Clear Hear is a manufacturer of cell phones and is currently negotiating a 100,000 cell phone unit contract. Kendra Sherman, Business Development Specialist, was instrumental in securing the cell phones contract with Big Box. Big Box needed the phones to support a promotion the company was running with a telephone service provider. All approvals of this order must be approved by Lisa Norman, Production Manager of Clear Hear, and decisions to implement this order will have to be reviewed by Lisa who will be briefed by Kendra Sherman the originator of this order from Big Box.
Big Box requested to have a contract drawn up requiring the phones to be delivered within 90 days. Lisa’s keen sense of business and ability to run her production lines helped in her discovery of 70,000 cell phone units that we will have in excess over the next 90 days. Lisa also earns the largest part of the bonus on factory total profitability and utilizing these 70,000 units would put her on top in terms of sales production. A vital concern for Kendra was that Big Box was not willing to pay any more than $15 per cell phone which is based on the $20 per unit Alpha model. Essentially, cutting costs is a key factor as to how we are going to solve this issue.
Clear Hear Scenario Summary
Clear Hear manufactures two cell phones. The Alpha model which is based on the $20 per unit and the Beta model which has more feature and sells for $30 because it also cost more to manufacture. As a long time cell phone manufacturer, Lisa knew Clear Hear would not have had any issue in switching from building the 30,000 Bata model cell phones to expanding the Alpha model line. Having a competitor (Original Equipment Manufacturer (OEM)) willing to show us and produce 100,000 units of a prototype of the Alpha model that had identical performance features as our Alpha model and willing to manufacture them on such a short notice at $14 per unit became a fundamental concern in determining our company’s position and devising the best strategy to fulfill the order while still continuing business at our current manufacturing plant.
Following the meeting with Kendra and before agreeing to accept the contract Lisa revisited the company’s profitability report and statement of values. Clear Hear profitability report is as follows:
Alpha Model price per unit was $20; variable cost per unit $8; fixed overhead $9; and profits of $3 per unit.
The Beta Model price per unit was $30; variable cost per unit $12; fixed overhead $10; and a profit of $8 per unit.
Big Box was not willing to pay our price per unit causing Clear Hear to rethink its strategy and discuss other necessary options to control costs. In order for Clear Hear to complete this order, Lisa and department heads will have to address profitability issues and will have to decide how to proceed to fill this order that will benefit our company needs, while still achieving profits for our company. If we agree to accept the contract from the 100,000 Alpha model units Clear Hear would be manufacturing each phone at a loss of $6 per units which I feel would be a bad business decision. A key contributor to our decision lies among our Clear Hear statement of values which consist of: (1) Keep our employees working; (2) Provide our customers with products on time and that reliably meet or exceed their expectation; (3) Treat our business partners the same as we want to be treated (UOP, 2010).
Analyzing Clear Hear Phone Contract Concerns
Accepting the contract Lisa knew that Clear Hear would no doubt live up to the organization statement of values with Big Box. The organization would meet the contract requirement at the cost of stopping production of the Beta Model unit. The Big Box contract would help Clear Hear to keep its employees working and the organization knew they were producing reliable phone that would exceed Big Box expectation. Anyhow, after analyzing the contract situation I feel that if Lisa accepts the contract as is, Clear Hear would lose more money than it stood to gain if Big Box decides to pay $20 per unit.
For this reason I would recommend that Clear Hear do one of the following three choices: (1) Decline the contract to manufacture the phones for Big Box based on the revenue losses that the organization would incur if they agree to the contract. (2) Manufacture the phones at a loss to Clear Hear. Manufacturing the phones at loss would keep the company’s employee working which is fulfilling one of the organization’s statements of values. (3) Accept the contract but sub-contract the phone order to Original Equipment Manufacturer (OEM) who can produce the phones for $14 per unit. Since OEM produce the phones at $14 per unit, Lisa and Clear Hear stand to earn $1 per unit profit on the contract.
Clear Hear would also save on variable cost and fixed overhead cost per unit produce by not producing the phones at a cost for Big Box. If Clear Hear agreed to accept the phone contract and decides to produce the phones in house, I believe the company would have to make some adjustment to variable cost input if the company wants to make a profit on the phone contract. Clear Hear would have to devise a strategy to produce the phones below the $15 range to earn a profit. Clear Hear could improve production rate and shorten the phone production time. Clear Hear could implement the change by instituting overtime or hire a second shift of part-time workers for the duration of the contract. Cutting the duration time for producing the phones would also cut the all fixed cost associated with the production of the phone. Clear Hear cutting the fixed cost could allow the company to meet the desire contract price.
Clear Hear could also produce the phones using a less costly material while providing the same level of functions the Alpha model phones provides. Nevertheless, Clear Hear changing the standard Alpha phone could put the company reputation at risk. Thus causes our name to be ruined from the manufacturing and supplying of an inferior product leading to reviews that are not reputable to our company by consumer advocates. Big Box may not agree to accept the new phone as part of the contract leading to a voided contract thus losing revenue for Clear Hear.
My recommendation to Lisa and Clear Hear is to accept order from Big Box for the 100,000 cell phones. I also recommend that Clear Hear sub-contract with OEM to produce the phone at $14 per phone. Clear Hear should continue to manufacture their Beta Model unit and keep their employees working.
Having OEM produce the phones will earn Clear Hear $100,000 just for acting as the general contractor with Big Box. My assumption is that with this recommendation is that Clear Hear can continue to work on their Bata Model unit with the present level of employees which will all the organization to sustain their commitment to organization statement of values with the employees. Also, with Clear Hear managing the contract, the company could be seen as a reliable organization that meet its customers needs and expectations, while still staying true to our statement of values. Clear Hear having partnered with EOM to complete the contract shows that our organization acts as a team player and our primary focus is our customer as well as keeping good relationships with our business partners and ensuring that all deadlines were met and products were up to our standards.