Reference no: EM132114165

Case Study Q. WD Indistries and Pearsall Pumps.

In October 2015, WD Industries (WDI) had just been awarded a 5-year contract with Northwest Boats amounting to U.S. $10 million per year, commencing in July 2008. WDI would be providing a number of key engine components for Northwest Boats’ luxury line of pleasure boats. The award marked an important milestone for WDI, in that it was the culmination of several years of hard work and dedicated service, supplying Northwest Boats parts for their boats on an as-needed basis. The contract had significant long-term follow-on potential as well, if they could continue to show Northwest Boats they had the capabilities to be one of their valued, alliance partners. In addition, with this contract Northwest Boats would represent approximately 30 percent of WDI’s annual sales, so performing adequately on this contract had a significant long-term financial impact on WDI.

One of the parts, a bilge pump, was an item that WDI had been purchasing from one of their suppliers, Pearsall Pumps, a small local specialty pump manufacturer, on an informal, non-contract basis. The remaining items were all built in-house by WDI and supplied to Northwest Boats from one of their two finished goods warehouses located near the Northwest Boats production facilities. Pearsall Pumps was producing and delivering 50 bilge pumps at a time at a cost of U.S. $1500 per unit and built to Northwest Boats ’ specifications, to one of the WDI warehouses, whenever an order was telephoned in by WDI. The delivery costs (about U.S. $500 per 50 pump shipment, depending on the carrier used) were included in the U.S. $1500 per unit price. This scenario typically occurred about every four to six months. Normally, WDI would order another batch of 50 about eight to ten weeks ahead of time, and Pearsall had always been able to supply the pumps before WDI’s stock was depleted.

Though WDI had sufficient excess capacity to ramp up production on the parts to be supplied in the Northwest Boats contract, they were not sure about the ability or willingness of Pearsall to increase their production of the bilge pumps. The new demand for bilge pumps starting in July would be 50 pumps per month, and potentially more, depending on Northwest Boats ’ demand, and the ability of WDI to perform on the contract.

There were a number of issues that Will Duncan, the purchasing manager who put the contract together with Northwest Boats, needed to work out with both Pearsall and the production manager at WDI, in order for this contract to be met with as few problems as possible. The issue with Pearsall Pumps was whether or not they could guarantee delivery of 50 pumps per month to one of the WDI warehouses. This had been the one item that had “slipped through the cracks” on the contract with Northwest Boats, and it now loomed as something that could conceivably put the contract in jeopardy. There were potentially additional equipment, labor, and other production costs for Pearsall associated with the extra demand for bilge pumps, not to mention extra delivery costs as well. Pearsall had been a reliable supplier for WDI for a number of years, but nothing else had ever been purchased from them. In addition, because the demand for these pumps was rather low and the deliveries were sporadic, no performance records had ever been kept for them. Mr. Grams had also not known specifically about the quality history of the Pearsall bilge pump, although he could not remember ever getting one returned by Northwest Boats for any reason. Up until now, the pump issue did not seem like anything to worry about.

Another possibility for WDI would be to make these pumps in-house. Will Duncan knew that WDI had the capability to make this pump, but it would require an initial capital investment of about U.S. $500,000 according to the WDI production manager, along with the clearing out of some space, and the hiring of three additional employees. With only about nine months remaining until the contract start date, it would be tight, but the production manager had assured Will that they could do this, if needed. While Will Duncan didn’t doubt the production manager’s assurances that the production line could be ready, he wasn’t sure that going to this added expense was a good investment for WDI, given their lack of pump manufacturing experience. There were also at least two other bilge pump manufacturers that Mr. Grams knew of, but both of them were about 500 miles farther away from the WDI warehouses, and he had never used either of these firms in the past.

This whole thing seemed to Will like an ideal job for his special project buyer, Charles Graham. He figured he had maybe a week or two to hammer out a plan to assure contract compliance with Northwest Boats, and Charles was known for his ability to put things together quickly. So, he called Charles.

Write in detail at least 1-2 paragraphs per question, 4-5 complete sentences per paragraph is required.

1. Should WDI continue to use pearsall to supply pumps, should they make them in house, should they consider one of the other suppliers, or should they do some combination of these alternatives?