Outsourcing

In the next round we will have the opportunity as a company to buy our own PET bottle blowing
machine. This machine will reduce our need for pallet locations and by the reduce our inventory
costs. Furthermore The purchasing value of the PET bottles will be halved. The machine does
however come with extra costs and an one time investment. In the following part we will use
calculations to find out if the PET bottle machine will give us an economic advantage. For these
calculations we will use the following information:

- Annual cost per pallet location: $200

- Safety stock: 2 weeks
- Lead time supplier: 5 days
- Lots size: 3 weeks
- Number of PET bottles per pallet: 1080 PET bottles
- Purchasing price of PET bottle: $0,0478
- Annual costs increase due to new machine: $140,000
- Average demand per week in the last year:

Round Demand for PET bottles per week

4 211430
5 210601
Average 211015

Calculatations:

Step 1: Finding out for how many weeks the PET bottles are in inventory

The first step is to find out how long the PET bottles are in the raw warehouse. To ensure our
dependability we have built in a safety stock and when ordering, when ordering our company places
an order to have enough inventory for a few weeks. This means however that we need to have
enough pallet locations to store enough pallet locations for a few weeks.

: + :

: 2 1 + 3 = 4
Step 2: Calculating how many PET bottles will be in inventory on average

: 211,015 4 = 844,060
Step 3: Calculating how many pallets are needed to store these PET bottles
844,060
: = 782
1080
Step 4: Calculating the storage costs for the PET bottles

: 782 200 = 156,400

Step 5: Calculating the annual purchasing costs for the PET bottles:

: 0,0478 211,015 52 = 524,499

Step 6: Calculating the total annual purchasing and storage costs:

: 524,499 + 156,400 = 680,899

Next we calculate the costs if the machine is bought

Step 1: Calculating the total storage costs:

790
: ( ) 200 = 15,800
10
Step 2: Calculating the annual purchasing costs for the PET bottles:
0,0478
: ( ) 211,015 52 = 262,250
2
Step 3: Calculate annual total annual cost price:

: 15,800 + 262,250 + 140,000 = 418,050

Finally we can calculate how much cost reduction the company will experience if this new machine
is bought.

: 680,899 418,050 = 262,849

Will we buy the PET bottle machine based on these calculations:

We have decided to buy the PET bottle machine on these calculations. Even though our ROI will
increase due to the 700,000 investment it is still a very good option because the last rounds will
count double for our ROI.

Theories concerning this purchase

Transaction cost approach:

The transaction cost approach is a theory that is based on the interaction of two behavioral
assumptions and two transactions assumptions. The theory states that the higher the transaction
costs get, the more likely a
company will start making the
product instead of buying it.

Based on this theory we

should not buy the machine.
We have little asset specificity
with our supplier and their
delivery reliability is very high.
The Resource Base View approach:

The Resource based approach believes

that companies should look within the
their own company to see if they can
make products internally. In table 3.4 the
view of this theory is drawn out. Based
upon this theory we should by the PET
bottle machine. This way we will be able
to make this product internally.

Did the theories change our view on purchasing the machine

No they did not, we looked at the calculations instead and based upon these we decided that it
would be beneficial for us to buy the machine.