Bridgeton Industries is facing a competitive environment with the development of foreign competition and burgeoning fuel prices. These are leading to a shrinking pool of production contracts.
Bridgeton is a major supplier to the big three domestic automobile manufacturers. Their cost system is comprised of materials, direct labor and overhead. Their products fall into three different product classifications (Class I, Class II, Class III). From 1987-1990, overhead rates have begun to increase, but with outsourcing, overhead costs have not decreased at the same rate as the labor costs.
Discussion and analysis:
Bridgeton outsourced oil pans as well as muffler exhaust to improve their product quality. They also implemented programs, such as decreasing the time required to change dies, in the hopes of increasing efficiency. However, despite taking these measures, manifolds were downgraded from Class II to Class III in 1990. If they were to outsource manifolds, it would reduce variable/avoidable costs, but reduce revenue at a higher percentage, as manifolds account for 41% of Bridgeton’s sales.
With higher efficiency standards in place, I don’t think it would be a good idea for Bridgestone to outsource the production of manifolds. With the higher efficiency standards also might come a higher demand for manifolds, and with the higher demand will come an increase in sale price. But this is only the case if 1) the manifolds are not outsourced and 2) there is no significant increase in variable costs in during the production of the manifolds.
Bridgeton should focus on increase technological capabilities. Doing this would decrease their overhead, decrease their costs of good manufactured and increase their production. They could also sell their outdated equipment and initiate cost-cutting to increase their working capital. Both of these things would give them more money to increase their technological capabilities, labor or do whatever was needed to increase production.