Trail Frames Chassis (TFC) of Elkhart, Indiana, is a major manufacturer of chass

Question

Trail Frames Chassis (TFC) of Elkhart, Indiana, is a major manufacturer of chassis for the motor home and van mar- kets. Two unemployed truck-manufacturing engineers founded TFC in 1976. Since then, the company has grown into one of the largest suppliers of chassis. In the past, TFC has produced only a pusher type of chassis, one that is powered by a diesel engine located in the rear. This design offers many advantages (e.g., no tunnel for the transmis- sion, reduced engine noise, better handling). However, these chassis tend to be expensive, and they are used in motor homes that are very expensive ($150,000 and up). Recently, TFC entered into an agreement with Gulf Stream to produce low-end pusher-type chassis for motor homes priced under $100,000. These new designs offer some of the features of the higher-end pushers, but at a lower cost. Today’s market for motor homes and vans is increas- ingly made up of people in their late 40s to 60s. These older customers want a motor home that rides like a car, and they are willing to pay for innovations such as ABS (anti-lock breaking systems), assisted steering, and com- puter-balanced suspension. TFC is the technological leader in this market. TFC sells to large manufacturers such as Winnebago, Airstream, and Gulf Stream. In general, these companies order small quantities (5 to 10 in a batch), and many of the units in a batch are customized to a specific customer’s requirements. Achieving continued success in the motor home and van markets is difficult because of the rate of change taking place. TFC has become successful because of its ability to develop new product designs in a timely fashion. This ability stems from TFC’s extensive experience with motor home users and TFC’s knowledge of new technological advances. It is generally recognized that no one in the industry can match TFC’s design and marketing knowledge base. Until recently, TFC could design and build a chassis in less than 30 days. However, the lead times have been growing. As a result of limited capital, TFC has found itself unable to keep up with demand. Management has identified the design department as the major bottleneck. While pondering this problem, the management team was approached by Computer- Images, a design house located in Grand Rapids, Michigan. Computer-Images has made an attractive offer to take over the design responsibilities for the low end of TFC’s product line. Furthermore, Computer-Images has offered to work with TFC as a virtual corporation—one in which specifica- tions would be generated by TFC and sent electronically to Computer-Images. The new drawings would then be designed and electronic copies sent back to TFC. Outsourc- ing the low-end work to Computer-Images would free up TFC’s staff to focus on meeting the demand for medium to high-end chasses. Based on the information provided in Table 10-3 on the next page, complete the insourcing/outsourcing analysis. Prepare a report for the company president with the find- ings and your recommendation. Only one option can be recommended.

Computer-Image Proposal TFC Make Option Contract period 3 years (with option to cancel after first year with 45 days warning) Not applicable cost per design $225 per chassis $490 per chassis (arrived at by the summing direct labor computers and including corporate overhead) number of chassis per year 1,000 minimum to 2,500 max (1250 expected) TFC must commit to 1250 designs per year 2,000 chassis maximum (assuming stable growth in other chassis lines) setup costs (one time cost) $300,000 (computer systems, training, establishing computer linkages) $200,000 (to expand design capacity) lead times (sending specifications to receipt of new design) <2 working days 5-10 working days Quality all designs to be tested via computer simulation and to be certified feasable Feasibility of designs based on expertise of designers time until delivery of design 1 3 months Immediately Other terms and conditions Understoof that computer-images would be free to work with any other chassis builder To significantly expand design capacity would require a period between 6-8 months all designs generated by computer-images would remain the property of computer-images Computer-Images insists on training period of 6 months in which the designers of TFC would teach Computer-Images designers about the critical design tasks encountered in the motor home market

Explanation / Answer

Hi Sir,

As per the proposal sent to TFC by Computer-Images and looking at the scenario from TFC's current market presence, their customer base and their reputation which is great, I would recommend to accept Computer-Images proposal with slight changes in some of their proposal conditions. These are:

1) There will not be any commitment for fixed number of design per year which is currently kept at 1250 designs.

2) Computer-Images can work with other chassis builder with a conidtion that the designs used by TFC will not be shared to ther other chassis builder at any cost and if done so, there will be a legal penalty for the same on Computer-Images.

3)If possible , then reduce the training period to 3 months as we have huge requirement to meet.

The reasons why I recommend to work with the Computer-Images is that, we have a huge requirement to meet, and we can outsource this low-end work as it will free up our staff to meet the current demand easily. Moreover, as our customer base is huge and they are willing to pay any amount for technology and Designing of the motor homes, then this will not even burn a big holes in our pockets.

To stay in the lead in the market, i think this is a necessary step towards future.

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