Spartan Heat Exchangers Inc Report
Autor: yiyiyiyi0122 • September 12, 2017 • Case Study • 686 Words (3 Pages) • 2,732 Views
Case 2-1: Spartan Heat Exchangers Inc report
In order to help Spartan better compete in the current heat exchanger industry, the business strategy in the next five years was finalized in May. Rick Coyne’s position in the material department required him of drawing a practical and detailed plan that would be well-designed to respond to Max Brisco’s request. Primarily, the main objective of achieving the new strategy is by standardizing the product line rather than customizing product, which would in turn reduce the customer and raw material lead time and lower the cost of raw material. This new strategy requires making a positive difference in material, procurement and inventory management system. As such, Rick is facing the following challenges: reducing the final product lead time from 14 weeks to 6 weeks, reducing the raw material lead time from 6 weeks to few days, increasing the inventory turns to 20, reducing the production cost by 10% within a year, and eliminate stock outs.
First, standardizing the product line into three to four basic line means that Spartan is no no longer needs more than 350 vendors for its raw materials. The change requires identifying the most essential suppliers, and thus reducing the suppliers of the company. The material department needs to carefully analyze the past transactions and lead time recode of suppliers. Doing so would enable the strategic identification of several key suppliers that can meet the requirements for the new product line, particularly the shorter lead time. After filtering the suppliers that the company deals with, mapping out the possible shortest lead time, i.e. few days rather than several weeks, and negotiate with these key suppliers to ascertain that they can meet the raw material lead time objective of the new product line.
Second, to increase the inventory turns, the investment needed in inventory needs to decrease while increasing the cost of good sold. As the case states, raw material takes about 40% of Spartan’s total inventory in which 36% its purchases were for aluminum products, thereby making the investment for inventory worth $3.5 million.
Table 1: Calculation of new inventory turns after lead time and cost reduction are objective met
Raw material inventory of its total inventory cost: 0.40*$3,500,000 =$1,400,000 |
Aluminum product inventory cost:$1,400,000*0.35=$490,000 |
Aluminum product weekly inventory cost: $490,000/12/4=$10,208 (Assume raw material lead time reduce to our objective[within one week]) |
(Assume cost reduce by 10 percent [Spartan’s cost reduction objective]) $10,208*0.90=$9187 |
Cost of good sold for aluminum product:$25,000,000*0.40=$8,750,000 |
Cost of good sold for aluminum product to weekly:$8,750,000/12/4=$182,292 |
Inventory turns would increased to 20: $182,292/$9187=19.84=20 |
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