Reference no: EM132234706

CORDLESS INC.

Background

Cordless Inc. has based its business strategy on automation, fast deliveries, and reliable service. Cordless Inc. is one of the first low-cost telephone manufacturers still producing and selling telephones in the United States. Competition, especially from the Far East, has made this an increasingly difficult endeavor.

Stable demand for DECT 6.0 telephones has been forecasted for the next three years. To meet market demand, Cordless Inc. manufactures two models of telephones in a variety of colors.

The firm’s plant is located in Nogales, Arizona. The plant was built near the major sources of supply, which are in Mexico. Cordless Inc. procures all its components from Mexico except for the plastic items. The plastic components are purchased in the local domestic area. Cordless Inc. has ruled out the use of a maquiladora, due to the highly automated nature of its production process. As a capital-intensive firm, Cordless Inc. also concluded a maquiladora was not a feasible alternative because of the increased risks of having its equipment in a foreign country. (Maquiladora plants are located in northern Mexico and have been increasingly attractive after NAFTA was approved. Basically, foreign materials are imported duty free, processed (using low-cost labor), and then returned to the country of origin without customs duties being imposed in either Mexico or the country of origin.)

George Monahan is the president and founder of the company. He has an engineering degree from UW-Milwaukee and an MBA from Arizona State University. He attributes Cordless Inc.’s ability to stay competitive to two factors: (1) automating its process and (2) procuring highly labor-intensive materials in Mexico.

The plant employs only 200 people, of whom 140 are responsible for the actual assembly work. With the help of automated assembly machines, Cordless Inc. has been able to meet market demand and keep labor and manufacturing costs down.

Supply Management

Stephanie Cohen is the supply manager. She employs two supply analysts, Jan Stein and Bill Walker. Jan has been with the company for a little over a year and is a graduate of the University of Arizona. She has a strong background in price analysis. Bill is the eldest and most experienced member of the Cordless Inc. staff. He is expected to retire later this year. Jan purchases all the electronics and wire harnesses, while Bill concentrates his efforts on the plastics and hardware.

Supply Management System

The manufacturing process is highly dependent on timely deliveries from its suppliers. Local sourcing is used to assure prompt delivery and to keep supplier lead times short. Supply management focuses its efforts on maintaining a small supplier base.

The driving force of the supply management system is to obtain low-cost, high-quality materials as a means of staying competitive. As a standard procedure, supply management prepares annual re-costing reports of its suppliers. Currently, requests for quotations are sent to potential suppliers to compare with the current supplier’s prices. The supply professionals are to sort through the various bids and choose the lowest one submitted to use as a basis for negotiating future part pricing.

Developing Situation

Over the last six months, George has been noticing that expenses have begun to increase. A careful evaluation of production costs revealed a recent increase in the plastic component prices. Since plastic components account for 40 percent of the telephone’s cost, the rise in price significantly affected profit.

Injection molding makes plastic components. Injection molding is a process whereby a thermoplastic material, usually in pellet form, is heated to its melting point. The melted material is then pushed into a mold via an injection molding machine and held in the closed mold while it is cooled into a solid shape. The solidified part is ejected from the mold and the process begins again.

On further investigation, George noticed Cordless Inc. is sole-sourced by one injection molder in the local area, ABC Plastics. Cordless Inc. has been buying solely from ABC since it consistently submitted the lowest bid. Quality and delivery have been generally good.

George called Stephanie into his office to discuss the situation. George said to Stephanie, “As you are aware, our sales this quarter have not been growing and expenses have been increasing. I have gone through our material price sheets and noticed plastic part prices have been steadily increasing. Why is that?” Stephanie replied, “Bill has made me aware of the problem, but he has not been able to determine the cause of the price changes. He has stated that ‘ABC refuses to divulge any cost information.” George said firmly, “We have to understand what the problem is and get it fixed now!”

Stephanie was pondering her options and alternatives to solve this problem. She knew if he did nothing to rectify this situation quickly, Cordless Inc. would not be able to price its telephones competitively.

Stephanie also knew that Jan had been successful in obtaining price reductions; therefore, Stephanie decided to ask Jan to work with Bill to develop an action plan to get the escalating plastic material prices under control.

How does the competitive condition of the plastic component industry impact the use of price analysis? What are the advantages and disadvantages of each?

What tools and approaches can be used by the supply group to determine the right price?