In 1985, Bridgeton Industries, a major supplier to Big-Three domestic automobile manufacturers, is facing a competitive environment with advent of foreign competition and rising gasoline prices, leading to shrinking pool of production contracts. Bridgeton reacts by closing ACF diesel engine plant and hiring strategic consulting firm to classify their products on competitive position.
Based on analysis, Bridgeton outsourced oil pans and muffler exhaust (classified as Class 3) and introduced programs, such as lowering time required to change dies, to improve product, quality and productivity.
However, despite of these measures, manifolds were downgraded from Class II to Class III in 1990 model year budget. Now, Bridgeton faces the challenge to decide if manifolds be outsourced and, more importantly, what more to do (in terms of strategy) to keep the business?
Bridgeton’s Organization: • Cost System: It comprises of materials, direct labor and overhead. Per Exhibit 2, during period 1987-90, the overhead rates have increased as shown below; especially after outsourcing in 1988. With outsourcing, the overhead cost have not reduced at same rate as labor cost, leading to higher costs for the remaining products such as manifolds.
Thereby, outsourcing manifolds shall lead to higher cost for the remaining products such as fuel tanks and doors and shall push them down to Class III.
• Revenue and Profit: Outsourcing manifolds will reduce cost; however, the sales will be reduced even more, since Bridgeton’s highest revenue is from Manifolds, which account for 41% ($93,120/$226,542) of their total sales in 1990, leading to lower profit.
Business Market: With higher efficiency standards, demand for stainless steel manifolds such as those produced at ACF could be increased dramatically and so, probably, would their selling prices. This will lead higher revenue and profits from sales of manifolds (if not outsourced); assuming no significant increase in the cost (material).
Therefore, outsourcing Class III manifolds (per Consulting Firm’s recommendation) shall not be advantage for the ACF plant. Clearly, reduction in plant production volume and high overhead cost has caused ACF plant to be less cost competitive.
Recommendations: Following are the recommendation to utilize ACF plant resources efficiently and thus, improve overhead rates for existing products: • Increase technology capability, thereby, increasing production of existing products • Use Activity Based Costing (ABC) to actually analyze the individual cost incurred for these products and opportunity for its reduction • Initiate reforms in manufacturing and admin process • Sell un-used outdated machinery that are causing big depreciation and insurance cost • Promote cost-cutting but preserving quality • Set budgets and review them on a weekly, monthly and yearly basis.
Through this we can utilize overhead expenses more efficiently and allocate it amongst current products to be cost competitive and keep the pricing within reasonable limits, helping us to maintain our profitability and market shares.