CJ Industries and Heavey Pumps Case Study
CJ Industries and Heavey Pumps 1 In October 2007, CJ Industries (CJI) had just been awarded a 5-year contract with Great Lakes Pleasure Boats amounting to U.S. $10 million per year, commencing in July 2008. CJI would be providing a number of key engine components for Great Lakes’ luxury line of pleasure boats. The award marked an important milestone for CJI, in that it was the culmination of several years of hard work and dedicated service, supplying Great Lakes parts for their boats on an as-needed basis. The contract had significant longterm follow-on potential as well, if they could continue to show Great Lakes they had the capabilities to be one of their valued, alliance partners. In addition, with this contract Great Lakes would represent approximately 30 percent of CJI’s annual sales, so performing adequately on this contract had a significant long-term financial impact on CJI. One of the parts, a bilge pump, was an item that CJI had been purchasing from one of their suppliers, Heavey Pumps, a small local specialty pump manufacturer, on an informal, non-contract basis. The remaining items were all built in-house by CJI and supplied to Great Lakes from one of their two finished goods warehouses located near the Great Lakes production facilities. Heavey Pumps was producing and delivering 50 bilge pumps at a time at a cost of U.S. $1500 per unit and built to Great Lakes’ specifications, to one of the CJI warehouses, whenever an order was telephoned in by CJI. The delivery costs (about U.S. $500 per 50 pump shipment, depending on the carrier used) were included in the U.S. $1500 per unit price. This scenario typically occurred about every four to six months. Normally, CJI would order another batch of 50 about eight to ten weeks ahead of time, and Heavey had always been able to supply the pumps before CJI’s stock was depleted. Though CJI had sufficient excess capacity to ramp up production on the parts to be supplied in the Great Lakes contract, they were not sure about the ability or willingness of Heavey to increase their production of the bilge pumps. The new demand for bilge pumps starting in July would be 50 pumps per month, and potentially more, depending on Great Lakes’ demand, and the ability of CJI to perform on the contract. There were a number of issues that Nik Grams, the purchasing manager who put the contract together with Great Lakes, needed to work out with both Heavey and the production manager at CJI, in order for this contract to be met with as few problems as possible. The issue with Heavey Pumps was whether or not they could guarantee delivery of 50 pumps per month to one of the CJI warehouses. This had been the one item that had “slipped through the cracks” on the contract with Great Lakes, and it now loomed as something that could conceivably put the contract in jeopardy. There were potentially additional equipment, labor, and other production costs for Heavey associated with the extra demand for bilge pumps, not to mention extra delivery costs as well. (Case Excerpt)
In 2007, “Great Lakes” awarded “CJI” a five-year contract of 10 million Dollars annually. CJI mainly specializes in the supply of luxury boat engine components. CJI considered the agreement as an opportunity that could enable them to continue conducting business with Great Lakes even after their contract expires or a chance to lobby for another contract in future (Wisner, Tan & Leong, 2014). The agreement presented a lucrative business deal because it would boost CJI’s sales by 30 percent. While CJI built most of its products in-house, it sourced the bilge pump from Heavey, a local company. Heavey Pumps manufactured the bilge pumps according to CJI’s specification’s and delivered them to CJI’s stores where CJI’s employees could supply them to Great Lakes on a need basis.The relationship between CJI and Heavey Pumps was not contractual. Besides, requests made by CJI were not regular as the company would only make orders of about 50 pumps after every four to six months at 1500 U.S. Dollars per pump and an additional shipping cost of 500 U.S. Dollars. The agreement that was established in October 2007 and later in July the following year required Heavey Pumps to make an extra 50 pumps and deliver them to CJI every month (Wisner, Tan & Leong, 2014). However, CJI was not sure about Heavey Pump’s ability to fulfill the new demand. While the contract contained a contingency plan, the increased demand for pumps was an oversight, making it an issue for CJI. Although CJI has an option to manufacture the pumps itself, it would require its management to invest a total of 500000 U.S. Dollars and employ three additional employees.
CJI cannot determine whether Heavey will fulfill the additional demand of 50 pumps every month for the new Great Lakes contract. Also, CJI is worried concerning the additional delivery fee that it will incur if Heavey Pumps agrees to supply the additional pumps as specified. CJI was initially paying Heavey pumps 500 U.S. Dollars in delivery costs for every 50 pumps delivered. In the new agreement, CJI will be forced to pay 500 U.S. Dollars every month in delivery costs to Heavey Pumps, a move that will see the shipping costs shoot from the current 2000- 3000 U.S. Dollars to 6000 U.S. Dollars per year. CJI has the option of making the pumps in-house (Wisner, Tan & Leong, 2014). However, this will require an additional starting capital of 500000 U.S. Dollars in addition to space and three new employees. As such the production manager doubts whether manufacturing the pumps in-house would be a good move, given their limited experience in pump manufacturing.
- Nik Grams may arrange for a meeting with the Management of Heavey to discuss if the additional volume of pumps will decrease the price and whether Heavey Pumps can offer discounts. If the price per pump can drop low enough and offset the shipping costs, then it could be a good deal. Ideally, Heavey may also achieve economies of scale by manufacturing many pumps and supplying them in bulk. The company can take advantage of the economies of scale to reduce the cost per pump and supply them to CJI at subsidized prices.
- Nik may look into the other two bilge pump manufacturers more deeply and discuss with some of their clients to evaluate their service record, their product prices, and shipping costs. If they offer high-quality pumps, at affordable prices and favorable shipping costs, then Nik may consider engaging in a contract with them to deliver the pumps as alternatives to Heavey Pumps. Nik may also compare the two manufacturers and identify the one that can offer the best deal regarding prices and delivery costs.
- CJI may evaluate if Heavey Pumps or any alternative manufacturer can produce more than pumps every month. Such a move would enable the company to eliminate delivery costs. Since CJI’s contract with Great Lakes looks stable, CJI can make one or two bulk purchases of pumps every year and store them in its warehouses to benefit from economies of scale.
- The final alternative is that CJI may decide to produce the bilge pumps in-house. Nik Grams trusts that the company can be able to manufacture the pumps and still meet the deadline. His worry only concerns the viability of such an investment. It also seems that CJI can carter for the costs of producing the additional pumps in-house, making it a viable alternative.
Choice and Rationale
CJI should produce the bilge pumps in-house. Although it would make the company incur an additional investment of 500000 Dollars, it is worth it. CJI’s management is not sure whether the bilge pumps supplied by Heavey Pumps are of the right quality although they have not received any returns. Besides, CJI would be forced to conduct market research to identify whether the alternative manufacturers can be able to supply high-quality pumps at favorable prices and delivery costs. Such a process may be costly and time-consuming. Instead. CJI may utilize that time in setting up its production system. Manufacturing the pumps in-house will also enable the firm to ensure that only high-quality pumps are delivered to Great Lakes. CJI has not made any contract with Heavey Pumps. Therefore, Heavey Pumps can cut off its relationship with CJI any time and stop supplying pumps to them without any legal repercussions. As such, Heavey Pumps is not a very reliable company, and the only way CJI can be sure that it will be able to supply 50 pumps to Great Lakes monthly is by producing the pumps in-house.Other benefits CJI will enjoy by manufacturing the pumps in-house include increased flexibility and easier communication. Rather than having to contact other companies like Heavey Pumps, to raise the volume or customize the product to meet the required quality, the company will only have to contact its departments. Keeping production in-house also ensures faster and easier communication by eliminating different barriers. Ultimately, fewer opportunities for misunderstanding and real-time communication will enable CJI to obtain a more precise brief regarding the quality of pumps needed by Great Lakes, manufacture them and deliver them in time.
Goals and Strategies
a Problem Statement
In October 2007 CJI entered into a contract with Great Lakes to supply it with 50 pumps per month. CJI is worried that it will incur an additional 500 U.S. Dollars in shipping costs every month. The company is also not sure whether Heavey Pumps will be able to supply it with the required pumps monthly.
b Goal Statement
To set up an in-house production system to manufacture 50 bilge pumps and deliver them to Great Lakes monthly. The company hopes that by delivering these pumps, it will be able to fulfill the terms of its contract with Great Lakes.
c Strategy Description
CJI will allocate 500000 U.S. Dollars as an initial investment to the project. The company will recruit two new employees to operate the in-house production system. The company will also create enough space in its warehouse for the production system and additional pumps that will be produced.
|Overseeing the production process
|Allocating space for the manufactured pumps in the store
|Technical and support and Design
|Ensure proper operation of the production plant
|Two Plant Operators
|Operate the production plant
a Barriers to Successful Implementation
- Additional employees needed
- 500000 U.S. Dollars investment capital needed
b Implementation Steps
|Discuss with the employees
|Allocate the relevant capital
|Employee the required personnel
|Human Resource Manager
|Train the Employees on how to handle the production plant
|Human Resource Manager
|Make any necessary adjustments
- Resources Needed for Implementation
|500, 000 U.S. Dollars
|Two new Employees
- Performance Measures
|Quality Pumps manufactured
|50 Pumps delivered to Great Lakes monthly
|Increased Profits as a result of the contract
Appendix: Answers to Discussion Questions
The major issues include: CJI is unable to determine whether Heavey will fulfill the additional demand of 50 pumps every month for the new Great Lakes contract. CJI is worried concerning the additional shipping fee that it will incur if Heavey Pumps agrees to supply the pumps. CJI was initially paying Heavey pumps 500 U.S. CJI is not sure whether manufacturing the pumps in-house is a right decision because its employees have limited experience in pump manufacturing.
Advantages of using Heavey: CJI recognizes that Heavey is reliable and its product specifications are consistent and within the required quality. The two companies are close by and have a history of cooperation
Disadvantages of Heavey: CJI is unsure whether Heavey will produce at the capacity required by the contact. CJI is worried that Heavey will charge high shipping costs for delivering the pumps monthly.
Advantages of In-house production: Production could meet the amount demanded by Great Lakes, Shipping costs will be eliminated.
Disadvantages of In-house production: Large initial capital investment, The Company has no experience in in-house manufacturing.
Advantages of using other Suppliers: CJI will not solely depend on Heavey, it will allow CJI an opportunity to improve its production.
Disadvantages of using other Suppliers: CJI has not determined their reliability; they may not deliver the required quality and quantity of pumps.
In conclusion, CJI should produce the pumps in-house to ensure reliability and quality. The company may seek guidance from Heavey on the process of developing an in-house production system.
CJI should establish a strong business relationship with Great Lakes to ensure that it enables it to win an additional contract in the future. The company should abide by all the terms of the deal, supply the required pumps in the right quality and quantity and abide by the set timelines and operational criteria. Also, the company should inform Great Lakes concerning the increase in production and the measures it has taken to ensure that it delivers the required products as requested.