Brigdestone Case

carnival cruiseDespite closing the diesel engine plant and outsourcing the Mufflers/Exhausts and Oil pans product lines at the end of 1988, Bridgeton ACF is not cost competitive and profit is declining. Manufacturing costs declined by 29% however, overall profitability decreased by 35%. Outsourcing of one product line has resulted in an increase in the cost for the remaining products because Bridgeton uses a single overhead pool, direct labor dollars, to allocate overhead to products. The overhead burden rates over the past for years are:

1987 1988 1989 1990

437% 434% 577% 563%

This pattern raises serious concerns about using the consultant's classification scheme to make outsourcing decisions. My analysis shows that the consultants have not distinguished between costs that would be eliminated by outsourcing versus those that cannot be eliminated in the short term. I recommend that Bridgeton reevaluate its cost system by focusing on fixed factory overheads. Fixed costs are not easily eliminated. When Bridgeton outsources some products the fixed costs remain, leading to an increase in the burden ate of the remaining products making them more expensive to produce. This is the main cause of Bridgeton's declining profitability.

Concerning the manifold line, the consultants have classified it as Class III, implying that it is a candidate for outsourcing. However, I recommend that Bridgeton should not outsource the manifold because doing so would cause an increase in the cost for fuel tanks and doors for the same reason discussed above. Further, manifolds make a significant contribution towards fixed overheads so that outsourcing the manifolds would result in a further decline in profits. Additionally, new emission standards will most likely result in the industry moving towards lighter weight manifolds. It is very likely that there will be an increased demand for the stainless steel manifolds and that prices will also increase.

In summary, employee morale remains high and employees have good ideas for further cost reduction, Bridgeton needs to capitalize on this. I recommend that Bridgeton change its internal costing method from full absorption to a variable costing system in the short term and explore activity based costing as a long term solution. Variable costing distinguishes between variable and fixed costs and will allow managers to identify which costs will/will not be eliminated if a product line is outsourced. ABC will allow the firm to better understand its manufacturing process, and to identify bottlenecks and non-value procedures in order to cut costs to move the product to "best in class" costing category. However, ABC is time consuming and expensive, so this may be a project for the future.

...