Case 1- Industrial Heating Systems

docx

School

Northeastern University *

*We aren’t endorsed by this school

Course

6214

Subject

Industrial Engineering

Date

Jan 9, 2024

Type

docx

Pages

Uploaded by BrigadierExploration14072

Case 1: Industrial Heating Systems "Mike, this is Bill Simpson from engineering What's going on with the prices of the 541,234,567, and 876 capacitors this year? At this rate, we're spending the department's, budget twice as fast as we did last year." Look, Bill, we got an excellent price on several solenoid parts from a new supplier, but we had to accept higher prices for your components. Overall, the company will save more Than 60% on more expensive components Thanks for the lesson on purchasing. For your information, we do not use solenoids, Furthermore, I can get better prices online. I thought the purchasing department was supposed to save us money. "Bill, you are correct. Purchasing must look at the overall budget, not just your Mike Watkins is the director of purchasing for Industrial Heating Systema Corporation. He is solely responsible for purchasing all material items throughout the company. Mike has had various experiences in materials management prior to joining Industrial Heating Systems. After earning a bachelor's degree in business management with an emphasis in retailing at Crawford State University in West Texas, Mike has more than 35 years of industrial purchasing experience. As a summer purchasing intern with Industrial Heating, Todd Evans was assigned to shadow Mr. Watkins. Company Background Industrial Heating Systems is an industrial heating company established in 1949 The company is an innovator of flexible heating products, especially with its knit and braided heating elements. This heating element is a multistranded resistance wire that is knit and braided with fiberglass and is the base technology for almost all Industrial Heating Systems products. The company also produces control devices and heating cables and is known throughout the industry as being the highest-quality flexible heat supplier. Industrial Heating Systems has enjoyed first-mover advantages for quite some time, and the industry recognizes Industrial Heating Systems as the innovator of flexible heat. They have several patents that support the company in sustaining market share, while their patented grounded heating element provides additional safety that other flexible heating elements cannot provide. Industrial Heating System's competitive advantage stems from the quality of its products, which are able to maintain higher, safer temperatures that are more flexible than other products on the market. Products at Industrial Heating Systems All products that Industrial Heating Systems produces are solutions to industrial heating applications. Industrial Heating Systems manufactures roughly 50% standard products and 50% custom orders. Each product line can be designed to meet custom applications. While the variability of materials is substantial between product lines, all products essentially perform the same function. Industrial Heating Systems custom products can be applied to virtually all industries that require heating products. The standard products can be divided into eight basic product lines. Most of the product lines are enhanced versions of an existing product line. For example, a silicone heating blanket is several flexible heating tapes sandwiched together between layers of silicone. This blanket can be used in areas where more coverage is needed, for example, a hopper tank. Each product line can be associated with a particular application; for example, flexible heating tape and heating cables are ideal solutions for freeze protection. The product line from Industrial Heating Systems that contributes the greatest portion of sales revenue is the cloth heating jacket. This product is commonly used in the semiconductor industry to prevent condensation in the gas pipes that are critical in the semiconductor process. Industrial Heating Systems Heating the jacket can maintain

higher temperatures than the competition's and is superior in a clean room setting. However, the silicone heating jacket alternatives offered by competitors are less expensive. This is mainly due to how the two products are produced. The cloth heating jacket requires intensive labor to sew the cloth, whereas the silicone jacket is manufactured with the help of machines. Cloth heating jackets are the most labor-intensive and costly item to produce but, at the same time, are the largest revenue producer for Industrial Heating Systems. The labor required to produce a cloth heating jacket is highly skilled, thus making it difficult for other companies to duplicate the quality achieved at Industrial Heating Systems. In addition, since the product is made to fit, the cloth heating jackets tend to be custom designed, resulting in added engineering costs. Industrial Heating Systems operates exclusively in a business-to-business environment, supplying the semiconductor, food processing, medical, and petrochemical industries. Industrial Heating Systems has multiple competitors, who vary among different industries. The companies that they compete with generally offer less-expensive substitutes that tend to be of lower quality. Mateen Electric Manufacturing Company, Bailey Heating, and Cole Heating are a few of their many competitors. Industrial Heating Systems has annual revenues of approximately $100 million. Of that $100 million, $40 million, 40% of revenue, goes into the annual spend on material items. Another 20% of the revenue goes to direct labor. Overhead takes up the majority of the potential profit margin: 20% for direct overhead and 5% for indirect overhead, which includes selling and administration. The high overhead is a concern but appears to be unavoidable for a small company trying to grow. A sales call center was implemented over a year ago, which adds 10 more members to the payroll along with a marketing person who creates all of the written literature and designs marketing campaigns. This leaves a margin of about 15% for profit. This number can fluctuate due to negotiations with customers. Industrial Heating Systems keeps approximately $14,000,000 of supply inventory on hand at any given point. This gives Industrial Heating Systems approximately four inventory turns per year. Industrial Heating Systems is constantly looking for ways to improve its financial status but appears to be overall stable with over 35 years in the business. Purchasing According to Mike Watkins Todd, I will teach you everything I know about purchasing during your internship... We will first start with an overview of purchasing at Industrial Heating. "Mr. Watkins, thanks for allowing me to learn from you. “Todd pulled out his pad and began to take notes Todd observed that Mike Watkins was a one-man purchasing department. Over the past 30 years, Mike has formulated an opinion of how materials management and purchasing should be conducted. For instance, he outlined for Todd his five most important criteria for a qualifying supplier. The number one citation was on-time delivery. His belief is that if the product is not in possession of the manager the other factors are irrelevant. The second citation was quality Mike's definition of quality refers to both material quality and information quality from the supplier. He then re-stated that the number one citation is on- time delivery. The third citation is value. The 4th citation is the responsiveness of the supplier's organization. According to Mike supplier responsiveness is based on how quickly and accurately the supplier can change the order to meet industrial heating systems' requirements. Finally, Mike places emphasis on suppliers' financial stability. What good is to develop a relationship with the supplier if they Will not be around tomorrow? Mike views the partnership as an important part of material management and purchasing especially with small companies. With partnerships, industrial heating systems are able to call on short notice and have their orders fulfilled, a lot of the time without expediting charges. Companies would be less likely to help industrial heating systems if it was not for Mike taking the time to get to know the supplier's representatives on a personal level Mike gave as an example the time he was in the hospital when many of his supplier's representatives actually visited him he stated that this kind of relationship is not made

overnight and even though he has personal relations with his vendor, he still Stern and fair in negotiations. He said this is done through honesty and integrity, which he claimed as the secret ingredient to being an effective purchasing manager. Mike's enthusiasm for purchasing and supply chain management was easily observed by Todd. Mike's views on purchasing standards continue in the following section. Purchasing Process at Industrial Heating Systems Mike is the only person that handles purchasing at Industrial Heating Systems, which is all right with Mike since he likes the power. Typically, Mike sends out approximately 75 purchase orders a day. He bases his OEM purchase decisions on the following. 1. MRP action report: The primary method used to determine what needs to be ordered is based on Industrial Heating System's MRP-SAP inventory management system and its MRP action report. Each morning when Mike arrives at his office, he prints the MRP action report, which is typically around 8-10 pages, and manually reads it. His decisions are driven exclusively by the MRP system report actions: ◦ Cancel: No purchase is required ◦ Purchase requisition: Purchase order should be placed. ◦ Slide: Purchase could be pushed back. ◦ Short--no open orders: Parts are needed, and the suggested order date is due. Mike then examines the report and quickly looks for things that jump out to him, such as acceleration, low number of inventory, the high number required, and so forth. Once he has a grasp of what needs to be ordered, he prints out 'a material analysis report that gives detailed information about each product. This report can be up to 80- 100 pages. He then manually goes through both reports to sort out the requirements with different vendors and then creates the purchase order for each supplier. He prefers to go through this process manually because the SAP inventory management system has its limits as to listing the primary and secondary suppliers, creating problems later. He also likes to be in control and see which supplier should get the business and not let the computer decide it. After completing the manual analysis, he then prioritizes which suppliers should be called first. He manually phones or e-mails his purchase order to the supplier. 2. Current inventory level. Mike stated that every few days, he performs a detailed analysis of inventory in addition to the MRP action report. He looks for trends that may constitute larger- volume buying or reduction in inventory that the MRP action report would not recommend. Sometimes when a volume discount exists, he then consults with the Chief financial officer (CFO), since it involves a significant amount of capital. Industrial Heating Systems might have to carry additional inventory, but the cost may be offset by an attractive purchase price. According to Mike, every discount decision is the same.Mike, along with the CFO, decides the most profitable alternative for the company. 3. Interaction with people that use the parts. Mike is not one who likes to stay in his office.He spends a great deal of time on the plant floor talking to the production workers. If a need exists, a requisition form will be filled and the purchase will be made. The key players that typically requisition are members of the engineering team, especially for custom products; each engineering manager is responsible for forecasting, quality, and controlling cost for his or her specific section.

Your preview ends here

Eager to read complete document? Join bartleby learn and gain access to the full version

Access to all documents
Unlimited textbook solutions
24/7 expert homework help

He does this routine every day, which is very time-consuming, not to mention all of the paper being used. Although the use of an SAP/MRP program helps, that is, by preparing the MRP reports, ultimately, Mike relies on his memory to make decisions. Inventory Management Since on-time delivery is critical, having products in inventory is important. Along with this, it is also important that the inventory be accurate in the computer system. The inventory part activity can be checked on the computer. A manual count of inventory is necessary to assure its accuracy. Material is constantly being used, and it is important to keep track of where the inventory is going and how much is used. Industrial Heating Systems remedies this situation with an inventory requisition form that is manually filled out by anyone that takes material out of the stockroom. Recently, the material manager requested 25 pounds of a specific chemical substance, based on the bill of materials. The price at this level would have been $93 per pound. Mike purchased 500 pounds at only $45 per pound. According to Mike, this was successful because the product would not become obsolete and it is used on a regular basis. "This points out the disadvantage of SAP inventory management; it is not able to recommend volume buying because it looks solely at the bill of materials." Supplier Relationships Currently, Industrial Heating Systems maintains more than 800 suppliers in the database system. However, there are approximately 50-100 active suppliers. Some component parts and materials are acquired from more than one supplier. Mike does keep very good relations with his suppliers; oftentimes they will expedite their orders for him at no charge. Industrial Heating Systems, more specifically Mike, has the philosophy that multiple sourcing is better than single sourcing. Since they are a small company with little buying Power, a competitive environment is a key to negotiating better prices. According to Mike, there are two dilemmas, with single sourcing: On one side, by maintaining a single supplier you can cut down on administrative cons, have better integration with suppliers, and receive large quantity discounts. However, when uncertainty occurs and the supplier cannot fulfill the requirement, the buyer is scrambling to fulfill the requirement with an alternate supplier that has been cut off from the supply chain. Since on-time delivery is so critical to Mike, he chooses to pay the premium to have a stable of suppliers. In addition, with 50-100 active suppliers, keeping relationships with all of them is not impossible or excessively expensive When it comes to qualifying suppliers, Mike uses his five criteria, as mentioned earlier, on-time delivery, quality, value, responsiveness, and financial stability. Mike has a clear idea of who will be included in the Industrial Heating Systems supplier base. Mike uses his judgment, intuition, knowledge, and network to qualify a supplier. He then looks for the criteria just, mentioned in the suppliers. If they fulfill all the criteria, then the supplier is qualified. Negotiations According to Mike, to be a great buyer, you must be a great negotiator. Mike explains that a purchasing agent is measured on price variance. In other words, this is the difference between what the cost was and what the cost is now with savings. He has a goal to save at least 10% annually. An example at Industrial Heating Systems is the cost negotiated from a chemical supplier. In 2019, it cost $102 per container for 1,000 barrels. Currently, the cost is $90 per container for 2020, and the quality has dramatically increased. This was a savings of $10,200 for 2020. Another example of the negotiation that many buyers are not aware of is with United Parcel Service. Some inexperienced buyers think it is a set price; however, if a

large volume is done, the cost can be negotiated. Industrial Heating Systems uses UPS and FedEx for inbound and outbound; therefore, they were able to negotiate better prices. The most important characteristics Mike emphasized in negotiating with suppliers are honesty and integrity. This comes along with the quality of communication. Not only is it important for the supplier to communicate honestly, but it is also important that the purchaser is honest too. This allows both sides to know exactly what is expected, and trust can be gained. In addition, Mike says it is necessary to become an expert on what you buy. The more you know, the easier you can negotiate. Another scenario where Mike used negotiation had to do with the heating cable. When he first arrived at Industrial Heating Systems, the supplier was charging $1.10 per linear foot. He first began reducing costs by using a volume discount. Then he began researching and found another reliable supplier that was less expensive. He used this information to negotiate an even more favorable price with the current supplier. The result was huge cost savings while still keeping the reliability of the current supplier. Conclusion This is precisely what happened in the case of Bill Simpson's situation earlier today. The total annual usage of the solenoid amounted to $120,000. The total usage of capacitors was $32,000. A new low-cost supplier, B&B, was selected to supply the solenoid component. Mike also agreed to add the capacitor requirements to the deal. The annual total for the combined purchase contract was $150,000 [$100,000 (solenoid) + $50,000 (capacitors). The will receive a 10% rebate at the end of the year. Questions: Immediate problem? How to resolve this? Should it be resolved? Implications of not addressing Bill Simpson’s concerns? Assess the Sourcing and Procurement system: What options exist for improvement? Pros//Cons? Recommendations? Is Mike the right leader?

Case 1- Industrial Heating Systems

Related Documents