case steel works, inc. presentation (group 5)

Case : Steel Works, Inc.By Group 5

NIDA Flex-MBA # 26 Sec 3

• Founded in 1980, USA, by 3 material scientists from MIT

• A manufacturer of

• Custom Use Steels Custom Products Division

• Specialty Use Steels Specialty Products Division

• Currently employs more than 2,500 people at 5 different locations

Company Background

• Inventory levels are extremely high !!!

• Customer service level is the worst !!!

• Customers are going to competitors losing market share

• Sales are dropped 30% !!!

• Expenses are up 25% !!!

Current Issues

CEO wants to know how to fix all these problems in 1-week

Gary Lemming(Head of new centralized logistics group)

• General Strategy :

• Operates in 3 manufacturing plants, located near R&D centers and several warehouses, to serve West, Midwest, and Eastern regions of the U.S. Customers

• Develops under contract for a single customer, and sale exclusively to that particular customer

Data Collection & Analysis :Custom Product Division

• Negotiates with that customer to allow to sell the product to anyone by the time the product is no longer leading-edge, with premium added



90%

10%

Custom Products

Sold to only onecustomer

Sold to more than onecustomer

• Response to the question “Why the inventory levels are so high?” as follows;

“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!”


• General Strategy :

• Operates in 3 plants with 6 different product lines

• Exploit 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 Division’s largest customer brings 10% of the company’s total revenue

Data Collection & Analysis :Specialty Product Division


5

107

18

Profile of Specialty Products Customers(approx. 130 customers)

Big Customers (> $25mm) :15% of total revenue

Small Customers (< $1mm)

All Others


80%

20%

Demand Variation in Specialty Product(approx. 120 products)

C.V. > 0.5

C.V. < 0.5

• Suggests that the manufacturing is to be blamed for not having any steel in the warehouse to ship


70%

30%

Customer Service Level

Scheduled to be shippedfrom stock within 48 hours

Canceled by the customerat the time of entry / Placedin a backorder file

Data Collection & Analysis :Customer Service Level

• Feasible solution(s) recommended by logistics consultant

• Discontinue all slow-moving products that are either rarely sold of never sold at all, and focus on high margin & volume products

• Use least squares regression to predict demand

• Consolidate warehouses : fewer warehouse = less inventory

Consulting

• Discontinue all slow-moving products that are either rarely sold of never sold at all, and focus on high margin & volume products

• “Most important customers buy those products”

• Use least squares regression to predict demand

• 80% of specialty products fall in “High Volatile Category” (C.V. > 0.50)

• Reduce warehouses

• Longer leadtime, maybe cost more by added transportation costs

Reality Sets In :(Conflicts to the consultant’s solutions)

Other Provided Data of Specialty Products

Monthly Sales of DURABEND R12 (SKU # S0121958)

1 2 3 4 5 6 7 8 9 10 11 12 Units Price Cost Profit %Share

194 756 1,202 929 825 1,078 1,181 536 1,026 776 1,049 1,557 828 11,743 11,743 2,935.75 8,807.25 97.08%

223 - - - 30 - 1 8 4 - 9 - - 52 52 13.00 39.00 0.43%

147 42 - 49 22 6 - 44 5 - - - 31 199 199 49.75 149.25 1.65%

195 1 - - - - - - - 4 13 - - 18 18 4.50 13.50 0.15%

444 - - 3 - - - - - - - - - 3 3 0.75 2.25 0.02%

445 - - - - - 21 - 3 - 10 23 24 81 81 20.25 60.75 0.67%

Total 799 1,202 981 877 1,084 1,203 588 1,038 780 1,081 1,580 883 12,096 12,096 3,024.00 9,072.00 100.00%

Annual DemandMonthly DemandCust.

ID

194 978.58 265.90 0.272

223 4.33 8.72 2.013

147 16.58 19.79 1.193

195 1.50 3.80 2.535

444 0.25 0.87 3.464

445 6.75 10.04 1.487 T o t a l 1,008. 00 255. 92 0. 254

C VCust.

ID

A v e r a g e

D e m a n d

S t a n d a r d

D e v i a t i o n

* All in thousands


-

200

400

600

800

1,000

1,200

1,400

1,600

1 2 3 4 5 6 7 8 9 10 11 12

De

ma

nd

(th

ou

san

ds

un

its)

Month

Customer ID 445

Customer ID 444

Customer ID 195

Customer ID 147

Customer ID 223

Customer ID 194

Monthly Sales of DURABEND R12 (SKU # S0121958)

* All in thousands


Product Avg Lot Size Cost Price

DURABEND R10 17 $0.23 $1.15

DURABEND R12 977 $0.25 $1.00

DURABEND R15 2956 $0.27 $1.03

DURAFLEX R10 116 $0.17 $0.68

DURAFLEX R12 20 $0.22 $0.88

DURAFLEX R15 60 $0.30 $1.14

DURAFLEX R23 15 $0.31 $1.55

1 2 3 4 5 6 7 8 9 10 11 12

Demand 13 28 8 14 27 11 4 9 49 5 15 4

Inventory 75 69 76 68 68 73 67 77 74 78 75 74

Demand 799 1,202 981 877 1,084 1,203 588 1,038 780 1,081 1,580 883

Inventory 743 743 744 727 752 755 727 736 722 754 766 720

Demand 2,578 2,000 3,171 2,434 2,812 1,684 2,942 3,000 2,682 1,943 1,837 2,480

Inventory 1,835 1,858 1,911 1,873 1,846 1,894 1,909 1,835 1,890 1,904 1,838 1,908

Demand 108 189 101 102 11 8 25 299 48 41 23 212

Inventory 643 668 609 635 573 571 572 617 623 559 606 584

Demand 15 34 2 3 25 15 13 26 41 19 15 15

Inventory 51 58 53 54 57 59 58 56 53 53 57 59

Demand 242 135 - - - 149 - 69 52 11 - -

Inventory 396 402 359 402 387 358 412 370 396 383 374 423

Demand - - - - 123 80 84 63 - 1 - 76

Inventory 187 182 185 199 197 205 193 191 187 182 190 189

DURAFLEX R10

DURAFLEX R12

DURAFLEX R15

DURAFLEX R23

DURABEND R10

DURABEND R12

DURABEND R15

ProductMonthly Demand (in thousand units)

* All in thousands


-

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

1 2 3 4 5 6 7 8 9 10 11 12

DURABEND R10

Demand Avg. Inventory

-

200.00

400.00

600.00

800.00

1,000.00

1,200.00

1,400.00

1,600.00

1,800.00

1 2 3 4 5 6 7 8 9 10 11 12

DURABEND R12


-

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

3,500.00

1 2 3 4 5 6 7 8 9 10 11 12

DURABEND R15


* All in thousands


* All in thousands

-

10.00

20.00

30.00

40.00

50.00

60.00

70.00

1 2 3 4 5 6 7 8 9 10 11 12

DURAFLEX R12


-

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

1 2 3 4 5 6 7 8 9 10 11 12

DURAFLEX R15


-

50.00

100.00

150.00

200.00

250.00

1 2 3 4 5 6 7 8 9 10 11 12

DURAFLEX R23


-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

1 2 3 4 5 6 7 8 9 10 11 12

DURAFLEX R10


What would you do …?

Decision Making Towards Conflicts?

Group’s Recommended Solution(s)

Decision Making Towards Conflicts?

Group’s Recommended Solution(s)Using Critical Ratio Concept

Avg. SD CV Cost Price Profit

DURABEND R10 15.58 13.19 0.846 72.79 4.3377 100.00% 0.23 1.15 0.92 80.00% 0.8416 26.68

DURABEND R12 1,008.00 255.92 0.254 740.81 1.0441- 14. 82% 0.25 1.00 0.75 75.00% 0.6745 1,180.61

DURABEND R15 2,463.58 494.21 0.201 1,875.06 1.1908- 11. 69% 0.27 1.03 0.76 73.68% 0.6336 2,776.73

DURAFLEX R10 97.25 92.52 0.951 604.99 5.4876 100.00% 0.17 0.68 0.51 75.00% 0.6745 159.66

DURAFLEX R12 18.58 11.43 0.615 55.59 3.2380 99.94% 0.22 0.88 0.66 75.00% 0.6745 26.29

DURAFLEX R15 54.83 80.05 1.460 388.59 4.1691 100.00% 0.30 1.14 0.84 73.68% 0.6336 105.56

DURAFLEX R23 35.58 45.86 1.289 190.66 3.3814 99.96% 0.31 1.55 1.24 80.00% 0.8416 74.18

$ / Unit Critical

RatioZ

Recommended

Inventory

Demand Service

LevelZ

Avg.

InventoryProduct

DURABEND R10 26.68 80.00% 17 1.57 1 17 54.28% 2 34 91.87%

DURABEND R12 1,180.61 75.00% 977 1.21 1 977 45.18% 2 1,954 99.99%

DURABEND R15 2,776.73 73.68% 2,956 0.94 1 2,956 84.05% 1 2,956 84.05%

DURAFLEX R10 159.66 75.00% 116 1.38 1 116 58.03% 2 232 92.74%

DURAFLEX R12 26.29 75.00% 20 1.31 1 20 54.93% 2 40 96.95%

DURAFLEX R15 105.56 73.68% 60 1.76 1 60 52.57% 2 120 79.22%

DURAFLEX R23 74.18 80.00% 15 4.95 4 60 70.28% 5 75 80.50%

Service

Level

Service

Level

Avg

Lot SizeProduct

No. of Lots

(Rounded Up)

Inventory

Quantity

No.

of Lots

No. of Lots

(Rounded Down)

Inventory

Quantity

Service

Level

Recommended

Inventory

* All in thousands

-

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

90.00

1 2 3 4 5 6 7 8 9 10 11 12

DURABEND R10 : CV = 0.846

Demand Avg. Inventory Recommended Inventory


* All in thousands

-

200.00

400.00

600.00

800.00

1,000.00

1,200.00

1,400.00

1,600.00

1,800.00

1 2 3 4 5 6 7 8 9 10 11 12



-

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

3,500.00

1 2 3 4 5 6 7 8 9 10 11 12




* All in thousands

-

10.00

20.00

30.00

40.00

50.00

60.00

70.00

1 2 3 4 5 6 7 8 9 10 11 12

DURAFLEX R12 : CV = 0.615


-

100.00

200.00

300.00

400.00

500.00

600.00

700.00

800.00

1 2 3 4 5 6 7 8 9 10 11 12



-

50.00

100.00

150.00

200.00

250.00

300.00

350.00

400.00

450.00

1 2 3 4 5 6 7 8 9 10 11 12



-

50.00

100.00

150.00

200.00

250.00

1 2 3 4 5 6 7 8 9 10 11 12



Group’s Recommended Solution(s)Other Solutions for Customer Division

• Since most of the custom products sell exclusively to only one particular customer, to reduce the high inventory level, yet service level is maintained,, the company should negotiate with each customer to use “Demand Pull Ordering” which its production lead time matches with the customer’s required date of delivery.

Group’s Recommended Solution(s)Other Solutions for Specialty Division

• Customers’ Forecast and Forecast’s Follow-Up (to manage products in a high volatile category)

• Centralized Computer-Based System

Annually Semi-annually Quarterly Monthly Weekly

Member of Group 5

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NIDA Flex-MBA#26 Sec 3

case steel works, inc. presentation (group 5)

Business