High Tech Compounds Corporation: Using Ratio Analysis in Supplier Selection[1]

You are a supply analyst for High Tech Compounds (HTC) Corporation. HTC is a Michigan-based producer of highly specialized materials for application in a number of industries including automotives, aeronautics, sports, constructions, and transport. The company has 375 employees and an annual revenue of roughly $850 million.

You work for the composite materials group. Composites are made from two or more constituent materials with significantly different physical or chemical properties that, when combined, produce a new material with characteristics different from the individual components. HTC produces a range of composite materials. Composites are made to customer specifications, which change depending on their use. HTC is particularly well known for producing high quality glass reinforced with polymers. The reinforced glass composites that HTC makes are used in cars and planes windshields, among other things.

Reinforced glass composites are a polymer (plastic) matrix that is reinforced (combined) with a glass fibers with a sufficient aspect ratio (length to thickness) to provide a discernable reinforcing function in one or more directions. The four main ingredients of glass reinforced polymers are:

Resins The primary function of the resin is to transfer stress between the reinforcing fibers, act as a glue to hold the fibers together, and protect the fibers from mechanical and environmental damage. Resins are divided into two major groups known as thermoset and thermoplastic. Thermoplastic resins become soft when heated, and may be shaped or molded while in a heated semi-fluid state and become rigid when cooled. Thermoset resins, on the other hand, are usually liquids or low melting point solids in their initial form.

Glass fibers Glass fiber reinforcements are available in different forms to serve a wide range of processes and end-product requirements. Common materials used as reinforcement include woven roving, milled fiber, chopped strands, continuous, chopped or thermoformable material. Glass fibers can be designed with unique fiber architectures and be pre-formed (shaped) depending on the product requirements and manufacturing process.

Inorganic fillers Fillers are used as process or performance aids to impart special properties to the end product. Some examples of inorganic fillers include calcium carbonate, hydrous aluminum silicate, alumina trihydrate and calcium sulfate. In some circumstances, fillers and additives play a critical role in lowering the cost of compounds by diluting expensive resins and reducing the amount reinforcements. Furthermore, fillers and additives improve compound rheology, fiber loading uniformity, enhance mechanical and chemical performance and reduce shrinkage.

Additives and modifiers Additives and modifiers perform critical functions despite their relative low quantity by weight when compared to the other ingredients. Additives used in thermoset and thermoplastic composites can enhance a number of unique properties, including: low shrink/low profile (when smooth surfaces are required), fire resistance, air release, emission control, viscosity control, and electrical conductivity.

Resins and glass fibers are considered commodity chemicals, while fillers and additives are considered specialty chemicals. Commodity chemicals are typically produced in continuous processes, 24 hours a day, 7 days a week. Specialty chemicals, because of their complex chemistries and narrowly focused applications, are frequently produced batch-by-batch in a reaction vessel. Since continuous processes employ continuous feeds and yields, the production volume is usually far greater, per chemical, than for batch processes. The main difference, however, is that a batch process is not necessarily automated, and the chemical reaction (which yields the desired product) has a distinct beginning and ending for each batch.

HTC is currently undergoing an analysis of its suppliers for the above materials. There are several companies that can provide HTC with these materials. However, quality is variable, which means HTC will need to actively engage with suppliers to ensure the materials it needs meet specifications.

As the supply analyst, you are in charge of analyzing current and potential suppliers. You have narrowed the field to three suppliers that you think should be in HTCs portfolio of suppliers.

Specialty Chemicals Corp. is a Grand Rapids-based producer with annual revenues of roughly $155 million. The company does not have the capacity to meet HTCs annual volume requirements, but is growing quickly and has indicated it would be willing to work with HTC on customizing fillers and additives to suit HTCs changing needs.

ChemUnilimited Inc. is based in Los Angeles, California, and has annual revenues of roughly $1.2 billion. The company has a good reputation for producing quality materials to specification. However, according to a friend of yours that works for one of HTCs main competitors, ChemUnlimited Inc. is currently undergoing a leadership change that has caused its service levels (lead time, on-time delivery, etc.) to drop off.

Chemicals Group LLC. Is a Belgium-based conglomerate with annual revenues of roughly $11 billion. Chemicals Group LLC. offers a wide range of chemicals from a predetermined schedule of products at industry standard prices. Shipping terms with Chemicals Group LLC. are FOB origin buyer assumes the risk.

Your job now is to:

1.Conduct a ratio analysis of each company. Be sure to provide as many ratios as possible from each of the four categories of ratios: Profitability, Efficiency, Liquidy, and Leverage.

2.Provide a recommendation as to the sourcing strategy or strategies that HTC should pursue given these suppliers. Be sure to consider both product and supplier characteristics.

3.Discuss some risks involved with your proposed sourcing strategy.

4.What additional information might you want to have before moving forward with your proposed strategy?

	Specialty Chemicals	ChemUnilimited	Chemicals Group LLC
Balance Sheet
Accounts Receivable	22,932,000	417,385,055	1,114,441,978
Accounts Payable	4,158,000	102,545,579	1,591,816,909
Average Inventories	6,134,100	164,424,416	1,814,948,364
Current Assets	31,493,700	668,142,841	4,513,733,069
Current Liabilities	33,254,676	654,779,984	4,965,106,376
Quick Assets	18,896,220	514,469,988	4,468,595,738
Fixed Assets	49,382,760	1,226,859,101	7,429,613,184
Average Total Assets	82,606,860	1,911,214,150	11,950,820,434
Purchases	41,882,400	854,546,492	6,367,267,636
Total Liabilities	49,471,590	1,528,971,320	5,975,410,217
Stockholder Equity	41,024,760	1,681,868,452	5,079,098,685
Income Statement
Sales	154,783,608	1,264,803,197	11,144,419,776
Cost of Goods Sold	38,421,600	822,122,078	6,352,319,272
Total Operating Costs	42,827,400	917,492,078	6,669,935,236
Net Income	107,647,470	367,111,957	4,341,085,835

Note: You should be able to copy and paste the data from this table into an excel spreadsheet to perform your financial ratio analysis.