Factors to Be Matured by Menstrie & Co's Management before a Financial Decision on a Buy or a Deal - Example

Introduction This report looks at evaluating a buy versus make deal where Menstrie & Co which deals in component parts need to make a decision which alternative is better. Both the production and the purchase manager have put forward their view point’s which highlights the different areas which they deem fit. This report will thereby look to present the different arguments which have been put forward by the purchase and the production manager. This will then look into the different factors which need to be considered by the management of Menstrie & Co before taking a financial decision regarding the manner which will be beneficial for the organization. The report also analyzes the different risk involved and alternatives which are available so that the best one can be picked up. This will thereby help to bring a complete change and transformation and ensure that the entire working process is improved and better results can be achieved. Arguments used by purchasing & production managers Both the purchasing and production managers have raised different arguments which need to be analyzed before taking the decision. The arguments which have been raised by the production manager is that Quality of the product will be impacted as the purchased product in small in diameter by 2 mm and would mean additional cost of installing a new machine which will look towards variable diameter and will cost £8,000 The average stock holding would increase as it would mean an additional cost. Since, the products would be supplied in large batches it would mean that the business will have to hold large inventories which raises the cost associated with holding and also increases the risk of the inventories becoming obsolete Purchasing would mean that chief operator will have to be shifted in some other position within the organization which would mean additional cost and will also impact the overall productivity as it would mean a person having skills in some other areas work in some other areas. This will also have a negative impact on the organization workforce Purchasing goods from outside parties would also mean over reliance on outsiders which might increase their bargaining power in the future and might thereby impact the future earning potential. This would also mean that the business might get exposed or the secrets which the business has might be leaked and will thereby impact business productivity. The different arguments which have been raised by the purchasing manager are Purchasing the finished product from Stirling Components would result in a savings of £96,000 over 8 years which would be a strong financial gains over the years and will help to ensure that the business will be able to have a better financial figure The organization need not look at expanding their storage capacity as the warehouse is 60% occupied and would not need additional space for the next 4 years. This would mean no additional cost and the business would be able to thereby save on the financials which will prove beneficial for the organization. Factors to be considered in financial analysis Menstrie & Co while looking to take the financial decision whether they should produce the goods or purchase the products the following needs to be considered The quality of the product which could be impacted if they start to purchase the product instead of manufacturing the same. It is quite evident that the purchasing the product would lead towards the variation in the diameter of component by 2 mm. This could turn into a situation where certain section of the society might refrain from purchasing substandard products and could thereby have an impact on the overall business. Purchasing the component would mean more inventories as the size of the batches is big. This would mean more investment in inventories and more godown space would be needed. This will thereby mean more inventory holding and space will be needed which will thereby have an impact on the financials as more and more investment will be required which is an area of concern and needs to be evaluated before arriving at the decision Purchasing from outside sources will risk associated with the supply side as the business would be dependent on the suppliers and any changes or errors committed by the suppliers would lead towards increased risk. This could turn into a situation where the suppliers start to dominate the business and future growth and potential of Menstrie & Co will be determined by the suppliers The organization also needs to consider the fact that in case of changes in the demand and supply pattern the overall business fundamental will change which needs to be analyzed and considered so that the business is able to find out the fundamentals through which business opportunities will be created. This is an aspect which needs to be analyzed and should be involved in the decision making process. The organization also needs to analyze the fact that the production manager will be shifted to some other position within the organization and might not be able to work with the same efficiency as the person works in the production sector. This could thereby result in wastage of resources and instead of improving the overall efficiency the business effectiveness would be affected and would have an impact on the overall productivity. Steps that Menstrie & Co should take Menstrie & Co should look towards finding out the manner in which the purchasing or producing the decision will impact their business. They need to weigh all the alternatives and cost associated with each so that correct justification can be arrived. This can be achieved to a large degree by calculating the NPV of the project so that it determined the manner in which the business will be able to gain. The description is as follows Purchase Decision Future Savings = £96,000 over 8 years i.e. 12,000 every year Initial Investment = 35,000 (loss on selling the present machine) Additional salary which has to be paid = 8000 for first year after which the person will be removed New Machine assembly cost = 8000 Rate of Return (assumed) = 12% Total Investment = 8000 + 35000 + 8000 = 51000 Present Value of Future Earnings = £8611.68 This highlights that the business is able to make a profit of £8611.68 by looking towards making a purchase decision Produce Decision Direct Manufacturing Cost = £50,000 Raw Materials = £40,000 Depreciation on machinery used = £5,000 Cost of Capital= 20% (given) Revenues collected = £100,000 Total Investment = 50000 + 40000 + 5000 = 95000 Present Value of Future Earnings = £5000 every year This highlights that the business is able to make a profit of £5000 by looking towards making a purchase decision The overall analysis shows that choosing between both the purchase and buy decision will provide different benefits and profits which the organization needs to analyze as the purchase decisions will ensure better profits per year and will help to have a positive impact on the overall manner in which production is carried out. The purchase decision will also provide an opportunity where the business will be able to bring a complete change in the manner the business works and will be able to increase the bottom line through more profits. Risks involved following the decisions Menstrie & Co while looking to go with the purchase decision has to face the following risk which needs to be analyzed along with the profits that the business is able to make so that correct business decisions can be taken The quality of the product which could be impacted if they start to purchase the product instead of manufacturing the same. It is quite evident that the purchasing the product would lead towards the variation in the diameter of component by 2 mm. This could turn into a situation where certain section of the society might refrain from purchasing substandard products and could thereby have an impact on the overall business. Purchasing the component would mean more inventories as the size of the batches is big. This would mean more investment in inventories and more godown space would be needed. This will thereby mean more inventory holding and space will be needed which will thereby have an impact on the financials as more and more investment will be required which is an area of concern and needs to be evaluated before arriving at the decision Purchasing from outside sources will risk associated with the supply side as the business would be dependent on the suppliers and any changes or errors committed by the suppliers would lead towards increased risk. This could turn into a situation where the suppliers start to dominate the business and future growth and potential of Menstrie & Co will be determined by the suppliers The organization also needs to consider the fact that in case of changes in the demand and supply pattern the overall business fundamental will change which needs to be analyzed and considered so that the business is able to find out the fundamentals through which business opportunities will be created. This is an aspect which needs to be analyzed and should be involved in the decision making process. The organization also needs to analyze the fact that the production manager will be shifted to some other position within the organization and might not be able to work with the same efficiency as the person works in the production sector. This could thereby result in wastage of resources and instead of improving the overall efficiency the business effectiveness would be affected and would have an impact on the overall productivity. Other alternatives available Menstrie & Co can look at continuing with their production process instead of purchasing the finished products as it will reduce the above identified risk. This will also ensure that the business is able to earn normal profits and the entire mechanism provides an opportunity through which the production process will not be outsourced. This will also ensure that the business secrets won’t be revealed and the businesses don’t have to rely on external sources for their activities. Using a process where they continue to produce goods will also ensure that they are able to make a profit of 5,000 per year. This will thereby have to deal with the different risk and will also provide an opportunity through which the overall framework of the business will be better controlled. Conclusion This report evaluates a buy versus make deal where Menstrie & Co which deals in component parts need to make a decision which alternative is better. Both the production and the purchase manager have put forward their view point’s which highlights the different areas which they deem fit. This looks into the different factors which need to be considered by the management of Menstrie & Co before taking a financial decision regarding the manner which will be beneficial for the organization. The report also analyzes the different risk involved and alternatives which are available so that the best one can be picked up. This will thereby help to bring a complete change and transformation and ensure that the entire working process is improved and better results can be achieved. It is further seen that both produce and purchase decision is beneficial and ensures profits but the purchase decision ensures higher profits which is an alternative that can be analyzed and decision can be taken accordingly. This will also raise different risk which needs to be analyzed and looked into so that appropriate decisions are taken through which business productivity will improve. Read More