A Make-or-Buy Decision at Baxter Manufacturing Company
Write a two (2) page paper that presents your decision and supports it with evidence from the course text, lectures, whitepapers, and discussions. Outside research is not required but if you use outside sources they must be cited and referenced properly.
Baxter Manufacturing Company (BMC) is a leader in deep-drawn stampings. It has been in business since 1978 as a privately held company. The process for making these stampings is very involved and complex. BMC developed methods for efficiently producing large volumes of stampings while keeping their quality very high. BMC uses state of the art machines to make the stampings and they make all the tooling necessary for those machines. In the years since their founding, many changes have impacted the industry – especially when it comes to computer networks and software. In the 1980s many of BMC’s customers went to Just In Time manufacturing which affected BMC production schedules and inventory management. Automotive customers began asking for Electronic Data Interchange (EDI) capabilities around 1992. All of this has affected BMCs Information Technology department. Over the years, BMC has embraced the use of computers, computer technology, and software to enhance their competitive advantage and customer relationships. They have added CAD/CAM capabilities, a homegrown scheduling spreadsheet, and financial applications. A Commercial Off the Shelf (COTS) scheduling package was purchased in 1989 but the implementation was unsuccessful. Another COTS scheduling systems was purchased in 1991 but, again, the software did not match the needs of BMC. A new MIS manager, Don Collins, was hired in 1994 and he led an effort to develop a mini-computer based system to accept EDI orders from customers and allow customer service to create shipping schedules, as well as raw materials tracking, in process inventories, and finished goods inventories. These internally developed systems were so successful that the MIS department was flooded with requests for more systems. Don believes that it will take 2 years to internally develop the manufacturing software systems BMC needs to remain competitive. Lou Moore, Vice President of Manufacturing, thinks a COTS package from Effective Management Systems, Inc. (EMS) is the answer to BMCs manufacturing software needs. Specifically, he recommends the EMS Time Critical Manufacturing package. The software costs $220,000 up front and yearly maintenance contracts are available for $55,000 per year. EMS will allow limited customized changes to the software and the labor for those changes will be billed at $60 per hour. To deal with all the requests for new systems and to prioritize projects a steering committee has been established. The members of the steering committee are President Kyle Baxter, Controller Lou Wilcox, Sue Barkley (Vice President for Customer Relations) and Kyle’s sister, and Don Collins. The steering committee is currently discussing the option of in-house development (make) or purchasing the EMS system (buy).
Your role is that of Sue Barkley. You will recommend a course of action to your brother, Kyle, in regards to the new manufacturing software system. The obvious choices are do nothing, accept the EMS proposal and start implementation, or take Don Collins advice and create the system in-house. Are there others?
Sue, I have discussed the manufacturing software issue with Lucas and Don. I wanted to find out from Lucas why he feels so strongly about using EMS. I asked him the following questions: 1. Given that our MIS group is doing a good job developing new systems why should we purchase an outside system instead of building one in-house? 2. Why do you think we will be successful using an outside vendor when we were unsuccessful on two previous tries? Since Don is convinced we need to do this in-house I asked him to tell me: 1. His estimate of the time and cost to develop an in-house system. 2. His major objections to purchasing a system from EMS. I informed him of Lucas’ view that EMS can install the system in six months at a cost of $220,000 which is faster and less expensive than his estimates. Don responded to that and also estimated what it would take to do a more thorough investigation of EMS proposal. I know you looked into reusing one of the older systems we installed. I need to know what became of that effort. How do you think our customers will view this situation and what do you think is the best way to proceed?
We are still using outdated technology for our scheduling. The industry has passed us by in computer use for manufacturing and we are in danger of losing our reputation as a world-class manufacturer. My education and my experience with Don’s new inventory system have convinced me that computer systems can significantly enhance our efficiency and improve our customer service. We cannot wait two years for a home grown system that will probably have to be upgraded before it is completed. I have had extensive discussions with EMS manufacturing specialists, read their literature, and seen the proposed systems demonstrated. I am convinced the system will do everything we will ever want to do. EMS assures me there will be no problem integrating their manufacturing system with our financial system and we can be up and running in six months. Purchasing from EMS provides many benefits including: 1. Six months to install an advanced system versus two years to develop our own basic system. 2. The upfront cost for EMS is $220,000 firm against an estimated $400,000 cost for in-house. 3. We will get a proven, advanced system instead of a simple, “first try” system in-house. 4. EMS has advanced programming capabilities that we do not and they have sold this package to hundreds of manufacturers. 5. The EMS software has already undergone several improvement cycles. It may not do things the way we always do but what makes our way better than hundreds of other manufacturers using this system? As for the failed attempts in the past, there are three main differences this time: 1. There was very little ownership of the new system before. However, I am the champion for the new system and my people will make it work. 2. Previous vendors attempted to install an entire system without having inventory data under control. EMS will install one module at a time according to a proven schedule. 3. Other systems were installed during times when we were expediting daily and did not have the time to devote to making sure the installations were successful. Capacity is not an issue right now.
We can develop our in-house system in two years at a cost of $420,000. Outside help will cost $220,000 which includes training for our people and internal cost will be $200,000. As for the EMS software, it’s designed for manufacturing facilities that have far more complex processes than we do. We would use a small subset of the program’s features. Also, we have very little experience with computerized production systems. I don’t think Lucas understands the complexity of the system or the trouble our people will have adapting to it. It will force them into ways of doing things that they are not familiar with. Wouldn’t it be better to build a system that correlates to where we are on the learning curve and to plan updates as we progress in our understanding? It’s highly likely the system does not match how we do business. Since it is a pre-packaged system it may not allow us to make the changes necessary to match our business processes. Are we willing to change the way we do business just to fit their software? Our manufacturing facilities and processes are always changing. Purchasing a package means the vendor will have to make changes as we change. They may or may not make the changes we need and they might make changes we don’t want. Finally, we have proven we can successfully develop systems in-house. We were unsuccessful twice before with purchased systems; do we want to take that chance again? The figures Lucas received from EMS are deceiving. Part of purchasing software from a vendor includes time and effort to define your needs and then match those needs to the vendor’s software. That process is not included in the present proposal. I feel we must go through this process before purchasing any packaged software. Another cost is modifying your current software to interface with the new package in order to transfer data. Many purchased systems do not allow the end user to modify them so then you have to develop programs that will interface with the two packages. There are also costs associated with training, data conversion, and changeover. A good rule of thumb is that the total cost of installing a purchased package is twice its purchase price which makes the package cost $440,000. That compares favorably with our estimate of $420,000. It will take at least a year to evaluate and install a purchased system. That’s less than two years to create an in-house system but we’ll be installing and using components of our system as we finish them so the time advantage is not that important. We could undertake the effort to better understand the EMS proposal. It would take about six months studying manufacturing to determine what we are doing and what the new software system would need to do. I think we would need to take some time after that to explore the many packages available and get them down to the three or four most suitable. Then we would invite them to submit proposals so we could evaluate them and pick the best one. Once we have selected the best proposal we’d have to compare that to our plan of building the system in-house. The entire process would take about a year and cost between $50,000 and $90,000.
We thought about using the system we successfully installed but the specialized computer we purchased is dead and the software vendor has gone out of business. I don’t think our customers are concerned with our internal systems as long as we deliver quality parts on time. We are already interacting with our customers via EDI so internal systems are our problem, not theirs. It would be nice to get a system up and running but we have been doing fine without one for a long time.