7 Pages Posted: 21 Oct 2008
This case and its companion case, “RMC: Hydra Division” (UVA-QA-0399), are a supply-chain negotiation for which there is a narrow zone of potential agreement. Locating outcomes in that zone is challenging due to differences in raw material costs (real and perceived), potentially extreme opening offers, lack of commitment to do a deal, and different interpretations of history. The difference in raw material costs can provide an opportunity for mutually beneficial agreements to be reached.
Rev. Apr. 27, 2012
The instruction that Jim Mihelic had just received from Akron's manager of nonferrous products was quite clear. The operating margin on the RMC contract had to move closer to, if not exceed, Akron's corporate operating margin target of 24%. While the RMC business provided a useful means of improving capacity utilization, it was not essential to Akron's strategy, and senior management was no longer willing to let margins erode.
Akron was a medium-size foundry with sales of $ 225 million and an after-tax profit of 9%. It was best known for highly engineered iron castings for the automobile industry, including crankshafts, spindles, hubs, brake calipers, and differential housings. It also produced iron castings for components of refrigeration compressor systems and agricultural equipment. In addition, Akron supported a specialty castings business that focused on nonferrous castings in aluminum and brass. Akron had the capacity to produce 8,000 to 10,000 castings per day and was currently operating at 95% capacity.
For the past several years, Akron had supplied RMC's Hydra Division with aluminum castings for water-pump housings. Hydra performed the final milling on the castings, joined the housings with the other components of the pumps, and installed the pumps in a wide range of fluid handling equipment for agricultural and automotive products. Over the years, Akron's business with RMC had been sporadic. There had been several contracts each year, but with no discernible pattern to the timing. Although the contracts generally had a 30-day delivery date, Akron had always been able to schedule the RMC production without interfering with the demands of the other business activities for plant capacity.
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Keywords: cost analysis, management of service industries
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