Brocksweir Engineering Ltd
There has been a foundry on Brocksweir’s site for over 250 years. The present business of Brocksweir and Sons Ltd has been in existence for over 50 years. The current managing director is Colin Weir the son of founder Paul Weir. Colin Weir took over the reins from his father 10 years ago and his mission is to take the business forward in the 21st Century.
The company employs 250 people in various roles, but has managed to expand in some areas despite fierce competition from the Far East. The business markets are segmented on the basis of product into three distinct areas. These are:
- Machined parts
All the castings are done in house using the foundry facilities, which operates three main processes. These are; gravity diecasting, high-pressure casting and sand casting. Most of the castings are produced in various aluminium alloys, although some work is performed in bronze, brass and steel.
Fabrications are made on site and then installed at the customer’s premises although some fabrications have been made on site for customers.
Machining is carried out in the modern workshops and ranges from simple lathes to complex Computer numerically controlled (CNC’s). This part of the business has experienced considerable growth over the last 18 months.
Three directors assist Colin Weir in the running of the company. Paul Morley the Marketing Director, John Nicholas the Financial Director and Dave Reilly the Operations Director who is responsible for production and supply chain operations.
Brockweir’s current operations are based on four sites with the foundry being based in the centre of the small town of Davenport. The site is very cramped and opportunities for expansion are non-existent. All the castings are made at the foundry and then taken to other sites to be machined, polished or powder coated. Each site is under the charge of a general manager who has responsibility for the day-to-day running of the site.
Purchasing in the company comes under the control of John James the Head Buyer. James is a veteran in the metals business with over 30-year’s experience. He takes care of all the purchasing on the foundry site but has nothing to do with purchasing on the other sites which is usually dealt with by the general managers. James believes that purchasing is all about achieving the best price for the minimum amount of effort. James’s main role is buying production materials and consumables. The directors handle any large capital purchases. Operations director Dave Reilly believes the purchasing function can be improved considerably. He decides to call in a team from the University of Dernol who have a highly respected logistics and supply chain research centre. The team is asked to investigate purchasing practices over the last 5 years and in particular:
- Average spend per supplier
- Methods of sourcing, supplier selection and appraisal
- Development of supplier relationships.
It is not long before some alarming discoveries are made. Brocksweir currently have 250 suppliers and in one instance they have eight suppliers for the same product. Fifty companies who Brocksweir approved as suppliers all went broke within 3 months of becoming approved suppliers. No record of supplier appraisal exists although some suppliers said they had been inspected prior to business commencing. Capital equipment purchases have been problematic. One piece of equipment resulted in £10,000 structural alterations just to get it in the building. The new moulding machine is supposed to process 100 castings an hour, but is still only operating at 43 castings per hour and the latest CNC machine which cost over £500,000 was delivered with all the software in Italian. Currently, the company purchases seventy-five per cent of its metal alloy requirements from Metals for ‘U’ a local company. John James’s brother is one of the directors and it is estimated that they are paying 25% over the odds. They are not the most efficient operation but they will deliver small quantities at short notice. When James was asked about commodity markets he replied “Never heard of them.”
For the past 18 months managing director Colin Weir has been negotiating for a contract with the Morgan Blake Group who makes large marine diesel engines. Each engine has many different castings and Morgan Blake are looking to have a single supplier for all their castings. Morgan Blake currently has a full order book for the next 3 years. Brocksweir have already had a preliminary audit from Morgan Blake’s supplier quality assurance department. The audit raised concerns about Brocksweir ability to operate 21st century supply chain management. Operations director Dave Reilly has been given the task of improving the purchasing and supply chain management function.
As part of Reilly’s continuing professional development he recently attended a supply chain management seminar. During the 2-hour lunch break an old friend of Reilly’s who is now a supply chain management consultant gives him some good advice and ideas. With these ideas in mind Reilly believes the company must have 21st Century purchasing and supply chain management structure and practice.
At the next board meeting Reilly presents a 12-point plan with purchasing playing a major role. One of the points is extremely unpopular with the managing director. It is going to mean removing his friend of over 30 years John James as head buyer. Weir agrees to the plan reluctantly, but insists that James be found a suitable position elsewhere in the company.
A new position of Purchasing and Supply Chain Manager will be created who will have overall responsibility for purchasing and supply chain operations. An attractive package and company car is to be offered to help attract the right candidate. The services of a specialist recruitment company are to be used in finding and selecting suitable candidates. After three months and numerous problems with the recruitment company a new Purchasing and Supply Chain Manager is recruited. He is Peter Vickery a former Army Major who for the past 8 years has been Supply Chain Manager for the Trotter Group a major competitor. Vickery is a fellow of Institute of Logistics and Transport and a member of the Chartered Institute of Purchasing & Supply.
Vickery is invited to the next monthly senior management meeting where managing director Colin Weir explains the company’s plans. Weir reveals that he wants to move the company to a new industrial park being built by the local development agency. Two of the company’s existing sites are on prime development land and their sale will release badly needed capital. Weir then discusses the situation with the Morgan Blake contract and announces new developments for the sand foundry. Due to foundry sand now being classed as special waste the costs of disposal have more than doubled. Therefore Brocksweir have decided to outsource all sand reclamation from the casting process and set up a vendor managed inventory contract for all future sand supplies. Vickery asks, “Has purchasing been involved in this project,” Weir replies “We don’t normally involve purchasing in capital projects.” Vickery states “From now on there must be early involvement buyer and supplier involvement in all capital projects.”
The next agenda item is the purchasing of new induction furnaces and the expansion of the existing high-pressure casting facilities. Weir explains that the Super Heater Furnace Company has given a quotation to supply and install three five tonne furnaces. Vickery questions the rational behind only one quotation and Weir explains, “We have always dealt with the Super Heater Furnace Company and never had any problems with them.”
Demand for sand castings in recent months has grown considerably and as a result of this the company has employed three additional die-casters. While the increase in business is pleasing, Vickery has discovered a number of issues associated with the sand casting operations. His predecessor John James had ordered resins in bulk, many of which have fairly short shelf lives. Resins are used to bind the sand together in the moulds prior to the casting. Most of the resins that Brocksweir’s use are either phenolic or furan based, which presents the company with a number of additional environmental problems. An audit of the stores has identified about £20,000 of resins whose shelf lives have expired. As a consequence of this the company will now face a heavy bill for disposal of these resins as they are now classified as special waste.
Vickery is amazed at the complete lack of inventory management and how much cash is tied up in obsolete inventory. The savings that have been made from bulk sand purchases have been lost in the additional costs of drying the sand. Vickery enquires “How is inventory managed?” Reilly replies well “John used to look after and to be honest I don’t think we had a real inventory management system.” Vickery replies “So how do you know when to reorder and what quantity to order.” “Well that’s something I am not sure about” replied Reilly. Vickery is shocked and decides that the company must have proper inventory management from now on, based on the tried and tested techniques like economic order quantity, vendor managed inventory, maximum and minimum inventory levels for certain products and the need to consider total lead time.
1. Capital buying decisions are very important to an organization and should be taken with due care. The management of a company should consider all the pros and cons of an investment decision including deciding upon a suitable financing option for such capital buying. In common parlance, capital budgeting techniques are adopted to measure the viability of an investment proposal (Bierman and Smidt, 2012, p.8,). In the given case scenario, Brocksweir and Sons Ltd. Lacks a proper structural framework to make suitable capital buying decisions. Their Head Buyer John James, who has an experience of over 30 years, made these decisions. However, the present business environment has changed largely and the company is required to make changes accordingly to remain flexible while making policies and formulating strategies in this regard.
Desired Approach to be Adopted
Lack of a proper approach and structure has often escalated the costs of the company. Several factors are required to be kept in mind while making future capital buying decisions. Lessons should be leant from the present mistakes. For example, under utilization of production capacity, equipment installation problems, lack of proper inspection of equipments, etc. These factors have increased the expenses of the company due to lack of a proper organized procedure to acquire capital assets. Following are a few steps that should be taken by the company while making capital expenditures.
Proper Education and Research
In order to achieve success in the end and maximize the profits of the concern it is required for the management and the other employees to gain knowledge in the field of finance and costing. The contemporary concepts related to the business environment are of great importance and the managers are required to update themselves in order to achieve efficiency. Conducting detailed market research will enable them to recognize the needs of the organization and means to fulfil those needs in an effective manner. Such research and education will enable the company to minimize costs and maximize profits.
Adopting Capital Budgeting Techniques
Capital budgeting techniques are the most efficient tools of management while making capital expenditure. Use of these techniques provides the organization to measure the viability of an investment decision based on a few pre-determined criterions. These standards are in parity with the organizational objectives and help the management to make an informed decision in this regard. Techniques such as the payback period and calculation of post pay back profitability, discounted cash flow method, net present value method, average rate of return method, etc. have proved to be very useful while making capital budgeting decisions. These techniques help the organization to determine whether to accept an investment proposal or not and even measure the profitability to be achieved if the asset is bought or leased (Kashyap, 2014, pp.106 – 110).
Determining Financing Decisions
Capital budgeting decisions are always associated with financing decisions. Huge amount of money is involved in acquiring capital assets and thus, it becomes utmost necessary to consider all the important elements. Generally, organizations opt for debt or issue shares or a combination of both. The ultimate aim is to minimize the cost of capital so required to acquire the capital asset. Opting for debt provides leverage in the capital structure and acts as a tax shield as interest paid for availing debt can be claimed as a deduction for taxation purposes.
It has become abundantly clear from the above discussions that the company is required to formulate an organized procedure before making investment decisions. Capital budgeting techniques shall be used to assess the viability of the proposal and financing decisions are required to be carefully evaluated. Thus, by adopting these practices the company will gain in minimizing its costs in a large scale.
In the present business environment, purchasing plays an important role. Specialized professional after often inducted to perform this important task and this tends to add value to the whole process. This also includes early induction of suppliers/buyers in the purchasing process that produces a number of advantages to both the parties (Johnson et al. 2011). The advantages are as follows:
- Buyers/Suppliers act as a source of authentic information
- Development of healthy relationship between the parties to the purchase/sale contract
- Reduction in costs
- Proper evaluation of quality resulting in improvements
- Maximum utilization of available resources in a most economic manner
- Spreads awareness and promotes innovation
- Promotes better coordination and communication
- Increases the effectiveness of the manufacturing process
Early supplier/buyer involvement proves to be advantageous and increases the potential of a manufacturing concern. This in turn eases the business process and helps in gaining operating profit.
Ethics has gained much importance in recent times as the compliance requirements for companies have increased. Organizational behaviour is very much influenced by the ethical principles that organization follows. Business activities are required to be conducted within the prevalent legal framework in a fair and acceptable manner. Gaps in fulfilling these ethical standards often give rise to several risks (Lau, 2011, pp.910-942,). These risks may be enumerated as follows:
- Concentration on individual interests
- Failing to meet the organizational objectives
- May give rise to malpractices
- Operational risks as a result of succumbing to business risks
- Violation of legislations that could result in civil and criminal litigations
- Loss of goodwill
- Accumulation of losses
- Paying of penalties and fines
These are some of the risks that could arise if proper ethical standards are not put in place and implemented within the organization. Thus, to counter these risks, the company shall take the following steps:
- Development of a code of conduct and implementing the same
- Proper communication of the code of the ethical principles throughout the organization along with the buyers/suppliers
- Organizing and conducting meetings and workshops to discuss the present pressing issues
- Putting in place an effective internal check and control system
- Implementing a dispute resolution mechanism
- Strict action should be taken against people who deliberately violate the code of conduct and ethics
A proper communication and co-ordination is required to prevent any violations of the existing ethical and legal framework. Thus, it can be seen that the purchasing process may face a number of risks and the organization shall be ready to handle those risks in an effective manner to attain sustainability.
Supplier appraisal means evaluating the capability of the supplier to deliver the goods on time and in the required manner. This process of evaluation plays an important role in the entire purchasing process (Vendor Evaluation and Rating Using Analytical Hierarchy Process, 2015). This process coupled with constant monitoring are pivotal in increasing the efficiency of the operating activities of Brocksweir Company. Following are some issues that should be followed by the company while appraising its suppliers.
- Financial viability of the transaction to be undertaken
- Financial background check of the supplier
- Conducting a stock audit
- Conducting market research about the supplier
- Gathering market information about the supplier from its other clients
- Delegating authority to specialized personnel for following up and reporting
- Communicating the supplier about the operating cycle of the company
- Adopting inventory management
- Appointing a quality analyst to evaluate the quality of the goods received
- Ensuring timely delivery of goods so that the production process is not hampered
It is imperative to monitor the supplier’s activities in order to facilitate proper production activities (Sepúlveda and Derpich, 2014 pp.966-975,). After research, it has been found that Borcksweir has over 250 suppliers and almost 8 suppliers of the same product. Due care should be taken while choosing suppliers in order to reduce procurement costs. The above-mentioned issues, if addressed in a proper manner while appraising the supplier, will tend to bring down the overall cost of production of the company resulting in greater profitability.
Calculation of Vendor Ratings
The following table below shows the vendor ratings.
(90/100*100) = 90
(88/100*100) = 88
(5/95*100) = 5.26
(95/100*100) = 95
(96/100*100) = 96
(2/98*100) = 2.04
(80/100*100) = 80
100 (no late deliveries)
(10/90*100) = 11.11
(40*90+40*88+20*5.26)/100 = 72.25
(40*95+40*96+20*2.04)/100 = 76.81
(40*80+40*100+20*11.11)/100 = 74.22
It is clear from the above calculations that supplier B shall be awarded extra business as it has the highest ratings (METHODOLOGY FOR WORKING OUT VENDOR RATING, 2015).
Outsourcing has helped business organizations in many ways to achieve the objectives of the concern. It has resulted in cost savings and catered to the use of professional expertise in the entire process of production. Outsourcing may take different forms and various business activities can be outsourced by delegating work outside the organization. However, there are various factors that play an important role in the outsourcing process. Following are the factors that the company should carefully consider before outsourcing its sand reclamation operations:
- Viability of the option
- Expertise of the organization to whom the process will be outsourced
- Experience of the company in related field
- Expertise and experience of the staff to be engaged in the process
- Capacity evaluation
- Past business record and market reputation
- Risk evaluation
- Comparing the cost structure
The above-mentioned factors are very important and should be carefully evaluated before the entire process is outsourced. If any one of the factors mentioned above is not fulfilled, the entire outsourcing process can result into a strategic disaster for company. Thus, proper market research shall be conducted to make an informed decision.
Bierman Jr, H. and Smidt, S., 2012. The capital budgeting decision: economic analysis of investment projects. Routledge.
How to appraise suppliers?. (2015). 1st ed. [ebook] Available at: https://www.cips.org/Documents/Resources/Knowledge%20How%20To/How%20to%20Appraise%20Suppliers.pdf [Accessed 20 Dec. 2015].
Johnson, P.F., Leenders, M.R. and Flynn, A.E., 2011. Purchasing and supply management. McGraw-Hill/Irwin.
Kashyap, A., 2014. Capital Allocating Decisions: Time Value of Money.Asian Journal of Management, 5(1), pp.106-110.
Lau, A.K., 2011. Supplier and customer involvement on new product performance: Contextual factors and an empirical test from manufacturer perspective. Industrial Management & Data Systems, 111(6), pp.910-942.
METHODOLOGY FOR WORKING OUT VENDOR RATING. (2015). 1st ed. [ebook] Available at: https://www.rdso.indianrailways.gov.in/upload/METHODOLOGY%20FOR%20Vendor%20Rating%20System%20.pdf [Accessed 20 Dec. 2015].
Sepúlveda, J.M. and Derpich, I.S., 2014. Automated Reasoning for Supplier Performance Appraisal in Supply Chains. Procedia Computer Science, 31, pp.966-975.
Vendor Evaluation and Rating Using Analytical Hierarchy Process. (2015). 1st ed. [ebook] Available at: https://www.ijesit.com/Volume%202/Issue%203/IJESIT201303_62.pdf [Accessed 20 Dec. 2015].