Major Capital Project

The farm equipment industry in the 1970s had been doing well but there were some disturbing trends. Japanese manufacturers had entered the industry and were beginning to take a significant share of the domestic market. More significantly, domestic labor costs were significantly higher than overseas and resulted in price disadvantages that couldn't be ignored any longer. And perhaps most important of all, quality differences between American and (apanese farm equipment, including tractors, were becoming quite noticeable.

To improve the quality and costs of their incoming materials, many of the domestic tractor manufacturers were beginning to single-source a number of their tractor components. This allowed them better control over both quality and cost, and made it easier to coordinate delivery schedules at the same time.

In this vein, one of the major tractor engine manufacturers, code-named "Big Red" within ABI. let its suppliers know that it was interested in negotiating a contract for possible 100 percent sourcing of 17 versions of special piston heads destined for a new line of high-efficiency tractor engines which were expected to replace the current conventional engines in both new and existing tractors. These were all six-cylinder diesel engines and thus would require six pistons each.

This put ABI in an interesting situation. If they » failed to bid on this contract, they would be inviting competition into their very successful and profitable ^st-diesel engine parts business. Thus, to protect their ex- £ isting successful business, and to pursue more such ' business, ABI seemed required to bid on this contract Should ABI be successful in their bid, this would re-1 suit in 100 percent sourcing in both the OEM market as well as the replacement market with its high mar-gins. Furthermore, the high investment required to J|f produce these special pistons at ABI's costs would vir- * tually rule out future competition.

ABI had two plants producing diesel engine components for other manufacturers and believed they < had a competitive edge in engineering of this type These plants, however, could not accommodate the jy volume Big Red expected for the new engine. Big Red insisted at their negotiations that a 100 percent sup- '¡C plier be able to meet peak capacity at their assembly plant for this new line. iy

As lim looked over the proposal, he decided to refer back to the memos which restated their business strategy and started them thinking about a new Iowa v plant in the heart of the farm equipment industry for this project. In addition, Steve White had asked the following basic, yet rather difficult questions about the proposal at their last meeting and lim wanted to « be sure he had them clearly in mind as he reviewed f*

the files. K

• ABI is already achieving an excellent return on . investment (ROl). Won't these investments simply tend to dilute it? jj^

• Will the cost in new equipment be returned by .s an equivalent reduction in labor? Where's I he^ payoff? |

• What asset protection can we get? This proposal requires us to invest in new facilities < before knowing whether we will get a long-,; term contract that will reimburse us for our, investment.

• Does this proposal maximize ROl, sales potential, or total profit?

To address these questions adequately, lim de-, cided to recheck the expected after-tax profits, return on investment (internal rate of return), and the payback period for himself when he reached the financial portion of the proposals. These figures should give a clear indication of the "quality" of the investment. There were, however, other aspects of capital resource allocation to consider besides just the financial elements. One of these was certainly the new business strategy of the firm, as recently articulated by ABI's executive committee.

Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

Get My Free Ebook


Post a comment