Spartan Heat Exchangers Inc.
Current State Spartan Heat Exchangers Inc. is a leading designer and manufacturer of specialized industrial heat transfer equipment for more than 10 years. The company’s primary products are transformer coolers, hydro generator coolers, air-cooled heat exchangers and transformer oil coolers. Their USP – Fin tube type heat exchangers and long lasting products. They are into highly customized heat equipments & because of new competition from European & Korean companies they have changed their corporate policy, which emphasize on reducing the product variety & standardized the product.
The new business policy also states of reducing the current lead time from 14 weeks to 6 weeks. Problem Statement The Materials Department headed by Rick Coyne has to take a lot of initiatives internally to incorporate various implications of the new strategy, and submit his report to his boss Max Brisco of the changes suggested by him within a week. His major challenges are: •Change from responsive to anticipatory model. •Keep-up with the increased competition in the industry. Inventory turns from present 4 times to 20 times. •Eliminate material shortages & stock outs. •Reduce cost of Purchase goods by 10%. •Reduction in the custom lead time from 14 weeks to 6 weeks. Analysis of Key issues & options: •Interpretation of new corporate strategy. (ok, might need some rephrasing of words) In our view the key issue is to find out how to adapt the supply chain strategy from a responsive model to an anticipatory model.
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The previous corporate strategy was based on customization of each of their products which is now being changed to standardization. This change can be best illustrated by comparison of figures 1. 1 and 1. 2 in Appendix 1, wherein the possible corporate structures may tend to three different values, i. e. cost, differentiation and responsiveness; Spartan strategy has shifted from a focus in differentiation and responsiveness to a cost and responsiveness value proposition. •Job shop method of production to Hybrid.
The new corporate strategy implies re-engineering from a job shop method of production (which involved manufacturing operations with several departments, each of which produced particular components, Ref Case) to a hybrid method of production which is a flow operation, where multiple work stations can be working simultaneously, which will mainly allow Spartan to increase volume of production, reduce lead time, it will further lead in cutting down the carrying cost of inventory, even though the inventory will be high. Raw materials procurement The customization strategy required the presence of many vendors and a high level of inventory in the warehouse. On the contrast, the new corporate strategy reduces variety to 3-4 basic lines for each product category will require less variety of raw material but in higher quantity. This will give the company a higher negotiation power for better overall conditions, including delivery time, transportation cost, price, quality & budget. •Lead time reduction from 16 to 4 weeks
One of the main concerns for the company is to reduce the lead time from 16 to 4 weeks in order to keep up with the competition in the market. This should be discussed with the vendors at the time of negotiation & should also be a clause in the PO. Now since the process is already standardized, Rick should also insist on improved communication between sales, materials department & vendors will help in the prediction of demand. There is also an option of keeping a buffer stock in case of an inconsistent demand. We believe that this goal can be achieved with an adequate supply chain strategy.
The fact that we are reducing the number of vendors required will allow us to be more selective and procure only from the vendors that provide a service in accordance with our new needs, i. e. only from those who in the past have consistently delivered in few days lead time or those who can commit to do so in the future. •Change in Corporate Culture The new strategy will affect the corporate structure in the company. Earlier the work was based on the specific requirements of the client and it was more of research based but now the focus on research will be less and it will be more on general requirements.
Therefore the type of work would shift. The present organizational chart of the SC Department in the company includes two buyers, one material control clerk, one expeditor and two shipper/receivers. This structure was functional to the previous strategy because there was a strong focus on the purchasing function. We believe that in order to maximize the SC Department resources in accordance with the new structure the positions and functions of the people with the SC Department will have to be adapted to strengthen the inventory management function of the company.
There company could benefit from having one person responsible for forecasting demand. Processes should be reviewed to ensure that the SC Department has sufficient access to information in order to achieve this task. Re-buying will also be of utmost importance now in order to ensure that there is always sufficient inventory to maintain production going. •Vendor Development. A vendor base of 350 can prove very beneficial for Spartan. Such a large base of vendor proves that Spartan has a good market reputation.
Also the increase in the requirement of raw material & its variety getting reduced will help Rick to: •Maintain & improve quality •Find & develop best–in-class supplier (both these points will help in superior quality product) •Standardize the items bought & the processes used to procure them (now possible due to standardization of product) (Ref pg 48) •Purchase required items & services at lowest cost of ownership. •Another option that Rick will have is Consignment buying (Ref.
Pg 35) (which is possible due to the space available in the warehouse since the variety of raw materials has reduced) This space can be used to keep suppliers inventory under his control (specially for Aluminum which constitutes 40% of the total inventory). A)This will help Rick in another way as he will be able to solve the problem of stock out, specially for the basic raw material ie Aluminum. B)Since Spartan will now need only a fixed variety of raw materials, hence the requirement of a large vendor base will not be required. This will also provide Rick more negotiation power for a ixed vendor base, for his basic raw material as explained later on. The new business strategy being formulated for 5 years will give more negotiation power in view of a commitment of a long term relationship. As we previously mentioned, the new strategy of Spartan will enable the Supply Chain Department to restructure the procurement scenario. As we know, purchasing and supply management are critical to the success of a company. The general modern conception regarding procurement is recognizing the importance that, in addition to price, other elements may have in this relation.
In this line of thought, we believe that being able to reduce significantly the number of vendors will allow the company to make some considerable advances on vendor development. Since there will be a less variety of raw materials to purchase and in a larger quantity than previously, due to the new anticipatory approach, the company should aim to establish long term relationship with these fewer vendors. However by no means do we want to imply that purchasing function at Spartan should be any less strategic.
We believe that this should continue, but also that some resources can now afford, and will highly benefit, from reallocating some resources to the inventory management function. Spartan will require more inventory and raw materials as it would be an ongoing production always. For that the company will have to get in touch with their suppliers more often in order to fulfill production requirement. Suppliers will also have a strong incentive to cooperate with the company as they can obtain higher revenues due to more bulk orders.
Additionally, we know that reducing the costs will drive profitability up. Moreover, reducing the purchasing price on raw materials will produce a leverage effect on the return on assets. This means that any given reduction that Spartan can obtain on the procurement price of aluminum will translate in an even higher increase in the return on assets. (DEMONSTRATE) A reduction in the prices from suppliers is one aspect that is always possible and in this case is necessary because of the situation that is happening in the market.
Spartan should keep always in mind that many of their customers (including some of the key ones) decided to opt for standard product design because it brings them more advantages like lower cost and faster delivery. In consequence, Spartan should look for new suppliers that satisfy effectively the new needs of that the market is asking for. A 10% of reduction in the prices from suppliers could be possible by searching new suppliers that offer standardized products of good quality. It could be a good idea to search new Asian and European suppliers because they are being very competitive according the new market standards.
Spartan should also consider finding an effective logistics route which allows them to reduce costs and they should consider the possibility of consolidating their goods. This will represent a decrease in the expenses that the company has to pay once they receive their goods. •Training of manpower The change in corporate strategy will require the employees to get training in accordance with the new product line. The anticipated increase in business will require more staff so the HR Dept will have to recruit more staff. •R&D : New initiative for a array of new Products
The R&D will have to redirect their efforts to more standardized manufacturing process for a new product line based on the new strategy. •Procurement of Extra Machinery (don’t think this is necessary) Key Assumptions •The materials requirement in a customized product setup is not predictable, but the raw material requirement is quiet predictable in the standardized product setup which will help in reduction of a variety of raw material. We assume that there will be an on-going production. •Another part of the corporate strategy is to reduce the lead time from 16 weeks to 4 weeks.
By adoption of this strategy Spartan will now be able to overcome one of its weakness, which will result in increase in sales, since Spartan will now have access to customers, it lost due to longer lead times. This increase in sales will provide high inventory turnover and help Rick to negotiate the prices & increase his inventory turnover from 4 to 20 times. Inventory Turnover = Sales/ Inventory (ref Pg. ___) • The transition from customization to specialization will also help in reduction in the raw materials variety, which will provide some extra space in the companies’ warehouse, which will allow Rick to do “Consignment uying” (ref pg 35). Key Results of Calculations: Total cost of Inventory (Raw material & WIP) = $3,500,000. 00 Out of which 40% is Raw Material = $ 1,400,000. 00 Remaining 60% is WIP = $ 2,100,000. 00 Target 10% Reduction in cost of raw materials = $ 140,000. 00 •35% of the cost of raw material is Aluminum = $ 490,000. 00 A 15% reduction in the cost a saving of $ 73,500. 00 (as suggested this is achieved by consignment buying or bulk buying & savings on transportation). •Out of the remaining inventory cost of $ 910,000. 00 A 7. % reduction on cost price (ie a saving of $ 66,500. 00) on the remaining inventory achieved through negotiation & PO’s (which will fix the prices for over 12 months) will allow Rick to achieve the target. •Since in customized WIP is more which will decrease in standardization, ie reduction in handling & storage cost. No commitment but looks achievable over a period of 12 months. Recommendations: Based on the above argument we believe that the positivity in Rick’s mind in supporting the new corporate policy is valid & achievable. Appendix 1 1. 1 1. 2 1. 2