TKMC case: Just in sequence

Problem Definition

TKMC was mandated to advise the company Automotive Assembly (AA) which is in the automotive business and assembles axles for sports cars. The company has - as a Tier1 supplier - several locations worldwide, always near the OEM’s production plant for just in sequence delivery of the axles. The business model of AA is to assemble the components and pieces of the Tier-N suppliers to build a fully functional axle, quality check them, transport them to the plant of the OEM and prepare the axles to be directly built into the car on the production line. The axle has to be fully functional including damper, springs, brakes and all the necessary electronics. The administrative work for billing and paying is done centrally over all plants in the headquarters by a special department.

Short Solution (Expand) (Collapse)

Detailed Solution

Paragraphs highlighted in green indicate diagrams or tables that can be shared in the “Case exhibits” section. 

Paragraphs highlighted in blue can be verbally communicated to the interviewee.

Paragraphs highlighted in orange indicate hints for you how to guide the interviewee through the case.

I. Client situation

The CEO of the OEM plant in Problem-City has increasingly become unhappy and scheduled an ad-hoc meeting with the manager of the corresponding plant manager of company AA.

What could be a reason and what differentiates AA’s product from other suppliers of the problem-city plant?

Several possible problems possible, but since the customer of company AA is unhappy it should must do something with the products (axles) AA produces. Possible reasons coud be:

Wrong sequence or even worse, not the right time for the delivery of the products
Faulty axles – very dangerous since axles are a safety-relevant component

II. Derivation of measure list

The plant manager of AA took the meeting very serious and did an internal assessment of the production and financials. Besides some production issues, he detected a serious cash problem with a concerning low liquidity. He was not sure he would be able to pay his employees.

What could be the reasons and how are those two problems interlinked? What could be a very short-term fix, and what could be working in the upcoming weeks?

Problems could arise from the three different topics, all based on net working capital. Net working capital = inventories + receivables - payables.

Interlinkage:

High inventories result in low liquidity due to tied cash in inventories.
Receivables: customer is not paying the bill on time – outstanding cash
Payables: we are paying the customer to early compared to what we have to – drainage of cash to early

You can share diagram 1 with the candidate.

Now ask the interviewee, based on these three levers, what could be possible measures and how can they be differentiated regarding their potential and time frame. What is your proposal and why?

If the candidate is stuck you can share table 1 & 2.

Short-term measures:

Inventories	Depending on time frame, but real short-term (a couple of days) measures not available	Very low potential
Receivables	Outstanding bills of customers: send overdue message, or if already overdue try to sell the receivable to a refinance enterprise/company	Medium-to high potential
Payables	Don’t pay the supplier or ask the supplier the postpone for a few days	High potential, since the plant manager is not dependent from somebody else for the measure to be successful

Medium-term measures for the next weeks:

Inventories	Reduce any residual inventories that is not really needed (raw product, half and partly finished products and finished products) Reduction through optimization of order point and quantity at supplier Reduction through mitigation of the 7 types of waste (transport, inventory, motion, waiting, over-production, over-engineering, defects)	High potential, since 7 types of waste offer many measures along the value chain
Receivables	Outstanding bills of customers: send overdue message, or if already overdue try to sell the receivable to a refinance enterprise/company Standardize payment terms	Medium, since the administrative work is done centrally, we can assume that there is already a certain degree of optimization
Payables	Don’t pay the supplier or ask the supplier the postpone for a few days Optimize the payment cycle, standardize payment terms	Medium, since the administrative work is done centrally, we can assume that there is already a certain degree of optimization

III. Inventory optimization

The plant manager likes your structured and weighted measure list and decides that he wants you to work on the component “springs” by calculating and adjusting the reorder point.

For doing that he gives you some more information:

The plant operates 5 days a week, with one shift each day. One shift is 8 hours.

AA has (here simplified) only one supplier S for this product. This supplier S has three other suppliers for each component they have different lead times which are on average: 3 days, 5 days and 7 days. On some occasions, the sub-suppliers of S have difficulties and the lead times go up to 6 days, 10 days and 14 days (in the same order as above).

On an average month, AA needs 3,600 springs. Sometimes the OEM-plant is quicker and produces up to 1,000 cars a day.

Also, consider these given formulas:

 Important things that the candidate should consider. Help her out if she is stuck in the process.

The interviewee has to pick the longest lead-time for the calculations (7 days) since the supply chain always is only as fast as the slowest chain element.
Each axle has 2 springs, and since each car needs two axles (front and back axle) a car needs 4 springs.
The interviewee has to guesstimate the number of days in a month. We assume that an average month has 20 working days.

Lead time demand = lead time x average daily usage = 7 days x (3,600 springs/20 days a month) = 1,260 springs

Safety stock = ((1,000 cars x 4) x 14 days) – (180 springs per average day x 7 days)

= 56,000 – 1,260

= 54,740 springs

Reorder point = 1,260 springs + 54,740 springs = 56,000 springs

IV. Cash savings

The plant manager is surprised by the numbers since the current safety stock is 60.000 springs and obviously well above that number.

What is the potential and how much capital cost would he save by reducing the safety stock to the new calculated level? What are the risks of doing so?

Background information: the WACC is 8% and a spring costs 10 Euros.

Potential: 60,000 – 54,740 = 5,260 springs -> 52,600 EUR

Saved capital costs: 52,600 x 0.08 = 4,208 EUR

Risks: running out of springs and not delivering them to the OEM plan. Major business threat.