The Director of the European Interior Components Product Line Team of Morgan Components Company, Sean O'Fearna is facing a difficult decision. He needs to respond to the price reduction request on a door panel project, which would take-off in six months. The initial contract was signed at a price of 90 euros between Asiacar and Plasticom. Morgan Components took ownership of the contract, as it acquired the Clondalkin plant of Plasticom.
The project was seen infeasible by Morgan Components executives, even before the price reduction. Therefore, first a unit based cost breakdown analysis was applied. It was observed that with the current production processes, the minimum price that Morgan Components could afford was 80 euros. Then the possible process improvements and cost reduction alternatives were analyzed and redesigning the door panel to reduce its features was identified as a must. The other two alternatives of reducing scrap and in-house production of X-27 had their own shortcomings like high initial investments and going against company policies, and therefore should only be applied if the price was restricted to very low levels.
(e.g. at 73 euros Alternative of reducing features should be supported by reducing scrap to maintain profitability. For all the price levels below 72 euros, all three measures should be taken)
Then, the auto industry was analyzed with regards to the purchasing regimes in the first years of a new launched product. The outcome was that even a failure product driven to market by Asiacar would necessitate Asiacar to buy at least 30,000 units of door panels in total. (A moderate success would result in the purchase of 100,000 to 200,000 units and a real success would take the sales number of Morgan Components up to 300,000 units.) In the light of this analysis a comparison of worst...