Morgan Components Case Solution
While it can be seen from the information given in the case that the main difference held in the cost of labor which is because the company increased the labor wages some time before while setting up the new plant in order to keep the labor motivated, however, the cost of labor at Plasticom is lower the MC and that’s the significant difference among the cost structures of the two companies.
Â Furthermore, the decision of increase wages is seeming to be ineffective and inefficient since, its increasing the overall operating cost of the company but the decision is logical since the company has made a contract of five years and during the whole contract the company will not be forced to increase the wages even in higher market wages. In addition, the company has to sell almost 300,000 door panels to AC during the whole tenure if it wants to gain significant margin from the contract, however, to do this the company has to restrict the company to purchase over 300,000 door panels from MC which is not practically possible. Moreover, the company cannot do this since; it was not initially mentioned in the contract previously. Finally, the company can reduce this risk by transferring this risk towards the supplier by restricting him to repurchase the manufactured goods and sold them into the market. In a nutshell, this strategy can be chosen as a part of the procurement strategy to reduce the risk of loss.
Cost Reduction methods
There are three cost reduction methods which the company has the first option is to redesign the doo panel and to make less features in the door panel, while the second option is the in-house production of X-27 and the final alternative suggests the removal and reduction of scrap from the production. However, the first alternative seems to be more feasible than other two since, the first alternative will be more helpful in reducing the cost since, reduced design and features will allow the company to achieve economies of scales and ultimately resulted in reduced fixed cost. Moreover, with the help of reduced features and less complicated design the company will be able to manufacture more volume of the door panels and to sell it to other players in the market as well in the condition of fewer units sold and completion of the contract.
Â Furthermore, the first alternative will allow the company to prevent violation of policies of the company since, the in-house production of the X-27 will require a heavy initial cost and afterward this will also require additional cost to operate while this strategy will bypass the supplier which will result in decreased strategic relations with the supplier. Moreover, the company will also have to spend a lot of time to gain significant learning and experience in the in-house production of X-27. Afterward, the third alternative is to reduce the scrap from the manufacturing line. However, this option also looks feasible since, the company can reduce a moderate portion of the cost of the cost structure, and this will ultimately result in reduced overall cost which will allow the company to reduce the final prices of the door panel.
Â Finally, it can be seen that the most appropriate way to reduce the cost is the combination of the first and third method of cost reduction. The company has to follow the combination of less featured and reduced scrap door panels which will result in low production cost………………..
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