Harvard Case - LeMar Outdoor Play Products, Ltd.: An Outsourcing Decision to India
"LeMar Outdoor Play Products, Ltd.: An Outsourcing Decision to India" Harvard business case study is written by Mark E. Haskins, Paul J Simko. It deals with the challenges in the field of Accounting. The case study is 8 page(s) long and it was first published on : Jun 18, 2020
At Fern Fort University, we recommend that LeMar Outdoor Play Products, Ltd. proceed with outsourcing a portion of its manufacturing operations to India. This decision should be carefully implemented with a focus on building strong relationships with the Indian supplier, ensuring quality control, and managing potential risks associated with cultural differences and communication barriers.
2. Background
LeMar Outdoor Play Products, Ltd. is a Canadian company specializing in the design and manufacture of high-quality outdoor play equipment. The company faces increasing competition and cost pressures, leading them to consider outsourcing a portion of their manufacturing operations to India. This decision presents both opportunities and challenges, requiring careful consideration of various factors, including cost savings, quality control, and cultural differences.
The main protagonists of the case study are:
- John LeMar: CEO of LeMar Outdoor Play Products, Ltd., who is responsible for making the final decision on outsourcing.
- Susan Lee: Operations Manager at LeMar, who is tasked with researching and evaluating potential outsourcing partners.
- Rajeev Singh: CEO of the potential Indian supplier, who is eager to secure the contract with LeMar.
3. Analysis of the Case Study
Financial Analysis:
- Cost Accounting: LeMar can potentially achieve significant cost savings by outsourcing manufacturing to India, where labor costs are significantly lower. This can be analyzed using activity-based costing to identify the specific activities and their associated costs that can be outsourced.
- Financial Statements: LeMar needs to analyze its financial statements, particularly the income statement and balance sheet, to assess the potential impact of outsourcing on profitability and financial stability.
- Cash Flow: Outsourcing can impact LeMar's cash flow, both positively through cost savings and negatively due to initial investment in setting up the outsourcing relationship. This requires careful cash flow analysis and budgeting.
- Profitability: Outsourcing can improve LeMar's profitability by lowering manufacturing costs, leading to higher profit margins. However, this needs to be balanced against potential risks and costs associated with outsourcing.
Strategic Analysis:
- Corporate Strategy: Outsourcing aligns with LeMar's corporate strategy of remaining competitive in a challenging market by reducing costs and improving efficiency.
- Growth Strategy: Outsourcing can free up resources for LeMar to focus on other aspects of its business, such as product development, marketing, and sales, enabling them to pursue business growth opportunities.
- Emerging Markets: Outsourcing to India allows LeMar to tap into the potential of the emerging markets and expand its global reach.
Operational Analysis:
- Manufacturing Processes: LeMar needs to carefully evaluate the manufacturing processes of the Indian supplier to ensure they meet quality standards and can handle the complexity of LeMar's products.
- Quality Control: Implementing robust quality control measures is crucial to ensure that outsourced products meet LeMar's standards and maintain the company's reputation.
- Change Management: Outsourcing requires significant change management within LeMar, including communication, training, and employee engagement to ensure a smooth transition.
International Business:
- International Financial Reporting Standards (IFRS): LeMar needs to ensure that the Indian supplier adheres to relevant accounting standards, such as IFRS, to facilitate accurate financial reporting and transparency.
- Cultural Differences: LeMar needs to be aware of potential cultural differences between Canada and India and develop strategies to overcome communication barriers and build trust with the Indian supplier.
- Risk Management: Outsourcing involves various risks, including quality issues, supply chain disruptions, and intellectual property protection, which need to be carefully assessed and mitigated through effective risk management strategies.
4. Recommendations
LeMar should proceed with outsourcing a portion of its manufacturing operations to India, following these recommendations:
- Select a reputable and reliable supplier: Conduct thorough due diligence on potential Indian suppliers, including site visits, audits, and reference checks.
- Establish clear contracts and agreements: Define clear specifications, quality standards, timelines, and payment terms in the contract to minimize misunderstandings and disputes.
- Implement robust quality control measures: Establish a comprehensive quality control system, including regular inspections, audits, and feedback mechanisms to ensure product quality meets LeMar's standards.
- Invest in communication and training: Provide training to both LeMar and the Indian supplier's employees to facilitate effective communication, cultural understanding, and knowledge sharing.
- Develop a phased approach to outsourcing: Start with a pilot project for a specific product line to test the process and build trust before expanding to other products.
- Monitor performance and make adjustments: Regularly monitor the performance of the outsourcing relationship, including cost savings, quality, and delivery timelines, and make adjustments as needed.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core competencies and consistency with mission: Outsourcing manufacturing allows LeMar to focus on its core competencies of design and innovation, aligning with its mission of providing high-quality play equipment.
- External customers and internal clients: Outsourcing can help LeMar meet the needs of its external customers by offering competitive pricing and maintaining product quality. It also allows LeMar to focus on meeting the needs of its internal clients, such as employees, by providing opportunities for career development and growth.
- Competitors: Outsourcing is a common practice in the industry, and LeMar needs to stay competitive by leveraging cost-effective manufacturing options.
- Attractiveness ' quantitative measures: Outsourcing can potentially lead to significant cost savings, improving LeMar's profitability and financial performance. This can be assessed using quantitative measures such as net present value (NPV), return on investment (ROI), and break-even analysis.
- Assumptions: These recommendations are based on the assumption that LeMar can find a reliable and competent supplier in India who can meet its quality standards and handle the complexity of its products.
6. Conclusion
Outsourcing a portion of its manufacturing operations to India presents a significant opportunity for LeMar Outdoor Play Products, Ltd. to improve its profitability, competitiveness, and growth potential. However, this decision requires careful planning, execution, and ongoing monitoring to ensure success. By following the recommendations outlined above, LeMar can navigate the challenges and reap the benefits of outsourcing, ultimately strengthening its position in the market.
7. Discussion
Other alternatives not selected:
- In-house manufacturing: LeMar could continue to manufacture all its products in-house, but this would likely lead to higher costs and potentially limit its growth potential.
- Joint venture: LeMar could form a joint venture with an Indian company, but this would require significant investment and potentially lead to loss of control over manufacturing processes.
Risks and key assumptions:
- Quality control: A key risk is that the Indian supplier may not be able to meet LeMar's quality standards, potentially damaging the company's reputation.
- Communication barriers: Cultural differences and communication barriers could lead to misunderstandings and delays in the outsourcing process.
- Intellectual property protection: LeMar needs to ensure that its intellectual property is protected when outsourcing manufacturing to India.
Options Grid:
| Option | Advantages | Disadvantages |
|---|---|---|
| Outsourcing to India | Lower manufacturing costs, access to skilled labor, potential for business growth | Quality control risks, communication barriers, cultural differences |
| In-house manufacturing | Control over manufacturing processes, consistent quality | Higher costs, limited growth potential |
| Joint venture | Shared risks and costs, access to local expertise | Loss of control, potential for conflicts |
8. Next Steps
- Phase 1 (3 months): Conduct thorough due diligence on potential suppliers in India, including site visits, audits, and reference checks.
- Phase 2 (6 months): Select a supplier and negotiate a detailed contract, including quality standards, timelines, and payment terms.
- Phase 3 (9 months): Implement a pilot project for a specific product line to test the outsourcing process and build trust.
- Phase 4 (12 months): Evaluate the pilot project and make adjustments as needed. Gradually expand outsourcing to other product lines.
By following these steps and implementing the recommendations outlined above, LeMar can successfully navigate the challenges and reap the benefits of outsourcing its manufacturing operations to India, ultimately achieving its strategic goals.
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Case Description
This case, based on general business experience, casts students in the role of analyzing the financial effects of a possible outsourcing decision. Lee and Marcia Mills, owners of LeMar Outdoor Play Products, Ltd. (LOPP), a Canadian company that designs, manufactures, and installs outdoor play equipment, are faced with a decision pertaining to whether LOPP should outsource the company's back-office information technology enabled services (IT-ES) functions. Lee engages with an outside advisory firm specializing in matching companies with suitable outsourcing partners in India, and eventually a contract is presented. From just a financial perspective, students must ascertain whether Lee and Marcia should accept the outsourcing offer.
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