DQI: Looking for operational efficiencies.

Javier Zapata COO of the company Distribuidora de Químicos Industriales S.A.,

commented to Leonardo López the CEO, the opportunity to reduce costs by
eliminating an internal area of the company, the area of Packaging and Maintenance.
To do this, he proposed to outsource the area to improve the company's margin.

The company

It is a company with more than 30 years in the market, which thanks to the excellent
management of its relations with customers and suppliers and the constancy in the
effectiveness of the service has allowed them to penetrate the most important
companies of the different industries of the country and obtain the distribution of
products from large national and international suppliers.

DQI has been characterized as the leader in the Colombian chemical market, with a
market share of 53.3%, the company is characterized by customer service and the
quality of its products.

Quality Politics

In Distribuidora de Químicos Industriales S.A. “We work to maintain the loyalty of

our customers through their satisfaction, which will be measured by the compliance
of mutual agreements and their preferences, both commercial and product
specifications, prior to any negotiation. For this we have the necessary
infrastructure, the commitment of our trained staff and the support of our suppliers”.

Packaging and Maintenance Area

All the products that DQI commercialized, required a high quality packaging due to
the toxic product that their contact could put at risk the environment. For this, the
company used high quality products to preserve safety at the time of transporting
the product. The primary functions of this area are:

1. Produce the container required for the transport of the chemical product.
2. Perform the maintenance of the aforementioned containers for reuse.

To increase the safety of the product, the containers are coated with a product called
Plasticom. That the area was responsible for applying it on the container whenever
it was needed, to preserve its quality.

At the time of the conversation, Javier presented a quote obtained from a recognized
company Isoplasticos S.A.S. that makes containers. The contract would be signed
to last 5 years, with the possibility of extending it annually. The ten years were
required to cover the investments that the company had to incur in order to produce
our container.
In the contract with Isoplaticos S.A.S., a price of $ 38 per container was stipulated
on a quantity of 5000 containers that were needed by the company annually. If the
company came to need more packaging, the price would be respected. On the other
hand, the maintenance of the containers would cost $ 63,000 annually. In the
contract there was an item that gave a discount of 3% if the two contracts with the
company were subscribed.

Data for the decision

For both services:

1. The machine used to manufacture the container had been purchased two
years ago for $ 142,000. Currently the machine had two years of use and its
commercial sale price is $ 51,000.
2. The plasticom is a product that must be imported from Norway, therefore it is
customary to bring large quantities in such a way that discounts are used. At
this time 100 tons of Plasticom were kept in storage. The product was sold on
the market at $ 650 per ton, but our stock could be sold at all costs at $ 450.
3. The company had a deficit in spaces. For this reason, the Packaging and
Maintenance area had to rent a winery whose annual leasing fee was $ 9,500.
Space that if the area was outsourced, it would no longer be required.
4. In relation to the distribution overhead, closing the area would generate
savings of 10%.
5. The other indirect cost will keep the same amount.

An additional fact that worried Javier was the employees of the area. In case of
outsourcing the area, it was agreed with Isoplasticos, that the employees were going
to be hired by the company to prevent them from losing their jobs. In the area there
was an employee next to retire, so Javier decided to keep the employee for the 5
years that he needed to get the pension.

Another possibility offered by Isoplasticos was to outsource only the manufacture of

the containers, for them:

1. It is not necessary to use the machine

2. The supervision of the process was going to be in charge of a foreman for a
price of $ 16,000, the head of the area would be transferred to another area.
3. One fifth of the workforce would be used, giving priority to the oldest.
4. It would not be saved in physical spaces or in distribution overhead.
5. The materials would be 10% of the current one.
6. The other direct costs would amount to $ 5,500
 ACTUAL STRUCTURE
ITEM
Materials 80.000
Labors - Workforce 72.000
Salary of the boss 29.000
Rent 10.500
Amortization of the machine 35.500
Maintenance of the machine 8.000
Other direct cost 18.500
Distribution overhead 25.250

Total 278.750