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Makw or to Buy ?, Operation Management

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• ABC Ltd. is in the business of manufacturing one type of valves for last 3 years.
• Their sales have grown from 10,000 to about 50,000 valves per month.
• Now they are planning to expand and produce different varieties of valves.
• They have a plant of 50,000 sq. ft. If they continue manufacturing of all the varieties in
house, they would need another 50,000 sq.ft. of the area.
• The land prices in the area have more than doubled in last 3 years.
• The company is currently facing the problem of quality complaints which have gone up from
about 0.2 % in previous 2 years to 0.5 % this year.
• While, the workers complain about overwork, the overtime cost has increased 3 times.
• The Director – Operations called a meeting of all the department heads to discuss about the
expansion. The following data were presented by the team.
?Sales Forecast, as presented by the Marketing Manager. ? Year 1: 300,000
? Year 2: 500,000 ? Year 3: 700,000 ? Year 4: 900,000 ? Year 5: 1000,000
?Manufacturing Cost, as presented by the Production Manager.
? Supervisor Salary: Rs 5000 per month with 10% increase per annum.
? Direct Labor Cost: Rs. 4 per unit, with 10 % reduction in second year, no
change in 3rd year and increase of 10 % every subsequent year.
? Indirect labor cost: 50 % of direct labor.
? Material cost: Rs. 14 per unit with an increase of 10 % every year.
? Power and fuel cost: Rs. 2 per unit with increase of 10 % every year.
? Buying a new machine: Rs. 50 lac. With usable life of 5 years.
?Procurement cost, as presented by the Purchase Manager.
? Component price from supplier : Rs. 20 for the first 2 years with an increase
of 10 % every subsequent year.
? Transportation cost : Rs. 2 per unit for the first year with increase of Rs. 0.20
every subsequent year.
? Inventory cost ( storage cost): 5 % per year of the basic material cost.
• Questions:
1. Based on this data, is it economical for ABC Ltd.to go for buying the product from
market or manufacturing in house.
2. What other factors should ABC Ltd. look at for making this decision?

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