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DONLEY BROTHERS

The Donley Brothers Company had encountered the problem of latent defects in some of its purchasedcastings. Being latent, the defects did not show up until after machining had taken place at DonleyBrothers. This group of failures greatly irritated the manufacturing boss, who declared that repairing

those darn castings is eating up all our profits.

When the defects were discovered, the rough casting had to be taken off the machine, the defectchipped out and repair-welded, and the casting remachined when possible. Even with this process, almost12 percent of the incoming castings ended up as scrap. Actually, 1,140 raw castings had to be purchasedand machined in order to produce 1,000 good machined ones. The raw castings cost $600 each fromeither of two suppliers. Worse than the costs associated with rework and high scrap rates were thecontinual changes in production scheduling necessitated by a machined casting not being available asscheduled. These changes were costly because they required shop personnel to tear down the job theywere working on and set up a new job. Marketing was constantly complaining about the firms inabilityto meet delivery commitments for the finished machinery that incorporated the castings. Marketingclaimed that many sales were lost as a result of this failure.

George Donley, the production manager, and Terry Donley, the vice president for marketing,asked Bob Donley, the supply manager, to investigate the costs involved in supplying finished machinedcastings. If finished castings were purchased, the responsibility for finding hidden defects would be thatof the supplier. Such action would encourage the supplier to improve the casting quality. Donley Brotherswould accept and pay only for finished, usable castings.

The internal cost of machining each incoming rough casting and repair-welding and remachiningit, as necessary, was approximately $312 per casting. This figure included $156 of direct labor and $156of overhead. The accounting department estimated that overhead, which was 100 percent of direct labor,consisted of 50 percent variable and 50 percent fixed costs. No estimate was available on the cost ofdisrupted production schedules and operations.

Bob approached all his major suppliers of castings in an attempt to generate interest for the

supply of finished machined castings. Only one supplier, Akron Foundry, showed genuine interest. Ofmajor concern to all the foundries was the $120,000 to $160,000 investment necessary to set themselvesup to machine the raw castings. Akron was willing both to invest in the necessary machines and toguarantee delivery of up to 150 units per monthprovided Donley Brothers would contract with it as asole source for the castings for the next three years. The price per casting would be $1,000 the first year,with an annual increase or decrease in price tied to an appropriate economic index.

Bob was faced with the problem of deciding whether to recommend contracting with AkronFoundry for finished castings, continuing as in the past buying rough castings, or developing a moreattractive alternative. The Donley machine shop was currently operating at 90 percent of capacity, but itwas not possible to make a reliable estimate of what would happen in the next few months, let alone thenext three years. The decision of whether to buy finished castings was of major dollar importance toDonley Brothers because the firm used at least 1,000 finished castings per year and anticipated that thisusage would continue for each of the next five years.

1. Should Bob Donley contract with Akron Foundry for finished castings?

2. Would there be any dollar savings by contracting with Akron Foundry if the DonleyBrothers machine shop were operating at full capacity?

3. What are the dangers involved if Akron Foundry becomes a single source for DonleyBrothers castings?

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4. Who is responsible for the make-or-buy decision?

5. What other suggestions can you make for improving the situation at Donley Brothers?