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Consolidated Products GCA
Consolidated Products GCA
Consolidated Products GCA
Exhibit 1
Consolidated Products (2001)
Consolidated Products
Headquarters
Engineered
Materials
Santek Images
ConMed Products
Industrial Systems
Pharmacon
Sales: $5 billion
Location: Dallas
INDUSTRIAL SYSTEMS
Industrial Systems, a $5 billion business unit headquartered in Dallas, Texas, is
developing a new line of industrial pumps. This unit will assemble pumps in its own
facilities, but intends to outsource many of the key components and subassemblies,
including the electronic control sensors that are becoming the accepted standard on new
pumps and compressors. The decision to outsource the electronic sensors resulted from
an executive-level study that concluded the cost to manufacture electronic sensors inhouse was highly prohibitive.
Marketing, which is responsible for forecasting and demand planning, estimates that first
year demand for the new line of pumps, and therefore the control sensors that manage the
operation and performance of the pump, would be approximately 500,000 units, with a
20% growth expected for year two. Sensor demand depends totally on final product
demand, which can be somewhat volatile.
Exhibit 2 details the monthly sales forecast for the new product line. The marketing
director is responsible for forecasts, and he maintains that a 95% confidence interval
around the actual demand will likely be between 500,000 and 750,000 units. Supplier
responsiveness and ability to satisfy volume fluctuations will be critical.
Exhibit 2
Two-Year Pump Product Line Forecast
August 2002
September 2002
October 2002
November 2002
December 2002
January 2003
February 2003
March 2003
April 2003
May 2003
une 2003
July 2003
60,000 units
75,000 units
50,000 units
50,000 units
35,000 units
55,000 units
50,000 units
40,000 units
40,000 units
45,000 units
45,000 units
50,000 units
August 2003
September 2003
October 2003
November 2003
December 2003
January 2004
February 2004
March 2004
April 2004
May 2004
June 2004
July 2004
70,000 units
60,000 units
45,000 units
45,000 units
45,000 units
42,000 units
45,000 units
50,000 units
50,000 units
50,000 units
58,000 units
48,000 units
Industrial Systems is targeting the price of its pumps from $1300-$1800, depending on the
model and configuration. The electronic sensor must be in the $135-$150 range. The
company plans to introduce the new line of industrial pumps to the marketplace in August
2002. It must have inventory by June 2002 to begin process proving and pilot production.
Industrial Systems relies on cross-functional commodity teams to develop sourcing
strategies for key purchased items. Executive management views this supplier selection
decision as critical to the success of the new product line. Control sensor technology
helps differentiate the final product in the eyes of the customer. This is important to
counteract the perception that industrial pumps are a commodity item.
The commodity team has spent the last several weeks visiting three suppliers, and is
currently evaluating various supply options. The team expects to begin negotiation with
one or more suppliers within the next several weeks.
Five suppliers responded to the commodity team's Request for Proposal, which was
forwarded twelve weeks previously. Although other electronic control suppliers exist, only
five showed an interest in the proposal. An initial review of these proposals revealed that
three of the five suppliers were cost competitive given the initial target cost.
The team visited three suppliers directly to collect detailed information. The visits ranged
from one to two days each, with all three visits completed within a three-week period.
These visits were time-consuming and exhausting, particularly since one of the suppliers
was located in Asia. Unfortunately, Industrial Systems does not have an International
Purchasing Office (IPO) to support its international procurement activities. Furthermore,
no one on the team spoke Japanese. Fortunately, the other two suppliers, located in the
U.S., were much easier to visit. In fact, one supplier was located only fifty miles from the
buyers assembly facility.
The following sections summarize data collected during the commodity team's three
supplier visits.
Supplier 2: Techline
A second candidate for the contract is Techline, a smaller manufacturer located in
Colorado Springs, Colorado. The company focuses exclusively on the design and
production of electronic sensors for industrial pumps and compressors. The team
discovered this company almost by accident. A team member was browsing a trade
journal and saw Techlines advertisement. When the team visited the facility, the team
was surprised at its small size and by the fact that it is located in an old warehouse.
Techlines president met with the team in person. He explained that he was a graduate of
Stanford in electrical engineering and had decided to start his own company after working
for another supplier for 18 years. The company entered the sensor market four years ago
and, during this time, has established a reputation for delivery reliability and innovation.
The president explained that Techlines success was based largely on its commitment to
develop new technology, especially technology that enhanced product reliability. He also
claimed that he knew every customer personally
Everyone in the plant seemed highly motivated. The president was particularly excited
about the possibility of working with Industrial Systems, and promised to work closely with
the company on this contract and for any new product lines. When asked if his firm would
have any problem in meeting demand should they receive the contract, he hesitated
before answering. He admitted that this contract would be the largest in Techlines
relatively short history. He also indicated that several other buying teams were also going
to be sending teams to evaluate Techline within the next several weeks. However, he
assured the team that he would do whatever it took to maintain reliable delivery schedules
if Techline received the contract. Interestingly, it appeared that the production lines were
experiencing some problems during the team's visit, as they were shut down for nearly
four hours!
Relevant Techline data include:
Exhibit 3
Selected Supplier Balance Sheet Data (U.S. $ in millions)
For Period Ending December 31, 2000
Control
Technologies
Techline
Sensor Link
ASSETS
Cash
$105.9
$35
$75
Marketable securities
$152.5
$9
$115
Accounts receivable
$889
$54
$395
Inventories
$1177.7
$105
$183
$2,325.1
$203
$768
Investments at equity
$838.4
$26
$50
Goodwill
$400
$38
$130
$1,238.4
$64
$180
$1,958.5
$155
$372
TOTAL ASSETS
$5,522
$422
$1,320
Notes payable
$625.5
$21
$59
Accounts payable
$725.9
$95
$205
$270
$25
$63
$453.2
$50.5
$210
$2,074.6
$191.5
$537
Long-term debt
$1,643.5
$65
$266
Shareholders' equity
$1,803.9
$165.5
$517
$5,522
$422
$1,320
LIABILITIES AND
SHAREHOLDERS' EQUITY
Exhibit 4
Statement of Income Data (U.S. $ in millions)
Year Ended December 31, 2000
Control
Technologies
Net sales
Techline
Sensor Link
$6,250
$600
$2,400
$5,575
$401
$1,555
$450
$81
$630
Interest expense
$175
$35
$72
$6,200
$517
$2,257
$50
$83
$143
$20
$40
$69.5
NET INCOME
$30
$48
$73.5
Although Industrial Systems is buying an electronic sensor that has features defined
by industry standards, extra design features and performance capabilities that will
differentiate the end product will result in additional tooling requirements at each
supplier.
The company expects the line of pumps to have a two-year life cycle. The commodity
team will allocate all supplier-related production costs, such as tooling, on a per unit
basis over a two-year period. The company fully expects to introduce its next
generation of pumps at the end of two years.
Industrial Systems plans to maintain some level of safety stock inventory for the
sensors, at least for the first year. Due to long material pipelines, Industrial Systems
expects to maintain a one-month safety stock inventory if it utilizes an Asian supplier.
For domestic suppliers, the company expects to maintain an inventory equal to two
weeks worth of demand as safety stock.
Inventory carrying costs, which include storage, handling, obsolescence, taxes, and
cost of capital are 16% of the inventory's unit cost. The company assumes carrying
costs for safety stock material.
For this analysis, assume the unit price quoted by each supplier is what Industrial
Systems would pay for the sensor from each supplier. Subsequent negotiations will
likely alter the quoted price.
While tooling depreciation could be a cost consideration, this case does not consider
depreciation.
Assume the date is currently January 2002 with first production by the supplier
required in June 2002.
1. What is your recommended sourcing strategy in this case? Please support your
decision with quantitative and qualitative evidence gathered during the case
analysis. Also, present your plan to reduce any risks associated with your sourcing
decision.
4. No supplier selection decision is without risk. Create a table for each supplier that
identifies the various risks associated with the decision and identify ways to
mitigate or manage the impact of each risk if it were to occur.