CASE STUDY III-2
A Make-or-Buy Decision at Baxter
Manufacturing Company
It is late Friday afternoon, and Kyle Baxter, president of
Baxter Manufacturing Company, Inc., and his sister, Sue
Barkley, vice president for customer relations, are discussing whether or not to purchase the Effective
Management Systems manufacturing software package
proposed by manufacturing Vice President Lucas Moore.
“I’m really fearful of buying such a large, complex
software package given our past experience,” Baxter
exclaims. “What do you think?”
“I really don’t know,” Barkley replies. “We do need
manufacturing software, and there are some obvious
advantages to purchasing this software. We have had bad
experiences in past attempts to buy such software, but we
have learned from some of our mistakes, so we might be
successful this time. But I have been impressed by the
success that MIS has had in building new systems for us,
so I am in a quandry right now.”
“We’re going to have to decide before long,” Baxter
notes, “but we need to talk with some of our people first.”
Baxter Manufacturing Company Background
Baxter Manufacturing Company (BMC), located in a small
Midwestern town, is a leading manufacturer of deep-drawn
stampings, particularly for electric motor housings.
(Exhibit 1 shows a few of BMC’s products.) The company
was founded in 1978 by its chairman, Walter R. Baxter, as
a supplier of tools and dies, but it soon expanded into the
stamping business. BMC is a closely held corporation,
with the family of the founder holding most of the stock.
BMC’s engineers have implemented some of the
most complex stamping concepts in the industry, as the
company has established its niche as a quality supplier of
deep-drawn stampings to the automotive (85 percent of
sales) and appliance (15 percent of sales) industries.
BMC’s major customers include Ford, General Motors,
Copyright © 1997 by E. W. Martin. This case was prepared by
Professor E. W. Martin as the basis for class discussion, rather than to
illustrate either effective or ineffective handling of an administrative
situation.
442
Honda of America, General Electric, Whirlpool, Amana,
and Maytag. BMC puts great emphasis on quality and has
achieved Q-1 status from Ford, a QSP Award from GM,
and quality awards from Honda, and is recognized as a
world-class supplier within its niche.
Producing a deep-drawn part is a complex process
requiring repeated stampings, each with a different
male/female die pair. This process is performed on a heavy
press, using a very complex die that consists of perhaps 10
individual dies assembled together in a line. A coil of steel
of the proper width and thickness is fed into one end of the
press. After each stamping cycle a precision transport
mechanism moves the material forward exactly the right
distance so that a part that has completed one stage is positioned correctly at the next stage to be struck by the next
die on the next cycle of the press. Thus each cycle of the
press performs a different forming operation on each of 10
parts, and a finished part comes off the machine at the end
of each cycle. (Exhibit 2 shows the different stages of a
motor housing stamping.)
BMC’s strength lies in its ability to produce efficiently large volumes of high-quality complex stampings.
It may take 6 to 8 hours to install the dies and set up the
EXHIBIT 1 Some of BMC’s Stamped Parts
Case Study III-2 • A Make-or-Buy Decision at Baxter Manufacturing Company 443
EXHIBIT 2 The Stages of a Motor Housing Stamping
huge stamping presses for a production run, so BMC cannot efficiently produce short runs and therefore does not
serve the replacement market well.
BMC uses state-of-the-art equipment to develop and
manufacture the necessary tooling for the needs of its customers. With the use of wire electrical discharge machines
(EDM), computer numerical control (CNC) vertical
machining centers, and CNC horizontal lathes, it is able to
produce quality tooling efficiently. For the life of a part,
BMC’s computerized equipment can reproduce identical
die components for replacement of worn or damaged dies.
BMC’s 140,000-square-foot manufacturing facility
is one of the best in the country, with 39 presses that range
from 50-ton to 600-ton capacity. Every press is equipped
with accessory items such as feeds, reels, and electronic
detection systems. In addition to the presses, BMC has
recently added the capacity to weld, drill, tap, and assemble stampings into more complex parts to suit the needs
and desires of its customers.
BMC employs about 420 people and is nonunion.
Management believes that these employees are BMC’s
greatest asset. According to Chairman Walter Baxter:
We have a great group of people! We are fortunate to
be located in a farming area where the people have a
strong work ethic and a “do whatever it takes” attitude. We started out as a family company and we
have a lot of families—husbands and wives, their
children, aunts and uncles—working here. My son,
Kyle, is now President, and my daughter Sue is Vice
President for Customer Relations. We cherish our
family atmosphere.
Over its 19-year history, BMC has grown at about
20 percent a year. The last five years of sales have been as
follows:
1992
$32,000,000
1995
$61,976,000
1993
$37,292,000
1996
$74,130,000
1994
$49,900,000
This rapid growth has caused problems at times. For
example, in 1990 its sales were so close to BMC’s production capacity that, even when running its production 24
hours a day 7 days a week, it became almost impossible to
meet promised delivery schedules. According to Sue
Barkley:
In 1991 we had to turn down business from existing
customers who wanted to give us new parts to make.
For almost a year we did not accept any new business. That was the most difficult thing we ever did
because we were fearful that customers who had to
go to our competitors might never come back. We
told our customers that we hated to refuse their business, but we had to because if we took more business we couldn’t handle it—we would be late and
couldn’t provide the level of service that we are
committed to providing. Most of our customers
understood. They were not happy about it, but they
respected us for being up front about it. We did lose
some good orders because we weren’t accepting
business when they came out, but I don’t think that
there are any customers who haven’t come back to
us with more business.
By 1992 BMC had made the large investment necessary to significantly increase capacity and was back on its
historical growth track.
In the late 1980s BMC’s automotive customers started
to go to a just-in-time (JIT) philosophy in which they carried
444 Part III • Acquiring Information Systems
minimal inventories of raw materials and parts. Rather than
sending an order for a month’s parts at a time as they had in
the past, the customers began telling BMC one day what to
ship on the next. BMC was provided with a blanket order for
planning, but the customers reserved the right to change the
amounts at the last minute.
Including the time to procure the raw materials, run
them through the presses to make the parts, clean and pack
them, and ship them out, BMC’s production process
requires at least two weeks if things go well. Thus the
automotive companies are forcing their suppliers to maintain their inventories for them, which places great pressure
on BMC to reduce its cycle times. Because of its two-week
production cycle and long setup times, BMC is often
forced to maintain a finished goods inventory that is
substantially above its target of a three-day supply.
About five years ago its automotive customers began to
pressure BMC to convert to electronic data interchange
(EDI), where all paper document flows between customer
and supplier are replaced by electronic flows directly between
the customer’s computer and BMC’s computer. Thus BMC
receives all purchase orders and shipping schedules electronically and sends out electronic shipping notices and bills. EDI
has the potential to be quicker and more efficient for both parties, but BMC’s factory computer systems were incomplete
and fragmented, so for several years BMC accepted the data
electronically, printed it out, and then rekeyed the data into
those relevant systems that existed. The IS department is now
building interfaces to enter the EDI data directly into some of
BMC’s systems. One reason for this delay was that their automobile customers use one EDI standard while their appliance
customers use another, and each customer has its own variation on the standard it uses. BMC has had to build a separate
subsystem to handle each of its customers.
Information Systems at BMC
BMC’s managers have been very receptive to the introduction of new technology. They were early adopters of
CAD/CAM, and are at the forefront of stamping technology.
However, they have had little experience with the use of
computers in business applications and have limited understanding of what the technology can do for them.
BMC got its first PCs in 1987, and a few managers
started experimenting with Lotus spreadsheets. One of the
first applications they set up was a spreadsheet for generating
customer quotes by calculating what price to charge for a
part based on estimates of raw material cost, tooling costs,
the costs of stamping, and the expected quantity to be
produced. Another early use of the PC was a scheduling
spreadsheet developed by the company president, Kyle
Baxter, when serving as vice president for manufacturing.
This spreadsheet, which is still used today, contains data for
each part, including the machine used, the number produced
per hour, and the setup time. The quantity required and the
delivery date are entered, and the spreadsheet determines
when each part should be started into production and
generates a schedule of what should be run when on each
machine group. If the schedule is not feasible (e.g., some
parts must be started last week), the scheduler can make
manual adjustments in due date, quantity required, overtime,
and other factors to produce a feasible schedule.
Realizing that they needed someone to lead and
educate them in the use of computers, in 1989 BMC
management set up an MIS department and hired an MIS
manager, Nancy Shaw. BMC installed a Data General MV
minicomputer, and the first application was interoffice
e-mail. This was a great way to start because it demonstrated how helpful the computer could be in sharing
information. According to Sue Barkley:
E-mail was very well received because we were
growing so rapidly and the need to communicate
within the plant was so important. It wasn’t until we
got on e-mail that we realized how much time we
had been spending running around the plant trying
to find somebody and leaving little notes on their
desk. We really became dependent on our e-mail
system.
During the next two years Shaw led the purchase and
successful installation of a package of financial applications, including payroll, accounts payable and receivable,
and general ledger. Also, in 1989 BMC was beginning to
encounter problems in production because of its growing
capacity problems and its customers’ switch to JIT. When
customers changed their requirements, the production
schedule had to be changed, which forced changes in the
schedules of other parts, and production people seemed to
be spending all their time rescheduling things. Because
demand was so near to capacity, it was difficult to get all the
orders done on time, and there was a lot of expediting going
on, which again led to the need to reschedule. Although
there was no computer support for manufacturing other
than the spreadsheet used for scheduling, BMC’s management decided that if scheduling could be speeded up, the
problems would be alleviated. Consequently, the decision
was made to purchase a software package for scheduling.
Sue Barkley, who was involved in the process,
remembers:
Our MIS manager, Nancy Shaw, did some research
and selected four packages from which we tried to
choose the best one. That was my first exposure
Case Study III-2 • A Make-or-Buy Decision at Baxter Manufacturing Company 445
to software, and it was a terrible experience. Each
vendor claimed that his software would do anything
you wanted to do, and there were so many questions
we should have asked but didn’t.
Vendors all offered integrated packages that
included production scheduling, but you also got
sales, inventory, purchasing, shipping, etc. We made
our selection and paid about $120,000 for the system, including both hardware and software, which
was a large expenditure for us at the time.
Then we started to load the data and implement the scheduling package. The training the vendor provided was poor, the manual was full of errors,
and support from the vendor was minimal. We
worked and worked, and finally became so frustrated
by our inability to get the system to do what we
wanted it to that we just gave up. On top of everything else the vendor went bankrupt. It was a total
disaster—$120,000 down the tube!
As mentioned previously, by 1991 the problems in
meeting shipping schedules had gotten so bad that BMC
began to have to turn down new business. Management
again decided that they had to do something about machine
scheduling, so again they decided to purchase a scheduling
package. Sue Barkley remembers:
This time things went better. Nancy Shaw and I got
more people involved in the decision on what package to buy. This vendor provided some in-depth
training to our MIS people, and vendor people came
down here for 2 weeks to help us load the data and
get the production scheduling module working.
Again, we found that the manual was full of errors
and that the vendor people did not fully understand
the logic that the system was using. But we got the
system up and working and taught the production
scheduling people how to use it.
The problem was that whenever we had to
expedite something—give it top priority because it
had to be shipped quickly—the schedule had to be
regenerated, and that took 2 hours. Then we had to
take the schedule for each machine and examine it to
see what the impact on its schedule was and change
what it was going to do. Because we were always
expediting something, we were constantly churning.
After about a month the production scheduler
came to me and said, “I’m not getting anything done.
It takes me 2 hours to regenerate a schedule. I look at
it and I then have to change five or six machines
because of what the system did. Then it takes me 2
more hours to generate a new schedule and I have to
change another five machines, and I have to go
through the cycle again. It’s just a continuous
process of change, change, change!”
We tried for another month to make the system
work for us, but we were in such bad shape with our
capacity that we just couldn’t take the time to try to
cope with the system anymore. So we abandoned it
and went back to our Lotus spreadsheet. The
$150,000 that we had spent for that system was
down the drain!
The Present MIS Department
In 1994 Shaw left and BMC hired Don Collins to replace
her as MIS manager. Collins had 20 years of experience as
a lead systems analyst with a large manufacturer and broad
experience with manufacturing systems. In 1996, Collins
has a programming staff of four. The 1996 capital budget
for hardware, software, and other information technology
items was about $200,000. The MIS expense budget for
payroll, supplies, and education was about $350,000.
The MIS department is using a development tool
called Cyber Query Cyber Screen (CQCS) from Cyber
Science, but Collins is giving some thought to what BMC’s
development environment of the future should be. The
Data General MV computer is becoming obsolete and is
reaching capacity, so BMC will have to obtain additional
capacity soon.
In order to plan a production schedule you need to
know what you have in inventory, so the MIS group has
created systems to track raw-material, in-process, and finished-goods inventories. MIS has also developed a minicomputer system that accepts EDI orders from customers
and allows the customer service group to create a shipping
schedule on the computer. Collins believes that within 2
more years the MIS group can build and install a set of
manufacturing systems that will satisfy BMC’s basic needs
and provide quite satisfactory EDI service to customers.
This success in building new systems opened BMC
managers’ eyes to the possibilities for using the computer,
and they have generated so many requests for new systems
that an MIS steering committee has been established to
approve projects and set systems development priorities.
The members of the MIS steering committee are President
Kyle Baxter, Controller Lou Wilcox, Sue Barkley, and Don
Collins.
The New Proposal
In late 1996 Lucas Moore, vice president of manufacturing, suggested that BMC purchase and install an integrated
package of manufacturing software sold by Effective
446 Part III • Acquiring Information Systems
Management Systems, Inc. (EMS). Moore had worked as
an engineer with the company for 7 years and then took a
leave for 2 years to get an MBA. The vice president of
manufacturing retired soon after Moore returned, and
Moore was promoted to that management position.
Moore supports the proposal that BMC install the
EMS Time Critical Manufacturing package consisting of
eight modules: shop floor control, EDI integration, inventory management, factory data collection, standard routings, labor collection, engineered product configurator,
and general ledger. The purchase price of this software
package is $220,000, including documentation, training
by EMS, and consulting help during installation of the
software. The cost of a software maintenance contract is
$55,000 a year, and EMS will make limited changes
requested by BMC at a cost of $60 per hour.
The EMS software will run on several minicomputers, including BMC’s Data General MV. However, additional computer capacity will be needed whether BMC
purchases the EMS package or builds its own manufacturing systems.
Moore’s Views
Moore is relatively new to the manufacturing area, having
taken over that area about a year ago, and was not involved
in the past attempts to purchase scheduling software.
Moore explained to Baxter that BMC should purchase the
EMS package for the following reasons:
We are still fudging our EDI and still scheduling
with a Lotus spreadsheet. The entire industry has
passed us by in our use of the computer in manufacturing and we are in danger of losing our reputation
as a world-class parts manufacturer. Both my MBA
studies and our experience with the new inventory
systems that Don has installed have convinced me
that computer systems can significantly enhance
our efficiency and improve our service to our
customers, but we can’t wait another 2 years to
complete home-grown manufacturing systems that
will still need to be upgraded before they are really
first class.
I have had extensive discussions with EMS
manufacturing specialists, read their literature, and
seen the proposed systems demonstrated, and am
convinced that the proposed system will do everything that we will ever want to do. EMS has assured
me that there will be no problem integrating these
manufacturing modules with our existing financial
systems, and that we can be up and running with the
entire system in 6 months.
“Given that our MIS group is doing a good job developing new systems,” Baxter asked, “why should we
purchase the EMS package rather than build manufacturing systems in-house?” Moore’s reply was:
The time and cost differences between purchasing
and building are too significant to ignore: 6 months
to install this advanced system versus 2 years to
build our own basic system, and a firm $220,000 to
purchase this system versus over $400,000 to build
our own. These costs do not include new hardware,
but we will need to increase our capacity whether we
purchase or build our new systems.
Furthermore, we will get a high-quality
state-of-the-art system instead of a simple “first
try” system. EMS has sold this system to hundreds
of manufacturers, and thus has been able to spend
much more time and money developing it than we
could possibly afford. EMS has a large staff of
more creative and sophisticated programmers than
we can get, and EMS has gone through several
cycles of improvement of this system based upon
the experience of hundreds of users of the earlier
versions of the system.
It is true that the EMS system will not always
do things the way we currently do them. But is the
way we do them better than the way that is based on
the experience of hundreds of manufacturers? We
are always making changes in how we do things, so
it will not be difficult for us to make some changes to
conform to this new software, and I expect that these
changes will improve our operations.
“We have not been successful in two tries to use purchased software packages in the manufacturing area,”
Baxter noted. “What makes you think that we would be
successful this time?” Moore replied:
There are a number of important differences this
time. First, in the past there was little ownership of
the new system by the factory people, but this time
I am the champion of the new system and my people
will make it work. Second, in the past the conversion
strategy was flawed—BMC tried to install scheduling without having inventory data under control, but
this time we will go at it a module at a time in the
sequence that EMS has been very successful with in
many previous installations. Third, during the previous attempts we were pushing capacity and no
scheduling system was going to work when we were
having to expedite everything, but today capacity is
not a major problem and things are reasonably calm
Case Study III-2 • A Make-or-Buy Decision at Baxter Manufacturing Company 447
in our factory so we can devote our energy to making
the new system successful.
Collins’ Views
Baxter also talked with Collins, who argued that BMC
should continue its process of building the manufacturing
systems that it needed. He estimated that the needed systems could be completed in about two years at a cost of
around $420,000—$220,000 for outside help (including
training his people in new development tools) and
$200,000 in internal costs.
When Baxter asked Collins why BMC should not
purchase the EMS software, Collins replied:
First, the EMS software is far more complicated than
we need. For most general manufacturers each part
may require six operations on six different types of
machines, and each part has a routing that is different than other parts. Then several parts may be
assembled into a subassembly, so you have two- or
three-level bills of material. We typically take a coil
of steel, stamp out the part, clean it, box it, and ship
it out, so both our routings and our bills of material
are very simple, as is our production process. The
EMS system is designed for much more complex
manufacturing.
Second, we have had little or no experience
with computerized production systems. Does it
make sense for us to try to jump to a very complex
and sophisticated system like the EMS proposal?
Lucas has a very superficial understanding of this
software package, and he doesn’t know any of the
details of how it will work. Therefore, he has no idea
of the difficulties that his people will run into in
adapting to this complex package. It will require
them to do many tasks that they have never done, or
even considered doing. And they don’t need this
complexity. Wouldn’t it be better to build our own
systems that correspond to where we are on the
learning curve and plan to upgrade them as we
progress in our understanding of our systems needs?
Third, it is likely that the system does not fit
the way we are running the business. Do we change
the system or do we change how we run our business? We probably can’t change a purchased system,
so we would have to change the way we run the business. Do we really want to do this?
Fourth, we are constantly changing our manufacturing facilities and processes, and they may be
unique to our business. If you purchase a package, you
are at the mercy of the vendor to make changes in it.
He may or may not make the changes that you want,
and in fact he may make some changes that you do not
want. If you do not expect the system to change and it
is a common system, you probably should purchase it.
For example, one general ledger system is just like
any other, and they haven’t changed in 20 years, so
you should purchase this application. But we are
continually changing things out in the shop, and if we
build our own systems, we can change them when
we need to.
Finally, we have demonstrated that we can
build and successfully install our own systems, but
our record with purchasing and installing manufacturing systems is dismal. The EMS proposal may
fulfill our needs, but then again it may not. We failed
twice in the past because the system we purchased
did not fit our needs. Why take that chance again?
“You seem very concerned that the EMS system
might not suit our needs or that our needs might change,”
Baxter replied. “Could we modify this system if it does not
suit our needs?” Collins said:
Because we will not have a source-code version of
the software, it will not be feasible for our programmers to modify the functionality of this system.
However, we can write interface software to change
the form of the system’s input and output.
When Baxter noted the cost and time differences
between purchasing and building the system as estimated
by Moore, Collins replied:
The figures Lucas quotes are very misleading. The
purchase price is but a part of the total cost of buying, installing, and maintaining the software. To be
sure you are choosing software that truly meets your
needs, you must put a substantial effort into defining
your needs and evaluating each candidate package
against those needs. One of the major weaknesses of
the present proposal is that this process of defining
needs and evaluating possible packages has been
completely ignored. In my opinion we must go
through this process before buying any packaged
software, and this will affect both the proposed cost
and how long it will take to install the system.
Another cost of purchasing a system is the
cost of modifying your existing systems so that they
can feed data to or receive data from the purchased
package. If the systems that must be interfaced with
the purchased systems are also purchased systems
that you cannot modify, you may have to create
448 Part III • Acquiring Information Systems
additional systems to translate from one packaged
system to the other packaged system. In addition
there will be costs of training the users, data conversion, and the changeover to the new system. A good
rule of thumb for the total cost of installing a purchased package would be twice the purchase price
of the software, which in this case would be
$440,000. I doubt that we could do it for any less,
and that compares with about $420,000 to build our
own systems, which includes all the costs involved,
such as training, conversion, and defining the needs
of our manufacturing people.
It will take at least a year to properly evaluate
and install a purchased system. This is less than the
2 years we will need to complete our own system,
but we will be installing and using components of
the new system as we complete them, so the time
advantage is not that great.
When asked what it would take to do a more
complete evaluation of the proposal to purchase the EMS
system, Collins replied:
We would need to spend about 6 months studying
our manufacturing area to determine what we are
doing now and what the new systems should do.
Then we would take some time to explore the
many packages that are available, and winnow
them down to the three or four most suitable.
Then we would invite the chosen vendors to submit proposals so we could study and evaluate
each of these proposals in detail and pick the best
one. Meantime, we would prepare a proposal for
building the new system that would describe the
proposed system in detail and include a plan for
its development including schedules of both time
and dollars. Finally, we would compare the best
proposal with the plan for building the system
ourselves and decide which to do. That would
take at least a year and cost between $50,000 and
$90,000.
Decision Time
After his discussions with Moore and Collins, Baxter sat
down with his sister, Sue Barkley, to discuss what to do
about Moore’s proposal. “Sue,” Baxter began, “you were
able to get the second manufacturing software system we
bought up and running, but conditions in the shop were so
chaotic that we abandoned trying to use it. Why don’t we
go back and try it again?” Sue replied:
We recently considered trying again to use this system,
but the special computer we bought to run it died and
the software vendor has gone out of business, so we
were out of luck.
“Lucas claims that BMC is losing its reputation as a
world-class parts manufacturer because its systems are
inadequate, and therefore BMC must purchase a system
without delay,” Baxter said. “Do you believe that it is
critical that we get these new systems immediately?” Sue
thought a while before replying:
I don’t think that our customers care about our systems as long as we provide high-quality products at a
good price and deliver them when they are needed,
which we are doing. From their perspective, we are
already interacting with them via EDI, so that is a
problem for us rather than for them. It would be
great to have the proposed systems as soon as possible, but we have been getting along without them for
a long time.
“Well, Sue,” Baxter said, “I still don’t know what we
should do. What do you think?”