Clear_Hear_Scenarion

Clear Hear Scenario Big Box, a major service provider put an order of a 100,000 cell phones through Clear Hear’s business development specialist, Kendra Sherman. The order is a big opportunity boost for Clear Hear, not only in terms of profit, but gaining a wider market. It is also a bit of a challenge for Lisa Norman, production manager of Clear Hear, who will see to it that the company’s missions are upheld namely, keeping employees working, to provide customers with products on time delivery with the highest quality possible, and treat business partners as we want to be treated. Upon reviewing Clear Hear’s last month’s productivity report below, Lisa had to draw up several scenarios on how best to approach the Big Box order. Unit Profitability Report Alpha model Beta model Price per unit 20 30 Variable cost per unit 8 12 Fixed overhead 9 10 Profits 3 8 Note. All unit prices are in dollars. Lisa came up with three different recommendations to choose from, considering timeliness of delivery, quality of the products delivered, profitability and avoiding disruption of Clear Hear’s factory capacity and normal production schedules. Additionally, she knows of a competitor, Original Equipment Manufacturer (OEM), which has an extensive experience manufacturing cell phones for other brands and has won several quality awards for its manufacturing process. Their cell phone prototype has the same quality as Clear Hear’s Alpha model, and the fact that they can produce 100,000 units at a short notice, with a lower per unit price at $14 versus Clear Hear’s Alpha model at $20, OEM is an integral part of Lisa’s strategy to deliver the Big Box order in a timely and orderly fashion. First option is to accept the order and manufacture 70,000 of the 100,000 cell phones utilizing the facility’s excess capacity, and outsource the remaining 30,000 from OEM. Analyzing the mechanics of this option, however, will result in a loss. As per the Unit Profitability Report above, Clear Hear explicitly shows that the variable cost and fixed overhead cost to produce one Alpha model adds up to $17. Big Box is only willing to pay $15 per unit, which will result in a $140,000 loss. Although the OEM outsource will see a profit of $30,000 ($15-$14)*30,000, this option will result in a net loss of $110,000 ($140,000-$30,000). The second option is to produce the entire 100,000 devoting the whole manufacturing floor of producing the Alpha as well as the Beta model. It is apparent that this option is downright foolish, not to mention setting back Clear Hear’s profitability profile in a much larger net loss compared to the first option. The opportunity cost of switching production model is way too high. Furthermore, it will disrupt Beta model’s production, a highly profitable venture. The third option is to outsource all 100,000 cell phones to OEM. This will net Clear Hear a profit of $100,000. More importantly, its production schedule won’t be the least disturbed, and Lisa Norman gets her bonus for running the production company at full capacity, plus a cut from the outsourcing profit. This option looks too easy and elementary, but the fact of the matter is, Clear Hear’s reputation is riding on this alternative. OEM could very well sabotage the quality of this order intentionally or otherwise. Lisa Norman should inject herself in OEM’s quality assurance process for the manufacture of this order, making sure the product standards are adhered to in the strictest terms. Excellent quality products are expected by any consumer and it serves as the best advertisement for the company. Additionally, it fetches more business from “Big Boxes of the world.” Poor quality of products, on the other hand, is enough to bring down a company altogether. All three options bear risks. If the first option is to be picked, running multiple factories can stretch manpower which may sacrifice the quality of the product. The feasibility of this option may work provided Clear Hear restructures its overhead costs. On the profitability front, it will be hard to realize any semblance of profit. Because of the high production cost Clear Hear is accustomed of, the second option should not be entertained. The loss is much too high which goes directly against the primary objective of any business: to make profit. The third option provides not only a clear profit, but a huge opportunity for Hear Clear to study OEM’s processes, primarily on how they operate with less variable cost and fixed overhead, and still maintain the quality of its product. With the new business venture with OEM, Clear Hear can now compare its in-house cost structure with OEM and make adjustments to reduce production costs of producing Alpha and Beta models. The decision to initiate an outsourcing partnership is often a by-product of another powerful management tool: business process reengineering. This evaluation process allows a company to identify its core competencies and reform its operations, and aside from this short term venture with OEM, Clear Hear can garner valuable information and strategies on how to re-engineer manufacturing costs, while maintaining the utmost quality of products. This will pave the way for Hear Clear to manufacture future orders and short term contracts on its own without outsourcing. Additionally, forming a quality control department to monitor quality measures and production procedures should be an initiative Clear Hear must do. This is to sustain and maintain its reputation of delivering guaranteed quality product. Strategic outsourcing (n.d.) stated that, “by partnering with an outsourcing provider that has already accumulated a track record of excellence in the field of your non-core operations, your organization can immediately realize the anticipated benefits of business process reengineering.” (p.1) In conclusion, the recommended alternative of delivering 100,000 cell phones to Big Box is the third option, whereby the whole order is outsourced to OEM. The choice not only delivers the desired profit from the short term venture, uphold the 3 missions of Clear Hear for its employees and customers alike, but learn a much more effective way of manufacturing a product with the utmost quality standard, with the least overhead.