Futronics, Inc. Central Stores versus Outsourcing Analysis Devry University Online PROJ410/Contracts and Procurement Analysis: Central Stores versus Outsourcing Steve Hastell Futronics, Inc. 1213 Lincoln Parkway Lexington, Massachusetts, 02421 781-123-4567 EXECUTIVE SUMMARY To offset the changing trends of fierce competition, flattened sales, and decreased profits the following analysis will provide the Corporate Cost Reduction Team members with the needed resources and recommendations to make an informed decision in the corporate overhead reduction program.
Outsourcing is a hot topic in corporate America. Companies have begun to look at outsourcing of non-core materials and services to achieve substantial cost reductions while turning these low performing assets into a competitive advantage. Within this analysis a comparison of cost savings, lead and delivery times, product selection, facility space and labor cost will be examine as to assessing the “make or buy decision while supporting the Senior Management’s, May 2002 mandate. The objective is to reduce the short and long-term cost of office supplies for Futronics, Inc.
The question or decision to be made is whether to do so via in-sourcing, outsourcing, or a hybrid combination. FUTRONICS, INC. COST REDUCTION PROGRAM Two years ago Futronics found itself facing fierce competition, flattened sales and decreasing profits, so a corporate wide cost and overhead reductions effort was put into place with the emphasis being placed on purchasing departments to seek cost savings areas within the corporation. In the effort of reducing cost and overhead, the Central Stores operations came under review.
The initial purpose of this operation was to reduce individual office inventories and decrease purchase order costs. CURRENT CENTRAL STORES OPERATION POSITIVE ANALYSIS: Today, Central Stores services forty-two sites from the main warehouse in Lexington. The annual internal sales are $900,000, with an individual inventory of approximately $140,000. This operation’s main responsibility is: • Employment of four employees and facility maintenance with an annual cost of $200,000 a year for salaries and facility cost. Delivery of products on a daily basis to either the facilities loading docks or main reception areas and transferring corporate mail and other important correspondence. • Publishing current catalogue with 500 available items twice a year. • Part of the Corporate Administrative Services, which includes food service contracting, security service, and personnel. NEGATIVE ANALYSIS: The major complaints were long lead times and split deliveries of office supplies. New items that would be available on the open market were not made available through Central Stores for up to five months. Complaints over longer lead times during peak season, December for office calendars. • Specialty letterheads took three to four weeks. • Common items had a 10 to 14 day delivery time. INSOURCE-HOW TO REDUCE COSTS? From the perspective of in sourcing as a viable option to control cost and reduce overhead, the following options were examined. Any one or all the below options could be implemented to help meet the required mandate. • Reduce size of current catalogue items, thus reducing facility space. • Better quality control. Reduction of workforce (in periods of declining sales. • Better control of lead-time, transportation, and warehousing costs. • Cost considerations of current catalogue items. OUTSOURCING- BENEFITS AND CONCERNS Through outside contacts, Futronics, Inc. has the opportunity of cutting cost and reducing its overhead by contracting with an outsourcing service. Five potential outsourcing services have made general proposals, which if chosen, would reduce both expenditures and overhead for Futronics, Inc.
Each of the five companies’ offer sample catalogues, price lists, and ranges of cost for delivery/volume configurations. BENEFITS • 600 item specially printed catalogue in unique binder • 9% of current catalogue items would be available at lower cost • Promised savings would be about 6% • Order cycle would be a 10 day turn around including specialty letterheads • Special preprinted order forms for most common items • Deliveries made directly to secretaries • Reduction of labor and facility cost of Central Stores CONCERNS Loss or reduced control over the entire outsourcing process • Questions of outsource firms profit margin, granting them greater mass buying power. • Loss of current low price of transparencies, which is an important item to Futronics. The additional cost would be 16 to 23 dollars higher. • Futronics, Inc. would be locked into a three-year contract. • Severance packages for laid off employees from Central Stores • Retraining of current employees of Central Stores if necessary. • Negative public perception e. g. laying off a physically handicap worker.
While each of the benefits and the concerns are valid in their own right it is important to consider the worst features of in sourcing to those of the outsourcing proposals and the best features of in sourcing with those of the outsourcing proposal. RECOMMENDATION After a comprehensive analysis, it is my recommendation that outsourcing the procurement of office supplies would be profitable by reducing current cost expenditures and facility overhead. The benefits would include 100 additional items to the current catalogue, improved order cycle, and delivery time and an overall savings of six percent.
Additionally, the outsourcing firm would benefit by having the advantage of buying in larger qualities thus reducing our cost in the end. I further recommend that Futronics, Inc. take the next step in issuing a proper RFP (Request for Proposal) from Litton, Boise-Cascade, L. E. Muran, Bay State Office, and New England Supply. The RFP should encompass the following: • Introduction • Vendor Background Information • Customer background Information • Scope of Services • Performance Standards • Management and Control • Employee Issues • Staffing • Pricing • Termination Clauses • Contract Terms • Appendices • Terms and Conditions