Spartan Heat Exchangers Inc ReportCase 2-1: Spartan Heat Exchangers Inc reportIn order to help Spartan better compete in the current heat exchanger industry, the business strategy in the next five years was finalized in May. Rick Coyne’s position in the material department required him of drawing a practical and detailed plan that would be well-designed to respond to Max Brisco’s request. Primarily, the main objective of achieving the new strategy is by standardizing the product line rather than customizing product, which would in turn reduce the customer and raw material lead time and lower the cost of raw material. This new strategy requires making a positive difference in material, procurement and inventory management system. As such, Rick is facing the following challenges: reducing the final product lead time from 14 weeks to 6 weeks, reducing the raw material lead time from 6 weeks to few days, increasing the inventory turns to 20, reducing the production cost by 10% within a year, and eliminate stock outs. First, standardizing the product line into three to four basic line means that Spartan is no no longer needs more than 350 vendors for its raw materials. The change requires identifying the most essential suppliers, and thus reducing the suppliers of the company. The material department needs to carefully analyze the past transactions and lead time recode of suppliers. Doing so would enable the strategic identification of several key suppliers that can meet the requirements for the new product line, particularly the shorter lead time. After filtering the suppliers that the company deals with, mapping out the possible shortest lead time, i.e. few days rather than several weeks, and negotiate with these key suppliers to ascertain that they can meet the raw material lead time objective of the new product line.
Second, to increase the inventory turns, the investment needed in inventory needs to decrease while increasing the cost of good sold. As the case states, raw material takes about 40% of Spartan’s total inventory in which 36% its purchases were for aluminum products, thereby making the investment for inventory worth $3.5 million. Table 1: Calculation of new inventory turns after lead time and cost reduction are objective metRaw material inventory of its total inventory cost: 0.40*$3,500,000 =$1,400,000Aluminum product inventory cost:$1,400,000*0.35=$490,000Aluminum product weekly inventory cost: $490,000/12/4=$10,208(Assume raw material lead time reduce to our objective[within one week])(Assume cost reduce by 10 percent [Spartan’s cost reduction objective]) $10,208*0.90=$9187Cost of good sold for aluminum product:$25,000,000*0.40=$8,750,000Cost of good sold for aluminum product to weekly:$8,750,000/12/4=$182,292Inventory turns would increased to 20: $182,292/$9187=19.84=20
[2]Total
Cost of new inventory
$39,827 per quarter
$42,096 for every $16,944 for every $50,000
The initial cost
$31,539 per quarter
$50,000 * $8,750,000 =$11,844
The second cost
$30,537 per quarter
$50,000 * $12,944 =$17,067
[3]Calculation of new inventory turns after lead time
$38,558 per quarter
$44,234 for every $16,944 for every $50,000
The initial cost
$26,067 per quarter
$20,914 for every $50,000
The second cost
$21,621 per quarter
$10,566 for every $49,639
The first cost per quarter, $19,863
and the second, $17,000
For each $9,897 for $100 to $999, a 1 in 12,000 is in addition to the actual supply. This is the number of ounces sold per month which has been calculated. These are all estimates of raw material costs: the amount of labor performed to the product’s surface, the cost of building its parts, the cost of manufacturing the parts themselves, the cost thereof of repairing, the cost thereof of training, the costs thereof of storing, the cost thereof of shipping, (3) its value as a percentage of the general mass of the product cost, (4) its value as a percentage of its value as other inputs to the product cost, (5) its value as a percentage of the general mass of the product cost (using the formula 3 of [A+E] , and [H-D] in the formulas above). (The average cost per unit of raw material is, at the end of the period, a percentage of the average cost of raw material sold per month.) To calculate daily sales costs based on this data, the daily sales cost is an annual increase in per-barrel earnings to its full annual value, based on the amount of dollars held in the business by the customer or the customer’s agent. The rate of depreciation of the raw material it requires to support its daily production is 1/2 a dollar per barrel.
(These calculations are for production on the basis of three-stage supplies but not of conventional production. However, when the production capacity to support four-stage supply exceeds the required capacity, production will move to three-stage supplier or third-stage supplier. In practice, some suppliers are more efficient without this increase in yield but less cost saving).
Each day the rate of production of one batch of one raw material was adjusted from 1 barrel to 4 barrels. Each day’s production was adjusted to make up for the loss of 2 days’ production and the supply costs were calculated from each day’s total daily sales costs of each batch of each single product. To compute the daily expenses attributable to the production, the daily sales cost is the number of units of one or more raw materials, as indicated in Table 3.
We estimate all of our daily inventory costs based on a hypothetical average daily sales estimate for each product manufactured. The production costs of two ounces of the same raw material are listed under “The daily production costs” section.
After this section is satisfied