuse is the industry leader, offering the broadest line of circuit protection in the world. They offer seven major circuit-protection technologies that span three industries: electronics, automotive, and electrical. Microfuses technology is a critical component in many of the products we use on a daily basis, from cell phones to digital cameras. Nearly 90 percent of automobiles, industrial machinery, computers, and virtually any other devices using electrical energy include Microfuses products. The diverse product line is coupled with a worldwide presence. However, because of the characteristics of the industry, Microfuse is facing increased competition and pressures to remain innovative and efficient. Wednesday, April 29New Information During the data-collection phase of Vals research, she discovered that Microfuse currently has one site in China and another facility located in Southern China through a recent acquisition. Initially, the Chinese acquisition was driven by the fact that many more customers are setting up in China. For instance, the automotive sector in China alone is expected to increase in size from selling 4.4 million automobiles this past year to selling 10 million in 2010. Val was wondering how this new information would impact the outsourcing business case. The company was also projecting that almost all European functions may be required to move to lower-cost sites in the near future.More specifically, there appears to be an increased focus on moving the European division to Vietnam. Because of the increase in global business, Microfuse expects that, in the future, 70 percent of production will be done abroad. Domestically, a reduction in operations is forecasted. According to Vals interviews with some of the operating executives, while most of the forecasted shifts in manufacturing are contingent on many factors, there is a strong possibility of realization. However, there is a common belief that the Foundry site in Champaign-Urbana, Illinois, will never be completely relocated due to the fact that it is the base for planning and development and is heavily involved in the manufacturing function. The reasoning behind this belief is that the control-orientated mentality of the company would make moving all manufacturing away from headquarters unlikely. However, at the same time, it is not an impossibility.

Drawing from the case facts and the lessons learned from the strategic outsourcing evaluate the business case for or against an outsourcing strategy at Microfuse. In a two-page memo, addressed to Mr. Cecil, summarize your overall analysis of the case for or against an outsourcing strategy.