In October 2007, CJ Industries signed a $10 million contract with Great Lakes Pleasure Boats which chose CJI as a supplier of key engine components. The agreement between the two companies had a great deal of potential and crowned years of hard work by CJI. Collaboration with a big company meant the necessity to increase the number of bilge pumps purchased per month to meet Great Lakes Pleasure Boats’ demand. Previously, CJI used to buy the said boat component from a smaller manufacturer Heavey Pumps, and namely 50 units for $1,500 each with the shipping fee of $500.
Now that the agreement conditions oblige CJ Industries to provide Great Lake Pleasure Boats with a higher number of bilge pumps than it used to order before, Mr. Grams, the purchasing manager, is concerned. He is unsure whether Heavey Pumps, being a smaller firm, has the capacity to produce the required number of engine components so that the prospects of companies’ collaboration are not jeopardized. CJ Industries needs to make a decision as soon as possible, but the managing board is facing major uncertainty. Even if Heavey Pumps agree to ramp up production, there might be additional costs associated with new equipment, labor, delivery, and other factors.
As of now, the purchasing manager needs to choose between three possible solutions. First, CJ Industries might remain loyal to Heavey Pumps and get ready for extra expenses linked to the aforementioned factors. Although Heavey Pumps is a reliable supplier and there have never been any complaints about the product quality, CJI never kept any performance records, hence, the uncertainty. Making bilge pumps in-house seems to be an ambitious idea whose main advantage would be total quality control and self-reliance (Stentoft, Mikkelsen, & Johnsen, 2015). However, the investment of $500,000 is a heavy financial burden, and CJI might not need the equipment anymore after the contract expires. Lastly, CJI might want to reach out to other bilge pump manufacturers. It is not easy to tell whether it might be a feasible option since there is no information about their capacity and performance yet. One downside to outsourcing to them is known though: the distance might cause a substantial increase in transportation fees. On the contrary, CJI might delegate at least a part of the workload to the local manufacturers, which will make the situation easier.
Choice and Rationale
Neither of the listed options is perfect on its own. Hence, the purchasing manager should consider a combination of them. Building bilge pumps in-house is not economically reasonable at the moment; thus, Mr. Grams might want to share the workload between Heavey Pumps and another manufacturer out of two available. This way, Heavey Pumps will not have to worry about increasing their production beyond the usual 50 units, and the rest will be outsourced to some other company.
Mr. Grams will need to start negotiating with both companies producing bilge pumps in his region. First, he might want to do independent research and read their former and current customers’ reviews. Once they come into contact, he might request performance records to evaluate their capacity. The final decision as to which company is better will rely on the following factors: contract conditions, price range, and the distance to the warehouse.
The issues from CJI’s and Heavey’s perspectives
CJ Industries’ main interest, in this case, is to assure contract compliance and find a way to purchase extra pumps keeping additional expenses to the minimum. The greatest issue that CJI faces is the inability to rely on the old supplier, Heavey Pumps, due to its limited capacity in producing bilge pumps. Most probably, Heavey Pumps would like to keep CJ Industries as its loyal customer, but the company might not be quite able to meet CJI’s needs. In case CJI decides to negotiate an increase in bilge pumps supply, Heavey Pumps will have to seek ways to use their resources in a way that would enhance performance. The new terms would require balancing out equipment, labor, and transportation expenditures. Hence, Mr. Ashby will need to obtain more performance data from Heavey Pumps and be more certain about future costs.
The advantages, disadvantages, and risks of each of solution alternatives
Remaining Heavey Pumps’ client is time-efficient and worry-free in terms of product quality; however, the looming extra expenses are discouraging. In-house production could be a bold move that would assure autonomy, but no one can predict if the production line will be of any use once the current contract expires. Other suppliers might have competitive advantages over Heavey Pumps; nevertheless, CJI needs to do more research on them before making a decision. A combination of staying loyal to Heavey Pumps and outsourcing the extra pumps to one of the local manufacturers is the most advantageous option. It benefits all three parties: for CJI, it is both times- and cost-efficient, Heavey Pumps will not have to make radical changes, and a local manufacturer will get a new customer.
Contract compliance of the involved companies in the future
CJ Industries can and should assure continued contract compliance with Great Lakes Pleasure Boats by doing two things. First, CJI needs to make sure to meet the deadline for assuring compliance, which is two weeks. Second, the company should make the most reasonable decision which would stay viable in the long perspective. By combining two alternatives, CJI will provide Great Lakes Pleasure Boats with bilge pumps on time. Given prompt provision and high product quality, Great Lakes might want to extend the contract.
Stentoft, J., Mikkelsen, O. S., & Johnsen, T. E. (2015). Going local: A trend towards insourcing of production? Supply Chain Forum: An International Journal, 16(1) 2-13.