IIM BANGALORE

Fabtek Case Submission

Submitted to Prof. LS Murty Submitted By Group 10

Contents
Overview ................................................................................................................................................. 2 Current issues ......................................................................................................................................... 2 The 4 options .......................................................................................................................................... 2 Refco ................................................................................................................................................... 2 Pierce-Pike .......................................................................................................................................... 2 Worldwide Paper ................................................................................................................................ 2 Kathco ................................................................................................................................................. 3 Criteria to be considered ......................................................................... Error! Bookmark not defined. Alternatives ............................................................................................................................................. 4 Capacity Constraints ............................................................................................................................... 4 Observations in criteria ........................................................................................................................... 4 Selection Method ................................................................................................................................ 5 Conclusions ......................................................................................................................................... 6

Overview
Fabtek is an industrial titanium fabricator. The company is facing issues like poor deliveries and capacity constraints. The company has a certain amount of pre-booked orders for the coming fiscal year. On top of these, the company has the option of choosing from 4 different orders. The company also has to take into consideration the views of different stakeholders (Marketing, Operations and Finance) while making this decision. What follows is an analysis of the different options against these cumulative criteria. Final recommendations have been presented on the basis of this analysis.

Current issues
Late Deliveries of finished products due to capacity shortage Reduced working capital due to late payments Higher the complexity of the job, more Is the delay Lack of skilled resources especially in welding which is the core competence of Fabtek Fabtek is being pulled into price competition by its competitors, not able to command a higher price because of its specialization in complex welding The fabrication employees want technically challenging jobs whereas marketing prefers simple orders that be repetitively done

The 4 Options
Refco
The price of the deal is $6 million and will be the biggest order Fabtek has received Refco will pay 20% of the labour and material costs for every 25% project completion Refco has had a long standing relationship with Fabtek and has been its biggest customer but has recently faced issues with delivery delays

Pierce-Pike
Pierce Pike employed Fabtek pretty late for its contracts; till then, it had been awarding contracts to Fabtek's competitors. Request for pressurized reactor from Pierce pike to Fabtek The price quoted by Fabtek was $3.9 million on the job There were concerns whether Fabtek could do the job in hours expected Reactor involved some unusual fabrication in which Fabtek was inexperienced Pierce Pike was apprehensive of Fabtek's capacity to meet the order Pierce Pike was willing to make progress payments only on raw material

Worldwide Paper
Large integrated producer of pulp, paper and fabricated paper products Worldwide was putting its first full sized production unit out for bid.

Vitali sees opportunity in this contract to enable Fabtek to train employees on standard work, which is less demanding than custom work The $450,000 subcontracting involved is for special heat treatment Vitali is speculative of the cost estimations browsed through and believes that the competitors might come in between the range of $2.1-2.4 million This order offered no progress payments but required a penalty of 0.1% of the contract price for each working day that the complete order was late

Kathco
Kathco is a metal refinery that manufactured its own titanium electrodes for purifying manganese Fabtek had a good relationship with Kathco This order seemed to be a "one-shot" deal; once Kathcos plant was operating, it could supply all of Kathcos needs

Decision Criteria
The criteria that should be considered while selecting the project varies according to the different stakeholders involved. These are captured below: A) B) C) D) Operations Division Job should be technically challenging The job fits with Fabteks high-quality image & capabilities The companys engineering expertise is utilized The job is long-run & repetitive The company has experience with similar products Specifications and job scope are clear For larger payments, progress payments can be negotiated Overall contribution before SG&A Marketing Division The job is similar to what Fabtek had built before The design is simple & the cost estimates are 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 customers decision Finance Department Maintain COGS at 80%, maximum limit of 85% Maintain a healthy working capital, insist on progress payments Strategy Top Management Order should not cause one customers share of Fabteks overall revenue to cross 20% Order should not cause share of one markets contribution to cross 30% Order should utilize welding as it is Fabteks core competence

Alternatives
There are 15 possible combinations of projects which can be bid by Fabtek, henceforth referred to as Alternatives. We have used the following codes, A: Refco, B: Pierce Pike, C: Worldwide Paper, D: Kathco going forward. In our methodology, we have first looked at the possible set of alternatives, understood if they satisfy the overall capacity constraint conditions & scored feasible alternatives through our criteria set.

15 possible Alternatives

Feasible Alternatives who satify Capacity Contraints

Score & Ranking of Feasible Alternatives based on Criteria set

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, the 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, B+C, B+D, C+D, A+B+C, A+B+D, A+C+D, B+C+D and A+B+C+D Capcaity Constraint 1 A, B, C, D, A+D, B+C, B+D, C+D and B+C+D Capacity Constraint 2 A, B, C, D, B+C and B+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 CR1 COGS less than 85%, the lower the better CR2 Design should be simple with reliable cost estimates Customer contribution to overall revenue should not exceed 20% and CR3 market contribution should not exceed 30% Choose projects with progressive time payments to support working CR4 capital requirements Jobs chosen should allow for standardization in the future and have CR5 long repetitive runs CR6 Net Profit

Weight 23% 12% 15% 13% 12% 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 Sales COGS % CR1 CR2 CR3 CR4 CR5 CR6 Net Score A 6,000,000 82.75% 70.00 50.00 20.00 90.00 50.00 90.00 65.30 B 3,900,000 80.38% 90.00 60.00 90.00 70.00 60.00 80.00 77.70 C 2,400,000 87.75% 20.00 90.00 70.00 50.00 90.00 40.00 53.20 D 1,500,000 82.00% 80.00 100.00 90.00 50.00 60.00 40.00 67.60 B+C 6,300,000 83.19% 63.33 71.43 82.38 62.38 71.43 90.00 74.68 B+D 5,400,000 80.83% 87.22 71.11 90.00 64.44 60.00 90.00 80.17

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

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:
30,000

Welding - cumulative hours after combination of options

25,000

20,000

15,000

10,000

5,000

Jun-91 (5,000) Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92

(10,000)

(15,000)

(20,000) A B+D B C+D C A+B+C D A+B+D A+B A+C+D A+C B+C+D A+D A+B+C+D B+C

20000

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+D B C+D C A+B+C D A+B+D A+B A+C+D A+C B+C+D A+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+D B C+D C A+B+C D A+B+D A+B A+C+D A+C B+C+D A+D A+B+C+D B+C