Case 6- Michigan City Tractors
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Northeastern University *
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Industrial Engineering
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Jan 9, 2024
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Uploaded by BrigadierExploration14072
Case 6: Michigan City Tractors
Key Issue/ Problem Statement:
MCT is currently deciding to continue making or instead buy their 940-Tractor engines as
they have encountered defects in its purchased tractor engine block castings which is an essential
part of the 940-Tractor engine.
Options with pros and cons identified:
1.
Option 1: Finding a new supplier for Engine Block Casting
Advantage: Quality of product is consistent and remains at levels
Advantage: Great Flexibility, can adapt to changes quickly
Advantage: Cost-effectiveness, no contracts, or minimum orders
Disadvantage: Cannot trust the new supplier to match the demand as well as the price
Option 2: Outsourcing the entire 940-Engine Block.
Advantage: All internal issues related to the quality of engine casting will be solved
Advantage: The shop floor can be used for other more important production
Disadvantage: Higher long terms cost
Disadvantage: Difficulty in matching increasing demand
Recommendations: Outsourcing the entire 940-Engine Block
The prima facie suggests the unit cost of making the 940 Tractor in-house (considering
the average unit cost of $3465) considering all disruption costs and downtime is
approximately $4682.15 as compared to buying it which costs $4570
For the next year, however, the unit cost of buying the 940 tractors increases to $4700
and the following year to $4850. But the buying cost remains the same i.e., $4682.
If they find a supplier that is ready to give engine block casting for less than $3300 with a
surety of minimal defects, it makes more sense to keep the production in-house as the
unit cost decreases to $4500.
MCT can outsource for just 3 years, as from the 4
th
year the unit cost increases to $5000 a
unit. The contract as well is only for 3 years.
During those 3 years, MCT should also slowly invest in better machinery for in-house
production as there is a high cost of assembly that can be reduced by improved
machinery.
Finding a new supplier offering engine block casting for $3400 or lesser
should also be done in these 3 years.
Key Takeaways:
In-house production of core capability is essential in long term.
Make vs Buy analysis can be time-consuming but saves the company money in the long
term.
Buy Option Unit Cost
Year
1
2
3
4
5
Unit Cost
for
Outsourcing
4570
4707.10
4848.31
4993.76
5143.58
Cost
Make
Buy
Unit Cost 1st Year
3050
3900
3300
4570
Total Scrapped
Units Cost
122
156
132
0
Cost of Assembely
959
959
959
0
Disruption Cost
76.9
76.9
76.9
0
Overhead Cost
32.25
32.25
32.25
0
Total Unit Cost For
1st Year
4240.15
5124.15
4500.15
4570
2
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