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Transcript of Fibertec
Fibertec is a Belgium based manufacturing company that produces variety of natural products. Fibertec has a branch in Spain which has six product departments. The branches have decentralized product strategy in which investment decisions can be made on a branch level with authorization from the Belgium head office.
The clients of Fibertec are big industrial groups which made use of Fibertec products as a raw materials for special storage containers and household and industrial textile products.
PTC is one of the Product Department of Fibertec in Spain which manufactures one of company’s leading product. PTC is one of the key products requested by clients however due to competition, clients opted for alternative products. With this PTC did not generate high margins.
GARCIA, Dinah Lou
FERRER, Elaine Joy
RODRIGUEZ, April Rose
SALAZAR, Maria Teresa
PTC Materials 180,000.00
Salary of Martin Flores 60,000.00
Rental Cost of Building 30,000.00
Annual Equipament Depreciation 75,000.00
Equipment Maintenance 25,000.00
Direct Departmental Expenses 60,000.00
Distributed Overhead 50,000.00
1. PTC is a key product requested by many of Fibertec’s most important customers but do not generate high margins due to strong competitive pressure from alternative products.
2. IT Department, which is located outside the main building and currently renting at €120,000 per year, was not considered in Barrios calculation. IT can move to the main building if PTC Department will be dissolved.
3. Severance pay was not taken into account by Barrios in case of terminating employees. Severance pay costs 660,000 euros. Some employees were close to retirement age and some have tenure of more than 20 years.
4. Current capacity of PTC Department was not mentioned in the case.
5. Martin Flores will be transferred to other departments if PTC Department will be dissolved
ACA # 1 : Outsource PTC Product Department to Engineering Tools
1. Short term savings
2. May avoid equipment maintenance cost, direct labor, employee benefits
3. Increase in cashflow in selling the equipments and inventory of LT4
4. May venture on new investment
1. Possible lay-off of employees
2. Tied up to a long term contract of 5 years
3. Product quality may suffer
4. Government regulation and labor issues
5. Company image may be affected
6. Lack of control on production (contract cost of €975k is limited to 4,000 units only)
7. Design will be disclosed to suppliers
8. Annual cost at 4,000 units is more expensive to outsource by €25,000 than to manufacture
9. Costs to be incurred in year 1 is higher by €815,000
ACA # 2 : Continue in-house manufacturing of PTC to maintain efficient value-chain process & position the brand as “high-quality” product to gain more customers.
1. Product quality may be maintained
2. Increase employee loyalty
3. Maximize machine capacity and utilize remaining inventory of materials
4. Has better control on production (contract cost of €957k is limited to 4000 units only)
5. Design can be kept confidential
1. Limited cash flow since cash is tied up in the equipments and inventories
2. Lack of contingency (back up production)
3. If potential savings on rental of IT department is considered, annual costs to ‘make’ is higher by €85,000
Should Jorge Ruiz accept the proposal of Engineering Tools to outsource the PTC product department, or continue the in-house operation of PTC Product Department keeping the profitability goal of Fibertec as baseline for strategic decision making?
1. To evaluate costs incurred from manufacturing and compare the cost of producing PTC vs. accepting the offer of Engineering Tools
2. To evaluate qualitative factors for producing in-house or outsourcing, before finalizing a “make or buy” decision
3. To evaluate the value chain of Fibertec’s PTC line.
Point of view of Jorge Ruiz, CEO of Fibertec.
1. Jorge Ruiz - CEO of Fibertec
2. David Barrios - Head of Accounting of Fibertec
3. Martin Flores - Head of PTC Product Department of Fibertec
of the Problem
Porter's Competitive Strategy
determines the choice of how an organization or business unit is going to compete in its particular industry or market.
a. Fibertech receives PTC demand from it’s wide reach of customers;
b. The company is currently challenged towards maintaining a good product margin
The direction must not be geared towards “Low Cost” positioning. Hence, the most appropriate strategy for the company to achieve it’s objective is
SAMPLE APPLICATION TO FIBERTEC:
PTC products are positioned as high-quality & efficient.
Competitive Value Chain process
The group recommends ACA 2 in which
PTC Product Department should continue its operation despite not generating high margins due to competition.
1. Outsourcing the production of PTC to Engineering Tools will cost them additional 815,000 euros on year 1. Outsourcing may be lower for years 2-5 but this is not sufficient to recover the net cost incurred in year 1.
2. Inhouse production will only cost Fibertec 1.06m euros including the opportunity cost (savings on IT department rental) vs. outsourcing the production which will cost 1.875 euros.
3. The department already invested in the maintenance of the equipment and still has 4 year supply of LT4.
4. The salary of Martin Flores, building rental and distributed overhead will still be carried by the company even if the management decides to outsource the production of PTC.
Areas of Consideration
PTC Product Department Cost Breakdown
PTC Product Department Cost Breakdown
a. Fibertec bought €300,000 worth of LT4 which is one of the expensive raw materials of PTC for 120 euro. Reselling price of LT4 is 100 euro. Current market price if bought now is at €150.
b. 5 year forecast of LT4 inventory; Only 1 year worth of inventory was used up.
c. Invested in machinery maintenance for 600,000 euro 4 years ago with 8 years life span. Machine can be sold at €100,000 at most if sold now.
d. Rental costs of the main building are allocated to departments according to sqm.
Costing Info provided by David Barrios
Make-or-Buy decision - decision to perform one of the activities in the value chain process in-house, instead of purchasing externally from a supplier.
Factors to Consider
1. Quantitative Factors
2. Qualitative Factors (In-house)
3. Qualitative Factors (Outsource)
Business Strategy: Step-by-Step guide to Make or Buy Decision (Martin, January 25, 2015)