CASE STUDY: AUTOMOTIVE BUILDERS INC.

THE STANHOPE PROJECT

QUESTIONS AND ANSWERS 1. HOW DID ABI HANDLE FORECAST RISKS?
The main risk faced by ABI Automotive was the failure of the new line of high-efficiency tractor engines expected to replace the current conventional engines in both new and existing tractors. ABI handled the risk by installing a flexible manufacturing system in the new Iowa plant which would reduce the risk as the flexible manufacturing plant would be able to produce other versions of engine pistons. Also the equipment would be capable of working with other metals like aluminium. This would help to produce different pistons for other manufacturers if the BIG RED line fails.

2. WERE ABIS STANHO PE 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. Team members are invited to participate in every step of the management process. The decision on a course of action is taken by the whole team. Bottom-up style allows managers to communicate goals and value, e.g. through milestone planning.

Steve White (VP) Jim Wickes (revises the proposal)

Ann Williamson (project manager)

3. WHAT ARE THE ANSWERS TO STEVE WHITES QUE STIONS? ABI is already achieving an excellent return on investment (ROI). Wont this investment simply tend to dilute it
The investment in the Stanhope Project would not tend to dilute the excellent ROI achieved by ABI because it was in accordance with the new business strategy of the company. The strategy was to bid only on high margin products capable of sustaining their margins over a long time. ABI bid on BIG RED engines which would result in in 100 percent sourcing in both the original equipment market (OEM) as well as the replacement market with its high margins.

Will the cost in new equipment be returned by equivalent reduction in labour? Wheres the payoff?
Yes the cost in new equipment will be returned by equivalent reduction in labour as the company believes in maintaining small plants having maximum 480 employees.

What asset protection is there? This 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 strategic plan 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 a competitive edge in engineering of producing diesel engine components combined with the flexible manufacturing system which would help in producing engine components of other types with the same equipment. Hence, in this manner, assets would be protected.

Does this proposal maximize ROI, sales potential or total profit?

This proposal will maximize the sales potential in the future for increased volumes and other products that can be run on these machines. Through time and experience, this equipment may also be used to manufacture other versions of pistons for tractor engines

4. WHAT ARE OTHER FACTORS RELEVANT TO THIS ISSUE?

Factors like new business strategy of the firm, variation in demand forecasts, manufacturing plan, operation & organization of the plant and certain financial considerations.

Also factors like high tax-margins, loss of substantial volume to competition, innovation and creativity, capital resource allocation, product design are factors may be relevant to this issue.

5. HOW DO CHANGES IN ASSUMPTIONS MENTIONED BY THE OTHER MANAGERS AFFECT THE PROPOSAL?
The first manager makes assumptions that the sales forecasts may not be accurate. This would not affect the proposal as 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. The second manager was also doubtful about the after-tax margins

6. WHAT POSITION SHOULD JIM TAKE? WHY?

Jim should take the position of recommending the project to Steve White. Even though there are risks and chances of failure, but ABI needs to protect their existing successful business, and to pursue more such business so they need to invest in the Stanhope Project. Also the risks 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: NITIN KATOCH