Case Study 3 - Suman Corporation PDF

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Case Study 3 – Barac Supply Challenges for Suman Corporation

Business Administration Students School of Business Southern Alberta Institute of Technology (SAIT)

Requested by Roy George, SCMT370 Instructor

April 06, 2021

TABLE OF CONTENTS LIST OF ILLUSTRATIONS..........................................................................................................iii INTRODUCTION...........................................................................................................................4 MAJOR FACTS...............................................................................................................................4 Qualitative....................................................................................................................................4 Quantitative..................................................................................................................................4 MAJOR PROBLEMS......................................................................................................................4 POSSIBLE SOLUTIONS/ALTERNATIVES.................................................................................5 Continue to outsource barac long term........................................................................................5 Insource barac by investing in R&D manufacturing facility.......................................................5 Purchase a long-term contract and develop a strong partnership with Levi Chemicals..............5 Look into buying Levi Chemical company or their barac production department......................6 Invest in stockpiling barac...........................................................................................................6 Advertise to the public about the need of barac...........................................................................6 CHOICE AND RATIONALE..........................................................................................................6 IMPLEMENTATION OF THE ACTION PLAN............................................................................7 Step 1: Properly forecast future sales by looking at historical data (see appendix).....................7 Step 2: Determine the amount of barac supply needs by aligning with sales forecast (see appendix)......................................................................................................................................7 Step 3: Evaluate the risk (see appendix)......................................................................................7 Step 4: Negotiate contract agreements and price.........................................................................7 Step 5: Sign a 5-year long-term contract with Levi Chemicals to ensure barac supplies for 5 years.............................................................................................................................................7 Step 6: Sign a short-term contract with Vasey Inc. and an open contract with T.R. Specialties..8 Step 7: Negotiate plans about producing Levi Chemical’s patented barac product.....................8 Step 8: Sign an agreement with Levi Chemicals to produce their barac.....................................8 Step 9: Develop a project execution plan to build an R&D facility, including hiring experts to educate on barac manufacturing..................................................................................................8 Step 10: Determine internal processes in manufacturing barac...................................................8 APPENDIX......................................................................................................................................8 Time Series Forecasting Revenue................................................................................................8 Supply Forecast............................................................................................................................9 Risk Analysis Matrix of Action Plan..........................................................................................10 Outsourcing Versus Insourcing..................................................................................................11 CONCLUSION..............................................................................................................................12 REFERENCES..............................................................................................................................14

LIST OF ILLUSTRATIONS Table 1: Weight of Each Year's Observation....................................................................................9 Table 2: Weighted Moving Average Time Series Forecast Table....................................................9 Table 3: Insourcing Versus Outsourcing Options..........................................................................11 Figure 1: Barac Purchases Forecast Graph....................................................................................10 Figure 2: Risk Matrix of Chosen Action Plan................................................................................11 Figure 3: Potential Savings Per Year Graph..................................................................................12

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INTRODUCTION Suman Corporation is a leading corporation when it comes to North American consumer and industrial heating and air conditioning units. The company has been historically growing and is forecasted to increase its growth by an average of 20% each year. Based in Pittsburg Pennsylvania, the corporation owns different retail sales markets and installation services throughout North America. They also sell air filtration and humidification units along with their heating and air conditioning units. Recently, the popularity of air filtration units has been suddenly increasing. Barac, a material they use to filter airborne particles, has been experiencing supply challenges due to increased demand. Suman Corporation’s supply team needs to find solutions to keep barac supply continuous in the coming years to keep its operations going.

MAJOR FACTS Qualitative     

Poor sales forecasting from the marketing department. Barac supplied from 3 different suppliers. Pressure from current suppliers to sign long-term contracts or face barac shortages. Possible barac low-cost substitute in the next couple of years. Levi Chemicals hold the patent for barac.

Quantitative          

Air filtration add-ons to new air cooling and heating accounted for 7% of total sales. Manufacturing cost of barac filters was 28% of its selling price. Forecasting showed $2million in sales but were closer to $13million in the first year. Second-year forecasting was $18million with more accurate sales of $35million. Third-year forecasting showed $48million with sales closer to $87 million. Predicted sales growth to level off in the next 3 years, 20% per year. Consistent pricing of barac from all three suppliers at a rate of $60.00. 5-year contract with Levy Chemical for 25,000 pounds and 20% annual increase thereafter its prices subject to increase for energy, raw materials and labour based on current $60.00 per pound rate. 2-year contract with Vasey Inc. for 10,000 pounds a year with prices subject to increase for energy, raw materials, and labour based on current $60.00 per pound rate. 12.5% of annual requirements offered by T.R. Specialists at a proposed rate of $68.00 initially and adjusted semi-annually based on inflation, energy, labour, and material.

MAJOR PROBLEMS   

Inaccurate sales forecasting by the marketing department leading to stockout situations. Possibility of barac supply shortage from all suppliers in the future. Levi Chemicals, Suman Corporation’s long-term supplier, will not guarantee to deliver supply sufficiently if long-term contracts are not signed.

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    

Barac’s popularity might plummet in a couple of years as there are rumors for barac alternative. The contracts’ terms and conditions may not be ideal for the company. Suman Corporations has a high growth potential so there is a need for huge amount of barac to keep their operations going. Although forecasting is not Mike Bradie’s job, it affects his duties as a supply manager greatly. Mike Bradie will be terminated from the company if he does not deliver enough barac supply.

POSSIBLE SOLUTIONS/ALTERNATIVES Continue to outsource barac long term. Advantages:  Suman will know how expensive it will be to outsource and it will likely be cheaper than insourcing.  Scalability is much easier and suitable for a growing company like Suman. Disadvantages:  Employees at the outsourcing firm likely will not take the same pride in their work compared to employees making barac in house.  Cannot customize the process and respond as quickly as making in house.

Insource barac by investing in R&D manufacturing facility. Advantages:  More control regarding the manufacturing of barac.  Able to customize the process and respond more quickly to change.  Employees feel more ownership.  Can be a cheaper option long term to determine whether insourcing can be lucrative.  If insourcing is deemed lucrative, barac supply will be less of an issue. Disadvantages:  Likely to be more expensive than outsourcing because of recruiting and hiring people.  Scalability is likely to get out of control with the increased projections of barac sales.  Could end up being an avoidable expense if insourcing is unreasonable.

Purchase a long-term contract and develop a strong partnership with Levi Chemicals. Advantages:  Levi Chemicals is Suman’s largest supplier, so developing a strong partnership could lead to better service and more barac.  Any guaranteed barac is beneficial as there are very few suppliers. 5

Disadvantages:  Levi Chemicals cannot guarantee the projected barac sales of Suman.  Being locked into a long-term contract could provide difficulties down the road if Suman and Levi Chemicals cannot cooperate.

Look into buying Levi Chemical company or their barac production department. Advantages:  Ensures a sufficient supply of barac over the foreseeable future. Disadvantages:  Expensive.  Unlikely to be possible as Levi Chemical company is one of the largest suppliers of barac.

Invest in stockpiling barac. Advantages:  Helps to ensure sufficient stock of barac for future sales. Disadvantages:  Holding costs can get expensive.

Advertise to the public about the need of barac. Advantages:  New suppliers may come forward to offer their supply of barac. Disadvantages:  Current suppliers of barac may be upset that Suman is looking for other suppliers and cut off supply or take back that long-term contract offer.

CHOICE AND RATIONALE The choices for Suman corporation to address the supply challenges of barac now and in the future keeping its operations continuous is to outsource through Levi Chemicals and current suppliers while investing in an R&D manufacturing facility to insource barac in the future. The main reason and rationale to adopt insourcing is to hold more control over its manufacturing aspect. Having abundant control over their manufacturing, the company would be able to regulate product customization and produce to their own favour. More importantly, Suman corporation can set their target market by supplying products competitive to the market. Another advantage of being able to insource by building a R&D facility would be theoretically, employees and staff would feel more in control of their company and more secure in their positions. Insourcing in the long term would be beneficial for Suman corporation and would help 6

save the company’s capital once a set process is in place (see appendix). Also, in the long run, this would help the company gain a competitive advantage.

IMPLEMENTATION OF THE ACTION PLAN Step 1: Properly forecast future sales by looking at historical data (see appendix). A proper and accurate forecast is important to determine the right amount of supply needed in the future. Suman Corporation should start by adapting a proper and more accurate forecasting method. Starting their action plan to eventually develop a research and development facility to insource barac by determining how much they need is imperative. This is the most important step in the implementation process as it defines the suitability of building a research and development facility investment in future businesses and for Mike Bradie’s position.

Step 2: Determine the amount of barac supply needs by aligning with sales forecast (see appendix). Once a more accurate forecast has been determined, the company can align the forecast to evaluate the amount of barac supply needed in the future. The company can use this information to determine whether an investment for a research and development facility to insource the product is more beneficial for the long-term or not.

Step 3: Evaluate the risk (see appendix). This step involves evaluating the risk of signing a long-term contract with Levi Chemicals while developing a project execution plan to build a research and development centre. Any likely or possible risks that can happen when implementing the action plan should be considered by the company. For an action plan to succeed, risks that are likely to happen should be eliminated or prevented.

Step 4: Negotiate contract agreements and price. Negotiation is an important part of a contract agreement. Purchasing a large volume of their supply is an important aspect to obtain a better price deal. Since the company’s largest supplier is Levi Chemicals, Mike Bradie should negotiate a deal such as volume pricing discounts. This negotiation should present the most opportunity for Suman Corporation to strike a better deal because of their relationship and proposed long-term business contract. It is assumed that Vasey Inc. and T.R. Specialties will pose a lower probability of getting a better contract deal because of their volume of supply to Suman Corporation.

Step 5: Sign a 5-year long-term contract with Levi Chemicals to ensure barac supplies for 5 years. Once the previous steps are weighed out, investing in insourcing the product will come out as the best action plan for Suman Corporation’s barac supply challenges. However, building a brandnew facility will take some time for the company. They should sign a long-term contract with their largest supplier, which is Levi Chemicals, to ensure a continuous supply and operations while investing in a new facility. This step also ensures their commitment to Levi in addition to 7

the development of their relationship. Also, this could lead the way for future contract negotiations in obtaining their permission to produce their patented barac products.

Step 6: Sign a short-term contract with Vasey Inc. and an open contract with T.R. Specialties. Vasey Inc. will act as a second supplier to Suman Corporation’s barac needs while T.R. Specialties will act as a filler depending on business levels. Since the forecast shows an abundant supply of barac is needed in the future, it is important to retain the relationship with other suppliers as they can be crucial when needed.

Step 7: Negotiate plans about producing Levi Chemical’s patented barac product. Suman Corporation should also start discussing about obtaining a license to produce Levi Chemical’s patented barac product to the company’s board of directors. The first step in executing an insourcing process is to obtain Levi Chemical’s trust and dedication to let Suman Corporation manufacture their product. Suman Corporation should use their strong relationship and long-term business partners to an advantage.

Step 8: Sign an agreement with Levi Chemicals to produce their barac. After countless meetings and discussions, Suman Corporation should use all their ability to obtain a contract agreement about licensing Levi Chemical’s barac product. The choice of an action plan to insource barac will not be possible without completing this implementation step.

Step 9: Develop a project execution plan to build an R&D facility, including hiring experts to educate on barac manufacturing. Once a license to produce is obtained, Suman Corporation can start developing a project management plan to build a new manufacturing facility. At this point of the implementation process, a new site location, contractors, project execution plan, timeline, project nodes, and predecessor lists should all be determined.

Step 10: Determine internal processes in manufacturing barac. Developing a new department in a new facility that manufactures barac should take years. While this is happening, third-party suppliers ensure a continuous barac supply. Once the facility is finished, a set of processes should be made to uniquely cater to Suman Corporation’s barac supply. In the long run, this could be one of the company’s core competencies, which can add a lot of value to customers.

APPENDIX Time Series Forecasting Revenue Since Suman Corporation’s sales revenue historical data is available, the time series forecasting method will generate more accurate results than using a straight-line method. Using three years of sales revenue data, a weighted moving average model can be used. The table below shows a calculation of the company’s sales revenue forecast using a weighted average forecasting method 8

using an assumed 20% growth rate. Since last year’s sales revenue is the most recent observation, it is assumed that the given weight for last year will be 70% or 0.70. The year before that will be 20% or 0.20, and the first year will be 10% or 0.10. Table 1: Weight of Each Year's Observation Year 1 2 3

Weight 0.1 0.2 0.7

Table 2: Weighted Moving Average Time Series Forecast Table Year 1 2 3 4 5 6 7 8 9 10

Sales Revenue (millions) $13 $35 $87 $104 $125 $150 $180 $216 $260

Data Status Historical Historical Historical 20% growth 20% growth 20% growth 20% growth 20% growth 20% growth

Forecast

$69 $94 $117 $141 $169 $203 $243

Forecast Error

% Error

$35 $31 $33 $40 $48 $57

34% 25% 22% 22% 22% 22%

In year 10, the forecasted sales revenue is $243 million with an approximate error percentage of around 20%. The worst-case scenario accounting for the possibility of 20% of error would still forecast about $194 million in sales revenue. This suggests that Suman Corporation needs to have an abundant barac supply to accommodate the volume of sales. For long-term forecasted high sales volume, insourcing barac could save the company capital versus outsourcing because of the high amount of possible growth and the possibility of developing an effective process when made in-house. This could lead to a high core competency and value proposition when achieved.

Supply Forecast An accurate forecast determines an accurate amount of supply needed. With 20% of growth annually, the company can assume a 20% growth in barac supply purchases. The graph below shows a forecast of barac purchases calculated with 20% growth. In year 10, Suman Corporation will need a supply amount of around 115,000 pounds of barac to continue its operations. The current three suppliers to the company have a capacity of 140,000 pounds, which 82% is the percentage Suman Corporation needs in its 10th year of operations. If Suman continues to outsource barac, it may be a costly option for the company compared to 9

investing in their facility to insource barac because of the high volume needed. Ultimately, Suman Corporation will need a lot of barac supply in the future. Figure 1: Barac Purchases Forecast Graph

Barac Purchases Forecast 180,000

165,113

160,000 137,594

Amount of Barac (lbs)

140,000 114,662

120,000 95,551
...