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a Internal and External Linkages, Strategic Cost Management Maxwell Company produces a variety of kitchen appliances, including cooking ranges intensified. In order to maintain-and perhaps increase-its Maxwell's management increased. Furthermore, costs needed to be reduced so that the selling prices of its products could be reduced. After some i that many of its problems could be traced to the unreliability of the parts that were purchased from outside suppliers. Many of work as intended, causing performance problems. Over the years, the company had incre and dishwashers. Over the past several years, competition has se-its market share, Maxwell's management decided that the overall quality of its products had to be these components failed to ernally, then it was usually possible to rework the appliance so that the desired performance was achieved. Management also had ased its inspection activity of the final products. If a problem could increased ts warranty coverage; warranty work had been increasing over the years. DAVID Haight, president of Maxwell Company, called a meeting with his executive committee. Lee Linsenmeyer, chief engineer; Kit Applegate, controller; and Deannie Mitchell, purchasing manager, were all in attendance. How to improve the company's competitive position was the meeting of the meeting was recorded as follows: DAVID: We need to find a way to improve the quality of our products and at the same time reduce costs. Lee, you said that you have done some research in this area. Would you share your findings? LEE: As you know, a major source of our quality problems relates to the poor quality of parts, and this adds to the complexity of the problem. What I though interchangeable parts as possible. This will cut down the number of different parts, make it easier to inspect, and cheaper to repair when it comes to warranty work. My engineering staff has already come up with some new designs that will do this for us the parts we acquire from the outside. We have a lot of different t would be helpful would be to redesign our products so that they can use as many JEANNIE: I like this idea. tt will simplify the purchasing activity significantly, with fewer parts, I can envision some significant savings for my area. Lee has shown me the designs so t know exactly what parts would be needed. I also have a sugpestion, We need to embark on a supplier evaluation program. we have too many suppliers. By reducing the number of different parts, we will need fewer suppliers t And we really dont need to use all the suppliers that JEANNIE: I like this idea. It will simplify the purchasing activity significantly. With fewer parts, I can envision some shown me the desi have too many suppliers. produce the parts demanded by the new designs. We should pick suppliers that some preliminary research and have identified five suppliers that seem willing to work with us and assure us of the quality we some of his engineers into their plants to make sure that they can do what they are dlaiming. DAVID: This sounds promising. Kit, can you look over the proposals and their estimates and give us some idea if this approach will save us any money? if so, how much can we expect to save? significant savings for my area. Lee has gns so I know exactly what parts would be needed. I also have a suggestion. We need to embark on a supplier evaluation program. We By reducing the number of different parts, we will need fewer suppliers. And we really don't need to use all the suppliers that will work with us and provide the quality of parts that we need. I have done need. Lee may need to send And KIT: Actually, I am ahead of the game here. Lee and Jeannie have both been in contact with me and have provided me with some estimates on actions would affect different activities. I have prepared a handout that includes an activity table revealing what I think are the key also assembled some tentative information about activity costs. The table gives the current demand and the expected demand implemented. With this information, we should be able to assess the expected cost savings activities affected. I have after the changes are Handout Current Expected Capacity Demand Demand 2,000 Activities Purchasing parts Inspecting products Inspection hours Reworking productsNumber reworked Warranty repair Additionally, the following activity cost data are provided Activity Driver Number of different parts 2,000 500 50,00050,000 25,000 As needed 62,500 25,000 9,000 3,500 Number of defective products 10,000 n Handout Current Expected Activities Purchasing parts Inspecting products Inspection hours Reworking products Number reworked Warranty repair Additionally, the folloning activity cost data are provided: Activity Driver Capacity DemandDemand Number of different parts 500 50,000 50,000 25,000 As needed 62,50025,000 9,000 3,500 2,000 2,000 Number of defective products 10,000 Purchasing parts: Variable activity cost: $30 per part number: 20 salaried derks, each eamning a $45,0oo annual salary. Each derk is orders associated with 100 part numbers. Twenty-five inspectors, each earning a salary of $40,000 per year. Each inspector is capable of 2,000 hours of inspection. Reworking products: Variable ac ivity cost: $25 per unit reworked (labor and parts) Warranty: Twenty repair soents, each paild a salary of $35,000 per year. Each repair agent is capable of repairing 500 units per yea: variable activity costs 500 units per year. Variable activity costs: $15 per product repaired. Required t. Assume that resource spending is reduced where possible. When calculating the number of Compute the total savings posaible as refiected by kit's handout employees no longer needed, round down to the nearest whole number. For example, if there are 10 employees and the number employees will be retained and 4 will be let go. 2,605,000 X
