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Case study: Brisbane Extraction Systems Australia
Brisbane Extraction Systems Australia Pty Ltd designs and manufactures custom-made high performance automotive exhaust extraction systems for the Australian motor racing industry and the automotive after-market. The business was established in Brisbane by two part-time motor-racing drivers in 1997. Martin Graves was an automotive mechanic by trade and Benito Treglia was a mechanical engineer. The business operated originally in Bowen, but relocated to Wacol in 2011 to take advantage of lower rental costs. Whilst the move created some marketing issues, the new premises were much larger than the old factory in Bowen. The new premises gave the firm much needed room to grow.
The company was originally a part-time venture created to supply specialty exhaust extraction systems to the motor racing industry, specifically, the Supercar V8 circuit. But as Brisbane Extraction's reputation grew, more and more demand came from other sectors of motor racing as well as private motorists seeking to improve the performance of their street cars. Whilst originally specialising in custom V8 exhaust systems for Holdens and Fords for V8 Supercars racing, Brisbane Extraction quickly developed the expertise to design and manufacture systems for several of the more popular makes and models of car common to motor racing in Australia. This ability to meet a diverse range of market demands helped to create a solid company that quickly became a full-time operation. Now days, Brisbane Extraction is a well-respected supplier to the motor racing industry, as well as a supplier to the performance street car sections of the automotive after-market.
Traditionally, the company had focussed entirely on custom-built systems; each being specifically tailored to the engine in question. This process involved fitting, calibration and tuning of the system individually to each engine. But as the company's reputation grew, more and more requests were received for high performance systems that could be bought off the shelf. Individual fitting and tuning was an expensive process and many potential customers were put off by the cost. Customers knew that they could buy off-the-shelf systems from other manufacturers, but the Brisbane Extraction brand was very attractive to many performance motoring enthusiasts.
Seeing an opportunity for expansion, in 2008 Martin and Benito started manufacturing a few systems to stock to meet this small but growing demand. Initially, this production was limited to the two main systems (Holden and Ford), and only occurred when the work schedule permitted. The move into off the-shelf products resulted in Brisbane Extraction producing a more standardised line of performance extractors and exhaust systems. These systems were not specifically tuned to an individual engine, but
were designed to fit standard production cars. Whilst they were still high performance systems, their performance was slightly inferior to that of the custom-made extractors that were carefully tuned to the engine in question. Customers were more than happy to trade-off a small drop in performance for a substantial saving in the purchase price. These customers appreciated the brand value offered by Brisbane Extraction but expected good value for money. Martin and Benito felt however that the off the-shelf products should reflect the same quality of engineering as the custom systems that sold for a great deal more, and attracted a much healthier profit margin. Notwithstanding the increasing demand for off-the-shelf product, the custom-designed and made systems continued to dominate the company's sales.
Brisbane Extraction operates a single manufacturing facility in Wacol, where both custom-made and off-the-shelf systems are manufactured. The high-tech engineering equipment used to manufacture the systems is mainly general purpose in nature in order to provide the flexibility needed for producing custom systems. The factory is laid out with equipment grouped by function: tube cutters together in one section of the facility, tube benders in another, a swaging and flaring section, a separate welding section, and so on. The machine shop that produced header and exhaust flanges and other machined components was housed in its own internal section, well away from the hustle and bustle of the assembly areas. The facility also has three dyno-equipped service bays that facilitate the tuning and fitting of custom systems. The majority of the staff are highly skilled tradespeople who take pride in the quality of design and the quality of manufacture of their products. Both the custom and the off the-shelf systems are produced on the same equipment by the same tradespeople using the same processes and procedures.
A few months ago the firm was approached by Race Gear International; a national car parts distributor specialising in the supply of high performance automotive components to both motor racing enthusiasts and the general public. Race Gear was seeking supply of a limited range of high performance exhaust systems for the 5.0L Ford “Boss 302” SVO and the 5.0L Chevrolet small block racing engines (the same engines used in the V8 Supercars). After due consideration and careful analysis, Brisbane Extraction entered into an agreement with Race Gear that involved production of an initial stockholding to populate the supply chain, and regular replenishment of stocks in line with sales. Based on comprehensive market research, Race Gear estimated demand for the systems to be regular but of low volume. The initial stock requirement of 200 units of each system was met by scheduling overtime production across several weekends. All production for Race Gear was transported to Race Gear's central distribution centre in Sydney from which the products were distributed nationally at Race Gear's expense. Retail pricing would be similar to the off-the-shelf systems sold over the counter by Brisbane Extraction, but with a small premium to cover Race Gear's distribution costs. Even though the wholesale price received from Race Gear was substantially less than Brisbane Extraction's own retail price, the gross profit margin on the products was still very viable, and represented not only a useful increase in revenue, but also an increase in net profit.
Race Gear's sales forecasts suggested that the day-to-day demands for stock replenishment could be met during normal production time augmented with a small amount of occasional overtime. Overtime costs were factored into the modelling based on Race Gear's demand forecasts. In an effort to increase efficiency, it was decided to produce the standardised systems (both for Race Gear and for Brisbane Extraction's internal sales) in small batches of two to five systems. This would reduce machine setup time and allow for faster assembly. Martin and Benito were confident that these arrangements would ensure that the new contract would not disrupt operations whilst providing a useful new income stream.
During the past few months however, sales of performance systems through Race Gear steadily increased, leading to more regular scheduling of this line of products. However, when scheduling trade-offs had to be made, the custom-made systems were always given priority because of the higher profit margins these products attracted or because of the urgency of the job. Thus, scheduled lots of components for the Race Gear systems were often taken out of production and partially completed batches were left sitting around the factory in various stages of completion. Occasional stock-outs were also occurring with Brisbane Extraction's own over-the-counter systems but as a rule, the Race Gear requirements were always met on time. The overall increase in demand had however, created an increase in the level of raw material stocks as well as purchased components such as catalytic converters and mufflers.
As the owners reviewed the progress of Brisbane Extraction, both Martin and Benito were happy with the growth of the company. Sales of custom-made systems remain strong, and sales of made to stock and wholesale systems were slowly but steadily increasing. Currently the custom systems were accounting for 60 percent of the production volume and 75 percent of the revenue. However, Cathy Wu, the company accountant, had recently indicated that net profit was in line with forecasts. Cathy's latest financial report recommended that manufacturing costs be reviewed as gross profit was not growing as expected. Costs associated with the off-the-shelf and Race Gear systems were rising. Money was being tied up in increased inventory; raw materials, components, work in process and finished product. Expensive nearby warehouse space has been rented to accommodate the growing inventory volume. Martin was also concerned with increased lead times for both custom and Race Gear orders. It was sometimes difficult to meet promised delivery times. Stock-outs had also occurred with their own off-the-shelf retail products. Capacity was being pushed, and with the current layout, no space was available in the plant for expansion. Benito was worried that it was getting increasingly difficult to meet the demand created by their new contract with Race Gear and decided that the time had come to take a careful look at the overall impact this increased demand for exhaust systems was having on operations.
Write an essay discussing the operational issues facing Brisbane Extraction Systems Australia. The essay should identify and discuss the operational aspects that are affecting the organisation. Assume that the strategic direction of the company is not going to change in the near future. The essay should discuss the following issues with responses integrated within the essay.
∙ Current production processes used by Brisbane Extraction Systems Australia (technical analysis).
∙ The effect of the new contract with Race Gear International on Brisbane Extraction Systems Australia's operations (problem identification and specification).
∙ The effect that the move to producing off-the-shelf systems may have had on the company's financial structure1(broader organisational issues caused by operational problems).
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Brisbane Extraction Systems Australia Pty Ltd was the brainchild of Martin Graves and Benito Treglia, both former amateur motor-racing driver. They started off quite decently manufacturing customized high-performing automotive exhaust extraction system at Bowen in Brisbane, in the year 1997. Their technical expertise led the business to new heights and for expansion purpose, they moved their base from Bowen to Wacol in 2011. It was a strategical move for their business as they could exploit the advantageous factor of the factory space and the low cost of rent in their favor. From catering to a customized service to the motor racing industry to extending their services to the general public, Brisbane's Extraction came a long way. In order to target a bigger market, their expertise went beyond that of the super racing cars to the popular public model cars. This flexibility of automotive service providing from customized racing cars to popular models has earned Brisbane Extraction a goodwill in the market.
The popularity of the firm reached a stage that they were asked for readymade products. So the duo obliged the customers both with the customized products which were their specialty as well as the newly started readymade system. But it is seen that in comparison with their customized system, the readymade one was relatively not up to the mark. Still, Brisbane Extraction's reputation brings the customer to them. Martin and Benito both being business minded person realized the difference between their customized and ready-made product gap and makes their mind upgrade the standards as per the expectation of the customers.
Total Quality Management (TQM)
The difference in product standard no doubt is an issue in any organization, so the founders thought of doing it away in line with the Total Quality Management (TQM) concept. As per the TQM concept, customer satisfaction is crucial for a company to stay in the run for the long-term period. This concept broadly covers all the aspects of the organization – as a customer-centric approach as it is found in this case. The customers are undoubtedly satisfied so they buy from Brisbane Extraction. Otherwise, they would have left for other suppliers in the market (Sallis, 2014).
The leadership element in this concept also finds a place as they are the main guardians of the business and both Martin and Benito explores the option to fill up the product inferiority gap and consistently carry on both the systems as per their standards.