Rondot Case Study
Glenn Northcott is a purchasing planner in Rondot Automotive. Their Jackson, Mississippi plant manufactures an average of 7million small motors which they distribute to their OEM customers. Their purchasing organization which has a hybrid structure is comprised of two groups—strategic purchasing (dotted-line reporting to purchasing manager) and plant purchasing department (straight-line reporting to purchasing manager). Currently, they are being pressured to cut down their plant costs and reduce their prices. Aside from these, they are also facing employment and global competition issues.
Three months ago, an opportunity to outsource their painting operations to Greven was presented to Glenn. As part of the evaluation process, tests were administered and colleagues were consulted. The tests showed that 5 steel housings which undergo hot-bond process can be converted to e-coating and only one family cannot be converted due to the cold-bond adhesion it requires. John Underwood from manufacturing engineering encouraged the prospect, explaining that their wet-paint system has to be stopped or upgraded soon while Betty McKinley from production planning called out that 2 weeks’ worth of inventory has to be added and an additional $0.03 for transportation and packaging costs will be incurred. Now, Glenn has to discuss his suggestion to Terry Gibson (Purchasing Manager) and Dick Taylor (Plant Manager).
1. ACUTE- Primary issue that Glen has to face is his discussion with Terry and Dick regarding outsourcing their painting needs to Greven. This would mean contracting 5 out of their 6 steel housings or 60% of their volume to Greven while the 40% stays with them. Outsourcing will also change their painting process to e-coating which is said to be more cost efficient vis-à-vis Rondot’s wet paint system. Align with this, the plant is also being pressured to reduce their costs. 2. CHRONIC- Rondot Automotive is also confronted with long-term issues like total sales and employment drop. They are also facing great amount of pressure caused by global competition and demand for lower prices.
1. Rondot will cut down cost by at least $294k annually if they outsource their painting operations. Comparison and computations are summarized below: Wet-Based System
– system to be pulled out or upgraded soon due to cost and environmental factors = more cost No additional inventory = costs stay the same
No change in production capacity
More control over the product
($0.15 Greven + 0.03 for transpo & packaging)
Additional inventory needed = higher carrying cost
Higher production capacity
Less control over the product
(WET PAINT) 7,000,000 units/ year x $0.25 /unit= $1,750,000 painting cost (E-COATING, GREVEN) 60% will be outsourced to Greven (4,200,000 units) 4,200,000 x $0.18= $756, 000 40% will stay with Rondot (2,800,000 units) 2,800,000 x $0.25= $700,000 Total: $1,456,000 painting cost SAVINGS: $294,000/ year
If possible, Rondot can negotiate with Greven for a cheaper price since they can only cover 60% of their volume. They can also look at other outsourcing vendors who can accommodate both hot and cold-bond processes. This is a more practical and cost-cutting alternative because as John Underwood from manufacturing engineering pointed out, they will need to upgrade or pull out the wet-paint system in the near future.
2. Outsourcing can also aid Rondot in facing the demand for price reduction since 60% of their painting cost was cut down by almost 30%. This also entails overhead expenses from 20,000-square foot section will decrease. Production capacity, on the other hand, will increase because their workers can concentrate on other manufacturing processes since painting operations were lessened. This can help augment their global competitiveness and total sales.
It is recommended that Rondot Automotive outsource their painting requirements not only because they will generate immediate savings and cut down plant costs but also because benefits of outsourcing will help contribute in resolving their other long-term issues. To be more practical and more cost-efficient, it would be better if their purchasing team can look for a vendor which can accommodate 100% of their volume. It should also be noted that Glenn has joined the company only the previous year and he can be inexperienced in spearheading big projects. More thorough review and discussion should be done with more senior/ experienced team members. Also, since this can be a big contract, it should be redirected to the strategic purchasing group in Michigan.