CJ Industries and Heavey Pumps Case Solution

1. Please provide at least three suggestions (alternatives) on how CJI can get the extra number of bilge pumps necessary for the contact that they have already signed with their customer. Also, state the advantages and risks of each alternative you provide. Please state which of those alternatives you would like to recommend for CJI and why.

The second option is to setup their own pump manufacturing plant with an initial investment of $0.5 million. The main advantage of starting in-house production is that the company will not have to rely heavily on a third party. The major risk associated with this option is that the company has to follow a tight schedule of nine months only and make that plant operational; not to mention the hassle of making space and recruitment of new highly skilled employees.

The last option that the company has is to contact and coordinate with two suppliers who are located approximately 500 miles away from their location. The main advantage of this option is that it will decrease the company’s dependence on HP. The main risk is that it will increase their transportation cost.

So, it is recommended that the company should pursue the second option as it will reduce the company’s dependence on HP. Secondly, the case mentions that Great Lake demands pumps on “need basis”, which means their specifications can change that HP cannot provide. It is better for the company to start their in-house production so that they can have full control over their operations.

2. How can CJI assure continued contract compliance and additional contract business from Great Lakes in the future?

About 30% of company’s revenue comes from the Great Lake Company, which shows high bargaining power. In order to balance out the bargaining power of supplier and customers, the company needs to reduce the bargaining power of suppliers. In case the company continues to operate with HP, it might have to agree with their terms and condition if they plan to get into a legally binding contract with them. So, the company needs to start their own in-house production facility in order to reduce the bargaining power of suppliers.

Secondly, the company can enhance their just-in-time system of operations management by making their suppliers or raw material/finished parts in time. In this way, the company can reduce their inventory management cost. In the long-run, the company can cut off its finished goods warehouse from their balance sheet in place of a small warehouse. The company needs to have a small warehouse for finished goods because a buffer inventory of 50 pumps must be maintained for every month. It will also help the company in making additional space for manufacturing machinery for pumps.

The cost associated with in-house production facility is very high if compared to other options, but it needs to be kept in mind that the company has signed a five year contract. In most cases, five year time period is allotted for medium-term strategic goals. In order to secure 30% of its revenues, an investment of $0.5 million is very small with a payback period of only 3 months. The company will earn $10 million in 5 years, which suggests that it will take only 3 months ($10/5=$2, $2/4=$0.5).