Case Scenario 1: Heartsong LLC

question 146

True/False

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, along with carrying increased levels of inventory that are in fact sitting on their 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) Heartsong should not outsource its inventorying, warehousing, and delivery of its valves to EdFex since EdFex poses a direct threat as a future competitor.

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Definitions:

Efficiency

A measure of how well resources (time, energy, costs) are used to achieve a goal or perform a process with minimal waste or effort.

Break-Even Point

The point at which total cost and total revenue are equal, meaning there is no net loss or gain.

Variable Cost

A cost that varies with the level of output or production, such as materials and labor costs.

Break-Even Point

The level of production or sales at which total revenues equal total costs, resulting in no net loss or gain.