Buy a finishing line in Surat?
Before the decision
A Surat textile processor has outsourced finishing since opening its weaving shop. When external lead times lengthened, one customer started splitting orders across suppliers. The director found a used finishing line but needs to justify a fixed commitment against an order book that swings by season.
Read the companion story: The queue at the finishing line
The problem
Install a finishing line or keep outsourcing the work?
Decision owner: A textile processor’s operations director.
Decide before next quarter’s capacity booking. Compare one year of incremental economics. The in-house line can finish at most 90,000 metres per year. The model uses an annual fixed charge rather than an upfront purchase price.
Option economics
Scroll the table to see all figures.
| Option | Volume (metres) | ₹ per unit | Fixed cost | Net contribution |
|---|---|---|---|---|
| In-house | 70,000 | 18 | ₹8.4 lakh | ₹4.2 lakh |
| Outsource | 70,000 | 6 | ₹0 lakh | ₹4.2 lakh |
Make the call
- At what committed volume do the two options tie?
- How would lost throughput affect the decision?
Reveal the worked solution
At 70,000 metres, both options contribute ₹4.2 lakh. The line saves ₹12 per metre relative to outsourcing. The ₹8.4 lakh annual fixed charge divides by ₹12 per metre to give a crossover of 70,000 metres. At 60,000 metres, outsourcing leads by ₹1.2 lakh.
- Frame the decision
Check the bottleneck at the busiest point in the operating cycle. An annual forecast can fit on paper while a peak week still breaks the service promise.
- Calculate both options
In-house: 70,000 metres × ₹18 less ₹8.4 lakh in fixed costs gives ₹4.2 lakh. Outsource: 70,000 metres × ₹6 less ₹0 lakh in fixed costs gives ₹4.2 lakh.
- Stress-test the forecast
The options tie on the base assumptions. Compare the cost and reversibility of the commitments. If In-house delivers 10% fewer metres (63,000) at the same margin and fixed cost, it contributes ₹2.94 lakh. Holding the other option constant, the stressed result falls behind. This isolates volume risk. Check whether both options would respond to the same change in demand.
- Set a decision threshold
Holding the other option’s result fixed, In-house needs at least 70,000 metres to match or beat it under the model. Install once signed work reliably exceeds 70,000 metres per year and trial runs show the line can match the outsource vendor’s rework rate.
Keep outsourcing while demand remains uncertain. Ask for a three-month overflow agreement so that work beyond the line’s capacity can still be accepted.
Check whether your answer names the trade-off, cites a number from the exhibit and specifies a reversal condition.
What if the whole market moves?
The worked solution tests a change to one option at a time. Here, both options gain or lose the same percentage of volume. Unit contribution and fixed costs stay constant.
| Volume scenario | In-house | Outsource | Higher contribution |
|---|---|---|---|
| Both lose 10% of volume | ₹2.94 lakh | ₹3.78 lakh | Outsource |
| Base assumptions | ₹4.2 lakh | ₹4.2 lakh | Tie |
| Both gain 10% of volume | ₹5.46 lakh | ₹4.62 lakh | In-house |
Explain which option you would take forward. Check whether capacity, price or customer mix would also change as the market moves.
Practise this case as an interview