The Windber Frame Company had encountered the problem of latent defects in some of its purchased rough metal frames. Being latent, the defects did not show up until after additional machining had taken place at Windber Frame’s facility. This group of failures greatly irritated the manufacturing boss, who declared that “repairing those bad metal frames is eating up all our profits.”

When the defects were discovered, the rough metal frames had to be taken off the machine, the defect polished out and repair-welded, and the metal frame re-machined when possible. Even with this process, 15 percent of the incoming metal frames ended up as scrap. Actually, 1,150 raw metal frames had to be purchased and machined in order to produce 1,000 good machined frames. The raw metal frames cost $500 each from either of two suppliers. Worse than the costs associated with rework and high scrap rates were the continual changes in production scheduling necessitated by a machined metal frame not being available as scheduled for production. These changes were costly because they required shop personnel to tear down the job they were working on and set up a new job. Marketing was constantly complaining about the firm’s inability to meet delivery commitments for the finished product that incorporated the metal frames. Marketing claimed that many sales were lost as a result of this failure.

Tyra Williams, the production manager, and Brittany Hayes, the vice president for marketing, asked Tom Jones, the supply manager, to investigate the costs involved in supplying finished machined metal frames. If finished metal frames were purchased, the responsibility for finding hidden defects would be that of the supplier. Such action would encourage the supplier to improve the metal frame quality. Windber Frame Company would accept and pay only for finished, usable metal frames.

The internal cost of machining each incoming rough metal frame and repair-welding and re-machining it, as necessary, was approximately $300 per metal frame (e.g., direct labor plus overhead). The cost of disrupted production schedules and operations was estimated at $100 per raw metal frame. Tom estimated the costs to go on-site and work with Suppliers to correct their problems would be $20 per good metal frame. Marketing estimated “lost sales” costs to be $50 per good metal frame. Any safety/buffer stock of good metal frames would incur a carrying cost of $100 per frame (e.g., 15% of good frames).

Tom approached all his major suppliers of rough metal frames in an attempt to generate interest for the supply of finished machined metal frames. Only one supplier, Premium Steel, showed genuine interest. Of major concern to all the framing companies was the $150,000 investment necessary to set themselves up to machine the raw metal frames to produce finished metal frames. Premium Steel was willing both to invest in the necessary machines and to guarantee delivery of current demand of 1,000 units per year plus additional units necessary to meet future demand, provided Windber Frame Company would contract with it as a sole source for the metal frames for the next three years. The price per finished metal frame would be $1,000 the first year, with an annual increase or decrease in price tied to an appropriate economic index that would be mutually agreed to and identified in the contract.

Tom was faced with the problem of deciding whether to recommend contracting with Premium Steel to buy finished metal frames, continuing with the current process of buying rough metal frames and finishing them in-house, working with current suppliers to reduce or eliminate defects or developing other more attractive alternatives. The Windber Frame machine shop was currently operating at 100 percent of capacity, so it was not possible to make a reliable estimate of what would happen in the next few months, let alone the next three years. The decision of whether to buy finished metal frames was of major dollar importance to Windber Frame Company because the firm currently used at least 1,000 finished metal frames per year and anticipated that this usage would continue for each of the next five years at a minimum.

1. Should Tom Jones either (1) contract with Premium Steel to buy finished metal frames, (2) continue to make finished metal frames in-house- status quo, (3) work with suppliers to correct problems or (4) implement other alternatives (provide adequate description of these alternatives)?
2. What are the savings by implementing the different alternatives?
3. What are the dangers if Premium Steel becomes a single source for Windber Frame’s metal frames?
4. What other suggestions can you make for improving the situation at Windber Frame Company?