Make Versus Buy Case ABC Ltd. is a manufacturing company engagedin the manufacturing of valves. They have been in the business forlast 3 years and have been manufacturing only one type of valves.They started their business initially with sales of 10,000 valvesper month and now they have grown the volume to about 50,000 valvesper month. They have been buying all the raw material for the valveand were doing all the manufacturing in house. Now they haveestablished themselves in the market and are planning to expand andproduce different varieties of valves. They have their plant in themain city and the total area of the plant is 50,000 sq. ft. Now ifthey want to expand and continue doing all the activities ofmanufacturing of all the varieties in house, they would needanother 50,000 Square feet of the area. In the recent times, theland prices in the area have more than doubled in the last 3 yearsand still land is available with great difficulty. Mr Mohan is theproduction head of ABC Ltd. and has been successful with theproduction and the level is continuously increasing. But in recenttimes, he is facing the problem of quality complaints which havegone up from average 0.2 % in previous 2 years to 0.5 % this year.Also, he is finding that there is a high level of dissatisfactionamong the workers regarding workload as well as salary levels. Theworkers are regularly complaining about the over work. Although, MrMohan has found that the workers have been spending lot of time ontea breaks, lunch breaks and even in between the productionspending lot of time talking to each other. But, due toinsufficient workers and staff, he is unable to take strict actionand the workers are taking advantage of this situation. Forcompleting the work and delivering the products timely, he has toemploy workers on overtime and his overtime cost has also increased3 times. Mr Mohan is worried about the new expansion plan of themanagement and is worried where the new workers would come from ashe is already finding shortage of workers for the existing job. Hehas requested the management not to go for expansion immediatelyand look at improving and consolidating the existing set up. He hassent his request to Mr S. Kumar Director – Operations. Mr Kumar hasgone through the request of Mr Mohan and called a meeting of allthe department heads and explained the situation to all concerned.The marketing manager has expressed very bullish prospect about thecompany’s growth and said that the company should take advantage ofgrowing economy and established brand image of the company anddefinitely go for expansion. The finance manager also expressedthat this will result in economy of scale for the products and willfurther increase the profitability of the products. Mr Mohan againexpressed his problems regarding availability of manpower as wellas production control and effect on quality and productivity. TheMarketing manager asked the Production manager about the option ofoutsourcing. Mr Mohan is sceptical about the outsourcing option ashe felt that the outside agency will always charge more as he willtry to make his profit as well and also is worried about thepossible problems of deliveries. Mr Kumar asked the Mr Naresh whois the Purchase manager about his views. He said that since thesuppliers would also be interested in doing the business, theywould not like to delay as with delay they also incur loss. TheFinance manager said that we can look at cost comparison for buyingagainst in house manufacturing. After listening to all the views,Mr Kumar told Mr Mohan to work out the cost of production forfuture sales as per the forecast given by the Marketing department.He also told Mr Naresh to collect the details of the futurerequirements to get the purchase cost details for few components ofthe valve. Mr Mohan and Mr Naresh have collected their data andthey have presented the data in the meeting called by Mr Kumar toreview the plan. First the marketing head Mr Suresh presented hismarket forecast and then Mr Mohan presented his report andexplained the details as follows. One supervisor with monthlysalary of $5000 with expected increase of 10 % per year. Directwages of worker as $4 per unit. With 10 % reduction in second year,no change in 3rd year and increase of 10 % every subsequent year.Material cost of $14 per unit with an increase of 10 % every year.Power and fuel cost of $2 per unit with increase of 10 % everyyear. Indirect labour as 50 % of direct labour. They will have tobuy a new machine with a cost of $50 lac. With usable life of 5years Mr Naresh explained his details as follows: Component pricefrom supplier at $20 for the first 2 years with an increase of 10 %every subsequent year. Transportation cost of $2 per unit for thefirst year with increase of $0.20 every subsequent year. Inventorycost (storage cost) as 5 % per year of the basic material cost. TheMarketing manager has given the sales forecast for next 5 years asfollows:

Year              1                    2                    3                    4                    5

Sales quantity 300000           500000           700000           900000           1000000

Questions 1. Based on this data, is it economical for ABC Ltd.togo for buying the product from market or manufacturing inhouse.

Question 2. What other factors should ABC Ltd. look at formaking this decision?

Question 3. What factors of quality are important to make thefinal decision whether to manufacture in house or procure?

Reasonable assumptions that are not stated in the casewill be accepted.