Jackie indicated that a recently Incorporated medical group was Interested In installing 1 million electrocardiogram monitors over the next five years If the screens and frames could be supplied at an all-in-cost of $100 per unit. Dennis shared this news with Larry McDonald in the engineering R department. Larry called back with some exciting news. Engineering was confident that a new model under development, the MEA , would meet the buying firm’s specifications and could be manufactured at a variable production cost of $65 per unit provided It could use a special plastic frame designed y Burton Plastics, Inc.
Burton had approached Mamma’s engineers with a prototype of a 9-inch superstore frame coated with a special chemical that made the frame more elegant and economical. Burton could manufacture 20,000 such frames per month, starting within three months, and offered a price of $30 per unit F. O. B. Mamma’s plant, provided Mazda agreed to use the new frames exclusively for the next five years. This price of $30 per unit was incorporated in the $65 per unit variable cost estimate by engineering for the MEA.
The firm’s cost accountant, Dirk Hagen, estimated hat If 200,000 units of the MEA were sold, the allocation for fixed general, administrative, and marketing expenses of $4 million per annum would add approximately $20 to the cost per unit. This was based on the assumption that the MIMEO would be discontinued, which would have to be the case, since Mazda did not have the plant capacity to produce both the MIMEO and MEA simultaneously. Dennis decided to call a meeting before a final decision was made on whether to replace the ME 1001 with the new low-cost MEA model. He Invited Jackie Brown,
Larry McDonald, Patrice Regale from manufacturing, and Jeff Meltzer of supply management. Everyone seemed enthusiastic about the new low-priced model, which would also be the first of its kind in the market. Jeff, however, was not too happy that Burton would be the sole source of supply for the superstore 9-inch frame. As a former ICQ technician, Dennis expressed his concern about the quality of the new frame. On previous occasions, he had experienced many unpleasant situations with excellent low-cost developments that had failed to meet quality standards over long rides of use.
Components that appeared to function well initially would then, for no apparent reason, develop defects that sent the whole process out of control. In his opinion it would take at least a year to effectively test the new component and stabilize the process. Jackie wasn’t sure Mazda could wait that long. If it did not sign the five-year contract with the medical group within six months, chances were that someone else would develop a monitor screen and frame for less than $100 per unit. Patrice agree Walt n Dennis Ana Annihilate Tanat tenure was a 1
U percent prodigality the production department might require considerable testing and rework if Mamma’s quality standards were to be maintained. In the event the low-cost frame turned out to be defective, the cost of rework would turn the estimated profit contribution into a loss. More disastrous was the possibility that promised delivery dates might not be met. As a result, current sales, customer goodwill, and future business could suffer. At the end of the meeting, Dennis was in a predicament. There were so many unanswered questions.
And a decision on whether or not to proceed with the MEA had to be made. 1 . Should Mazda Electronics proceed with the low-cost MEA, incorporating the new frame developed by Burton Plastics, Inc.? Explain. 2. Who should be involved in the decision-making process? Who is ultimately responsible for the decision? 3. What additional information would you require if you were in Dennis Kook’s place? 4. What other issues related to this problem are of concern to supply management? Jimmy Millenarian and David N. Burt of the University of San Diego developed this case.