Long-term strategy for vertical integration vs. outsourcing of components



It is February 2010. Martin Kelsey must prepare a six-month production plan that “optimizes the use of manufacturing resources while meeting product quality standards and delivery schedules.” We know the following background on the company from the case study:

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· Demand for FoldRite’s folding tables and chairs typically peaks in May, but FoldRite must increase shipments to distributors in April to meet that demand.

· The new CloudChair product has won a number of design awards and early inquiries have been very strong – but it’s still too early for confirmed sales. Kelsey does not know how much of the early interest will become actual sales.

· FoldRite experienced manufacturing problems in 2006 which had severely weakened the company financially – causing it to be sold to a group of private investors, who brought in new senior management. The 2008-2009 recession hurt the company further.

· New management mandated four major goals for the company:

· Continued innovation in both products and processes,

· Customer responsiveness: producing high quality products that fulfilled market needs, and providing quick service,

· Lean manufacturing, and

· Retention of a well-trained, stable, and productive workforce, with reduced turnover.

· The company reduced time from order receipt to shipment to a maximum of 2 weeks, and in many cases just 2 days. These helped FoldRite recapture some lost customers – both distributors and their customers, the end users, delayed orders until the last minute.

· The number of products was reduced, enabling the company to offer customization, and still often ship orders in less than a week.

Kelsey has a number of options to plan for a spike in demand in the next few months. These are detailed on pages 4-7 of the case study.

Please answer the following 4 questions based on the case study and everything we have studied to date. Each question counts for 25% of your grade.

1. The VP of Sales told Kelsey that, “manufacturing has got to meet productivity goals because this kind of opportunity might not come again for a long time.” What did he mean by that?

2. Should FoldRite use a demand-leading or demand-lagging strategy? Explain the opportunities and the risks of each approach. What choice would you make? Explain the reasons for your choice.

3. Kelsey reviewed the monthly sales forecast in Exhibit 2. Some major changes in the monthly volumes projected for CloudChair worried him. The peak volume of 4800 units in July was more than 5 times the low projected volume of 900 units/month in November and December. In 2009, the peak in actual chair demand was 3906, only 2 times the low of about 1900/month in November and December.

a. Why does this make Kelsey’s job very difficult?

b. How should he plan to meet this projected demand?

4. FoldRite is strongly dependent on outsourcing for the components in its tables and chairs. Imagine that Kelsey was also asked to recommend a long-term strategy for vertical integration vs. outsourcing of components. Kelsey used the following chart from Chapter 5 to consider his options. Recognizing that the outsourcing decision is different for different components, are there any that you might consider bringing in-house? Explain your reasoning. 

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