Global Heat Exchangers Inc. Deirdre Collins, buyer-expediter for Global Heat Exchangers Inc. (GHE), was faced with an important purchasing decision. A large new client had Just signed for a substantial order, and production was scheduled to begin in a couple of days. Unfortunately, the original pricing of the project was now being threatened because a GHE supplier had Just raised its prices considerably. Company Information. Global Heat Exchangers Inc. (GHE) was established in 1920 and had since established a strong reputation as a leading designer and manufacturer of a wide range of specialized heat transfer equipment.
Their refined manufacturing process had enabled GHE’s heat exchange systems to find applications in a wide variety of industries, including pulp and paper, power generation, electrical transmission and distribution, and other process-related industries. Some of these systems were known to last more than 20 years, so long-lasting relationships in the industry were normal. GHE had operated as a distinct entity under ‘ various ownerships during its evolution and maintained a leadership position in the industry. In 1991, GHE was acquired by Zest Industries, and became a member of the Zest Heat Transfer Group.
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Zest was a large privately held corporation in the United States with more than 12,000 employees. GHE’s facility was divided into two principal areas: (1) the manufacturing facility, and (2) the office building. The manufacturing building consisted of fabrication, machine shop, assembly, testing, and research and development areas, totaling approximately 94,000 square feet with 80 employees. The office building consisted of sales, purchasing, engineering, estimating group, accounting, and management, totaling approximately 9,000 square feet with 60 employees.
GHE’s renowned international eputation was supported by various sales offices across North America as well as foreign offices in Australia, China, Pakistan, Sweden, and the United Kingdom. Some of the more recent large international projects included hydroelectric installations in India, electric transmission systems in Europe, giant water-pumping systems in California, and several waste-to-energy facilities in the Far East. The Purchasing Department. Deirdre was a 10-year veteran of GHE. She worked with Charlie Bond in the purchasing department and they were each responsible for the procurement of different parts.
They each worked very closely with managers in the engineering and estimation departments. Deirdre believed that “communication” was the key to the successful coordination of these groups, I am always in contact with the people in engineering and estimation because we want to make sure that the system we design at GHE is of the highest quality but still reasonably priced. This takes a great deal of coordination amongst ourselves so that the operation runs smoothly. Deirdre also commented on the importance of her position and the effect on profits, The money I can save is free-and-clear profit.
Purchasing is very critical to the bottom ine and every penny counts towards the estimate. The Estimating Process. The complexity of the purchasing decision depended on whether an order was for a standard or custom heat exchange system. A standard unit usually required only one motor and a simple design and could be ordered from GHE’s catalogue. The price was relatively low (approximately $5,400 for an average standard system) and thus stock was either readily available or could easily be replenished. An order for a custom unit, on the other hand, entailed a complex estimation process.
Custom units were much larger and at least 20 times more expensive than standard units. They required several motors and were often designed and manufactured with specific materials in mind. Before a large custom order was filled, GHE policy required that an estimate be sent back to the prospective client for approval. An estimate request typically arrived through the sales department and the specs were then forwarded to the estimation group. The estimation group worked very closely with the engineering department so that the design of the system would match the specs from the client.
Once the design was completed, the estimation group worked with the purchasing department to come up with the formal estimate. The estimate was then passed on to sales, who forwarded it to the client for sign-off. GHE estimates were typically valid for only 30 days, after which they were void and had to be renegotiated. This constraint was the industry standard and many of Deirdre’s suppliers offered GHE similar terms. Deirdre often felt that GHE’s turnaround time was quick and that usually the client was the one to slow down the transaction.
We work closely with each other to make sure that the process is fast so we can keep business moving. However, one shouldn’t forget that our clients have their own sales, estimation, engineering, and purchasing epartments as well so it takes time for orders to get through their whole system and we sometimes end up not hearing from them for a while. The Japanese Account. On March 1, GHE’s sales manager, head engineer, and president returned from Tokyo with an estimate request for a custom heat exchange system for a large Japanese power-generating plant.
The prospective order was lucrative and the expected contribution from the sale was projected to be substantial. The president, a recently assigned executive from Zest Industries, was extremely excited about the potential new business, given its exposure to Far Eastern markets, and reiterated the mportance of this deal with all key personnel at GHE, including Deirdre. Over the next week, members of the sales, engineering, and estimation departments worked earnestly on the estimate and forwarded the final requisition of parts to Deirdre.
Deirdre had little difficulty in sourcing the estimates for the required materials from her long-standing suppliers and submitted the information back to the group. The proposed heat exchange system required dozens of customized motors and tubes as well as the use of a specialized titanium alloy which would prove to be very expensive, amounting to 50 percent of overall cost. An appropriate margin was added to the final cost estimate and the contract was sent back to Tokyo within the week, priced at $1. 2 million. 3:13 p. m. on April 17. At 3:13 P. M. n April 17 Deirdre had Just returned from a long lunch part that was thrown by the president to celebrate the Japanese acceptance of GHE’s estimate that had been received the previous day. The whole company was excited about the order and the potential new business that this client would bring in the future, and all seemed bright at GHE. Deirdre sat down in her office and read the fax (see Exhibit 1). She gasped at the contents of the nnouncement and reread it to make sure. Titania’s price increase would result in a substantial underestimate of the cost of the original Japanese order and might well result in a loss to GHE.
She shook her head in disbelief and wondered what her next move should be. exhibit 1 Fax to: Deirdre colitns TITANIA LTD. FAX SENT: April 17th ATTENTION: Deirdre colitns Buyer-Expeditor, Global Heat Exchangers Inc. Deirdre: I wanted to personally notify you of our recently published price changes that we are advertising in our new catalogue (your copy is in the mail and should arrive in your office shortly). As you will notice, there was a substantial increase in our Titanium sheet metal units of nearly 25%.
Given your request for a materials estimate on this particular item dated March 3rd, I thought you should be aware of the change. I understand that your old request was for a substantial amount of volume. I am sorry about the price increase (it was out of my control) and I hope it does not affect your future business with us. I eagerly anticipate continuing our long-standing relationship. Charles Pappas National Sales Director Titania Ltd. IMMEDIATE ISSUE What should Deirdre do about the announced price increase from Titania? BASIC ISSUES 1. Role of suppliers in gaining competitive advantage. . Pricing and estimating. 3. The marketing-purchasing connection in custom work. 4. Dealing with the unforeseen. 5. Use of top management in supply. ASSIGNMENT 1. As Deirdre Collins, what alternatives do you believe you have regarding Titania and what are the advantages and disadvantages of each? 2. What action would you take and why? QUESTIONS 1 . Does the estimation process for custom work make sense? 2. Why might a price increase by 25% in a period of less than six weeks? 3. If this price increase had been sent three weeks earlier, would it make any difference?