FABTEK (A)

CASE SUBMISSION
Case Report
Submitted to

L S MURTY

GROUP - 9

ADITYA BHARADWAJ (1311141)

HEMANTH KUMAR D R (1311227)
VIGNEESH P (1311275)
KARTHIK ARUMUGHAM (1311299)
ALEJANDRO SAEZ MATA (1311E5063)

INDIAN INSTITUTE OF MANAGEMENT BANGALORE

Date: 24/10/2014

Contents
Overview ................................................................................................................................................. 2
Current issues .......................................................................................... Error! Bookmark not defined.
The 4 options ........................................................................................... Error! Bookmark not defined.
Refco .................................................................................................... Error! Bookmark not defined.
Pierce-Pike ........................................................................................... Error! Bookmark not defined.
Worldwide Paper ................................................................................. Error! Bookmark not defined.
Kathco .................................................................................................. Error! Bookmark not defined.
Criteria to be considered ......................................................................... Error! Bookmark not defined.
Alternatives ............................................................................................................................................. 2
Capacity Constraints ............................................................................................................................... 4
Observations in criteria ........................................................................................................................... 4
Selection Method ................................................................................................................................ 5
Conclusions ......................................................................................................................................... 6

Overview
Fabtek, one of the first companies to provide industrial-use titanium products has been struggling to
have positive bottom-line despite recording its record sales of 31.2 million in 1990. There have
been issues related to excessive backlogs unreliable internal forecasts and mismanagement of the
existing capacity. In June 1991, the companys booking exceeded its capacity by a significant margin.
Under this circumstance, the company at present has four prospective orders to choose from and
need to manage the acute shortage in capacity and reduce the increasing dissatisfaction related to
late deliveries. The company has different objectives set-out by the various stakeholders and also
needs to balance them while decision-making. In this report, an analysis of the various options has
been carried out and a viable sales and operations plan is recommended to overcome the current
crisis.

Existing Issues at Fabtek

Fabtek is plagued by several issues which have been summarized below:

Capacity shortages leading to delayed deliveries

Labour shortage (skilled) specifically in core competence area, welding

Price wars with competitors due to entry into commoditized bids. Fabtek is struggling to
command a price premium for its core-competency viz. welding

Mismatch in operations and sales criteria for order attractiveness. For ex: Operations wants
technically challenging jobs while sale sis looking for simple, familiar jobs

Delays in job completion leads to payment delays leading to working capital crunch

The Available Options Pros & Cons

Refco
PROs
Highest Profitability
Meets most of the order selection criteria
Fabtek is the co-designer of smaller Whoppers
Enhancing the relationship with an existing client
progress payments for materials and labour
Fabtek has experience with similar kind of product.
In line with companys high quality image.
Good payment terms - On time payment of bills
Order size: $6million
Reliable cost estimates - progress payments for
material and labor

CONs
Too much reliance on Refco - risk of losing a large portion of
business at once
Late delivery
One-time order, it is unknown whether this order will lead to
further related business
Choosing this order eliminates the opportunity to take any
other order (promising long-term relationships because of the
high demand for labour
Refco unsure of Fabtek delivery schedule - labour already
running backlogs
Rumours of Refco shifting to in-house fabrication.

Pierce-Pike
PROs
Growing market
Acquiring a new long-pursued (valuable) client (New
Business Opportunity)
Fabtek's largest competitor may lose a valuable client
Good opportunity to develop a new important
capability

CONs
Uncertainty about timely delivery (reputation damage)
No experience in a similar job
Failure can risk in losing credibility and customer forever
Progress payment only on raw material

Long-term business opportunity (as PP is currently

unhappy with the quality of its existing sources, it may
switch its manufacturing partially/ totally to Fabtek)
Vitali has been pursuing Pierce-Pike for business for
four years
Order Size: $4million

Worldwide Paper
PROs
Opportunity to develop a standard line of product
Ease for management in training the employees
Long-term business opportunity (as WP is planning to
license this job to its manufacturer)
Experience in a similar job
In line with fabteks high quality image.
Standard work, less demanding than custom work

CONs
Penalty of 0.1% of the contract price for each working day
that the complete order was late. No incentive for early
delivery
No progress payments for material/ labor

Good market potential - develop a standard sales force

Kathco
PROs
Enhancing the exisiting good relationship with Kathco
Simple design

CONs
The order is a one-shot deal, i.e. no long-term business
opportunity as Kathco is building its own fabrication facilities
The job doesnt fit with Fabteks high quality image and
capabilities
No new capabilities being developed

Alternatives
With the existing alternatives, 15 combinations of projects are possible for Fabtek to bid. We use the
following codes to refer the projects: A- Refco, B- Pierce Pike, C- Worldwide Paper, D- Kathco , A+BRefco & Pierce Pike and so on. The various alternatives are initially checked against the various
capacity constraints in terms of availability for welding, machining and fabrication. The alternatives

which satisfy the capacity constraints are then taken through a scoring matrix based on the critical
criteria for final recommendation.

Capacity Constraints:
The capacity constraints are evaluated in 2 steps. The first step is to check if the cumulative labor
hours left after taking up the option are not significantly negative for each of welding and fabrication
(note machining can be subcontracted). Based on the first pruning the following Alternatives are
valid: A, B, C, D, A+D, B+C, B+D, C+D and B+C+D.
The second capacity constraint is that since Kathco's horizon is just one year, the feasible alternative
cannot have negative cumulative fabrication labor in the year 1991. This eliminates A+D, C+D and
B+C+D. Hence the feasible alternatives are: A, B, C, D, B+C and B+D. The table below summarizes the
results of the method.
Possible Alternatives
A, B, C, D, A+B, A+C, A+D,
B+C, B+D, C+D, A+B+C,
A+B+D, A+C+D, B+C+D and
A+B+C+D

Capcaity Constraint 1
A, B, C, D, A+D, B+C, B+D,
C+D and B+C+D

Capacity Constraint 2
A, B, C, D, B+C and B+D
Feasible Alternatives

Observations:
It can be seen that some of the criteria are contradicting for ex. The design is simple & the cost
estimates are reliable & Job should be technically challenging. So we need to eliminate one of
these.
After scrutinizing the above criteria, we see that some of them can be merged, some are redundant
and some may need to be eliminated. We have below a consolidated criteria list:
CR1:COGS less than 85%, the lower the better
CR2:Design should be simple with reliable cost estimates
CR3:Customer contribution to overall revenue should not exceed 20% and market contribution
should not exceed 30%
CR4:Choose projects with progressive time payments to support working capital requirements
CR5:Jobs chosen should allow for standardization in the future and have long repetitive runs
CR6: Profitability should be high
Based on the information gathered from the case, we have assigned the following weights to each of
the criteria. This will be used in option evaluation where each of the available 4 options will be rated
on a scale of 1-10 on each of these chosen 6 criteria.

No.
CR1
CR2

Definition
COGS less than 85%, the lower the better
The job fits with Fabteks high-quality image and builds capabilities

CR3

Chosen projects should have progressive payments to support

working capital

11%

CR4

The chosen project should allow adequate delivery time

11%

CR5

Jobs should allow standardization in the future and have repetitive

runs to gain on learning curve effect

8%

The job gives opportunity for Fabtek to enter high profit new growth
segments to beat the commodity trap

8%

Maximize Profit

25%

CR6
CR7

Weight
24%
13%

Net profit & COGS have been given the highest priority as the company has experienced a steep
decline in income (negative income in last fiscal) and thus in the short-term to stay afloat it needs to
take on projects that have a high profit and lower costs of production.

Selection Method:
Out of the five feasible alternatives, we have selected our recommendation on the basis of criteria
as mentioned above. We use a total score approach to score & rank the feasible alternatives. For
alternatives with more than one project, we use weighted average score based on the sales revenue.
The table below shows the scores(out of 100):
Score

Sales

6,000,000 3,900,000 2,400,000 1,500,000 6,300,000 5,400,000

COGS %

82.75%

80.38%

87.75%

B+C

82.00%

83.19%

B+D

80.83%

CR1

40

90

60

30

80

CR2

70

80

90

40

85

70

CR3

90

75

25

40

55

CR4

70

70

50

50

60

60

CR5

65

50

85

40

70

45

CR6

60

90

80

50

85

65

CR7

80

60

20

20

85

80

The final selected alternative, which is our recommendation is to take up the Projects Pierce-Pike
and Kathco.

Long Term solutions:

For Fabteks survival is a commoditized market few changes in its sales and operations strategy is
required.
Common set of organizational goals:
Each department is looking at their own departmental objectives rather than organizational goals.
Operations department is looking for technically challenging projects with high margins and job
scope and specifications. Marketing department is looking for simple and similar jobs with reliable
cost estimates. There should be a common set of organizational goals for better focus and overall
synergy and growth of Fabtek.
Common set of criteria:
Fabtek should come up with a common set of criteria to take up a job. This is very important for
Fabtek which is in B2B market. Common set of criteria taking into account both the departments
view has to be created so that every project can be objectively analyzed rather than a case base
decision.
Value selling:
Marketing is trying to sell as much as possible and bidding for a lot of projects in B2B commoditized
market. 15% bidding conversion rate is a testament to it. Fabteks margin has eroded and its
currently operating in negative profits. Best way to beat the commodity trap is to adopt value selling
and stop transactional selling. Sales force has to be trained in value selling. Showcase the value that
Fabtek brings to its clients.
Focused segmentation:
Fabteks bidding conversion rate is lower than industry average. This shows that the marketing effort
random and has gone haywire. Bidding for anything and everything in a commoditized market is a
very bad move. Once value selling concept is accepted they have to have more focused customer
targeting. Pick and choose their customers and approach them with Fabteks solutions for their
existing problems or superior value proposition compared to their existing system.
Cross functional teams:
Value selling to a focused customer segment is a complicated but essential activity that has to be
made to beat the commodity trap and survive in the industry. Value selling cannot be done by usual
sales force. They have to be trained and the team has to compose both operations and sales
personnel who can showcase the value proposition in Fabteks solutions.

Conclusions:

The projects if taken up will provide a combined profit of $ 1.06 million which might help
significantly in moving from red in the profit column to green
The COGS of this project combination is 83%, which is above our target of 80% but still
below the upper limit of 85%

For Worldwide Paper project, the design is very simple and has the scope for becoming a
standardized offering in the future and thus this is a huge positive given the direction in
which Fabtek wants to move strategically
Working Capital however will still be an issue as progressive time payments are not cleary
mentioned in the deal.

Appendix:
Decision Criteria
The criteria used by various stakeholders for selecting the projects are discussed below:
A)

B)

C)

D)

Operations Division
Job is technically challenging
The job fits with Fabteks high-quality image & capabilities
The companys engineering expertise is utilized
The job is long-run and repetitive
The company has experience with similar products
Specifications and job scope are clear
For larger orders, progress payments can be negotiated
Overall contribution before SG&A is near 20% products price
Marketing Division
The job is similar to what Fabtek had built before
The design is simple and the cost estimate is reliable
The job has good payment terms
The market area has potential for further development
The job allows adequate delivery time
Price is not the primary factor in the customers decision
Finance Department
Maintain COGS should be 80%, with 85% upper limit
Insist on progress payments to maintain healthy working capital
Corporate Policy
Maximum 20% should only reside with one customer
No more than 30% business in one market area
Orders should utilize Fabteks core competence viz. welding

30,000

Welding - cumulative hours after combination of options

25,000

20,000

15,000

10,000

5,000

Jun-91

Jul-91

Aug-91

Sep-91

Oct-91

Nov-91

Dec-91

Jan-92

Feb-92

Mar-92

Apr-92

May-92

(5,000)

(10,000)

(15,000)

(20,000)
A

A+B

A+C

A+D

B+D

C+D

A+B+C

A+B+D

A+C+D

B+C+D

A+B+C+D

20000

B+C

Fabrication - cumulative hours after combination of options

15000

10000

5000

0
Jun-91

Jul-91

Aug-91

Sep-91

Oct-91

Nov-91

Dec-91

Jan-92

Feb-92

Mar-92

Apr-92

May-92

-5000

-10000
A

A+B

A+C

A+D

B+D

C+D

A+B+C

A+B+D

A+C+D

B+C+D

A+B+C+D

B+C

8,000

Machining - cumulative hours after combination of options

6,000

4,000

2,000

(2,000)

(4,000)
A

A+B

A+C

A+D

B+D

C+D

A+B+C

A+B+D

A+C+D

B+C+D

A+B+C+D

B+C