Al Introduction

Clem looked up from his computer as Naomi walked into his office. "Hi, Naomi. Sit down. Just let me save this stuff."

After a few seconds Clem turned around, showing a grin. "I'm working on our report for the last quarter's operations. Things went pretty well. We exceeded our targets on defect reductions and on reducing overtime. And we shipped evervthing required—over 90% on time."

Naomi caught a bit of Clem's exuberance. "Sounds like a report you don't mind writing."

"Yeah, well, it was a team job. Everyone did good work. Talking about doing good work, I should have told you this before, but I didn't think about it at the right time. Ed Burns and Anna Kulkowski were really impressed with the report you did on the forge project."

Naomi leaned forward. "But they didn't follow my recommendation to get a new manual forging press. I assumed there was something wrong with what I did."

"I read your report carefully before I sent it over to them. If there had been something wrong with it, you would have heard right away. Trust me. I'm not shy. It's just that we were a little short of cash at the time. We could stay in business with just fixing up the guides on the old forging hammer. And Burns and Kulkowski decided there were more important things to do with our monev.

"If I didn't have confidence in you. you wouldn't be here this morning. I'm going to ask vou and Dave Sullivan to look into an important strategic issue concerning whether we continue to buv small aluminum parts or whether we make them ourselves. We're just waiting for Dave to show up."

"OK. Thanks, Clem. But please tell me next time if what I do is all right. I'm still finding my way around here."

"You're right. I guess that I'm still more of an engineer than a manager."

Voices carried into Clem's office from the corridor. "That sounds like Dave in the hall saying hello to Carole," Naomi observed. "It looks like we can aret started."

Dave Sullivan came in with long strides and dropped into a chair. "Good morning, even-body. It is still morning, barely. Sorry to be late. What's up?"

Clem looked at Dave and started talking. "What's up is this. I want you and Naomi to look into our policy about buying or making small aluminum parts. We now use about 200 000 pieces a month. Most of these, like bolts and sleeves, are cold-formed.

"Prabha Yaidyanathan has just done a market projection for us. If she's right, our demand for these parts will continue to grow. Unfortunately, she wasn't very precise about the rate of growth. Her estimate was for anything between 5% and 15% a year. We now contract this work out. But even if growth is only 5%, we may be at the level where it pays for us to start doing this work ourselves.

"You remember w-e had a couple of engineers from Hamilton Tools looking over our processes last week? Well, they've come back to us with an offer to sell us a cold-former. They have two possibilities. One is a high-volume job that is a version of their Model E2. The other is a low-volume machine based on their Model El.

"The E2 will do about 2000 pieces an hour, depending on the sizes of the parts and the number of changeovers we make. The El will do about 1000 pieces an hour."

Naomi asked, "About how many hours per vear will these formers run?"

"Well, with our two shifts, I think we're talking about 3600 hours a year for either model."

Dave came in. "Hold it. If my third-grade arithmetic still works, that sounds like either 3.6 million or 7.2 million pieces a year. You say that we are using only 2.4 million pieces a year."

Clem answered, "That's right. Ms. Yaidvanathan has an answer to that one. She says we can sell excess capacity until we need it ourselves. Again, unfortunately, she isn't very precise about what this means. We nowr pay about five cents a piece. Metal cost is in addition to that. We pay for that by weight. She says that we won't get as much as five cents because we don't have the market connections. But she says we should be able to find a broker so that we net somewhere between three cents and four cents a piece, again plus metal."

Xaomi spoke. "That's a pretty wide range, Clem."

"I know. Prabha says that she couldn't do any better with the budget Burns and Kulkowski gave her. For another S5000, she says that she can narrow the range on either the growth rate or the potential prices for selling pieces from any excess capacity. Or, for about S7500, she could do both. I spoke to Anna Kulkowski about this. Anna says that they won't approve anything over S5000. One of the things I want you two to look at is whether or not it's necessary to get more information. If you do recommend spending on market research, it has to be for just one of either the selling price range or the growth rate.

"I have the proposal from Hamilton Tools here. It has information on the two formers. This is Wednesday. I'd like a report from you by Friday afternoon so that I can look at it over the weekend.

"Did I leave anything out?"

Xaomi asked, "Are we still working with a 15 % after-tax MARR?"

Clem hesitated. "This is just a first cut. Don't worry about details on taxes. We can do a more precise calculation before we actually make a decision. Just bump up the MARR to 25% before tax. Th at will about cover our 40% marginal tax rate."1

Dave asked, "YMiat time frame should we use in our calculations?"

"Right. Use 10 years. Either of these models should last at least that long. But I wouldn't want to stretch Prabha's market projections bevond 10 years."

Dave stood up and announced, "It's about a quarter to one." He turned to Xaomi. "Do you want to start on this over at the Grand China Restaurant? It's past the lunch rush, and we'll be able to talk while we eat. I think Clem will buy us lunch out of his budget."

Clem interjected, "All right, Dave. Just don't order the most expensive thing on the menu."

Xaomi laughed. "I'm glad we have one big spender around here."

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