Read PSM Case 5-1 Garland Chocolates and prepare three 10-year cashflow spreadsheets for three scenarios---maintaining the current lines, upgrading the lines, and outsourcing---using the attached template and submit the completed spreadsheets.

Please only use explicit information provided in the case. For example, when the case states "annual maintenance cost...expected to increase by at least 25 percent in the next 12 months", you can assume that the cost will increase exactly 25% for the next year and remain at this level for future years.

Exhibit 1 lists the standard costs, rather than actual costs, of current operations. Exhibit 2 shows that the actual scrap rates deviate from the standard scrap rates. The standard material costs are based on the standard scrap rate rather than the deteriorated actual scrap rate. There fore you need to adjust the standard material costs based on the standard and actual scrap rates to calculate the actual costs. The labor costs do not need to be adjusted.

For the outsourcing option, the case states "it would need six months to ramp up production", therefore you should assume the outsourcing options takes effect in year 1 rather than 0. You may also make the assumption that the outsourcing option uses new packaging lines and thus enjoys the 20% increase in sales.

ANSWER IN EXCEL FORMAT ONLY, THE PICTURE HAS BEEN POSTED TO SHOW WHAT THE EXCEL ASKS.

A B C D O 1 1 N Year Maintenance Sales Selling price Raw material Packing material Labor-manufacturing Labor-packing Overhead&depreciation Total cost Cash flow maintain upgrade outsource + Ready 3 Case 5-1 Garland Chocolates Shanti Suppiah, director of operations at the Garland Choe- lates plant in Durham, North Carolina, was preparing for a team meeting scheduled for Monday, March 18. to de- cide what to do about declining margins for the Edgeworth Toffee brand. Options were to invest in new equipment or outsource manufacturing and packing. It was Wednesday, March 12, and Shanti needed to prepare her analysis and develop a recommendation prior to the meeting. GARLAND CHOCOLATES Headquartered in London, UK, Garland Chocolates Garland) was a leading global food manufacturer with an nual revenues of $3 billion. The company produced a wide range of chocolate and confectionary products, under more than 65 brands. It operated more than 50 plants globally, in- cluding eight plants in the United States. Garland's products Chapter 5 Make or Buy, Insourcing, and Outsourcing 127 were among the leading brands in the industry, and the Dur- in an effort to spur consumer interest in the brand, marketing ham plant manufactured 20 product lines that were distrib- was proposing a new marketing strategy that included a face uted to retail customers in North America, including grocery lift for the packaging. However, the new packaging would re- Stone chats, boutique candy shops, and convenience stores. quire a different type of packing technology. John Slaughter, Garland's brands were managed by cross-functional the representative from marketing on the Edgeworth Toffee Teans with representatives from sales and marketing, op- Team, felt that the introduction of new packaging combined erations, finance, engineering, purchasing and distribution with a new marketing campaign could deliver as much as a Each team was governed by corporate goals for growth, prof- 20 percent increase in sales. It was unclear to Shanti whether itability, and brand management, but was given significant the new marketing strategy would be enough to stimulate in autonomy to make strategic and tactical decisions in order to creased sales, or if the product was mature and a decline in achieve their business performance objectives (BPO). demand was inevitable. The competitive nature of the industry placed an upper limit on prices, so margins were determined by THE MANUFACTURING AND production and supply chain efficiencies. Consequent PACKING LINE REPLACEMENT ly, cost control and continuous improvement were high priorities. The company's enterprise resource planning OPTIONS (ERP) system generated weekly BPO reports for team The accounting department set standard costs for each members. product line annually. Exhibit 1 provides the standard costs for Edgeworth Toffee, and Exhibit 2 shows actual THE EDGEWORTH TOFFEE BRAND operating performance data for the manufacturing and Production of Edgeworth Toffee was a two-step process packing lines. As shown in Exhibit 2. the packing line manufacturing and packing. The product was manufac- was operating at 48 percent efficiency, and the scrap tured in two formats. The first format was a fixed-size, rate was nearly 10 percent. Annual maintenance costs on the packing line were approximately $18.000 per retail-ready pack, which contained a half-pound of toffee. year and expected to increase by at least 25 percent in The second format was a 10-pound bulk package that was the next 12 months. placed in stores so that customers could select the amount of toffee they wanted and self-pack the product. Produc- Working with lan Haase, purchasing manager at the tion of the fixed-size format was approximately 2.500 cas- Durham plant and a member of the Edgeworth Toffee team, Shanti obtained an estimate of $140.000 for the cost es a year, compared to approximately 3.000 cases a year of the bulk format. Both formats sold for $145 per case. of replacing the two packing lines for Edgeworth Tottee, including installation. It was expected that the new equip- There were two dedicated packing lines for Edgeworth ment would be able to achieve the BPO efficiency and Toffee, one for each format. However, the packing lines had Serap rate targets and be able to accommodate the new long outlived their useful lives, and efficiencies had declined in recent years (see Exhibit 1). Furthermore, sales of Edge- packaging that marketing was recommending. worth Toffee had been flat for the past couple of years, and Shanti also felt that it was time to examine replace ment of the manufacturing line. The manufacturing and packing lines had originally been installed together EXHIBIT 1 Operating Standard Costs for more than 20 years earlier. Although efficiency of the Edgeworth Toffee Sper case % EXHIBIT 2 Manufacturing and Packing Line Selling price $145.00 100 Performance Statistics Raw material 24.65 17 Standard Actual Packaging material 29.00 20 Measure (%) (%) Labor--manufacturing 13.05 9 Labor-packing 7.25 5 Manufacturing efficiency 80 76 Overhead & depreciation 21.75 15 Manufacturing scrap rate 1.2 1.5 Total cost 95.70 66 Packing efficiency 80 48 Margin 49.30 34 Packing scrap rate 1.2 9.6 manufacturing line was close to the target of 80 per that it would need six months to ramp up production of Edge- cent, it was also showing signs of deterioration. The ef-worth Toffee. ficiency rate had declined to 76 percent, compared to more than 90 percent five years prior, and it had become THE TEAM MEETING increasingly more difficult to find replacement parts. A new manufacturing line would cost approximately As Shanti looked at the information on her laptop that $600.000 installed. had been collected regarding manufacturing and packing of Edgeworth Toffee, she knew that something had to be OUTSOURCING done to address the declining margins of the brand as a re- sult of increased production costs. Investing in new equip- In addition to investigating options to replace the existing ment seemed like an obvious solution, however, the capital manufacturing and packing lines, Shanti had also looked investment would be significant and her proposal would into outsourcing. A preliminary review indicated that there need to exceed the company's 10 percent cost of capital would be substantial coordination costs if only packing rate to get approval by finance. was outsourced, therefore, outsourcing manufacturing and While reviewing the proposal by Martin, Shanti felt that packing was investigated. Ian and Shanti selected two con- some of the overhead coses at the Durham plant could be elim tract manufacturers to submit proposals, Martin Contractinated if production of Edgeworth Toffee was outsourced. Manufacturing (Martin) and Dasan Inc. Bids were requested The estimate provided by the accounting department was that from both for the existing packaging and the new pack-overhead costs allocated to the brand could be reduced by ap- aging proposed by marketing. In order to make sure the proximately 30 percent if production was outsourced. suppliers were well informed about the manufacturing and Historically, the company's strategy had been to packing processes, both were invited to tour the Durham control production of its products to ensure quality and plant, and they were provided with detailed information delivery performance. Garland had an excellent reputa- and related data regarding the operation of the lines tion with it customers and the customer service level Following a review of the proposals submitted by the for Edgeworth Toffee was a line fill rate of 98 percent. suppliers, lan and Shanti decided that Martin had the best However, if the case to outsource could be made sue bid. Martin quoted a cost of $68.00 for manufacturing and cessfully to the team on Monday, Shanti felt that senior packing for both the current packaging and marketing's management would approve the proposal. This was an new packaging. The supplier would be responsible for raw important decision and she wanted to make a clear rec- material and packaging material costs. In addition, Garland ommendation at the meeting on Monday, supported by a would pay $35,000 in tooling costs up front. Martin indicated thorough analysis of both options. A B C D E G H 1 K 0 1 2 3 4 5 6 7 8 9 1 Year 2 Maintenance 3 Sales (boosted) 4 Selling price 5 Raw material 6 Packing material 7 Labor-manufacturing 8 Labor-packing 9 Sourcing cost 10 Overhead&depreciation Cost 12 Cash flow (boosted) 11 A B C D O 1 1 N Year Maintenance Sales Selling price Raw material Packing material Labor-manufacturing Labor-packing Overhead&depreciation Total cost Cash flow maintain upgrade outsource + Ready 3 Case 5-1 Garland Chocolates Shanti Suppiah, director of operations at the Garland Choe- lates plant in Durham, North Carolina, was preparing for a team meeting scheduled for Monday, March 18. to de- cide what to do about declining margins for the Edgeworth Toffee brand. Options were to invest in new equipment or outsource manufacturing and packing. It was Wednesday, March 12, and Shanti needed to prepare her analysis and develop a recommendation prior to the meeting. GARLAND CHOCOLATES Headquartered in London, UK, Garland Chocolates Garland) was a leading global food manufacturer with an nual revenues of $3 billion. The company produced a wide range of chocolate and confectionary products, under more than 65 brands. It operated more than 50 plants globally, in- cluding eight plants in the United States. Garland's products Chapter 5 Make or Buy, Insourcing, and Outsourcing 127 were among the leading brands in the industry, and the Dur- in an effort to spur consumer interest in the brand, marketing ham plant manufactured 20 product lines that were distrib- was proposing a new marketing strategy that included a face uted to retail customers in North America, including grocery lift for the packaging. However, the new packaging would re- Stone chats, boutique candy shops, and convenience stores. quire a different type of packing technology. John Slaughter, Garland's brands were managed by cross-functional the representative from marketing on the Edgeworth Toffee Teans with representatives from sales and marketing, op- Team, felt that the introduction of new packaging combined erations, finance, engineering, purchasing and distribution with a new marketing campaign could deliver as much as a Each team was governed by corporate goals for growth, prof- 20 percent increase in sales. It was unclear to Shanti whether itability, and brand management, but was given significant the new marketing strategy would be enough to stimulate in autonomy to make strategic and tactical decisions in order to creased sales, or if the product was mature and a decline in achieve their business performance objectives (BPO). demand was inevitable. The competitive nature of the industry placed an upper limit on prices, so margins were determined by THE MANUFACTURING AND production and supply chain efficiencies. Consequent PACKING LINE REPLACEMENT ly, cost control and continuous improvement were high priorities. The company's enterprise resource planning OPTIONS (ERP) system generated weekly BPO reports for team The accounting department set standard costs for each members. product line annually. Exhibit 1 provides the standard costs for Edgeworth Toffee, and Exhibit 2 shows actual THE EDGEWORTH TOFFEE BRAND operating performance data for the manufacturing and Production of Edgeworth Toffee was a two-step process packing lines. As shown in Exhibit 2. the packing line manufacturing and packing. The product was manufac- was operating at 48 percent efficiency, and the scrap tured in two formats. The first format was a fixed-size, rate was nearly 10 percent. Annual maintenance costs on the packing line were approximately $18.000 per retail-ready pack, which contained a half-pound of toffee. year and expected to increase by at least 25 percent in The second format was a 10-pound bulk package that was the next 12 months. placed in stores so that customers could select the amount of toffee they wanted and self-pack the product. Produc- Working with lan Haase, purchasing manager at the tion of the fixed-size format was approximately 2.500 cas- Durham plant and a member of the Edgeworth Toffee team, Shanti obtained an estimate of $140.000 for the cost es a year, compared to approximately 3.000 cases a year of the bulk format. Both formats sold for $145 per case. of replacing the two packing lines for Edgeworth Tottee, including installation. It was expected that the new equip- There were two dedicated packing lines for Edgeworth ment would be able to achieve the BPO efficiency and Toffee, one for each format. However, the packing lines had Serap rate targets and be able to accommodate the new long outlived their useful lives, and efficiencies had declined in recent years (see Exhibit 1). Furthermore, sales of Edge- packaging that marketing was recommending. worth Toffee had been flat for the past couple of years, and Shanti also felt that it was time to examine replace ment of the manufacturing line. The manufacturing and packing lines had originally been installed together EXHIBIT 1 Operating Standard Costs for more than 20 years earlier. Although efficiency of the Edgeworth Toffee Sper case % EXHIBIT 2 Manufacturing and Packing Line Selling price $145.00 100 Performance Statistics Raw material 24.65 17 Standard Actual Packaging material 29.00 20 Measure (%) (%) Labor--manufacturing 13.05 9 Labor-packing 7.25 5 Manufacturing efficiency 80 76 Overhead & depreciation 21.75 15 Manufacturing scrap rate 1.2 1.5 Total cost 95.70 66 Packing efficiency 80 48 Margin 49.30 34 Packing scrap rate 1.2 9.6 manufacturing line was close to the target of 80 per that it would need six months to ramp up production of Edge- cent, it was also showing signs of deterioration. The ef-worth Toffee. ficiency rate had declined to 76 percent, compared to more than 90 percent five years prior, and it had become THE TEAM MEETING increasingly more difficult to find replacement parts. A new manufacturing line would cost approximately As Shanti looked at the information on her laptop that $600.000 installed. had been collected regarding manufacturing and packing of Edgeworth Toffee, she knew that something had to be OUTSOURCING done to address the declining margins of the brand as a re- sult of increased production costs. Investing in new equip- In addition to investigating options to replace the existing ment seemed like an obvious solution, however, the capital manufacturing and packing lines, Shanti had also looked investment would be significant and her proposal would into outsourcing. A preliminary review indicated that there need to exceed the company's 10 percent cost of capital would be substantial coordination costs if only packing rate to get approval by finance. was outsourced, therefore, outsourcing manufacturing and While reviewing the proposal by Martin, Shanti felt that packing was investigated. Ian and Shanti selected two con- some of the overhead coses at the Durham plant could be elim tract manufacturers to submit proposals, Martin Contractinated if production of Edgeworth Toffee was outsourced. Manufacturing (Martin) and Dasan Inc. Bids were requested The estimate provided by the accounting department was that from both for the existing packaging and the new pack-overhead costs allocated to the brand could be reduced by ap- aging proposed by marketing. In order to make sure the proximately 30 percent if production was outsourced. suppliers were well informed about the manufacturing and Historically, the company's strategy had been to packing processes, both were invited to tour the Durham control production of its products to ensure quality and plant, and they were provided with detailed information delivery performance. Garland had an excellent reputa- and related data regarding the operation of the lines tion with it customers and the customer service level Following a review of the proposals submitted by the for Edgeworth Toffee was a line fill rate of 98 percent. suppliers, lan and Shanti decided that Martin had the best However, if the case to outsource could be made sue bid. Martin quoted a cost of $68.00 for manufacturing and cessfully to the team on Monday, Shanti felt that senior packing for both the current packaging and marketing's management would approve the proposal. This was an new packaging. The supplier would be responsible for raw important decision and she wanted to make a clear rec- material and packaging material costs. In addition, Garland ommendation at the meeting on Monday, supported by a would pay $35,000 in tooling costs up front. Martin indicated thorough analysis of both options. A B C D E G H 1 K 0 1 2 3 4 5 6 7 8 9 1 Year 2 Maintenance 3 Sales (boosted) 4 Selling price 5 Raw material 6 Packing material 7 Labor-manufacturing 8 Labor-packing 9 Sourcing cost 10 Overhead&depreciation Cost 12 Cash flow (boosted) 11