Outsourcing the catalogue production

Arctic Clothing has operated a direct-mail clothing business specializing in outdoor adventure clothing for more than 15 years. In the past five years it has increasingly been turning to the Internet to drive sales volume and so has been relying less on catalogues for customer interaction. However, it still produces a large number of catalogues on an annual basis, and it expects to produce between 400,000 and 600,000 catalogues a year for the next five years. The cost of the catalogues is equal to about 8 percent of total catalogue sales.

These catalogues are produced in three separate waves, with one catalogue in each of November, March and July. Because of the product emphasis in each of the catalogues, the November and March catalogues have equal distribution and the July catalogue is sent out at half of the volume of the other two. The president of Arctic Clothing, Joe Barker has noted that the timing of catalogue delivery is very important; any slippage in delivery has the potential to ruin a season of sales.

The firm has operated its own printing facility since inception and has the capacity to produce 100,000 catalogues in any given month without any overtime, using its internal labour force. These people, who can produce 1,000 catalogues in 22 hours, are paid $15 per hour for regular time and time-and-a-half for any overtime. Unfortunately, as the catalogues are always ready for printing exactly one month ahead of time, there usually is a lot of overtime involved in the printing. The material costs for the catalogues are $0.16 per unit. Variable overhead is equal to 75% of labour costs; fixed overhead runs to $175,000 per year.

Arctic Clothing has recently been considering outsourcing the catalogue production to two different firms. The first company, Scarborough Printing, has proposed that it handle any amount of printing up to 400,000 catalogues per year for $1.15 per catalogue; above 400,000 catalogues, the price would decline at a rate of $0.05 per 50,000 units until it hit a price of $0.95 at a volume of 600,000. If Arctic Clothing were to choose this option, or any other option, it could save half its fixed overhead, but only if it outsourced all the production. Scarborough Printing is noted for its quality, which is in fact superior to that of Arctic's in-house production, but it also has a reputation for being difficult to work with.

The second firm, Durham Printing, has proposed a slightly different deal: a fixed price per year of $300,000 plus $0.60 per catalogue at a volume of 400,000. After that the price would decline 5 cents per 50,000 more produced until it hit a price of $0.40 at a volume of 600,000. Durham Printing has a good reputation in other markets but no reputation in this market, as it has just opened a local plant.

Compare the scenarios and advise which option should the company take?