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Subcontracting or Outsourcing
As J Franklin, Managing Director of Burke Engineering, you have now completed the
business plan. Action is now necessary to change the company from one providing a
range of low margin general engineering services into a specialist high value added valve
manufacturer. This will involve the company in operating in new areas, and you must
identify the core operations of the firm those that it will carry out using its own personnel,
and those that can be more effectively left to other organisations. Some of the areas that
have historically been handled in house are of particular concern. Initially you have
decided to concentrate upon the following areas of operation: a) Tool cutting, b) Foundry
operations, c) Physical distribution, d) Data processing, e) Catering, f) Security, and g)
Cleaning.
Tool cutting
Because of the increasing complexity of valve design and construction, meeting customer
demands would steadily become more costly. Currently, Burke's investment in tool cutting
was limited to old style lathes and drilling equipment. Introducing the entire range of
computer aided cutting equipment into the area would place a substantial cost burden on
the company. The plan indicates that the tooling problems facing the company faced
would inevitably increase, as both the number of customers and the depth of product
range grew.
The entire department would also be under greater pressure with the reduced time that
could be allowed in the tooling process. It was thought likely that the total number of tools
required would rise from around 100 to over 500; the complexity of each tool would more
than double, and tools would have to be available within four rather than six weeks. You
had investigated the alternatives of using outside contractors to provide support in both
areas. A number of suppliers could meet Burke Engineering's needs in the foreseeable
future. There were advantages and disadvantages associated with each of these but three
contractors had been identified as possible tool suppliers.
Panopil of Portugal. Panopil was heavily used by many companies in the toy industry, and
was increasing its share of the engineering market in the West Midlands. It had a whole
range of computer controlled cutting equipment in its plant near Lisbon in Portugal. It
offered a comprehensive service for all types of tooling from the very small to the largest
currently used by UK manufacturing industry. The speed of tool production varied
according to the complexity and the urgency of the request, but were costed on an
individual basis and the company did not require overseas companies to enter into any
other contractual agreement. For Burke, the majority of their valve designs would require a
two week turn round to which would have to be added the journey time from Portugal (an
additional week). It was likely that Panopil could offer cost savings of around 35 per cent
on the current Burke tool cutting operation.
Driffield Toolmakers. Driffield Toolmakers were the leading specialist toolmaker in the
Midlands. It had been established to service the requirements of the steel industry, but
had, with the demise of most manufacturing in that area, been forced to diversify into
automotive and other components. The company had some of the more sophisticated
cutting equipment, but much of its work still used traditional machinery. The company had
a high reputation for producing quality work. The costing system differed from Panopil. It
required a fixed contract system whereby the manufacturer guaranteed a specific revenue
over a two year period. This fixed contract covered all the costs of the standard range of
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