Case Study - Victorian Steel Fabricators

If you prefer, you can download a PDF version here: VictorianSteelFabricators.pdf

Victorian Steel Fabricators Pty Ltd (VSF) makes standard steel frames designed primarily to build storage systems.

VSF buys standard steel tubing in bulk. The steel is 3 mm thick, the rectangular cross section is 20 mm x 20 mm, and the tubing comes is 6-metre lengths. VSFs production team cuts the steel tubing to size and welds the pieces together into frames. The welding is done by robots. The frames are then coated with a durable paint, baked at 150^oC to cure the coating, and then packaged and shipped to customers. The frames are heavy and bulky, delivery costs are significant. VSF charges customers for delivery at cost.

Most of VSFs customers use the frames to make storage shelves and cabinets, which are then sold to consumers. However, the frames may be used in other applications. Recently, a construction firm bought 2500 frames for utility chases in commercial and industrial buildings.

PFs sales volume increased by 15% in the early stages of the COVID-19 pandemic in 2020, yielding a healthy boost to profit margin. However, profit margins have been falling since then.

VPFs managing director, Doris Knight called a meeting after receiving the data presented in Exhibit C and Exhibit D from the accountant, Dawn Heydon. It seems that in spite of the teams concerted efforts to reduce costs over the last two years, VSFs performance for the year ended 31 December 2022, is well below expectations.

The following conversation took place in the meeting.

Doris (CEO):

We have worked very hard to reduce costs, we have cut our fixed cost by almost a million dollars. Most of the variances on the report are favourable. I was expecting a better result than the previous year, but our operating profit falls far short of target. What else can we do? Can anyone explain what is happening?

Min (sales manager):

My team has put in a big effort this year. We lost one of our sales representatives, but still managed to gain new customers.

A few of our larger customers have been complaining about poor quality and late deliveries. Some deliveries have been more than two weeks late. One customer returned a batch of 200 frames because they were the wrong size! We have also received complaints of sub-standard coatings. The admin staff are over-worked, and the work is piling up. In many cases, invoices are issued more than two weeks after delivery. We need more people in the office.

Fuzu (production manager):

Weve had a difficult year - unexpected equipment break-downs; more rework; higher prices for steel and paint; and the 6% pay increase to top it all off. At one stage we ran out of steel tubing for two days. But Im happy to see that most of the manufacturing costs are well below budget.

Two of our key people resigned last year. Weve been operating without a quality officer for 6 months. We need to recruit a factory supervisor and a quality assurance officer.

Doris (CEO):

Well, there has been no pay increases since 2015. A few of our key people left us to work elsewhere where they receive higher wages. We had budgeted for a pay increase of 3.5%, but with the cost of living rising so fast, anything less than 5% would have left us well below market rates.

Xui Chen (marketing manager):

There is a lot of pressure to reduce costs. We managed to keep our advertising expenses well below budget. I must say, theres not much we can do with our current level of spending.

Peter Taylor (purchasing officer):

Our steel tubing inventory levels are lower than they have been for a long time. That should translate to significant savings. However, I must warn you, with inflation running at over 7%, we can expect more price increases.

Doris (CEO):

We have a good business strategy, but we all need to reduce costs further. I cant see any other way.

I expect specific plans from each of you before our next meeting.

Exhibit A

Exhibit B

Inflation rate in Australia Source: Australian Bureau of Statistics, Consumer Price Index, Australia March Quarter 2023Links to an external site..

Exhibit C

Exhibit D

Requirements

Discuss the following matters based on the quantitative and qualitative information provided. Explain your findings in a clear and concise manner.

1. Fuzu, the production manager is happy to see that most of the manufacturing costs are well below budget. Should he be happy about this? Has the production team performed well? Outline the key aspects of the production teams performance based on the information presented in Exhibit D.
2. Doris, the managing director says We need to keep reducing costs. I cant see any other way. Do you agree that there is no other way?
3. Doris has come to you for help. She needs specific management initiatives or action plans that she can pursue to improve VSFs profitability in the long term. Clearly identify and outline two initiatives that you would recommend.