PURCHASING & SUPPLY MANAGEMENT Garland Chocolates Chapter 5 and Trojan Technologies Chapter 14

Purchasing & Supply Management Garland Chocolates Chapter 5 and Trojan Technologies Chapter 14
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Garland Chocolates Chapter 5
Currently, Garland Chocolates is experiencing problems in manufacturing and packing their brand of Edgeworth efficiently. This problem is leading to a decline in the company’s profit margin. The annual maintenance cost is $ 18,000 and is expected to increase by 12% in the next year (Johnson, 2014). This will cost the company at least 90,000 in five years, excluding 25% projected to increase (Johnson, 2014). The cost of replacing the two packaging lines for the Edgeworth Toffee brand is estimated to be $ 140,000, including installation, but it is expected to achieve the Business Performance Objective (BPO) efficiency of scrap rate targets (Johnson, 2014).
The efficiency of the twenty years old manufacturing line of the company has decreased by 14% (Johnson, 2014). To replace the twenty-year-old manufacturing line, Edgeworth Toffee will require $ 600,000 (Johnson, 2014). The manufacturing line efficiency was close to 80% target. However, it was also showing signs of decline. Overall, the company is targeting around $848,000 in immediate start-up costs. This amount is more than the firm’s cost of capital rate, implying that it will be hard to gain approval.
Due to the decline in the company’s profit margin, it would be imperative to outsource the Toffee manufacturing and manufacturing to Martin Contract Manufacturing. This contract manufacturer can offer Edgeworth a competitive cost of $ 68 for manufacturing and packing with a tooling cost of $ 35,000 (Johnson, 2014). The outsourcing strategy will increase the company’s profit margin from 34% to 53% (Johnson, 2014). This shows an increase of Toffee’s profit margin by 19%. In each case, the company will make over $27 through outsourcing (Johnson, 2014). Assuming Edgeworth Toffee sells about 5,500 cases in a year, the profit will increase by up to $148,500 (Johnson, 2014).
The risks associated with outsourcing the Edgeworth Toffee brand include loss of control, loss of innovation, loss of organizational trust, and confidentiality breach. Managers of the Edgeworth Toffee brand may complain about the loss of control over their quality standards and process technologies if the company is outsourced to Martin Contract Manufacturing (Johnson, 2014). The consequence of this can be severe. In particular, outsourcing may disrupt production schedules, reduce quality, and develop contractual disagreements. Another risk is the loss of organizational trust.
Outsourcing often weakens the relationship between the employer and the employee. Edgeworth employees, for instance, may think that their jobs are at risk, which makes them lose morale. Lastly, outsourcing threatens the confidentiality of the company's data. When an organization to be outsourced allows the outsourcing company to access confidential information, the privacy of that information may be compromised (Harland et al.,2015). This may damage the company’s reputation; reduce customer loyalty and the company's profitability.
The decision to outsource will chan...