SPARTAN HEAT EXCHANGERS INC.
On June 10, Rick Coyne, materials manager at Spartan Heat Exchangers Inc. (Spartan), in Springfield, Missouri, received a call from Max Brisco, vice president of manufacturing: “What can materials department do to facilitate Spartan’s new business strategy? I’ll need your plan in next week.”
SPARTAN HEAT EXCHANGERS
Spartan was a leading designer and manufacturer of specialized industrial heat transfer equipment. Its customers operated in a number of industries such as steel, aluminium smelting, hydroelectricity generation, pulp and paper, refining, and petrochemical. The company’s primary products included transformer coolers, motor and generator coolers, air-cooled heat exchangers, and transformer oil coolers. Spartan’s combination of fin-tube and time-proven heat exchanger designs had gained wide recognition bot in North America and internationally.
Sales revenues were $25 million and Spartan operated in a 125,000-square-foot plant. Spartan was owned by Krimmer Industries, a large privately held corporation with more than 10,000 employees worldwide, head-quartered in Denver.
Rick Coyne summarized the business strategy of Spartan during the past ten years: “We were willing to do anything for every customer with respect to their heat transfer requirements. We were willing to do trial and error on the shop floor and provide a customer with his or her own unique heat transfer products.” He added, “Our design and manufacturing people derived greatest satisfaction making new and customized heat transfer products. Designing and research capabilities gave us the edge in developing and manufacturing any kind of heat transfer product required by the customer. Ten years ago, we were one of the very few companies in our industry offering customized services in design and manufacturing and this strategy made business sense, as the customers were willing to pay a premium for customized products.”
MANUFACTURING PROCESS
The customized nature of Spartan’s product line was supported by a job shop manufacturing operation with several departments, each of which produced particular component parts, feeding a final assembly area. Each job moved from work center to work center, accompanied by a bill of material and engineering drawing. The first process involved fitting a liner tube (in which the fluid to be cooled passed) into a base tube. This base tube, made of aluminium, was then pressure bonded to the inner liner tube through a rotary extrusion process that formed spiral fins on the base tube. The depth of the fins and the distance between them determined the amount of airflow across the tubes, and thus the cooling efficiency and power of the unit.
MATERIALS DEPARTMENT
Spartan’s buyers sourced all raw materials and components required by manufacturing and were responsible for planning, procurement, and management of inventories. Rick managed an in-house warehouse used for housing the raw material inventories, maintained adequate buffer inventories, and executed purchase contracts with vendors, ensuring specifications were met while achieving the best possible price. Rick’s department included two buyers, a material control clerk, an expeditor, and tow shippers/receivers.
It was common for Spartan to have multiple vendors for raw material supply, and the materials group used more than 350 vendors for its raw materials, with current lead times ranging from a few days to six weeks. This wide supplier base was necessitated by the customization strategy adopted by the company. Rick noted that approximately 35 percent of Spartan’s purchases were for aluminium products, mainly tubes and sheets. On average the plant had $3.5 million worth of inventory, in the form of both raw and work in process. Raw material inventory constituted approximately 40 percent of the total. Rick estimated that Spartan had inventory turns of four times per year, which he believed was comparable to the competition.
Manufacturing operations regularly complained about material shortages and stockouts and regular inventory audits indicted significant discrepancies with inventory records on the company’s computer system. Furthermore, a significant amount of stock was written off each year due to obsolescence. Rick suspected that production staff regularly removed stock without proper documentation and that workers frequently deviated from established bill of material.
NEW BUSINESS STRATEGY
Competition in the heat exchanger industry had increased dramatically over the past decade, with much of the new competition coming from Korea and Europe. Korean firms with their low cost base competed primarily on price, while European firms focused on standardizing their product lines to a few high-volume products and competed on delivery lead time and price. Spartan’s competitors in Europe used assembly line manufacturing processes, rather than batch or job shop operations.
Senior management viewed the competition from Europe and Korea as an imminent threat. Many of Spartan’s customers had recently developed aggressive expectations regarding pricing and delivery lead times and some key customers had decided to opt for standard product design, sacrificing custom design for lower cost and faster delivery.
The changing nature of its industry forced senior management to re-examine their business strategy. As a result, in January, a multidiscipline task force representing engineering, manufacturing, and sales was formed with the mandate to formulate a new five-year business strategy.
The new corporate strategy was finalized in May and reviewed with the management group on June 1st in an all-day meeting. The central theme of the new strategy was standardization of all product lines, in terms of both design and manufacturing, reducing variety to three or four basic lines for each product category. The sales department would no longer accept orders for specialized designs. The aim of the new strategy was to reduce the delivery lead time from 14 weeks to 6 weeks and to lower production cost dramatically.
NEW CHALLENGES FOR MATERIAL DEPARTMENT
Max Brisco indicated that he expected the materials department to play a major role in support of the new corporate strategy and needed to know by next week the specifics of Rick’s plan. The task force set a number of ambitious targets. First, customer lead times for finished products were to be reduced to six weeks from the current average of 14 weeks. Second, the new objective for inventory turns was 20 times. Meanwhile, Raw material stockouts were to be eliminated. Third, Max believed that product standardizations also would provide opportunities to reduce costs for purchased goods. He expected that costs for raw materials and components could be cut by 10 percent over the next 12 months.
Rick fully supported the new direction that the company was taking and saw this as an opportunity to make major changes. He knew that Max would want the specifics of his plan during the meeting in a week’s time.If you were Rick what plans would you have for presenting during the meeting?