Custom Fabricators Case Solution

I. Problem: How can Custom Fabricators, Inc. (CFI) prevent a possible business takeover of the Mexican suppliers and at the same time, ensure long-term profitability? II. Assumptions: 1. The case is set on the current year. 2. The Mexican suppliers will win the bid and production will move to Mexico. 3. In case CFI would switch to contract manufacturing, the contracted volume of units that they will produce is within the range of their production under lean manufacturing. 4. Orleans would shoulder the cost of shipping products from Mexico to CFI only. III. Alternatives: Based on the opportunities of CFI, the group has identified three alternatives for the company to implement: a. Work closely with Mexican suppliers This involves establishment of effective communication lines (e. g. through Internet, video conferencing), assigning a representative to monitor quality of products to be shipped, sending quality control machines to Mexico or asking Orleans to require the Mexican suppliers to conduct quality check before shipment. b. Differentiate product and/or expand market This involves developing more advanced products (e. . touch-screen elevator control panels) or expanding its target market (e. g. instead of just supplying control panels for elevators it can also create ones for ATMs, safety vaults etc. ) c. Switch to contract manufacturing This means instead of producing outputs only when Orleans needs it, CFI would now have a fixed production per month that they would need to deliver. IV. Analysis: First, let us identify the major is sues in the case. Currently, CFI has several strengths that help them establish a competitive advantage. First is the company’s proximity to the construction site and to the Bedford plant which serves as its supplier as it was able to keep the transportation costs minimal. Another one is its customer intimacy. Because CFI knows exactly what Orleans needs and when to provide it, it is able to cater to their customer’s demands in time with good quality products. Having been in the business for over 15 years, CFI was also able to set up efficient operations which helped them on becoming a lean manufacturer. It also has loyal and skilled employees that are satisfied in their job. Lastly, its business has also been profitable with a high profit margin of almost 30%. However, the company also has several weaknesses that we must take into consideration. First, CFI is a private company which means it has limited financing options and relies heavily on its revenues as generated by its operations. Also, because it wants to maintain its good relationship with its employees it could not reduce labor cost. Because of Orleans’ increasing efforts to reduce costs, the company faces the threat of having the production of raw materials moved to Mexico because of the cheaper labor costs there. If that would happen (and this paper assumes that it will), CFI might have problems with shipping back items that are not of par quality in addition to possible problems in communication. Moreover, there is also the threat of competition as Orleans might look for other suppliers in Mexico to continue to lower costs and since CFI couldn’t lower its costs anymore, Orleans might just source totally from Mexico. Now, let us analyze each of the alternatives. The first one is to work closely with its Mexican suppliers. Through this, CFI will be able to ensure the quality and secure shipment of units to their company. It would also lessen chances of error in production and delivery and decrease waiting costs for the unit replacements. However, there is the uncertainty of soliciting cooperation from the Mexican suppliers and sending a representative or a quality control machine in Mexico is costly. Moreover, the Mexican suppliers might gain knowledge of CFI’s efficient production process which increases the risk of business takeover. If CFI will differentiate its product, it would be able to lessen its dependence on Orleans as it would be able to get more customers and therefore generate more income. Also, there is a lesser risk of business takeover as their product will increase competitive advantage as it was able to provide more value for a small additional cost. This can also be related to the alternative of market expansion as its differentiated product could open new market opportunities for them. However, it should also be considered that this alternative requires more investment in R&D and other equipment. Also there are risks of market failure and having problems in meeting demand due to its limited capacity. Lastly, we have the alternative of switching from lean manufacturing to contract manufacturing. This would help CFI develop economies of scale and receive fixed income or stable inflow of revenues. Because of this, it will be able to better allocate its resources and might even reduce labor costs as it would generally need less workers. CFI can also use its excess capacity to cater to other customers or work on other products. However, this can also be a factor against them because Orleans might be reluctant to have it as a contract manufacturer thus increasing the risk of CFI being replaced by a Mexican supplier. In addition to that, this alternative also comes with termination costs and decrease in competitive advantage. V. Plan of Action: After analyzing the position and the possible alternatives of CFI, we created an action plan that takes into consideration the long-run costs and benefits of each option and its technical, operational and economic feasibility given the current capacity, resources, and opportunities of the company. Based on the analysis, CFI could undertake several alternatives but each should be implemented at the right time. Here is the proposed action and contingency plans for the company: Short-term (1-2 years) Assuming that the production of raw materials will move to Mexico, the best immediate action that CFI could undertake is to work closely with the Mexican suppliers. The company might not be able to lower its costs anymore but they could still ensure that the products that they create are still of good quality and are able to meet the demand. Moreover, we see that it is unlikely for Orleans to eliminate CFI in the supply chain as it would be more costly for them to look for new Mexican suppliers considering that they already established a good business relationship and developed the efficiency caused by over 15 years of working together. Long-term (More than 2 years) To address the issue of ensuring long-run profitability knowing that CFI couldn’t compete with Mexican suppliers in terms of cost, it can try to differentiate its products to enhance its competitive advantage. Since the company has a high profit margin and loyal workers that produce when there is only a demand for it, it could use these as additional investment in R&D and be used to cater to other consumer demands. Because of this, it would be impractical for Orleans to eliminate CFI in the supply chain as they would get more value from it that they couldn’t just get anywhere easily. Moreover, CFI could also see get an opportunity to expand its market for its unique selling proposition therefore increasing its profitability.