Muenster Company Case

Statement of the problem – The Muenster Pump Company must determine whether to continue making the L-1012 casting housing, or buy the housing from Union Foundry.

Background – Terry Dorf, the supply manager for the family owned and operated pump manufacturing company, is trying to gather cost information on the L-1012 casting housings that Muenster manufactures. Another company, Union Foundry, has suggested that Muenster buy the housing from them at a price of $90 per housing, and Muenster would not be responsible for the transportation costs. After calculating the variable cost and direct labor cost, Terry realized that Muenster is manufacturing the pump housings for $96 per unit.

Discussion –There is a difference between making the product in-house, and choosing to outsource it. Even though the Union Foundry offer appears to be a good deal by paying for the transportation costs, there is not enough money saved in outsourcing to cover the inspection and incremental costs. Also, according to Ned Dorf, the Muenster Pump Company “produces a quality housing that is not equated in the industry.” By outsourcing a product, Muenster is losing a competitive advantage. Finally, consider the time it would take to receive orders from Union Foundry, compared to making the products in-house. Since the L-1012 is one of the most demanded products at Muenster, the lag time between receiving orders should be held to a minimum.

Recommendations – Terry should not accept the offer from Union Foundry to outsource the L-1012 casting housing because of the lag time, the loss of competitive advantage, and the fact that the project does not save money in the long run due to the incremental and unforeseen costs. Terry should present her results to her supervisor Ned.