Reference no: EM133320251

Case Study: Spartan Heat Exchangers Inc.

On June 10, Rick Coyne, materials manager at Spartan Heat Exchangers Inc. (Spartan), in Springfield, Missouri, received a call from Max Brisco, vice president of manufacturing: "What can the materials department do to facilitate Spartan's new business strategy? I'll need your plan next week." SPARTAN HEAT EXCHANGERS Spartan was a leading designer and manufacturer of specialized industrial heat transfer equipment. Its customers operated in a number of industries, such as steel aluminum smelting, hydroelectricity generation, pulp and paper, refining, and petrochemical. The company's primary products included transformer coolers, motor and generator coolers, hydro generator coolers, air-cooled heat exchangers, and transformer oil coolers. Spartan's combination of fin-tube and time-proven heat exchanger designs had gained wide recognition both in North America and internationally. page 41 Sales revenues were $25 million and Spartan operated in a 125,000-square-foot plant. Spartan was owned by Krimmer Industries, a large privately held corporation with more than 10.000 employees worldwide. headquartered in Denver. Rick Coyne summarized the business strategy of Spartan during the past 10 years: "We were willing to do anything for every customer with respect to their heat transfer requirements. We were willing to do trial and error on the shop floor and provide a customer with his or her own unique heat transfer products." He added "Our design and manufacturing people derived greatest satisfaction making new customized heat transfer products. Designing and research capabilities gave us the edge in developing and manufacturing any kind of heat transfer product required by the customer. Ten years ago. we were one of the very few companies in our industry offering customized services in design and manufacturing and this strategy made business sense. as the customers were willing to pay a premium for customized products." MANUFACTURING PROCESS The customized nature of Spartan's product line was supported by a job shop manufacturing operation with several departments, each of which produced particular component parts, feeding a final assembly area. Each job moved from work center to work center, accompanied by a bill of material and engineering drawing The first process involved fitting a liner tube (in which the fluid to be cooled passed) into a base tube. This base tube, made of aluminum, was then pressure bonded to the inner liner tube through a rotary extrusion process that formed spiral fins on the base tube. The depth of the fins and the distance between them determined the amount of airflow across the tubes, and thus the cooling efficiency and power of the unit. After the tubes were formed, cabinet and end plate fabrication began The tubes were welded to the cabinet and the end plates. Flanges were then welded to pairs of tubes on the other side of the end plates to create a looped system. The unit was then painted and fans and motors were installed Finally, the unit was tested for leaks and performance, crated, and shipped to the job site for installation MATERIALS DEPARTMENT Spartan's buyers sourced all raw material and components required by manufacturing and were responsible for planning, procurement, and management of inventories. Rick managed an in-house warehouse used for housing the raw material inventories, maintained adequate buffer inventories, and executed purchase contracts with vendors, ensuring specifications were met while achieving the best possible price. Rick's department included two buyers, a material control clerk, an expediter, and two shippers-receivers. It was common for Spartan to have multiple vendors for raw material supply, and the materials group used more than 350 vendors for its raw materials, with current lead times ranging from a few days to six weeks. This wide supplier base was necessitated by the customization strategy adopted by the company. Rick noted that approximately 35 percent of Spartan's purchases were for aluminum products, mainly tubes and sheets. On average. the plant had $3.5 million worth of inventory in the form of both raw and work in process. Raw material inventory constituted approximately 40 percent of the total. Rick estimated that Spartan had inventory turns of four times per year. which he believed was comparable to the competition. Manufacturing operations regularly complained about material shortages and stockouts, and regular inventory audits indicated significant discrepancies with inventory records on the company's computer system. Furthermore, a significant amount of stock was written off each year due to obsolescence Rick suspected that production staff regularly removed stock without proper documentation and that workers frequently deviated from established bills of material. NEW BUSINESS STRATEGY Competition in the heat exchanger industry had increased dramatically over the past decade, with much of the new competition coming from Korea and Europe Korean firms, with their low cost base. competed primarily on price, while European firms focused on standardizing their product lines to a few high-volume products and competed on delivery lead time and price. Spartan's competitors in Europe used assembly-line manufacturing processes, rather than batch or job shop operations. Senior management viewed the competition from Europe and Korea as an imminent threat. Many of Spartan's customers had recently developed aggressive expectations regarding pricing and delivery lead times. and some key customers had decided to opt for standard product design, sacrificing custom design for lower cost and faster delivery.

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