Patterson Manufacturing Essay Covers History, Financial Analysis, Non-financial Considerations, And Management Accounting.

History of Patterson Manufacturing

Patterson Manufacturing has been in business in a small north eastern town for over a century.  Wesley Patterson founded the firm in 1896 alongside a fast-moving stream.  A water wheel, via a series of belts and gears, converted the stream’s energy into mechanical power to drive cutting tools, grinders, lathes and polishers.  These tools were used to produce parts needed by other manufacturers.  The firm quickly established a reputation for producing high quality products to exacting tolerances. The firm soon prospered.

Wesley Patterson closely monitored technical publications for the industries he served and frequently developed new products to fill emerging needs.  He was particularly skilled at being able to identify simpler designs for manufacturers’ new products and then getting a contract to supply the needed parts.  He also kept abreast of new manufacturing technology and was the first in the industry to convert to electric power when reliable generators became available.

The firm grew slowly but steadily until 1917 when it expanded rapidly to meet the demand for rifle parts for the war effort.  By 1920 the firm was the community’s largest employer.  Mr. Patterson donated the land that is now the town’s central park.  He also paid for constructing the first municipal buildings.

The depression brought hard times to the company.  However, the firm still takes pride in the fact that it did not discharge any employees during the depression years.  Instead the firm and its employees cooperated by reducing each individual’s working hours (and wages) to spread the available work among all employees.  During this time the firm also suspended paying dividends to its owners.

The Second World War again brought prosperity.  At the war’s end the firm diversified into supplying products for the highway construction industry.  Employees who had been with the firm through the depression were grateful for their treatment and contributed many ideas for new products and improvements to existing products.  The firm rewarded its employees with wages and benefits that are still the most generous in the industry.  

Required

1.If the product is outsourced the task force recommends decreasing the product’s selling price by 5% with the anticipation that unit sales volume will increase by 15%. Prepare an analysis which determines whether this outsourcing plan is financially viable.

2.Identify and evaluate the major non-financial considerations that should be considered when making the decision of whether to outsource the product 

3.You notice that the manager had listed ‘implementing manufacturing efficiencies’ as one of the options for the task force to consider. Identify and analyse two management accounting techniques that would support achieving manufacturing efficiencies 

4.After discussing with you your observations in parts 1 through 3, Patterson’s manager expressed concern with taking a short-term orientation. “We need a longer-term strategy for improving the business generally.” Prepare a written report for the manager discussing and evaluating ways to improve Patterson’s future profitability.

Patterson’s, a manufacturer of number of products, is facing reduction in demand and now considering outsourcing manufacturing of one of its largest selling products. An evaluation from the financial view point of this outsourcing decision has been presented below:

The cost of outsourcing the product is given in the statement as shown below:

Note-1: As the outsourcing decision would result in 5% decrease in sales price and 15% increase in sale volume, thus, it would affect the contribution margin of the company as below:

Thus, the total cost of product if it is outsourced will be $25.8 million. This cost is to be compared with the cost of in house manufacture of the firm, which is presented as below:

From the above computations, it could be observed that the company in house manufacturing cost of the product is $27 million as against the cost of outsourcing of $25.8 million. Therefore, the cost of outsourcing is lower and hence the company is advised to go for outsourcing arrangement.

The decision for outsourcing the operations should not only be based on the financial considerations but it should also take into account the non financial factors (Goehlich, 2009). The firm should consider the fact that it may be financial beneficial for it to outsource the manufacturing operations in short run; however, the case may not be the same in the long run. There are a number of non financial factors such as plant obsolescence, machine breakdowns, employee retrenchment, and loss of goodwill, loss of customer base, loss of suppliers and loss of distribution network. These are the crucial factors when considering the firm’s operations from the longer term perspective (Goehlich, 2009).

If the firm goes for outsourcing the products, its plant and machinery would be idle for the time being which will increase the risk of obsolescence. Further, the machines would not get timely maintenance which would increase the risk of machine breakdowns and deterioration in the physical condition (Garrison, 2012). The cost of machine breakdown and plant obsolescence would be higher than what the firm seeks to save from outsourcing the operations. Further, the most crucial point is loss of experienced and trustworthy employees. The company shutting operations down for some period would look to retrench the employees and it might not able to again find such employees. The employees are the backbone of a firm and they play a crucial role in the success of the company. Thus, if company loses employees, it would a great loss to the company and it might greater than the benefits sought to be derived from outsourcing (Garrison, 2012).

Financial Analysis of Outsourcing

Further, in an outsourcing decision, the firm stands to the risk of loss of goodwill and customers base. The firm creates goodwill by delivering outstanding product quality and services and if the operations are shut down, it would lose the goodwill and customer gradually which would be detrimental to the firm’s long term success (Drury, 2006). Further, the firm might also loss suppliers and lenders. Losing the suppliers and lenders would be devastating and the firm might not be able to perform at the platform at which it was performing earlier (Drury, 2006).         

Patterson manufacturing is an old company having good reputation, customer base, and supplier and distribution network. If the company decides to outsource the manufacturing operations of the product under consideration, it would be financial benefited in the short run as the cost of outsourcing is lower than cost of manufacturing but at the same time it would stand to the risk of losing goodwill, customer base, suppliers, and plant deterioration (Drury, 2006).  

In the case of Patterson, the task force suggested outsourcing the product as a way to improve the profitability of the company. In case the company goes for outsourcing the product, it will have to shut down the production operations which would lead to retrenchment of loyal employees and several other disadvantages like of loss of customers and goodwill in the market. The manager of the company is of the view that rather than outsourcing the product the task force should consider the techniques to bring in efficiencies in the production. The efficiencies in production would lead to cost cutting which would ultimately help the company to improve its profitability.

There are various techniques of management accounting that support the achievement of efficiencies in manufacture. The two most prominent such techniques are Just in Time (JIT) technique and Lean Manufacturing technique (Tabitha & Ogungbade, 2018). Just in Time technique was developed to reduce the wastage of material and labor time in the production. Just in time technique provides for streamlining the production operations in such a manner that leads to production as and when needed. Thus, the production activities are arranged in such a fashion that goods are manufactured in the exact quantities in order with customer and production takes place at such times make deliveries of goods at the time sought by the customer (Nganga, 2014).

Implementing the Just in Time technique in the production reduces the pile of inventory which leads to substantial cost reduction in the form of savings in the inventory carrying and storage cost. Further, this technique promotes real time production of goods which also results in reduction in the wastage of material and labor time (Nganga, 2014). The reduction in wastage also reduces the overall cost of manufacture. Therefore, as a result of implementation of Just in Time technique, the company can bring in efficiencies in the production and it can achieve cost reduction which would ultimately result in improvement in the overall profitability (Nganga, 2014).

Non-Financial Considerations to Take into Account

Apart from Just in Time, Lean Manufacturing is also a leading management accounting technique which could be used to bring in efficiencies in the manufacturing process. Lean Manufacturing is an extension of Just in Time or in other words, one would say that Lean Manufacturing is an improvement over Just in Time (Askin & Goldberg, 2007). The implementation of Lean Manufacturing system provides the firm an opportunity to reduce or rather say eliminate wastages without the productivity being affected adversely. All the manufacturing operations are sequentially arranged in a systematic manner so that manufacturing activities takes place one after another in cyclical form. The plant and machines are placed in a cycle form. The output of one machine is transferred to another machine quickly without having the need to displace and move it from one location to another (Askin & Goldberg, 2007).                   

Patterson which is engaged in the manufacturing of guns and allied materials could employ Just in Time and Lean Manufacturing Techniques. These techniques would reduce wastage, cost of production, and improve the overall profitability of the company.   

In the recent years, Patterson has not been able to do well and its market share is continually deteriorating. The company once enjoyed monopoly in gun manufacturing now facing problems with low demand. It has been observed that the company was manufacturing a range of 100 products which reduces now to 12. In the recent last year, the company has been observed to be operating with net operating income of $5.5 million which is severely low considering the age of the company and size of resource deployed in the business.

There are various techniques and approaches to increase the operational efficiency of the manufacturing concern so that its overall profitability can be improved. Examination of overall impact of purchases could be one of those approaches (Posteuca, 2018). Buying of stock in bulk orders could me more economical but at the same time the manufacturing must also ensure that there must not be excessive funds blockage in the bulk stock purchases. Also, the carrying cost of such stock must also be examined properly to avoid high cost incurrence. The other way to increase profitability is to apply machine intensive methods of manufacturing (Posteuca, 2018).

A manufacturing concern must avoid using labor-intensive approaches of the production because labor consumes more time and other resources to produce the desired output than the machines (Adler, 2013). Moreover, there are fewer chances of errors and mistakes in the work performed by machines and therefore manufacturing process could be undertaken more accurately. Profitability can also be improved by improving the product mix. The firm must focus on products that have high margins. It must produce only such products for which there is less competition in the market so that the selling prices of such products could be kept higher to earn higher profitability. Reduction in the overheads can also lead to increased profitability of a manufacturing firm. It must undertake only core operations and outsource the non-core functions if favorable prices are available in the outsourcing service market (Adler, 2013).

Management Accounting Techniques to Increase Efficiencies

From the longer term view point, the patterns manufacturing should focus on diversifying the business as the demand of guns and its allied products in not increasing. The company should focus on brining in innovation and it should develop new products having regards to change in the demand. In the old days, the company used to supply guns to the government agencies for use in wars. Now, the company has to change its buyer group because the demand from government agencies would be lower as there are no war situations in present times. Thus, it is highly recommended to the company to look in the sports area. The company should find new buyers such as sport clubs where guns and allied products are used for sport activities (Porter, 2011). The change in buyer group would lead to increase in demand which would be advantageous to the company to improve its overall profitability in the long run.

Further, the company is facing stiff competition in the market. In order to reduce the competition, the company may look to acquire the new competitors which seems promising in regards to innovation but lacks sufficient resource (Porter, 2011). Patterson is equipped with optimal resources whether it’s human resource, manufacturing capacity, or capital. However, the company might be lacking capital at the present times but it can arrange capital for future expansion taking advantages of its brand image and goodwill in the market. The company still has good network of suppliers and lenders which could help it grow rapidly. Further, it is recommended to the company to analyze its production mix. It should eliminate the products having low profit margin and increase the focus on the products having high profit margin (Porter, 2011).

References

Adler, R. 2013. Management Accounting. Routledge.

Askin, R.G. & Goldberg, J.B. 2007. Design And Analysis Of Lean Production Systems. John Wiley & Sons.

Drury, C. 2006. Cost and Management Accounting: An Introduction. Cengage Learning EMEA.

Garrison. 2012. Managerial Accounting 11E W/Dvd. Tata McGraw-Hill Education.

Goehlich, R. 2009. Make-or-Buy Decisions in Aerospace Organizations: Essays on Strategic Efficiency Improvements. Springer Science & Business Media.

Nganga, C. 2014. An Application of JIT and Lean Operations in a Manufacturing Company. GRIN Verlag.

Porter, M.E. 2011. Competitive Advantage of Nations: Creating and Sustaining Superior Performance. Simon and Schuster.

Posteuca, A. 2018. Manufacturing Cost Policy Deployment (MCPD) Transformation: Uncovering Hidden Reserves of Profitability. Taylor & Francis.

Tabitha, N. & Ogungbade, O.I. 2018. Cost Accounting Techniques Adopted by Manufacturing and Service Industry within the Last Decade. International Journal of Advances in Management and Economics, 5(1), pp. 48-61.