Fabtek

FABTEK

Background

Fabtek, one of the first companies to provide titanium products for industrial use, has a fabrication division which is the second largest industrial fabricator of titanium in the industry. The company is currently facing shop backlog and delivery times have increased from 8-10 weeks to 16-60 weeks. Some employees of the company were of the opinion that customers continued to place orders with Fabtek in spite of the delays and backlog, because of the quality.

The company is now faced with four orders of which they have to choose one to make a bid. Choosing more than one for bidding is not a feasible option since the added volume from any one of these orders will affect metal purchases and Fabtek’s limited facility size will make overtime or a third shift impractical and also because there will be no room to store work in process.

The criterion that operations would consider while making a bid include a technically challenging job in which the company’s engineering expertise is utilized and a job that is long run and repetitive. It would also be preferable to have progress payments that can be negotiated, for labour and materials. Marketing would look at criterion that includes a job that involves simple design, reliable cost estimates, and one that Fabtek is familiar with and which falls in an area that has market potential and allows for adequate delivery time. Negotiable progress payments on labour and materials, is again, a criterion.

The Options

The first order request is from Refco, Fabtek’s single largest customer, contributing 15 to 20% to Fabtek’s revenues. Fabtek is the only outside titanium fabricator in the world that Refco has used or uses, but Refco has been unhappy with the long delivery schedule and occasional late deliveries.

Nonetheless, the order that Refco has presented to Fabtek is based on the manufacture of a product that has been developed in close consultation with Fabtek. Refco always pays its bills on time but possibilities of setting up its own in house fabricating facility exist in the future.

The new order will add another $6 million in revenues to Fabtek, over and above another six million that Fabtek is receiving from Refco, totaling $12 million which would exceed at 20% revenue contribution from Refco (making them 34%) alone in the estimated $36 million that Fabtek hopes to make as sales. This will be counter indicative to Fabtek’s policy of limiting the contribution of a single customer to not more than 20%.

The second order comes from Pierce- Pike, a subsidiary of a large chemical company that has developed a strong position in a rapidly growing market and has so far never approached Fabtek with any orders. All its work has been shared by Fabtek’s largest competitor and number four competitor in the market. The reactor that Pierce has ordered for involves some unusual fabrication, developing capabilities for which will involve additional investment of resources, labour and money. Moreover, Pierce-Pike is willing to pay progress payments only on materials.

The third order comes from Worldwide Paper that has developed a new piece of equipment made entirely of titanium. This order presents Fabtek with the opportunity of creating a proprietary product which is in line with its future plans of creating a standard product line. Moreover, creating this standard product line will help Fabtek develop an in house capability of special heat treatment, which it currently sub contracts. Doing so will help Fabtek circumvent the problems that it faces with the subcontractors and will also help reduce costs involved in transportation to the sub contractor and the time lag therein.

Worldwide paper offers no progress payments and also charges a 0.1% penalty of the contract price for each working day that the complete order is delayed. Also,

The fourth order is from Kathco which is a one shot deal and does not