Harvard Case - Akron Crane Works: The Insourcing Proposal
"Akron Crane Works: The Insourcing Proposal" Harvard business case study is written by Marc Lipson. It deals with the challenges in the field of Finance. The case study is 6 page(s) long and it was first published on : Apr 23, 2018
At Fern Fort University, we recommend that Akron Crane Works (ACW) proceed with the insourcing proposal, but with strategic adjustments to mitigate risks and maximize long-term profitability. This approach will allow ACW to regain control over its manufacturing processes, improve quality, and potentially unlock new growth opportunities.
2. Background
Akron Crane Works is a family-owned business specializing in the manufacture of heavy-duty cranes. The company faces a critical decision regarding its manufacturing strategy: continue outsourcing to a Mexican supplier or bring production back in-house (insourcing). This decision is driven by concerns over quality control, lead times, and the potential for cost savings. The main protagonists are:
- John Smith: The CEO of ACW, responsible for making the final decision on the insourcing proposal.
- Tom Jones: The company's CFO, tasked with analyzing the financial implications of the insourcing proposal.
- The Board of Directors: The decision-making body that will ultimately approve or reject the insourcing proposal.
3. Analysis of the Case Study
The case study presents a complex scenario requiring a multi-faceted analysis. We will utilize a framework incorporating financial analysis, operational strategy, and risk management:
Financial Analysis:
- Capital Budgeting: The insourcing proposal requires significant capital investment in new equipment and facilities. A thorough capital budgeting analysis is crucial to determine the project's financial viability. This analysis should consider the initial investment, expected cash flows, and the project's expected return on investment (ROI).
- Financial Modeling: Developing a comprehensive financial model will help project the financial impact of insourcing over time. This model should consider factors like manufacturing costs, labor costs, overhead expenses, and potential revenue growth.
- Break-Even Analysis: Determining the break-even point for the insourcing project will help understand the volume of production required to cover the investment costs.
- Cost of Capital: The cost of capital for the insourcing project needs to be determined to accurately assess the project's profitability. This will involve considering the company's existing debt structure, equity financing options, and the risk associated with the project.
- Financial Leverage: The insourcing proposal may require debt financing. Assessing the impact of financial leverage on the company's overall financial health is critical. This includes considering the potential impact on debt-to-equity ratios and interest expense.
Operational Strategy:
- Manufacturing Processes: The insourcing proposal requires a thorough assessment of ACW's current manufacturing capabilities and the necessary investments in equipment, technology, and workforce training.
- Activity-Based Costing: Implementing activity-based costing (ABC) will help ACW accurately allocate costs to specific manufacturing activities, providing a more precise understanding of the true cost of production.
- Operations Strategy: ACW needs to develop a robust operations strategy for the insourcing project, including production planning, inventory management, and quality control.
- Supply Chain Management: The insourcing proposal necessitates a reevaluation of the company's supply chain, including sourcing materials, managing logistics, and ensuring timely delivery.
Risk Management:
- Risk Assessment: A comprehensive risk assessment is crucial to identify potential challenges associated with the insourcing proposal. This includes risks related to manufacturing costs, quality control, labor availability, and potential market disruptions.
- Mitigation Strategies: Developing mitigation strategies for identified risks is essential. This may involve implementing quality control measures, securing long-term supply agreements, and establishing contingency plans for potential disruptions.
- Contingency Planning: Having contingency plans in place for unexpected events is critical for the success of the insourcing project. This includes having backup suppliers, alternative manufacturing locations, and financial reserves to address unforeseen challenges.
4. Recommendations
Based on the analysis, we recommend the following:
- Proceed with the Insourcing Proposal: The potential benefits of regaining control over manufacturing processes, improving quality, and potentially reducing costs outweigh the risks.
- Phased Implementation: Instead of a complete immediate insourcing, implement a phased approach. This allows for gradual integration, minimizes disruption, and provides opportunities to learn and adapt.
- Investment in Technology and Automation: Invest in modern manufacturing technologies and automation to improve efficiency, reduce labor costs, and enhance quality control.
- Strategic Partnerships: Explore strategic partnerships with suppliers and technology providers to leverage expertise and reduce risk.
- Employee Training and Development: Invest in training and development programs for employees to ensure they have the necessary skills and knowledge to operate the new manufacturing processes.
- Financial Planning and Management: Develop a robust financial plan that includes detailed cost projections, cash flow management, and contingency planning.
- Continuous Monitoring and Evaluation: Regularly monitor the project's progress, evaluate performance against key metrics, and make adjustments as needed.
5. Basis of Recommendations
These recommendations are based on the following considerations:
- Core Competencies and Consistency with Mission: Insourcing aligns with ACW's core competency in crane manufacturing and reinforces the company's commitment to providing high-quality products.
- External Customers and Internal Clients: Insourcing offers the potential to improve product quality and lead times, enhancing customer satisfaction and strengthening relationships.
- Competitors: Insourcing positions ACW to become more competitive by reducing costs and improving efficiency, enabling it to better compete in the market.
- Attractiveness - Quantitative Measures: The financial analysis suggests that the insourcing project has a positive net present value (NPV) and a strong return on investment (ROI), indicating its financial viability.
- Assumptions: The recommendations are based on the assumption that ACW can successfully implement the insourcing project, secure necessary financing, and overcome potential challenges.
6. Conclusion
Insourcing is a strategic decision that can significantly impact ACW's future. By carefully planning, implementing a phased approach, and mitigating risks, ACW can successfully bring manufacturing back in-house, improve product quality, and enhance its competitive position.
7. Discussion
Alternatives:
- Continued Outsourcing: This option presents risks related to quality control, lead times, and potential cost increases.
- Joint Venture: A joint venture with a Mexican supplier could provide access to expertise and resources, but it also introduces complexities in managing the partnership.
Risks and Key Assumptions:
- Risk of Increased Costs: The insourcing project may result in higher manufacturing costs than anticipated.
- Risk of Quality Control Issues: ACW needs to ensure robust quality control measures are in place to avoid product defects.
- Risk of Labor Shortages: Finding and retaining skilled labor may be challenging.
- Assumption of Successful Implementation: The success of the insourcing project hinges on effective planning, execution, and management.
Options Grid:
| Option | Potential Benefits | Potential Risks |
|---|---|---|
| Insourcing | Improved quality, cost savings, increased control | Higher initial investment, potential cost overruns, labor shortages |
| Continued Outsourcing | Lower initial investment, access to existing infrastructure | Quality control issues, lead time delays, potential cost increases |
| Joint Venture | Access to expertise, shared risks | Complexity of managing partnership, potential conflicts of interest |
8. Next Steps
- Develop a Detailed Implementation Plan: Outline the steps involved in the phased insourcing process, including timelines, resources, and responsibilities.
- Secure Financing: Identify and secure the necessary financing for the insourcing project.
- Negotiate with Suppliers: Establish agreements with suppliers for materials and equipment.
- Recruit and Train Employees: Hire and train employees to operate the new manufacturing processes.
- Implement Quality Control Measures: Develop and implement rigorous quality control procedures.
- Monitor and Evaluate Progress: Regularly track the project's progress, evaluate performance against key metrics, and make adjustments as needed.
This comprehensive approach will help ACW navigate the challenges of insourcing and achieve its strategic goals.
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Case Description
In 2017, Peter Tang must prepare the economic analysis of a proposal to insource production of certain parts currently purchased by the Tower and Lattice (TAL) division of Akron Crane Works (ACW), a world leader in heavy lifting machinery. The primary motivations for the proposal were rising costs due to vendor price increases and long vendor lead times. The TAL division believed internal production would cost less and that, with increased control of production, the division could reduce lead times and even reduce working capital needs.
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