Case Scenario 1: Heartsong LLC

question 7

Essay

Case Scenario 1: Heartsong LLC.
Heartsong LLC is a designer and manufacturer of replacement heart valves based in Peoria, Illinois. While a relatively small company in the medical devices field, it has established a worldwide reputation as the provider of choice high-quality, leading-edge artificial heart valves. Most of its products are sold to large regional hospital systems and research hospitals. Specialty heart centers are another emerging, but fast-growing, market for its valves. While Heartsong would like to grow quickly, its growth is constrained by the need to finance larger production runs and then carry this additional inventory. For products like those of Heartsong, vendors typically do not collect payment until the unit is actually used in surgery. Moreover, heart valves are usually required on short notice, which means that they must be either onsite, or inventoried at a nearby location. If nearby, then transport of the unit to a hospital or heart center occurs within a matter of hours, and sometimes minutes. For this reason, accelerated growth would require Heartsong to both finance increased production of its heart valves and carry increased levels of inventory that are in fact sitting on its customers' shelves. In fact, inventory-carrying cost is its single largest cost outside of research and development. While profitable growth is necessary if Heartsong is to continue extending its competitive advantage through increasingly greater investments in basic heart valve R&D, it is not clear that the company can internally support all these increased financial commitments (R&D, manufacturing, and inventory). Doc Watson, the CEO of Heartsong, is considering an outside contractor, EdFex, to handle the inventorying, warehousing, and delivery of its valves. EdFex has secure, high-tech warehouses in most major population centers around the country, and can ensure delivery of a product to these markets from its warehouses in less than one hour.
-(Refer to Case Scenario 1). Why might an outsourcing arrangement with EdFex be attractive to Heartsong?

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Definitions:

Downward-Sloping Demand

A market situation in which the quantity demanded of a good or service decreases as its price increases, depicting an inverse relationship between price and demand.

Consumer Surplus

The difference between the total amount that consumers are willing and able to pay for a good or service versus what they actually pay.

Willingness to Pay

The maximum amount an individual or organization is willing to spend to acquire a good or service.

Consumer Surplus

The discrepancy between the financial amount consumers intend to spend on a good or service and the amount they end up spending.