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Spartan Heat Exchangers Inc.

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Spartan, who was a leading designer and manufacturer of specialized industrial heat transfer equipment earns sales revenues of $25M. The company has prided themselves on creating a Make-to-Order system that allows customers the option of customizing their orders to their needs. Customization is what gives Spartan the competitive edge over their competitors. Meanwhile, however, countries like Korea and Europe are currently changing industry standards. Korean firms have a low cost base and compete primarily on low cost. European firms have begun to focus on standardizing their product lines to a few high-volume products and compete on delivery lead times and price. Rick Coyne, Materials manager for Spartan, is faced with a proposal of “renewing” Spartans business strategy. Spartan would like to reduce customer lead times for finished products from 14 weeks to six weeks. Second, Spartan would like to move from an inventory turnover rate of 4/year to 20/year. Third, Spartan would like to include some form of standardization in hopes of lowering costs for purchased goods. Quantitative Analysis

Inventory Turnover (Purchasing $14M of inventory/year or 56% of revenues) – (Spartan) 4 turns/year: Holding costs of $875,000/year. (3.5M * 25% inventory carry costs) – (Competitors) 20 turns/year: Holding costs of $700,000/year (2.8M * 25% inventory carry costs) Raw Materials

– (Spartan) $3.5M * 40% = $1.4M
Qualitative Analysis
Basis of Competition
– (Spartan) Make-to-Order – Customization
– (Competitors) Make-to-Standard – Availability/Delivery Lead Time, Cost Delivery Lead Times
– (Spartan) 14 weeks
– (Competitors) 6 week lead times
Inventory Levels
– (Spartan) Regular shortages, stock outs, and write-offs
– (Competitors) No inventory stock outs. Finished goods held in stock in anticipation of customer orders. Product Lines
– (Spartan) Customized design and manufacturing (Requiring 350 suppliers) – (Competitors) Standardization across all product lines: No specialization (Narrow Supply Base) Recommendation

Based off of the quantitative and qualitative analysis above, Spartan should move towards a more standardized process offering three to four basic lines. Becoming standardized, Spartan can shrink their supply base greatly. Spartan can move from a supply base of 350 to a more manageable supply base of around 20 to 30 suppliers. Spartan will also be able to shrink costs by over $100,000 as mentioned earlier by having 20 turns/year, compared to 4 turns/year. Finally, Spartan can shrink raw material costs up to 10% over the next 12 months. To accomplish this Spartan should follow these steps:

1. Plan out three to four basic lines in each category of production (Similar to competitors) a. Plan/Layout for equipment that may be needed to create standardization b. Plan to move from batch process or job shop operation to an assembly-line process 2. Create a detailed plan on which materials Spartan will need to purchase a. Specifications: What will be bought, how much will be bought, and when it will be bought 3. With the above planned out, Spartan can plan to eliminate the suppliers that will not be needed a. Contact each supplier that is not necessary for production and discontinue relationship b. Contact each supplier that is necessary for production and submit bill of materials 4. With more stable production lines, Spartan can guarantee a more stable/shorter delivery lead time to customers a. Guarantee customers of a six week lead time (Advertise: If greater than six weeks, offer discount) b. Plan where and how to hold finished goods in anticipation from customers future orders 5. Submit plan to proper departments for approval

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