Jignesh Springs Ltd. - Case Study Analysis

Case background

Jignesh Springs Ltd. is a family owned spring manufacturer. The plant is located in the heart of Surat city. They have been manufacturing in-house for the last three years. Now, as they have established themselves in the market, they are planning to expand. Mr. Manmohan, production head of Jignesh Springs Ltd., has been given the task of overseeing the proposed expansion.

Of late, Mr. Manmohan had begun to receive complaints from the workers, most of which were related to their long work hours and insufficient pay. However, upon investigating, Mr. Manmohan found that the workers were in a habit of taking extended breaks for lunch, smoking and tea. Also, they engaged in idle chit-chat when the production line was running. This resulted in the workers requiring overtime almost every week to complete their daily tasks which, in turn, unnecessarily compounded the production expenses. So far, there had only been minor issues with delivery schedules and customer complaints about quality were within the permissible limits. As there was a dearth of semi-skilled workers required for this type of production, the regulations were not set as strict as they could have been. It would be impossible to go for expansion at once without improving the current factory set-up. With expansion, the added stress to the production line could throw this delicate balance out the window. Mr. Manmohan called up a meeting of various department heads. The marketing manager, Mr. Kamlesh, expressed a bright and confident prospect about the company’s growth. He explained that the brand image of the company, the goodwill it has earned, combined with the growth in this sector indicated that it was a favorable time to expand. Mr. Naveen, the finance manager agreed by commenting that expansion will enable economies of scale for the company’s product. In the long run, they can expect a significant increase in profitability of the products. Mr. Manmohan shared his findings regarding the shortage of semi-skilled labor for the existing job as well as the current status of production and possible effects on quality and productivity if expansion is pursued. Mr. Kamlesh probed the possibility of outsourcing the production. Mr. Manmohan expressed skepticism about the outsourcing option as he felt that any outside agency will try to maintain its own profit margins, thereby reducing profits earned by Jignesh Springs Ltd. Additionally, the problems with timely deliveries and quality assurance will be present in this option as well.

Mr. Naveen suggested looking at cost comparison for purchasing from the external agency against in house manufacturing. Mr. Manmohan agreed to this solution. He began planning to work out the cost of in-house production of springs as per the sales forecast given by the marketing department and the estimated cost if the same production is outsourced. Constraints to be considered Mr. Kamlesh presented the forecast generated by his department (as shown in the table on the subsequent page).Mr. Manmohan examined and came up with the following numbers in his report for manufacturing in house:

• One additional floor in-charge with a monthly salary of INR 5500 and a yearly raise of 12%• Labor wages would amount to INR 3.5 per unit. Upon optimizing, they expect a 8% reduction in the second year, no change for the third year and a 10% increase year-on-year after that
• Materials required to manufacture would cost INR 16 per unit and given market trends, the cost is expected to go up 9% every year
• The energy required to manufacture (power and fuel) is INR 2.4 per unit with an increase of 11% every year
• Indirect labor expenses will amount to approximately 50% of the direct labor expenses• A new machine will set the company back by about INR 58,00,000. It can be amortized over the five years of its usable life.
• Doing a market survey of available agencies willing to produce springs for Jignesh Springs Ltd. Brought out the following data:
• Material cost would be INR 21.5 for first two years with an increase of 10% every year after that
• Transportation cost for every unit would be INR 2.2 for the first year with increase of INR 0.20 per unit every year thereafter
• Storage cost during the process of manufacturing (inventory cost) is estimated as 6% of the basic material cost per year
• Also, a lock-in contract is required to bind the external agency and Jignesh Springs Ltd. to trade in good faith, typically with a one year validity. It has to be renegotiated every year.

We can see that there are a variety of costs involved in manufacturing and procurement and every year these costs are subject to modifications. The formula has been designed so as to account for all these variations and allows the user the flexibility to change the starting values or multipliers or both.

Variable costs and fixed costs have been separately calculated to add clarity. All the relevant multipliers across costs and years are available in a separate table below the total cost.

Conclusion

Upon varying the constraints and the year-on-year multipliers of each constraint, a well-informed decision can be made about the course to be pursued by the company to best manage its operations. In this case, it turns out that outsourcing the valve manufacturing process is the best route to profitability.