SCM381 Case 2-1 Spartan Heat Exchangers Fall 2016

SCM381 Case 2 1 Spartan Heat Exchangers Fall 2016

SCM381 Case 2-1- Spartan Heat Exchangers Fall 2016

Analyze the strategic and operational changes required for Spartan Heat Exchangers as it transitions from a make-to-order (MTO) to a make-to-stock (MTS) strategy. Discuss how the organization needs to adapt across different categories such as competition approach, margins, product variety, scheduling, inventory, labor, manufacturing process, and flexibility. Additionally, evaluate necessary changes in the supply base, lead times, inventory types, and costs. Explore ways for Rick to reduce customer lead times from 14 weeks to 6 weeks and calculate the reduction in inventory levels needed to increase inventory turns from 4 to 20 times annually. Finally, estimate the potential cost savings in raw materials and components resulting from this strategic shift.

Paper For Above instruction

Transitioning from a make-to-order (MTO) mode to a make-to-stock (MTS) paradigm represents a fundamental shift in Spartan Heat Exchangers’ operational strategy, requiring comprehensive organizational adjustments to align with new market demands and operational efficiencies. This shift affects multiple facets of the company’s processes, competitive stance, and supply chain management, demanding a reevaluation and transformation across various categories.

Differences in Strategy and Organizational Changes

In the MTO strategy, Spartan primarily focuses on customizing products to meet specific customer requirements, often resulting in higher margins due to tailored solutions. Conversely, an MTS approach emphasizes the sale of standardized products stored in inventory, which can lead to lower margins but faster delivery times. The organization must adapt its tactics in the following ways:

  • Margins: MTS typically results in thinner margins because of increased volume and lower customization. Spartan must optimize operations to maintain profitability through efficiency and scale economies.
  • Product Variety: MTO involves high product customization, whereas MTS favors a limited, standardized product range to streamline manufacturing and inventory management.
  • Production Scheduling: MTO requires flexible, on-demand scheduling, often with batch or job-shop processes, while MTS necessitates continuous flow production integrated with demand forecasts.
  • Finished Goods Inventory: Transitioning to MTS will require building and managing more substantial finished goods inventory to meet shorter lead times.
  • Labor/Employees: The workforce may need retraining for higher-volume, process-focused production operations, emphasizing efficiency and quality control.
  • Manufacturing Process/Flexibility: Spartan may need to adopt more standardized, automation-friendly processes that support high-volume production and rapid changeovers.

Supply Strategy Adjustments

Adapting supply base elements is critical in supporting the shift to MTS:

  • Supply Base: The number of suppliers might need to decrease as Spartan consolidates suppliers for critical components to improve quality control and reduce lead times. Suppliers capable of large-volume shipments and consistent quality should be prioritized.
  • Lead Time: Reducing lead times involves strategic supplier partnerships, localized sourcing, and improved logistics. Implementing just-in-time (JIT) delivery systems would be beneficial.
  • Type of Inventory: Moving towards raw materials and work-in-progress (WIP) inventory that align with forecasted demand, rather than high finished goods inventory initially designed for custom orders.
  • Cost: The costs associated with an increased inventory level include warehousing, carrying costs, and obsolescence risks. Spartan must analyze whether the benefits of faster delivery outweigh these costs.

Reducing Customer Lead Times

Rick can implement several strategies to reduce customer lead times from 14 weeks to six weeks. These include enhancing supply chain responsiveness by expanding local sourcing, negotiating with suppliers for shorter lead times, increasing process automation, and adopting advanced planning and scheduling software to optimize workflow. Additionally, maintaining a critical inventory buffer and improving internal manufacturing efficiencies through lean principles can significantly contribute to faster deliveries. Establishing close communication channels with customers ensures tight coordination and responsive adjustments to demand fluctuations.

Impact of Increased Inventory Turns

Currently, Spartan achieves approximately four inventory turns annually. To increase this to twenty, the company must reduce its average inventory. The relationship between inventory turns and average inventory is given by:

Average Inventory = Cost of Goods Sold / Inventory Turns

Assuming the sales (and thus COGS) remain constant, reducing inventory turns from 4 to 20 means the company needs to reduce its inventory levels by a factor of 5. Mathematically, if the current average inventory is I, then the new inventory level required is I/5.

This significant reduction in inventory levels implies a leaner operation, minimizing carrying costs and obsolescence risks while demanding a more responsive supply chain and production system.

Cost Savings in Raw Materials and Components

By shifting to an MTS strategy and reducing inventory levels, Spartan can potentially realize substantial savings in raw materials and components. The savings are proportional to the reduction in inventory holdings. If the current annual expenditure on raw materials and components is $X, then reducing inventory by a factor of five to support higher inventory turns could translate into cost savings of approximately 80–90%, considering that a significant portion of procurement costs is tied to inventory holding and safety stock. These savings could be reinvested into processes or used to enhance product quality and customer service.

Furthermore, improved supplier relationships and bulk purchasing enabled by higher inventory levels can lead to discounts and negotiated cost reductions, amplifying the financial benefits of the strategic change.

Conclusion

Overall, Spartan Heat Exchangers’ transition from a make-to-order to a make-to-stock strategy involves complex adjustments across multiple operational domains. It requires a balanced approach to maintaining product quality and customization capabilities while optimizing manufacturing and supply chain processes for higher efficiency and responsiveness. By carefully managing these changes, Spartan can achieve faster customer deliveries, reduce costs, improve cash flow, and strengthen its competitive position in the heat exchanger market.

References

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