Bracket International—The RFID Decision Jack Bracket, the CEO ofBracket International (BI), has grown his business to sales lastyear of $78 million, with a cost of goods sold of $61 million.Average inventory levels are about $14 million. As a smallmanufacturer of steel shelving and brackets, the firm operatesthree small factories in Ohio, Kentucky, and South Carolina. BI’snumber one competitive priority is “service first,” while highproduct quality and low cost are the number two and threepriorities. Service at BI includes preproduction services such ascustomized engineering design, production services such as meetingcustomer promise dates and being flexible to customer-drivenchanges, and postproduction services such as shipping,distribution, and field service. The Ohio and Kentucky factoriesare automated flow shops, whereas the South Carolina factoryspecializes in small custom orders and is more of abatch-processing job shop. All three factories use bar codinglabels and scanning equipment to monitor and control the flow ofmaterials. BI manually scans about 9,850 items per day at all threefactories. An item may be an individual part, a roll of sheetsteel, a box of 1,000 rivets, a pallet load of brackets, a box ofquart oil cans, a finished shelf or bracket set ready for shipment,and so on. That is, whatever a bar code label can be stuck on isbar coded. A factory year consists of 260 days. One full-time BIemployee works 2,000 hours per year with an average salaryincluding benefits of $69,000. Two recent sales calls have Mr.Bracket considering switching from the old bar coding system to aradio-frequency identification device (RFID) system. The RFIDvendors kept talking about “on-demand” operational planning andcontrol and how their RFID and software systems could speed up thepace of BI’s workflows. One RFID vendor provided the followinginformation: · Bar code scan times for the sheet metal business(similar to BI) average 10 seconds per item and include employeetime to find the bar code, pick up the item and/or position theitem or handheld bar code reader so it can read the bar code, andin some cases physically reposition the item. Item orientation is aproblem with manual bar coding. · The 10-second bar code scan timedoes not include the employee walking to the bar coding area orequipment. It is assumed that the employee is in position to scanthe item. The 10 seconds does not include the time to replace ascratched or defective bar code label. Replacing a damaged bar codetag, including changes to the computer system, may take up to fiveminutes. · All three BI factories can be fitted with RFIDtechnology (readers, item tags, and hardware-related software) for$620,000. In addition, new supply chain operating system softwarethat takes advantage of the faster pace of RFID information ispriced for all three factories at $480,000 and includes substantialtraining and debugging consulting services. · RFID scan time isestimated to be 2/100ths of a second, or basically instantaneous. ·For the sheet metal business, bar code misreads average 2 percent(i.e., 0.02) over the year of total reads, and this is estimated toreduce to 0.2 percent (i.e., 0.002) for RFID technology. The 0.2percent is due to damaged RFID tags or occasional radio-frequencyinterference or transmission problems. Misreads are a problembecause items are lost and not recorded in BI’s computer system.The vendor guessed that a single misread could cost a manufactureron average $4 but noted this estimate could vary quite a bit. ·According to the RFID vendors, other benefits of RFID systemsinclude readily located inventory, fewer required inventory audits,and reduced misplacements and theft. However, they did not have anyinformation quantifying these benefits. Bracket Internationalrecently had problems adapting quickly to changing customerrequirements. BI had to deny a Wolf Furniture job order requestbecause it could not react quickly enough to a change in jobspecifications and order size. Eventually, BI lost the WolfFurniture business, which averaged about $2 million per year.Another BI customer, Home Depot, keeps talking about BI needing tobe more flexible because Home Depot’s on-demand point-of-salesystems require frequent changes to BI orders. Home Depot is BI’stop customer, so every effort needs to be made to keep Home Depothappy. Mr. Bracket doesn’t think throwing away the bar codingsystem that works is a good idea. The BI employees are familiarwith using bar coding technology, whereas the RFID technology seemshidden from employees. He also doesn’t think the return oninvestment (ROI) on an RFID system is compelling. So why does hefeel so guilty when the RFID vendors leave his office? Is he doingthe right thing or not? He has an obligation to his trustedemployees to do the right thing. Should he adopt RFID based purelyon strategic and/or economic benefits? He writes down severalquestions he needs to investigate.

Question

1.For the in-house production of one specific component A,Bracket faces an annual fixed cost is 70.000 USD and the cost percomponent is 75 USD per unit. In order to sustain the demand,Bracket foresees the need to produce units of products (each unitof product would require 1 unit of component A). The productionyield of component A is 80%. A vendor approached you, the CEO,offering the component A at 130 USD per unit, including all qualitytests to be sure you receive and pay only for good components A,completely within the quality tolerance. Perform a break-evenanalysis, reporting calculation in a table, in order to supportyour outsourcing decision. Explain as well what are the pro andcons and the motivation for your decision. Dedicate to thisquestion no more than 30% of your term paper