The Maine-Barnes Ltd A Case Study - 1 Introduction

The supply management director of Maine-Barnes Ltd, Josh Purdy, has

to decide whether to make or buy a key component for a new product. MaineBarnes Ltd (MBL) finds itself in a highly competitive electronic office products
niche market and thus proposes to launch a new line of rechargeable battery
powered calculators, which, in spite of its higher initial price, has a competitive
operating cost due to the accompanying battery recharger. However, since
the design is not patentable MBL has to look elsewhere for a competitive
advantage and not the way of proprietary design. MBL has a further
complication in that its current manufacturing capacity does not allow it to
meet the required production levels of 100,000 units per year, at least not
while manufacturing the companion recharger units (CRU). Josh and MBL are
therefore faced with a choice of investing in MBL by purchasing new
equipment to increase the manufacturing capacity, or outsourcing the
manufacturing of the CRUs to an appropriate supplier. This paper identifies
and reflects on the issues and factors to be considered in conducting the
aforementioned make or buy analysis. It also identifies the alternatives
available to MBL and proposes a report with recommendations for MBLs
General Manager with details of the analysis.

Factors to Consider in the Make or Buy Analysis

The seemingly complex analysis to be performed by Josh and MBL
may be simplified by identifying the issues present in this scenario. Essentially
a make or buy decision has to be taken if MBL is to launch its new product
and consequently make a bid to advance its market position. One option is the

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The Maine-Barnes Ltd A Case Study - 2 making of CRUs in-house; this requires consideration of issues such as the
acquisition of new equipment, the cost of manufacturing in-house and the
possible terms of the new labor agreement once the old contract has expired.
The other option of outsourcing the manufacturing of the CRUs requires
consideration of issues such as the selection of a good, trustworthy and
dependable supplier, especially given the fact that the design cannot be
patented and therefore the supplier would be required to demonstrate great
ethics and not reveal the design to MBLs competitors. Another issue is the
actual comparison of the cost of the two options. These issues are
represented in the table 3.1.2 a below.

Table 3.1.2 a - A Comparison of Issues in the Make or Buy Decision

Decision to Buy = Outsource Decision to Make = produce

Basic options

recharger production

recharger units in-house

1. Select a supplier each year

1. Purchase new equipment

2. Select a supplier for a 3-

2. Lease new equipment

year period
Important

1. Selecting the best supplier

1. Total cost of ownership for the

considerations

2. Trust in the MBL supplier

equipment

relationship

2. Cost comparison for making

3. The impact of outsourcing

recharger units

on the labor force and the

3. The approaching expiration of

union

the labor contract and the

4. Cost comparison for

implications for new terms an

outsourcing recharger units

conditions of work

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The Maine-Barnes Ltd A Case Study - 3 Burt, Petcavage & Pinkerton (2010) make it quite clear that it is
important to perform a competitive analysis before initiating the outsourcing
analysis (p. 219). According to the information provided in the MBL case,
MBLs main strength is its ability to produce high-quality specialty products
but it has to be aware of being located in the heart of a high-tech
manufacturing community. Additionally MBL has a profitable niche in the
electronic office products field but faces the limitation of its manufacturing
shop. These issues strongly suggest that MBL should pursue the
development and launch of its rechargeable battery powered units. However
the make or buy question requires further reflection.
In considering what to make or buy, the decisions should nurture and
exploit the firms core competencies (ibid). Since product development and
manufacturing is core to MBL it may be suggested that once the cost is not
prohibitive, the production should be done in-house. Burt, Petcavage &
Pinkerton (2010) also quote Michael Porter (2001) who believes that
companies must be aware of sourcing from people who also supply
competitors. Since the market that MBL finds itself in is very competitive, it
may once again be suggested that the production be done in-house.
Risk is also a factor to be considered. Bolgar (2010) believes that the
very nature of outsourcing means youre going to increase risk, not decrease
it. Consequently MBL will have to evaluate the risk that will arise if the
outsourcing option is chosen. Apart from the risk of proprietary information
being leaked to competitors MBL will have to manage the risk of suppliers
production falling behind the demand for product as well as the risk of the
supplier giving less than desirable quality.

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The Maine-Barnes Ltd A Case Study - 4 Yet another factor which must be assessed in MBLs make or buy
decision is the labor-management climate, especially since the end of the
labor contract is imminent. A hostile union may seize the opportunity to
irritate management as a result of the decision to buy [whereas] an
amicable labor-management climate may generate a different reaction (Burt,
Petcavage & Pinkerton (2010). In the MBL case the labor-management
climate seems more hostile than not making in-house production attractive;
although it must be noted that the information provided on the union is
inconclusive. On the other hand the fact that wages seemed particularly
important this year suggests that the estimates for the make option will
naturally be higher than projected if only because the wages will be expected
to rise. The decision is a tough one. MBL will have to decide if it wants to have
an experienced and loyal labor force at a cost potentially higher than the cost
of outsourcing, or if it wants some production to be outsourced and
consequently a potentially unhappy labor force.
The size of MBL also influences the make or buy decision. Burt,
Petcavage & Pinkerton (2010) believe that the stabilizing of the workforce is
more important for small firms since they are more sensitive to the loss if a
few orders. Consequently the make option may be preferable for small firms
like MBL.
Finally, the cost comparison must be done to support data based
decision making. The table 3.1.2 b below, shows the comparisons.

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The Maine-Barnes Ltd A Case Study - 5 Table 3.1.2 b: The make or Buy Comparison
Make Option

Buy Option

Highest price to produce 50,000

Cost of equipment = $84,000

CRUs (Eastern Mfg @ 8.15) =

In-houseCRU cost @ 6.77 = $677,000

$407,500
The lowest price to produce only

Excluded are other components of the

50,000 CRUs (Boston Electrical @

total cost of ownership (TCO) for the

7.45) = $372,500

new equipment including the

amortization of the new equipment, as
well as expected increase in wages
for labor force

For 100,000 CRUs the cost to MBL

For 100,000 CRUs the lowest cost to

if outsourced will be at least

MBL if made in-house will be

(Boston @ 6.79) = $679,000

$761,000

At least $82,000 cheaper to

outsource100,000 CRUs or $0.82
per CRU

It must be noted though that the cost under the buy option hides the cost of
quality including the training of the supplier staff in the manufacture of the new
product, the cost of risk as well as the additional cost associated with the
decreased morale of the labor force when faced with outsourcing. It is also
worth reflecting on the general administrative and selling expense ($0.62).
This cost seems to be a marketing and sales cost and hence would be
applicable to CRUs whether they were made in-house or outsourced.

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The Maine-Barnes Ltd A Case Study - 6 Overall, cost analysis seems strongly in favor of outsourcing but the
non-mathematical issues, which albeit impact cost, such as the ethical
dealings required from the supplier with respect to the proprietary design
features, the importance of a stabilized workforce, greater control over
production, risk and quality, all point towards in-house production.

Recommendations & Conclusion

MBL enjoys a niche market which it needs to secure and grow. This is
fertile ground to apply the advice of Anderson, Britt & Favre (2007) to listen to
market signals and align demand planning accordingly across the supply
chain, ensuring consistent forecasts and optimal resource allocation.
Therefore the projections of the marketing manager need to be more in touch
with the customers and not just at the order of magnitude of comfort.
Another important observation is that the firm has grown steadily
during the past five years which is undoubtedly due also to the efforts of the
labor force. The sustaining and building up of employee loyalty should
therefore feature in the make or buy analysis and decision. Furthermore,
given the imminence of new labor negotiations with the union it is
recommended that the potential cost savings derived from outsourcing be
leveraged as a bargaining card to encourage the union to be less hostile and
more amicable. Once this is accomplished the reward to staff should be the
opportunity to earn more, albeit by a reasonable amount, and the securing of
in-house production of the CRUs. Simultaneously, alternatives to make the
production leaner will have to be sought including the consideration of the
leasing of equipment rather than an outright purchase. Furthermore the

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The Maine-Barnes Ltd A Case Study - 7 materials side of the supply chain will need attention such as the deepening of
relationships with the materials suppliers. This should also be done with a
view to make the supply chain more lean.
Although it is cheaper to outsource, the benefits of labor loyalty and the
greater control and management of risk and quality, against the backdrop of
the size of MBL, the competitive nature of the market and the need to
leverage the proprietary design features of the calculator as it relates to
outsourcing, tips the balance in favor of in-house production. However it must
be noted that efforts to streamline the supply chain for materials and make the
production of calculators leaner, must be done in tandem with the decision to
make. Failure to do this will result in MBL losing ground in its niche market.

References
Anderson, D.L., Britt, F.F. & Favre, D. J. (2007, April). The Seven Principles
of Supply Chain Management Supply Chain Management Review, p.
41-46
Bolgar, C. (2010). Outsourcing offers flexibility, but it comes at a cost.
Retrieved

on

July

21,

2010

from

website:

http://www.supplychainriskinsights.com/archive/scri-outsourcing
Maine-Barnes Ltd case study. Retrieved on August 13, 2010 from
website:http://highered.mcgrawhill.com/sites/dl/free/0073381454/647734/mainebarnes.pdf
Burt, D. N., Petcavage, S. D., & Pinkerton, R. L. (2010). Supply Management.
New York: McGraw-Hill Irwin

2015 Anderson Gordon