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Fabtek, one of the first companies to provide titanium products for industrial use, is at a crossroads and needs to make a quick decision on which one of four orders to accept and how it should bid on them. In a perfect world, they would be able to pick up more than one order but, despite expansions in the past few years, capacity constraints and poor planning have wreaked havoc with their shop schedule and they can only fit one of the four. Each order represents a different mix of customer needs, labor, material and manufacturing talents and therefore comparability among them is difficult. They definitely need to be very selective in choosing the order. The easiest way to summarize their current situation is by looking at their operating philosophy which is “to make money by moving titanium”. They have simply stopped delivering on that basic philosophy and this is due to several reasons.
On the manufacturing side, they have a critical level of backlog in their shops, difficulties in hiring and training qualified welders and a lack of reliable information on the shop’s actual capacity at any given moment. There are also severe communication issues between Marketing and Operations, with both acting as if they were independent entities. This misalignment is in part to blame for the company’s very low bid success rate of 15%. From a financial standpoint, looking at their 1989 and 1990 P&L, they do not seem to be delivering on one of their most important premises for selecting orders (20% of gross profit before SG&A), getting dangerously close to the upper limit of their average cost of goods threshold of 80% to 85% of sales (See Exhibit 1 in the Appendix). Additionally, SG&A as a percentage of sales has risen significantly and steadily in the last three years. This in part supports Management’s view of poor results driven by erratic marketing and unstable market conditions. Since sales are going up and they are working at full capacity, there is obviously...