FABTEK

FABTEK ( FABTEK ( A ) C ASE SUBMISSION Case Report Submitted to

L S MURTY 

GROUP - 9

 ADITYA BHARADWAJ (1311141) UMAR D R (1311227) HEMANTH K UMAR R (1311227) IGNEESH P (1311275)  V IGNEESH

K  ARTHIK ARUMUGHAM (1311299)  ALEJANDRO SAEZ M ATA (1311E5063)

INDIAN INSTITUTE OF M ANAGEMENT  ANAGEMENT B ANGALORE  ANGALORE Date: 24/10/2014

Contents Overview ................................................................................................................................................. 2 Current issues ..........................................................................................Error! Bookmark not defined. The 4 options ...........................................................................................Error! Bookmark not defined. Refco ....................................................................................................Error! Bookmark not defined. Pierce-Pike ...........................................................................................Error! Bookmark not defined. Worldwide Paper .................................................................................Error! Bookmark not defined. Kathco ..................................................................................................Error! Bookmark not defined. Criteria to be considered .........................................................................Error! Bookmark not defined. Alternatives............................................................................................................................................. 2 Capacity Constraints ............................................................................................................................... 4 Observations in criteria........................................................................................................................... 4 Selection Method ................................................................................................................................ 5 Conclusions ......................................................................................................................................... 6

Overview Fabtek, one of the first companies to provide industrial-use titanium products has been struggling to have positive bottom-line despite recording its record sales of 31.2 million in 1990. There have been issues related to excessive backlogs unreliable internal forecasts and mismanagement of the existing capacity. In June 1991, the company’s booking exceeded its capacity by a significant margin. Under this circumstance, the company at present has four prospective orders to choose from and need to manage the acute shortage in capacity and reduce the increasing dissatisfaction related to late deliveries. The company has different objectives set-out by the various stakeholders and also needs to balance them while decision-making. In this report, an analysis of the various options has been carried out and a viable sales and operations plan is recommended to overcome the current crisis.

Existing Issues at Fabtek Fabtek is plagued by several issues which have been summarized below: •

Capacity shortages leading to delayed deliveries

•

Labour shortage (skilled) specifically in core competence area, welding

•

•

•

Price wars with competitors due to entry into commoditized bids. Fabtek is struggling to command a price premium for its core-competency viz. welding Mismatch in operations’ and sales’ criteria for order attractiveness. For ex: Operations wants technically challenging jobs while sale sis looking for simple, familiar jobs Delays in job completion leads to payment delays leading to working capital crunch

The Available Options – Pros & Cons Refco PROs

CONs

Highest Profitability

Too much reliance on Refco - risk of losing a large portion of business at once

Meets most of the order selection criteria

Late delivery

Fabtek is the co-designer of smaller Whoppers

One-time order, it is unknown whether this order will lead to further related business

Enhancing the relationship with an existing client

Choosing this order eliminates the opportunity to take any other order (promising long-term relationships because of the high demand for labour

progress payments for materials and labour

Refco unsure of Fabtek delivery schedule - labour already running backlogs

Fabtek has experience with similar kind of product.

Rumours of Refco shifting to in-house fabrication.

In line with company’s high quality image.

Good payment terms - On time payment of bills Order size: $6million Reliable cost estimates - progress payments for ‘material and labor’

Pierce-Pike PROs

CONs

Growing market

Uncertainty about timely delivery (reputation damage)

Acquiring a new long-pursued (valuable) client (New Business Opportunity)

No experience in a similar job

Fabtek's largest competitor may lose a valuable client

Failure can risk in losing credibility and customer forever

Good opportunity to develop a new important capability

Progress payment only on raw material

Long-term business opportunity (as PP is currently unhappy with the quality of its existing sources, it may switch its manufacturing partially/ totally to Fabtek) Vitali has been pursuing Pierce-Pike for business for four years Order Size: $4million

Worldwide Paper PROs

CONs

Opportunity to develop a standard line of product

Penalty of 0.1% of the contract price for each working day that the complete order was late. No incentive for early delivery

Ease for management in training the employees

No progress payments for material/ labor

Long-term business opportunity (as WP is planning to license this job to its manufacturer) Experience in a similar job In line with fabtek’s high quality image.

Standard work, less demanding than custom work Good market potential - develop a standard sales force

Kathco PROs

Enhancing the exisiting good relationship with Kathco

Simple design

CONs

The order is a one-shot deal, i.e. no long-term business opportunity as Kathco is building its own fabrication facilities The job doesn’t fit with Fabtek’s high quality image and

capabilities No new capabilities being developed

 Alternatives With the existing alternatives, 15 combinations of projects are possible for Fabtek to bid. We use the following codes to refer the projects: A- Refco, B- Pierce Pike, C- Worldwide Paper, D- Kathco , A+BRefco & Pierce Pike and so on. The various alternatives are initially checked against the various capacity constraints in terms of availability for welding, machining and fabrication. The alternatives

which satisfy the capacity constraints are then taken through a scoring matrix based on the critical criteria for final recommendation.

Capacity Constraints: The capacity constraints are evaluated in 2 steps. The first step is to check if the cumulative labor hours left after taking up the option are not significantly negative for each of welding and fabrication (note machining can be subcontracted). Based on the first pruning the following Alternatives are valid: A, B, C, D, A+D, B+C, B+D, C+D and B+C+D. The second capacity constraint is that since Kathco's horizon is just one year, t he feasible alternative cannot have negative cumulative fabrication labor in the year 1991. This eliminates A+D, C+D and B+C+D. Hence the feasible alternatives are: A, B, C, D, B+C and B+D. The table below summarizes the results of the method.

Possible Alternatives •A, B, C, D, A+B, A+C, A+D,

Capcaity Constraint 1 •A, B, C, D, A+D, B+C, B+D,

B+C, B+D, C+D, A+B+C, A+B+D, A+C+D, B+C+D and A+B+C+D

Capacity Constraint 2 •A, B, C, D, B+C and B+D

C+D and B+C+D •Feasible Alternatives

Observations: It can be seen that some of the criteria are contradicting for ex. ‘ The design is simple & the cost estimates are reliable’ & ‘ Job should be technically challenging’ . So we need to eliminate one of

these. After scrutinizing the above criteria, we see that some of them can be merged, some are redundant and some may need to be eliminated. We have below a consolidated criteria list: CR1:COGS less than 85%, the lower the better CR2:Design should be simple with reliable cost estimates CR3:Customer contribution to overall revenue should not exceed 20% and market contribution should not exceed 30% CR4:Choose projects with progressive time payments to support working capital requirements CR5:Jobs chosen should allow for standardization in the future and have long repetitive runs CR6: Profitability should be high Based on the information gathered from the case, we have assigned the following weights to each of the criteria. This will be used in option evaluation where each of the available 4 options will be rated on a scale of 1-10 on each of these chosen 6 criteria.

No.

Definition

Weight

CR1

COGS less than 85%, the lower the better

24%

CR2

The job fits with Fabtek’s high -quality image and builds capabilities

13%

CR3

Chosen projects should have progressive payments to support working capital

11%

CR4

The chosen project should allow adequate delivery time

11%

CR5

Jobs should allow standardization in the future and have repetitive runs to gain on learning curve effect

8%

CR6

The job gives opportunity for Fabtek to enter high profit new growth segments to beat the commodity trap

8%

CR7

Maximize Profit

25%

Net profit & COGS have been given the highest priority as the company has experienced a steep decline in income (negative income in last fiscal) and thus in the short-term to stay afloat it needs to take on projects that have a high profit and lower costs of production.

Selection Method: Out of the five feasible alternatives, we have selected our recommendation on the basis of criteria as mentioned above. We use a total score approach to score & rank the feasible alternatives. For alternatives with more than one project, we use weighted average score based on the sales revenue. The table below shows the scores(out of 100): Score

A

B

C

D

B+C

B+D

Sales

6,000,000

3,900,000

2,400,000

1,500,000

6,300,000

5,400,000

82.75%

80.38%

87.75%

82.00%

83.19%

80.83%

COGS % CR1

40

90

0

60

30

80

CR2

70

80

90

40

85

70

CR3

90

75

0

25

40

55

CR4

70

70

50

50

60

60

CR5

65

50

85

40

70

45

CR6

60

90

80

50

85

65

CR7

80

60

20

20

85

80

The final selected alternative, which is our recommendation is to take up the Projects and Kathco.

Pierce-Pike

Long Term solutions: For Fabtek’s survival is a commoditized market few  changes in its sales and operations strategy is

required. Common set of organizational goals:

Each department is looking at their own departmental objectives rather than organizational goals. Operations department is looking for technically challenging projects with high margins and job scope and specifications. Marketing department is looking for simple and similar jobs with reliable cost estimates. There should be a common set of organizational goals for better focus and overall synergy and growth of Fabtek. Common set of criteria:

Fabtek should come up with a common set of criteria to take up a job. This is very important for Fabtek which is in B2B market. Common set of criteria taking into account both the departments view has to be created so that every project can be objectively analyzed rather than a case base decision. Value selling:

Marketing is trying to sell as much as possible and bidding for a lot of projects in B2B commoditized market. 15% bidding conversion rate is a testament to it. Fabtek’s margin has eroded and it’s

currently operating in negative profits. Best way to beat the commodity trap is to adopt value selling and stop transactional selling. Sales force has to be trained in value selling. Showcase the value that Fabtek brings to its clients. Focused segmentation: Fabtek’s bidding conversion rate is lower than industry average. This shows that the marketing effort

random and has gone haywire. Bidding for anything and everything in a commoditized market is a very bad move. Once value selling concept is accepted they have to have more focused customer targeting. Pick and choose their customers and approach them with Fabtek’s solutions for their

existing problems or superior value proposition compared to their existing system. Cross functional teams:

Value selling to a focused customer segment is a complicated but essential activity that has to be made to beat the commodity trap and survive in the industry. Value selling cannot be done by usual sales force. They have to be trained and the team has to compose both operations and sales personnel who can showcase the value proposition in Fabtek’s solutions.

Conclusions: 

The projects if taken up will provide a combined profit of $ 1.06 million which might help significantly in moving from red in the profit column to green



The COGS of this project combination is 83%, which is above our target of 80% but still below the upper limit of 85%



For Worldwide Paper project, the design is very simple and has the scope for becoming a standardized offering in the future and thus this is a huge positive given the direction in which Fabtek wants to move strategically



Working Capital however will still be an issue as progressive time payments are not cleary mentioned in the deal.

 Appendix: Decision Criteria The criteria used by various stakeholders for selecting the projects are discussed below: A) Operations Division 

Job is technically challenging



The job fits with Fabtek’s high-quality image & capabilities



The company’s engineering expertise is utilized



The job is long-run and repetitive



The company has experience with similar products



Specifications and job scope are clear



For larger orders, progress payments can be negotiated



Overall contribution before SG&A is near 20% product’s price

B) Marketing Division 

The job is similar to what Fabtek had built before



The design is simple and the cost estimate is reliable



The job has good payment terms



The market area has potential for further development



The job allows adequate delivery time



Price is not the primary factor in the customer’s decision

C) Finance Department 

Maintain COGS should be 80%, with 85% upper limit



Insist on progress payments to maintain healthy working capital

D) Corporate Policy 

Maximum 20% should only reside with one customer



No more than 30% business in one market area



Orders should utilize Fabtek’s core competence viz. welding

 30,000

Welding - cumulative hours after combination of options

 25,000

 20,000

 15,000

 10,000

 5,000

 Jun-91

Jul-91

Aug-91

Sep-91

Oct-91

Nov-91

Dec-91

Jan-92

Feb-92

Mar-92

Apr-92

May-92

 (5,000)

 (10,000)

 (15,000)

(20,000) A

B

C

D

A+B

A+C

A+D

B+D

C+D

A+B+C

A+B+D

A+C+D

B+C+D

A+B+C+D

20000

B+C

Fabrication - cumulative hours after combination of options

15000

10000

5000

0 Jun-91

Jul-91

Aug-91

Sep-91

Oct-91

Nov-91

Dec-91

Jan-92

Feb-92

Mar-92

Apr-92

May-92

-5000

-10000 A

B

C

D

A+B

A+C

A+D

B+D

C+D

A+B+C

A+B+D

A+C+D

B+C+D

A+B+C+D

B+C

 8,000

Machining - cumulative hours after combination of options

 6,000

 4,000

 2,000

 -

 (2,000)

(4,000) A

B

C

D

A+B

A+C

A+D

B+D

C+D

A+B+C

A+B+D

A+C+D

B+C+D

A+B+C+D

B+C