CASE STUDY:

AUTOMOTIVE BUILDERS INC.

THE STANHOPE PROJECT
ANSWERS

1.

HOW DID ABI HANDLE FORECAST RISKS ?

The biggest risk for ABI was the failure of the new line of engines produced by BIG RED. The failure of the new line of engines would result in the failure of the Stanhope project. ABI handled the risk by installing a carefully designed FMS, which would add additional flexibility which might be required in the future for other versions, or even other manufacturers. This would handle the risk of the failure of the new line of engines

2. WERE ABI S STANHOPE SITE COSTS IN TABLE 2 DERIVED BY A TOP - DOWN OR BOTTOM UP PROCESS ? WHY ?
ABIs Stanhope site costs in table 2 are derived by a bottom-up process. A bottom-up process in in which the people doing the work are consulted regarding times and budgets for more accuracy and then given to high-level managers. The project proposal was first handled by Ann Williamson (project manager), which was then reviewed by Jim Wickes and then finally approved by the Steve White (Vice president).

3.

WHAT ARE THE ANSWERS TO STEVE WHITE S QUESTIONS ?

ABI IS ALREADY ACHIEVING AN EXCELLENT RETURN ON INVESTMENT (ROI). W ON T THIS

INVESTMENT SIMPLY TEND TO DILUTE IT

This investment would not tend to dilute the excellent ROI achieved by ABI as it was investing in the new engine line with high margin products capable of sustaining their margins over a long time. W ILL THE COST IN NEW EQUIPMENT BE RETURNED BY EQUIVALENT REDUCTION IN LABOUR ? W HERE S THE PAYOFF ? Yes there would be equivalent reduction in labour as the company believes in maintaining small plants having maximum 480 employees. The employees would also be trained to do almost all the machine maintenance and would be trained to do all kinds of work for a particular class. This would result in equivalent reduction in labour.

W HAT ASSET PROTECTION IS THERE ? T HIS PROPOSAL REQUIRES AN INVESTMENT IN NEW FACILITIES
BEFORE KNOWING WHETHER A LONG TERM CONTRACT WILL BE PROCURED TO REIMBURSE US FOR OUR INVESTMENT

According to ABIs business strategy new products would be pursued only when their production process and design are of a proprietary nature and exist in areas where its technical abilities help to maintain a long-time position. ABI had two plants producing diesel engine components believed they had a competitive edge in engineering of this type. Hence, in this manner, assets would be protected. Also ABI planned to install a flexible manufacturing system which would be able to produce newer versions of pistons as well as for other manufacturers. Thus assets would be protected. D OES THIS PROPOSAL MAXIMIZE ROI, SALES POTENTIAL OR TOTAL PROFIT ? The proposal would maximize the ROI and the total profit as it would enable 100 % sourcing in both the original equipment market and the replacement market with high margins.

4. WHAT ARE OTHER FACTORS RELEVANT TO THIS ISSUE ?

The other factors relevant to this issue are capital resource allocation, innovation and creativity, product design. The location of the new plant could also be considered a factor.

5. HOW DO CHANGES IN ASSUMPTIONS MENTIONED BY THE OTHER MANAGERS AFFECT THE PROPOSAL ?
The first manager is doubtful of the sales forecasts being accurate. But one of the main characteristics of the new plant is the flexibility offered by the FMS manufacturing system, thus it will be able to work with a number of other materials, operational conditions, productions rates and some other versions of the engine pistons. According to the second manager the assumption of market loss to the Japanese competitors seemed unlikely. Considering the increasing quality and competitive prices, this hypothesis should be considered, although even in the worst scenario the project is still profitable. Thus, it has not a great impact on Stanhope project.

6.

WHAT POSITION SHOULD JIM TAKE ? WHY ?

It can be concluded that Jim should recommend the project to Steve White. Even though there are inherent risks, they are manageable to a level where the probabilities of success and large profits are very high. The project also meets the business objectives of the company, and helps ensure that ABI will stand in a good technological and strategic position in the market of diesel engine components

Submitted by: SABHYATA MARWAH