STEEL WORKS, Inc.

Prepared For
Prof. D. Das
Faculty of Management Studies Delhi

Prepared By
Saurav Kumar | Shashank Agarwal | Shreya Choudhary | Sanjay S
192 194 198 188
Company Background

- Founded in 1980, by 3 Material Scientist from MIT

- Majorly Manufactures
I. Custom Use Steel - Custom Product Division
II. Speciality Use Steel - Speciality Division
- Currently employs 2500+ people at 5 different
locations
- With their first product, DuraBend™, the company
earned a reputation as a high technology provider
and quickly established a niche position in what is
typically regarded as a commodity market.

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6 Major Issues Customer service Inventory levels Plummeting
level is the worst are extremely high Market share
faced by Steel
Works

CEO wants to fix all the

prevalent issues in 1
Sales are dropped Expenses are up Loss of trust of
week
30% 25% !!! the brand

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DATA ANALYSIS for
both the categories

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Data Analysis – Custom
Product Division
Only 10% of all the
% sale to Customer types products is sold to
multiple customers

Sold to one customer Sold to multiple Customer

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Speciality 1. Operates in 3 plants with 6 different product
lines –
Product
2. Exploit economies of scale in production
Division
3. Rely on the logistics network to distribute
products
4. Mainly manufactures product families in the
same plant to minimize manufacturing costs

This division
generates 67% of
the total revenues.

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Why inventory levels
are so high?

Response

“We’ve got to keep our customers happy.

Customers aren’t satisfied when you tell them that
they to wait 3 weeks for delivery! We listened to
that corporate inventory reduction mandate in
1991 and cut our inventories back 20 percent and
we were running out of product every week!

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 CASE QUESTIONS - 1

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1. What are the challenges being faced by Steel Works, Inc?

Solution :

The current issues faced by Steel Works, Inc are as follows:

1. Inventory levels are extremely high
2. Customer service level is the worst in the industry
3. The company is losing market share and the customers are moving to the competitors
4. Sales are down by 30% and expenses are up by 25%

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2. What does data tell you about speciality product?

Solution :

• Operates in 3 plants with 6 different product lines and exploits economies of scale in production.
• Rely on the logistics network to distribute products.
• Mainly manufactures product families in the same plant to minimize manufacturing costs
Generates 67% of the company's total revenue.
• Specialty Divisions largest customer brings 10% of the company's total revenue.
• 120 products sell to the 130 customers.

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 3. How much inventory might you expect?

Solution :
Sum of Total Demand Demand Inventory

Service Selling Recommended

LABEL 12 Grand Total Average SD CV average Z value Unit Cost Profit Margin Z value
level Price Inventory

DURABEND R10 4 187 15.58333 13.18717 0.846236 72.78583 4.337738 0.999993 0.23 1.15 0.92 0.8 0.841621 26.68194

DURABEND R12 883 12096 1008 255.9172 0.253886 740.805 -1.04407 0.148227 0.25 1 0.75 0.75 0.67449 1180.614

2480 29563 2463.583 494.2095 0.200606 1875.064 -1.19083 0.11686 0.27 1.026 0.756 0.736842 0.63364 2776.734
DURABEND R15

DURAFLEX R10 212 1167 97.25 92.52432 0.951407 604.9867 5.487602 1 0.17 0.68 0.51 0.75 0.67449 159.6567

DURAFLEX R12 15 223 18.58333 11.4293 0.615029 55.59167 3.238024 0.999398 0.22 0.88 0.66 0.75 0.67449 26.29228

0 658 54.83333 80.05434 1.459958 388.5883 4.169106 0.999985 0.3 1.14 0.84 0.736842 0.63364 105.559
DURAFLEX R15

DURAFLEX R23 76 427 35.58333 45.86236 1.288872 190.6608 3.381368 0.999639 0.31 1.55 1.24 0.8 0.841621 74.18207

Grand Total 3670 44321 3693.417 417.4162 0.113016 3928.483 0.563145 0.713332

Grand
LABEL 1 2 3 4 5 6 7 8 9 10 11 12
Total
Label Recommended Inventory
DURABEND R10 74.61 68.94 76.38 67.84 68.06 72.87 67.14 76.78 74.14 78.12 74.8 73.75 873.43 DURABEND R10 34
DURABEND R12 743.33 743.3 743.9 726.94 751.84 755.28 726.96 735.76 722.29 753.85 765.85 720.36 8889.66 DURABEND R12 1954
DURABEND R15 1834.84 1857.73 1910.52 1873.12 1846.33 1894.38 1909.22 1834.63 1889.68 1903.9 1838.11 1908.31 22500.77 DURABEND R15 2956
DURAFLEX R10 643.13 668.45 608.65 634.8 572.64 571.16 571.77 616.94 623.44 558.96 605.92 583.98 7259.84 DURAFLEX R10 232
DURAFLEX R12 51.18 57.92 52.64 54.28 57.27 58.52 57.76 55.67 52.65 53.04 57.32 58.85 667.1
DURAFLEX R12 40
DURAFLEX R15 396.14 402.42 358.85 401.65 387.38 358.37 412.35 370.47 396.01 383.02 373.9 422.5 4663.06
DURAFLEX R23 187.11 181.51 185.33 199.21 196.78 205.01 193.42 191.46 187.29 182.06 190.02 188.73 2287.93 DURAFLEX R15 120
Grand Total 3930.34 3980.27 3936.27 3957.84 3880.3 3915.59 3938.62 3881.71 3945.5 3912.95 3905.92 3956.48 47141.79 DURAFLEX R23 75
Demand over the period of 1 month Recommended Inventory
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Demand vs Inventory

Demand Inventory

LABEL Average SD CV average Z value Service level Unit Cost Selling Price Profit Margin Z value Recommended inventory Change

DURABEND R10 15.58 13.19 0.85 72.79 4.34 100% $ 0.23 $ 1.15 $ 0.92 80% 0.84 26.68 ê

DURABEND R12 1008.00 255.92 0.25 740.81 -1.04 15% $ 0.25 $ 1.00 $ 0.75 75% 0.67 1180.61 é

DURABEND R15 2463.58 494.21 0.20 1875.06 -1.19 12% $ 0.27 $ 1.03 $ 0.76 74% 0.63 2776.73 é

DURAFLEX R10 97.25 92.52 0.95 604.99 5.49 100% $ 0.17 $ 0.68 $ 0.51 75% 0.67 159.66 ê

DURAFLEX R12 18.58 11.43 0.62 55.59 3.24 100% $ 0.22 $ 0.88 $ 0.66 75% 0.67 26.29 ê

DURAFLEX R15 54.83 80.05 1.46 388.59 4.17 100% $ 0.30 $ 1.14 $ 0.84 74% 0.63 105.56 ê

DURAFLEX R23 35.58 45.86 1.29 190.66 3.38 100% $ 0.31 $ 1.55 $ 1.24 80% 0.84 74.18 ê

Grand Total 3693.42 417.42 0.11 3928.48 0.56 4349.72 é

LABEL Recommended inventroy Service Level Avg Lot Size No. of lots New Inventory New Z value Service level
DURABEND R10 26.68 80% 17 2 34 1.3966 92%
DURABEND R12 1180.61 75% 977 2 1954 3.6965 100%
DURABEND R15 2776.73 74% 2956 1 2956 0.9964 84%
DURAFLEX R10 159.66 75% 116 2 232 1.4564 93%
DURAFLEX R12 26.29 75% 20 2 40 1.8738 97%
DURAFLEX R15 105.56 74% 60 2 120 0.8140 79%
DURAFLEX R23 74.18 80% 15 5 75 0.8595 80%
Grand Total 4349.72 5411

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Chart – Demand vs Inventory vs Recommended Inventory

DuraFlex R12
70
Demand Inventory Recommended Inventory
60 57.92 58.52 57.76 57.32 58.85
57.27 55.67
52.64 54.28 52.65 53.04
50 51.18
40 40 40 40 40 40 40 40 40 41
40 40 40 40
34
30
25 26
20 19
15 15 13 15 15
10
0 2 3
1 2 3 4 5 6 7 8 9 10 11 12
Demand 15 34 2 3 25 15 13 26 41 19 15 15
Inventory 51.18 57.92 52.64 54.28 57.27 58.52 57.76 55.67 52.65 53.04 57.32 58.85
Recommended Inventory 40 40 40 40 40 40 40 40 40 40 40 40

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4. What opportunities are there for custom products?

Solution :

• Sold multiple products to customers - Majority of the custom products are developed and
sold exclusively for one particular customer
• Increase custom products margin to 50% - Since the products are always in high demand,
the Division can charge a 50% margin on these products while selling them to the competitor
brands
• Lower Inventory Levels - The high levels of inventory in Custom Division was to keep the
customers happy as they were not willing to wait for three weeks for delivery. To combat this,
the division can work with each of its customers' to adapt a "Demand Pull Ordering'
system”. In demand pull ordering system, it places the primary emphasis on the consumption
or shipment of goods rather than forecasting, balancing the production lead time with the
customer’s required delivery date. This minimal approach to supply chain is designed to
handle demand uncertainty while balancing the inventory requirement.

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 CASE QUESTIONS - 2

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Q1. Based on the spreadsheet data, how would you characterize
Steel Works’ products? What about Steel Works’ customers? Given
your answer and the information in the case, what does this
suggest?
Solution :

There are two categories of product served by Steel works – Custom & Speciality

Following range of products are there –

Custom Steel
Product
1. Durabend R12 categories
2. Durabend R10 Speciality Steel
3. Durabend R15
4. Durabend R23

Steel works has 130 customers and 120 products in specialty division

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Q2. What does the coefficient of variation tell us? Can you
determine the coefficient of variation for the DuraBend™ and
DuraFlex™ product lines?

Solution :
The coefficient of variation (CV) is a statistical measure of the relative dispersion of data points in a
data series around the mean. In finance, the coefficient of variation allows investors to determine how
much volatility, or risk, is assumed in comparison to the amount of return expected from investments.

DURABEND DURAFLEX

5.25 5.62
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Q3. How much inventory has Steel Works been holding? How
much should they have been holding?

Solution :

Actual Expected
Cycle Stock Safe Stock
Inventory Inventory
DB R10 8 26 34 72
DB R12 504 510 1014 740
DB R15 1232 990 2222 1875
DF R10 49 185 234 604
DF R12 9 23 32 55
DF R15 28 160 188 388
DF R23 18 92 110 90
TOTAL 1848 3824 3834

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Thank You

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