© Executive Confidantes, 2018

CASE STUDY OPERATIONS & MANAGEMENT

BACKGROUND:

The subject company, C014¹, is a 40+ year old, private family-owned business located in lower Westchester County in the State of New York. As a provider of material handling machinery, their product line is narrow in focus, primarily satisfying the needs of the metals industry. Although they considered their knowledge of the marketplace to be extensive, revenue and profits were declining.

OBSERVATIONS:

After touring the manufacturing plant, a series of meetings were scheduled with the leaders of each of the functional departments involved in the process. Since the sales force was remote to the facility, Skype video calls were held rather than face-to- face meetings. By asking a series of questions and observing both the answers and body language of the key players a sequence of the “typical” sales process was developed:

WHAT:

1. Request for Quote -----------------------------

2. Quotation with estimated delivery ------
3. Purchase Order --------------------------------
4. Design ---------------------------------------------
5. Manufacture ------------------------------------ 
6. Testing ------------------------------------------- 
7. Shipping ------------------------------------------
8. Installation ---------------------------------------

WHO:

1. Customer

2. Sales Dept.
3. Customer
4. Engineering Dept.
5. Purchasing Dept., Production Dept., Engineering Dept.
6. Test Dept.
7. Production Dept.
8. Field Service

To complete the fact gathering, a recent customer was contacted to collaborate the process and estimate satisfaction. Their overall satisfaction level was low, primarily due to system cost and late delivery. Understanding that most customers believe that the product is too expensive, it was decided to investigate the cause of late delivery first with a comparison of costs done afterwards.

 

Late delivery is generally a valid concern for customers who may be scheduling multiple activities in parallel which could affect their customer deliveries and costs. Upon further discussion, it was determined that this was indeed the case with electricians having been paid overtime to shorten the installation schedule, and software modifications being done on-site. It was also determined that there had been some flexibility in the time frame, but C014 had not shared changes in delivery until too late in the process. A review of the notes provided by C014’s Program Manager identified a series of design
changes which were key to the delays.

 

Although the quality of the system provided exceeded expectations, the additional costs for on-site software development and electrical wiring were unacceptable. The customer felt that the process was more painful than it should have been. They had received lower quotations from other suppliers and were not completely certain that they would buy from C014 for their next expansion.

With the customer’s review in hand, the key players were brought together to perform a “postmortem” review. This technique should identify everything in the project that generated a delay and increase in costs. Realizing the importance of improving the process, a more detailed process was defined:

WHAT:

1. Request for Quote -----------------------------

2. Quotation with estimated delivery ------
3. Purchase Order --------------------------------
4. Design ---------------------------------------------
5. Manufacture ------------------------------------

  5a. Design Change -----------------------------

6. Manufacture ------------------------------------

  6a. Design Change -----------------------------

7. Testing ------------------------------------------- 

  7a. Test Procedure ----------------------------
8. Shipping ------------------------------------------

9. Installation ---------------------------------------

WHO:

1. Customer

2. Sales Dept.
3. Customer
4. Engineering Dept.
5. Purchasing Dept., Production Dept., Engineering Dept.

5a. Engineering, Purchasing Dept.

6. Purchasing Dept., Production Dept., Engineering Dept.

6a. Engineering, Purchasing Dept.
7. Test Dept.

7a. Engineering Dept.
8. Production Dept.
9. Field Service

Estimates of the additional costs indicated that the material costs had increased by 15% and labor costs by 25%, effectively reducing the gross margin of the sale from 50% to 40.5%.

ANALYSIS:
 

The company selling prices were determined by a 100% markup of direct material and semi-burdened labor costs. The profit for each project was to cover the remaining overhead costs including Engineering, Sales, Finance and Administration. For the first 25 years of operation, this had been adequate to return a typical annual growth of 5-7%. A detailed review of the data for the last ten years indicated that growth had declined. By studying the figures, it becomes obvious that if each project cost reduced the gross margin by [(50%-40.5%)/50%]*100 = 19%, the profit was inadequate to cover the increasing cost of the other overhead categories.

A comparison costs associated with the manufacture of certain items with outside suppliers confirmed that a cost saving of 3% could be achieved on roughly 30% of the items manufactured. The dollar value of this savings did not justify having the employees idle.

SUGGESTED ACTIONS:

Recognizing that improvements to both Revenue and Net Earnings are necessary, the following proposals are made to improve Net Earnings:

1. It is necessary to perform a more detailed analysis of the Request for Quotation in order to identify areas of potential cost overruns. The costs associated with performing this research can be included in the cost estimates. A checklist of required items can be created to minimize errors and reduce rework time. Once a firm understanding of what is to be supplied is determined, then costs and times can be estimated.


2. Since multiple departments are involved in meeting customer expectations, each should review their portion of the Scope of Supply to gain commitment and identify areas of concern. If software interfaces or special programs are required, estimate time to develop and test. Then an estimate of delivery can be determined based upon current loads and anticipated uncertainties. A draft of the project Gantt chart should be created for future comparison.


3. The Quotation should be discussed with the customer to achieve transparency and improve communications. Flexibility in the schedule should be explored and if requested, what is the cost associated with reducing delivery times.

4. Upon receipt of the customer’s Purchase Order, it should be compared to the Quotation to identify any changes.


5. A written acknowledgement of the Purchase Order should be submitted along with a firm delivery date.


6. Any changes to the Scope of Work should be documented and the customer notified if it will affect price or delivery. Errors caused by the company must be absorbed while changes requested by the customer may be negotiated.


7. Identify milestones and advise the customer when they are achieved and if there are any slips in the schedule.


8. Create documentation for assembly and test in advance so that Manufacturing is not waiting for information.


9. Arrange for pre-acceptance in the factory to identify any shortcomings. Include the customer.

By focusing their efforts on the transportation of products for the metals industry, the company had overlooked the opportunities provided by the food and warehouse industries. Applying the same technology with a different implementation would open the doors to growing markets. It is recommended that a sales effort directed to working with Amazon, Dollar Tree Stores, Auto Zone and others be instituted.

SUMMARY:


Although C014 had been providing solutions for many years, the advantages provided by advances in technology and a shift in market opportunities, had not been implemented. By changing the approach, cost of manufacture decreased realizing an increase in project profitability. In addition, by promoting sales to other industries (warehouses), revenue was also positively affected.