A: Overview:
Read and review the case study attached and write a one-page single-spaced narrative providing a response to the issues presented in this case.
You must identify the main Procurement/Purchasing issues in the case, summarize them, and then, using material from your text or other sources, present recommendations for solutions to the issues/problems you have identified. The format for the Case analysis is located below:
B. Case Analysis Format:
For the cases you will analyze in this course the following format is required.
Case summary – this should be a two to three-paragraph narrative (single-spaced) that provides an overview of the case and some of the key problems that the company/organization is facing.
Case Analyses – in this section you will present the main issues/problems/challenges that the company/organization is facing. This is not just a list but rather a substantive presentation of what the issues are and how they are affecting the operation of the business/organization. This section needs to be substantive.
Recommendations for Solution – this section will present a substantive listing and accompanying discussion of what you propose for solving the presented problems. This cannot be one sentence but rather a statement of the recommended solution followed by a substantive discussion as to why your solution will solve the problem or issue.
Case 1–3 Hansen Equipment
It was July 2, and Kathy Saxton had just been given her first assignment, the “Wire Management Program” (WMP) by Scott Carpenter, purchasing manager of Atlanta-based Hansen Equipment Inc. The purpose of the WMP was to reduce the supplier base for the company’s wire and cable
requirements. As a newly hired buyer, Kathy wondered how to proceed.
HANSEN EQUIPMENT
Hansen Equipment Inc. (Hansen) was a relatively new division of Hansen Equipment International, a multinational electrical engineering and technology company. Hansen generated sales of $130 million in the past year and had forecast growth of 25 percent for each of the upcoming four years.
Hansen manufactured material handling systems, mainly for customers in the automotive industry. Its principal product lines were assembly line equipment and press automation equipment. Assembly line products included units such as framers, in which a vehicle frame was fed onto a line and welded in specified areas. Press automation products were units that moved parts—such as vehicle frames, doors, and hoods—between large stamping machines as part of the customer’s manufacturing process. Hansen’s systems were built in Atlanta, tested, approved, disassembled into sections, shipped to the customer’s facility, and then reassembled.
All Hansen systems were custom designed, based on the unique requirements of the customer, including manufacturing equipment and product characteristics. Kathy estimated that 98 percent of component orders were job specific. Each Hansen system was composed of steel, mechanical, electrical, and hydraulic parts. Wires and cables were important parts of these systems. With automotive design changes occurring regularly, Hansen was constantly reconditioning previous systems or bidding on new lines. Hansen prided itself on customer satisfaction. In the automotive industry, a key factor was on-time delivery of equipment and systems.
HANSEN’S PURCHASING DEPARTMENT
Scott Carpenter supervised a purchasing department that included six buyers, with responsibilities divided into the following commodity groups: electrical, mechanical, hydraulic/pneumatic, robots/weld guns, affiliate-produced parts/fabricated components, and steel/other metals. Kathy was hired recently to replace two retiring buyers. Kathy held an undergraduate business degree and, upon graduation, worked for a year as an inventory analyst at a multinational manufacturing organization. She had applied to Hansen after visiting its display booth at a local manufacturing trade show. Kathy was eager to make an early contribution at Hansen and she believed that the WMP presented an excellent opportunity.
Purchasing Process
Last year, Hansen’s total component purchases totaled $63 million. Hansen had a total supplier base of approximately 3,000 companies, of which less than5 percent were regular . The first reason for having such a large number of suppliers was that newly hired buyers usually had previously established relationships with certain suppliers. The second reason was that Hansen’s systems were custom designed, and most suppliers specialized in certain product areas.
When Hansen was awarded a job, its engineers used a computer-aided design (CAD) system to create plans for the product. Part of this process consisted of determining every sub component within the final system. These components were divided into hydraulic, mechanical, and electrical categories and were entered into Hansen’s ERP system to create a bill of materials (BOM). Requisitions for specific parts were then created and sent to the appropriate buyer, based on the type of commodity needed. Buyers then created purchase orders to satisfy the expected demand.
There was usually some variation between actual requirements and initial expectations. When components were over ordered, they needed to be returned to the supplier or held in inventory until a need arose in the future. Returning products to suppliers was time consuming, while keeping over-ordered material in inventory tied up company funds. The CFO estimated inventory carrying costs at 15 percent per annum. There were also circumstances where shortages were created because volumes exceed initial forecasts or materials were not included in the original BOM. Recently, many items were labeled as “rush,” putting pressure on the buyers to expedite orders.
Assembly line and press automation systems were divided into “cells,” which were stations within the system designed to perform a specific operation. Some jobs were comprised of more than 10 cells, and it was common to have different engineers working on cells within the same system. Engineers were responsible for entering material requirements for their designated cells.
Although there were often common parts among the cells in the system, there could be numerous orders each day for the same components (e.g., 10-foot lengths of wire), creating unnecessary ordering costs, since each line in the purchase order had to be handled individually. This was often the cause of administrative problems and headaches, since a purchase order for electrical items could contain more than 100 items. When materials were received, they were kept in an unlocked warehouse area until needed. There were some incidences of workers “borrowing” items required for jobs, which had not been ordered or which had not yet arrived.
This created inventory shrinkage problems with no direct accountability. In some cases, the supervisor in the warehouse area might issue parts from another job to one with a more urgent requirement; however, approval had to be obtained from the project manager. The bottom line was that material availability was important, since each project required that the cells be completed in sequence to ensure that the system operated properly. Missing components could significantly delay the completion of later cells.
WIRES AND CABLES
Wires and cables were considered commodity products within the electrical industry. Wires were fabricated from copper rods rolled into a desired thickness and then covered with a protective coating. Cables were made by combining two or more copper wires, separated by insulation, and using an outer covering or jacket. Wire differed from cable primarily in the number of conductors, jacketing, insulation, and resistance to external factors. Occasionally, situations arose in which a product was specified by the end user.
In these instances, Hansen engineers were forced to use the specified product, which might only be available through nonstandard suppliers. Specified products occurred more often with cables than with wires. Scott Carpenter had recently initiated the WMP believing that Hansen could improve value for all of its wire and cable requirements from volume leverage. Rationalizing the supplier base would also save administrative time currently spent processing multiple supplier invoices. A stronger relationship could be fostered with the chosen supplier, which could help increase the priority of
Hansen orders and open further opportunities for cost savings. Also, transportation costs could be reduced if all items were shipped from a single source. Finally, sourcing from a single supplier would allow the buyer to focus on issues involving higher dollar values. Kathy felt that the WMP gave her an ideal opportunity to analyze what changes to Hansen’s supply processes would be possible. She knew, however, that buy in from key users would be required before implementing any significant changes. Scott had given her the impression that the WMP should be implemented before the end of October.
ELECTRICAL COMPONENT SUPPLIERS
Hansen’s wire and cable requirements for any one job were typically purchased from three to six different electrical suppliers. The suppliers’ product lines contained significant overlap, which led to the desire of reducing the base to a single source. The amount of wire and cable purchased last year was approximately $1.4 million. Wire and cable purchases were predicted to increase at the same rate as corporate sales. Kathy asked some shop floor employees about Hansen’s current six suppliers.
The employees volunteered both positive and negative comments regarding the various suppliers. Kathy considered these comments as “unofficial” past performance reviews. However, she got the impression that the some employees seemed to prefer certain suppliers because of friendships that had been developed. She was hesitant to consider all comments provided due to potential biases and was also skeptical about some of the comments of the other buyers for similar reasons.
Kathy discovered that the receiving manager, Wesley Wen, had been keeping records of supplier performance for the last 30 months because of Hansen’s ISO 9001 certification requirements. His data included on-time delivery performance, product returns, and overall supplier service.
Kathy also learned that there had been no significant quality problems with any of Hansen’s current suppliers according to Wesley’s information—it appeared that the suppliers provided relatively uniform quality. With these records, in conjunction with his conversations with Wesley, Kathy believed she could develop an objective assessment of the suppliers’ past performance.
NEXT STEPS
Scott Carpenter had created the WMP to seek benefits from reducing the number of wire and cable suppliers. Kathy’s initial thought was that a single supplier could provide the best prices for Hansen’s annual requirements.
However, she realized that there were arguments both in favor and against using this approach. She would have to analyze the capabilities and managerial abilities of each company in order to reach a decision.
Kathy began to think about possible methods to reduce the total number of wire and cable suppliers. Hansen had established strong relationships with some of the suppliers, and she therefore wanted to give all interested companies an opportunity to present their cases. Whatever she decided to do, Kathy would need to justify her recommendation to Scott and to Hansen’s engineers and other employees.
