Case Scenario 1: Heartsong LLC

question 62

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). What are the implications of an EdFex outsourcing arrangement for the capabilities underlying Heartsong's competitive advantage?

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Definitions:

Net Income

Net income represents the total earnings of a company once all costs, expenses, and taxes are deducted from its total revenue.

Dividends

Dividends are a portion of a company's earnings distributed to shareholders, usually in the form of cash payments or additional stock.

Equity Method

An accounting technique used to record investments in other companies, where the investment is initially recorded at cost and subsequently adjusted to reflect the investor's share of the net assets of the investee.

Net Income

The total earnings or profit of a company after subtracting all expenses, including taxes and operating expenses, from its total revenue.