Page 602 - Introduction to Business

576 PART 6 Managing Business Operations, Management Information Systems, and the Digital Enterprise

beginning of week 3 should be ordered for assembly at the beginning of week 2. The
numbers in the other cells are calculated similarly.
The estimation of the requirements for wheels is more involved and is also done
in Exhibit 16.13. Given that six wheels are used in each chair frame, when the orders
to assemble 25 chair frames are released at the beginning of weeks 2 and 3, a
request for 150 wheels will be triggered at those points in time; and when the orders
to assemble 50 chair frames are released at the beginning of weeks 4 to 7, requests
for 300 wheels will be issued. The other calculations in Exhibit 16.13 should now be
apparent. Of course, the requirements for all of the other components of the office
chair, listed on its bill of material, would be estimated with the same logic.
Purchasing

purchasing The business function Purchasing is responsible for the acquisition of goods and services needed by a
responsible for the acquisition of goods business organization. The relevance of purchasing can be easily understood when
and services
one considers that in manufacturing systems, approximately 60 percent of the fin-
ished goods cost comes from purchased materials and services, and in service sys-
tems such as retail and wholesale firms, this percentage can be as high as 90 per-
cent. Operations managers make purchasing decisions in regard to outsourcing,
value analysis, and supplier selection.
outsourcing Buying goods and services Outsourcing refers to buying goods and services from outside sources rather
from outside sources rather than than producing them in-house. A useful tool in outsourcing decisions is called
producing them in-house
break-even analysis. Let P denote the unit purchase price, C the in-house unit vari-
able production cost, F the in-house fixed production cost, and N the number of
units that are needed. Then the total cost when buying the items, TC(B), can be
expressed as
TC(B) PN

and the total cost of producing the items in-house, TC(P), can be expressed as
TC(P) F CN

Notice that if there exists a value of N, say N*, such that TC(B) TC(P), then N*
is given by
PN* F CN*
or
N* F/(P C)
Therefore, if the number N of units needed is less than N*, then the company
should outsource the item; if the number N of units needed is more than N*, then
the company should produce the item in-house; otherwise, the company is indif-
ferent regarding outsourcing or producing the item in-house. For example, if a firm
is facing a buying price of $100 per unit, in-house variable production costs of $75
per unit, and in-house fixed production costs of $10,000, then

N* 10,000/(100 75) 400
Hence for volumes lower than 400 units, the firm should outsource the item; for
volumes higher than 400 units, the firm should produce the item in-house; and for
a volume of exactly 400 units, the firm is indifferent regarding outsourcing the item
or producing the item in-house.
value analysis An examination of the Value analysis is a disciplined effort to examine the function that each pur-
function that each purchased part chased part serves, in order to find lower-cost alternatives. The effort is done in
serves, done in order to find lower-cost groups that include representatives from operations, engineering, marketing, and
alternatives
accounting. Questions asked by the group include
• What is the function performed by the part?

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