BlueJay Manufacturing: Evaluation of Outsourcing Options

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Table of Contents

Other Issues to be considered in Outsourcing
Reliability of the Supplier
Financial Standing of the Supplier
Confidentiality
Core Competency
References

This paper presents an analytical report on the evaluations of outsourcing options available to BlueJay Manufacturing as compared to in-house manufacturing. This report makes a recommendation based on the calculation of Net Present Values (NPV) and Payback Periods for the different options presented.

Evaluations of the options presented with a cash flow during the four years are presented below:

BlueJay Manufacturing
Evaluation of Investment Proposals – Manufacturing versus Outsourcing – 4 Years

	BlueJay		Supplier A		Supplier B		Supplier C
	Annual Cash flows	Cumulative Cash flows	Annual Cash flows	Cumulative Cash flows	Annual Cash flows	Cumulative Cash flows	Annual Cash flows	Cumulative Cash flows
Cost of capital	12%		12%		12%		12%
Tooling Costs	-1,200,000.00		-250,000.00		0.00		-250,000.00

Year 1	350,000.00	-850,000.00	200,000.00	-50,000.00	150,000.00	150,000.00	100,000.00	-150,000.00
Year 2	350,000.00	-500,000.00	200,000.00	150,000.00	150,000.00	300,000.00	200,000.00	50,000.00
Year 3	350,000.00	-150,000.00	200,000.00	350,000.00	150,000.00	450,000.00	300,000.00	350,000.00
Year 4	500,000.00	350,000.00	200,000.00	550,000.00	150,000.00	600,000.00	400,000.00	750,000.00

NPV	-37,142.87		319,169.53		406,787.86		416,487.32

Payback	3 years 3.6 months		1 year 3 months		0		1 year 9 months

Considering the evaluation of the different options, option B is recommended. Even though the NPV for Option B is less than Option C by $ 9,699.46 since there is no initial cash outflow from the company option B is recommended.

There is the option of extending the project to 6 years. The options have been evaluated assuming that the cash inflows remain the same and the cash flows for year 5 and year 6 remain the same as that of year 4. The results of the evaluation are appended below:

BlueJay Manufacturing
Evaluation of Investment Proposals – Manufacturing versus Outsourcing – 6 Years

	BlueJay		Supplier A		Supplier B		Supplier C
	Annual Cash flows	Cumulative Cash flows	Annual Cash flows	Cumulative Cash flows	Annual Cash flows	Cumulative Cash flows	Annual Cash flows	Cumulative Cash flows
Cost of capital	12%		12%		12%		12%
Tooling Cost	-1,200,000.00		-250,000.00		0.00		-250,000.00

Year 1	350000.00	-850000.00	200000.00	-50000.00	150000.00	150000.00	100000.00	-150000.00
Year 2	350000.00	-500000.00	200000.00	150000.00	150000.00	300000.00	200000.00	50000.00
Year 3	350000.00	-150000.00	200000.00	350000.00	150000.00	450000.00	300000.00	350000.00
Year 4	500000.00	350000.00	200000.00	550000.00	150000.00	600000.00	400000.00	750000.00
Year 5	500000.00	850000.00	200000.00	750000.00	150000.00	750000.00	400000.00	1150000.00
Year 6	500000.00	1350000.00	200000.00	950000.00	150000.00	900000.00	400000.00	1550000.00

NPV	442347.30		510965.59		550634.91		800079.45

Payback	3 years 3.6 months		1 year 3 months		0		1 year 9 months

Based on the above calculations supplier C can be selected for outsourcing. In this case, even though the Company has to incur an initial tooling cost of $ 250,000, since the net present value of option C is higher than any other options and hence this option can be pursued.

Other Issues to be considered in Outsourcing

Despite the advantages of outsourcing like shared risks, availability of better technology, improvement in production capacities, and better inventory management, there are certain issues associated with outsourcing that need to be considered while deciding to outsource products or components and parts (Ueanet.com). These considerations are apart from the cost considerations which relate to the issues of quality and reliability of the supplier.

Reliability of the Supplier

The foremost consideration in outsourcing the proposed job is the reliability of the supplier in terms of quality and timeliness. The reliability can be judged from the past dealings of the supplier with the company. Before a decision to outsource from a particular supplier, it is vitally important that the capacity of the supplier is assessed properly so that there will be no interruption of supplies.

Financial Standing of the Supplier

It is also important to consider the financial standing of the supplier to ensure a continued supply of products to the company. Unexpected disturbances in the supply due to the poor financial conditions of the supplier will affect the sales and reputation of the company.

Confidentiality

There is the likelihood that the supplier may work for a competitor in which case the technical and other specifications may be revealed to the customer by the supplier. The company must be guarded against this risk.

Core Competency

Before outsourcing it should be ensured that the Company does not outsource any of the products which represent the core competencies of the Company (Jones, 2001). Irrespective of any cost advantages it is not advisable to outsource the core competencies as it will seriously affect the competitive ability of the Company.

In addition, the Company may lose the ability to introduce new designs based on its research and development as it may have to depend on the capabilities of the supplier. There is also the risk of the development of innovative insights and solutions that require cross-functional teamwork, with the impact of outsourcing on the morale of the employees of the Company (Shankar, 2008). This is a serious issue that needs the attention of the Company before it decides to outsource some of the product lines.

References

Jones, D. W. (2001). Planning for an Outsourcing Evaluation. Web.

Shankar, R. (2008). Chapter 9: Procurement and Outsourcing Strategies. Web.

Ueanet.com. (n.d.). Guidelines: In house Manufacturing or Outsourcing? Web.

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