You have recently become an employee of the company Automotive Assembly GmbH (AA GmbH). Automotive Assembly GmbH is active in the automotive business and assembles axles for sports cars. As a Tier 1 supplier, the company has several locations worldwide, always in the immediate vicinity of the OEMs' production facility for just-in-sequence delivery of the axles. AA's business model is to assemble components and parts from Tier-N suppliers to build a fully functional axle, test it for quality, transport it to the OEM's plant, and prepare the axles so they can be installed in the car directly on the assembly line. The axle must be fully functional, including shocks, springs, brakes and all necessary electronics. Invoicing and payment is carried out centrally for all plants at headquarters by a specialist department.
The CEO of the OEM plant in Problem City has set up a meeting with the manager of their production site because he is unhappy with the just-in-sequence delivery. The plant manager of your company asks you to work out possible reasons for problems with a just-in-sequence delivery in order to be prepared for the meeting.
What problems could arise in relation to the just-in-sequence-delivery from your point of view?
Explain briefly what effect a reduction in inventories would have on the liquidity of AA GmbH.
Develop suitable measures to address the problems uncovered in the NWC analysis. Please differentiate the measures with regard to the time frame and assess the potential of each measure.
The plant manager is impressed by your structured and weighted list of measures and decides to involve you in the development of further NWC potentials. He wants you to analyze the stock levels of the ready-to-install springs by calculating the safety stock level and the corresponding reorder point.
The plant manager is surprised by the figures, as the current safety stock of 60,000 springs is much larger. He would like to know from you how high the savings potential is in terms of capital costs if the safety stock is reduced accordingly.
Calculate the potential savings in terms of the cost of capital in this case. In doing so, please also address possible countervailing risks and explain how the cost of capital affects the P&L.
The operations manager thanks you for your calculations. However, he explains that these small savings do not justify a reduction in the safety stock, as the contractual penalties for non-delivery to the OEM represent too high a business risk. Nevertheless, because of the good work, he would like to include you in future projects for NWC optimization.