By: Saurabh Saxena
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?
• 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. [pic]
• 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....