SCM Climax

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Supply Chain Management

µClimax Engineering Company Limited¶

Est.1940

Submitted to: Miss. Saba Rana

From:Rizwan Hameed

Awais Malik

Norooz Naveed Mirza

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Introduction:

Climax engineering company limited was established in 1940 as one of the very few electrical

manufacturing companies in Pakistan. They have been pioneers in producing electrical products

across the country. Moreover it was the first company in Pakistan to introduce transformers and

air conditioners. Climax Engineering Company earned popularity very quickly in Pakistan as it

became one of the only suppliers of electrical transformers to WAPDA in 1970. Subsequently,

they also started manufacturing electric motors, Fans, electric heaters and Air conditioners

Ever since the company is established they have emphasized on achieving a responsive supply

chain strategy in order to maximize the overall value generated. The company¶s supply chain

processes can be viewed by the cycle and push/pull view. The cycle views include the customer

order cycle, replenishment cycle, manufacturing cycle and Procurement cycle. Each process

starts with procurement cycle to customer order cycle. The suppliers for the company are the

local vendors in the city of Gujranwala that supply with raw materials such as copper, molded

sheet and other electrical products used in these products. The distribution is done through local

distributors that can carry large bulk stocks ordered by the retailers. Most of the distribution is

done on huge trucks and vans that can carry bulk of products at once. Climax Engineering

Company has a customer order cycle where the customers buy the products at the retail outlets

across the country. Most of the ordering is done through retailers which help the company to

manage their inventory more properly rather than pilling up stocks.

However the company is bound to use a pull processes as execution is initiated in response to a

customer order. This is done to reduce risk of excess inventory or seasons fluctuations. Moreover

electrical manufactured goods such as transformers are customized according to the needs and

requirements of the party upon voltage and capacity hence it is better to produce them on

response of customer order. Therefore at the time of execution of pull process, customer demand

is known with certainty whereas at the execution of the push process, demand is not known andmust be forecast.

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Process Flow Structure:

The process flow structure is the main element of the manufacturing of products in Climax

Engineering Company Limited. Flow structure of the process is used to make or deliver a

product or service impacts facility layout, resources, technology decisions, and work methods.

The raw materials are bought from the suppliers and used in manufacturing of these electrical

products that are stored in the company warehouses.

Stages of Supply Chain:

Suppliers:

Climax Engineering Company has a variety of suppliers that supply them with raw materials.

Basically manufacturing of electrical products require a number of raw materials that are used to

produce a single unit of transformer, motor or electric fan. It is important for the company to

bargain with their suppliers in order to decrease the risk of price variability of copper and

aluminum in the international market. The suppliers supply with the main raw materials that

include Electric sheet, MS sheet, Copper wire, Aluminum, Nut bolts etc. The major suppliers of

raw materials are:

y R M traders Lahore, MS sheet and Aluminum

y Nishat metal, Gujranwala, Copper Conductor

y Brothers engineering, Gujranwala Nut bolts

y Berger Paints, Lahore

Manufacturer:

The Climax Engineering Company Ltd is the manufacturer of several electrical products. After

getting the raw materials from potential suppliers the company uses it for manufacturing of

different electrical products. It is made sure that the product is made with the best quality as the

quality control department controlled by experienced engineers and testing inspectors report the

test results of finish products inspected by them.

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For instance the contract made with WAPDA for manufacturing of Transformers is gone

through a strict inspection under the regulations given by WAPDA. Before the transformers are

send to the final stage the inspectors are deputed to the core section, assembly section and tank

section to inspect them in accordance with the WAPDA specifications.

Distributor:

Climax engineering company has hardly any distribution network because majority of its

customers are government institutions and private investors that usually are willing to bargain on

prices and visit the factory to observe the product then buy it. Basically most of the orders that

are under contract of government require no distribution as government itself is responsible of

collecting it from the plant however some of the products such as electric fans which targets the

local market and the local customers has a distribution and retail network. The electric fans are

distributed on vans and trucks to potential retailers that are then used to sell them.

Retailer:

Products such as the electric motors and fans are distributed through retailers. These retailers are

the further distributor of electrical appliances and products such as fridge, air conditioners, fans,

electric motors and other appliances. The piled up stock is send to these retailers on cash

payment where the retailer is responsible for further sale of the product. Most of these retailers

are located in Lahore and R awalpindi. The other products manufactured such as electric meters

and transformers do not have a retail network as their customers are government institution and

private investors. These products are sold from the factory warehouses which are received by the

customer on the completion of product.

Customers:

Climax Engineering Company has very precise list of customers that buy their products. One of

the oldest and major customer of Climax is WAPDA that buys voltage transformers and electric

meters. In transformer division the other customer are the KESC, MES atomic energy

commission and Pakistan R ailways. The other potential customer includes the local market,

agricultural sector and private investors. Climax also supplies transformers to the housing

societies such as DHA and Bahria town. However Climax Engineering Company is open to the

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local market as well and any customer interested in buying their product can approach the

company head office to place an order but due to the fact that it is a electrical manufacturing

company a push strategy cannot be implemented for its supply chain processes so most of the

production is done on placing a order first.

Supply Chain Drivers:

Facilities:

Climax Engineering Company has huge manufacturing and storage plants which comprises of a

separate location department for each manufacturing product. A separate department for each

product makes it easy to increase supply chain responsiveness without any complications of

delay or mismanagement in production. The company is located in the main commercial area of

the city which makes it easy for the suppliers to reach the location and deliver the raw materials.

The company has 2 huge storage warehouses where the finished goods are assembled for further

delivery. The excess stock of inventory is also stored here in order to cope up with the demand.

Moreover within the company premises it has a raw material warehouse storage location as well

which allows the incoming raw materials to be stored safely for further use. The two major types

of facilities are production sites and storage sites and Climax Engineering Company has both

facilities. This advantage increases responsiveness of the company however decreases the

efficiency as large number of warehouse indicates low demand. This is due to the seasonal

fluctuations of demand and bulk order deliveries.

Inventory:

Inventory basically encompasses all raw materials, work in process, and finished goods within a

supply chain. The raw materials inventory is stored in the warehouse and later used upon

indications of the product department requirement. For example the copper wire is used in

manufacturing of electric fans and voltage transformers. Most of copper wire is bought 30 days

ahead of stock which increase the response time of production. Failing to do so will incur huge

losses for the company as copper wire is the main raw material used in the production of these

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products The Company is very responsive in getting the raw materials such as copper wire, MS

sheet, aluminum and other electrical products in order to keep the production running. The

company has a low inventory cycle due to the fact that the goods are manufactured on the

customers demand. As most of the electrical goods such as meters and transformers are

manufactured individually depending on the customers demand that includes different

specifications of the voltage and electricity capacity. This has made the company less responsive

and more efficient in saving their costs or avoiding wastage of inventory. WAPDA gives

different specifications of each transformer that is ordered hence the company has no safety

inventory. However in Electric fans the company has major inventory stocks for safety in case

the demand exceeds expectation.

Transportation:

The transportation network is the collection of transportation modes, locations and routes along

which product can be shipped. Climax Engineering Company has a small transportation network.

Most of the transportation or delivery of products is done by the retailers themselves. Due to

large transportation costs of delivering the products to different cities the company has decided

to cut these transportation costs. This has made the company less responsive to supply chain and

more efficient in saving huge chunk of costs of transportation. However the major source of

transportation is local trucks and vans used to transport the product across the retailers andcustomers.

Information:

Information deeply affects every part of the supply chain and impacts every other driver. Good

information on supply and demand can help improve utilization and responsiveness of a facility.

Climax Engineering Company uses accurate information to coordinate with their suppliers and

retailers. This allows them to be more responsive over their production decisions. Most of the

suppliers supply the raw materials on time to reduce supply chain inefficiency.

The company uses a pull process to execute the demand of customer order this makes them more

efficient in communicating with the manufacturing departments to produce the products.

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Forecasting is also done for supply planning in the company this allows company to plan for

future demand how condition will be.

Sourcing:

Sourcing is a set of business processes required to purchase goods and services. Sourcing

decisions for a firm is whether to perform a task in-house or outsource it to a third party.

However in Climax Engineering Company all the operations are done in-house and are not given

to the third party. The company has a variety of supplier selection depending on which supplier

gives the most effective pricing. For instance the copper rates are changing daily in the

international market so the company has to evaluate the best possible suppliers in order toachieve supply chain efficiency. This will also help them to reduce costs of the company as the

best supplier will be selected to supply for raw materials. All the operations are run within the

company and there is no outsourcing to the third party.

Pricing:

The recent phase of development of electrical goods in Pakistan has created an enormous

competition in the market where the prices charged to the customers are essential in getting a

competitive edge. Climax Engineering Company have coped up with the pricing strategy very

effectively by giving seasonal and bulk order discounts to their customers. Too much

competition in the market has made it very difficult for the manufacturing companies to reduce

prices and compete because manufacturing electrical products increases the overhead costs per

unit. Hence it becomes difficult to compete in the domestic market. However Climax

Engineering Company has coped up with the pricing very well as being the 3 largest

manufacturers of Transformers and Electric fans in Pakistan. This has made the company

responsive to ever changing demand and supply of the market.

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Network Design in Climax Engineering Company Limited:

Facility LocationModel:

In order to design the network design we look at a facility location, capacity allocation and the

facility that have to be build in order to improve the supply chain network design. The first thing

is to build a new facility location in local market that will help reduce transportation cost and

provides a fast response time, but on the other hand it also increases the facility and inventory

costs incurred by the firm. Therefore Climax Engineering has to build a new facility in the local

market and a certain capacity assigned to each facility. So in order to design a network we have

to look at factor rating model.

Factor Rating:

In factor rating method, first we must identify the Most Important Factors in evaluating

alternative sites for the new facility then we assign a weight between 0 to 100 to each of these

factors. Each alternative location will then be rated based on these factor weights. The most

weighted alternative is selected as the best alternative. Starting of with this factor rating model,the first essential factor is the availability of raw materials suppliers in that facility area,

availability of large warehouses to store surplus stocks and availability of skilled labor. Now we

have to select the facility location options. Currently Climax Engineering Company has a plant

in Gujranwala but there is a need to open a new plant in Lahore, R awalpindi and Karachi.

Factors Weights

Availability of raw material from electrical

goods Suppliers

0.6

Large Storage capacity 0.2

Availability of the skilled labor 0.2

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Total weight 1.0

Now we have to weight our factors on their importance as one can see from the above chart that

we have given highest importance to weight to availability of electrical raw materials that is 0.6

and the other 2 factors are ranked same as they are of the same importance. Now the next step is

we will then rank the 3 facility options out of 100 based on each factor.

Factor Sites Scores

Lahore Rawalpindi Karachi

Availability of electrical goods

raw material

70 70 40

Large storage capacity 60 80 50

Availability of the skilled labor 60 60 60

Now we have ranked the three locations on the bases of these three factors now we will multiply

the weights with the ranks to get the weighted score once we get for all the factors we will then

add them for each location to get the results. So the location with the maximum weighted score

will be the best location for the new facility to be set up. This is actually a way by which we get

to know that the location is suitable for a company to set up their facility or not.

Factors Weight Sites Scores

Lahore Rawalpindi Karachi

Score Weight Score Weight Score Weight

Availability of raw material 0.6 70 42 70 42 40 24

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Large storage capacity 0.2 60 12 80 16 50 10

Availability of the skilled labor 0.2 60 12 60 12 60 12

Total 1.0 66 70 46

So by looking at the total weighted score we can say that it is best to make a new facility

in R awalpindi as it is fully fulfilling the factors that are essential in deciding the facility

location. R awalpindi is the best local facility because most of the retailers of Climax

Engineering are located there so it will be easy to coordinate with them and develop aresponsive supply chain capability.

ACHIEVING STRATEGIC FIT:

The Implied Uncertainty Spectrum:

The implied uncertainty spectrum actually tells that is the demand and supply of your product is

predictable or somewhat predictable or the product you are offering in the market is fully

unpredictable. So for this we have a proper spectrum on which on the maximum left we have

predictable Demand and supply, in the middle we have somewhat uncertain supply and demand

and on the extreme right we have highly uncertain supply and demand. The Climax Engineering

Company has a predictable demand and supply as most of the production is order based hence it

is predictable.

Predictable Demand

and Supply

Highly uncert

Supply and dem

Somewhat Uncertain

demand and supply

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The Responsiveness Spectrum:

The responsive spectrum is the scale that tells that whether the company is responsive to the

customers or efficient in the cost. In the responsiveness spectrum there are four main divisions.

On the extreme left we have highly efficient then we have somewhat efficient then comes

somewhat responsive and lastly on the extreme right we have fully responsive or highly

responsive. Climax Engineering Company is using a highly efficient supply chain system as

most of the cost of distribution and transportation cost are not required in manufacturing of such

huge electrical manufactured goods.

Highly Efficient Somewhat

Efficient

Somewhat

responsive

Highly

R esponsive

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Designing distribution Network:

Distribution refers to the steps taken to move and store a product from the supplier stage to a

customer stage in the supply chain. Distribution is present in every step of supply chain from

suppliers to the customer and is essential for the profitability of the firm. Climax Engineering

Company has a very simple and small distribution network. The distribution network of thecompany can be divided into two major categories.

1. Manufacturer or distributor storage with customer pickup:

In this approach, inventory is stored at the manufacturer or distributor warehouse but

customers place their orders and then travel to designated pickup points to collect their

merchandise. Transformers and electric meters are the two products that have such a

distribution network in the company.

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2. R etail Storage with customer pickup:

In this option, often known as the most traditional type of supply chain, inventory is

stored locally at retail stores. Customers walk into the retail store or place an order

outline and pick it up at the store. Climax Engineering use this distribution network for

electric fans and motors where the bulk inventory is delivered at the retailers that are later

sold at the retail stores.

Sourcing Decision in Supply chain:

Climax Engineering Company Limited use different sourcing decisions in their supply chain

management. This helps them to achieve responsiveness along with efficiency in reducing cost to

achieve a strategic fit. One of the main sourcing decision is to use outsource operations that

result in the supply chain function being performed by a third party. Most of this outsourcing is

done to reduce the cost that is associated of producing in house. Nowadays there are several

ways of outsourcing which can help in increasing the supply chain surplus i.e. capacity

aggregation, inventory aggregation, transportation aggregation, warehousing aggregation and

information aggregation. However Climax Engineering Company has not been outsourcing any

of its supply chain operations and is producing the products in-house. But there are few risks as

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well that are associated with using a third party for production. The process is broken when a

firm outsources supply chain functions. It also decreases the customer/supplier contact by

introducing an intermediary. Using a third party requires a firm to share demand information

resulting in leakage of sensitive information and data.

Information Technology in supply chain:

Information technology plays a vital role in developing a framework for managers to use the

organizational information in a more effective way. The role of IT has broadened the scope

across which companies make decisions. The three macro supply chain processes are:

1. Customer R elationship Management (CR M)

2. Supplier relationship Management (SR M)

3. Internal Supply chain management (ISCM)

In order to increase the supply chain performance the organization has to focus on the macro

processes. Climax engineering company focuses on the supplier relationship management and is

lacking the customer relationship management. The SR M processes involve the company to have

negotiations, buy and have design collaboration with the suppliers. As the company has to rely

mostly on its suppliers for production they have to build a positive relation with them and give

them ample amount of bargains and flexibility of order. However Climax engineering company

also has computerized software that gives accurate information on the raw materials supplied

along with their contact information and the number of available inventory stock. Moreover it

also gives information of the stock that is sold and the payment that is to be collected from the

customers. This allows the company to manage it accounts properly without any mislead

information among the employees. All three macro SCM processes will continue to drive the

evolution of enterprise software.

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Recommendations:

Climax Engineering Company started manufacturing with a monopoly but now due to expensive

competition given by many other electrical manufacturing companies like PEL, SIEMENS

Climax engineering have to change their supply chain system by being more responsive rather

than being efficient. This can be done by increasing the inventory and catering to the large

consumer market. Moreover Climax Engineering has to increase their distribution network in

order to increase responsiveness this is help them increase profits. The second recommendation

can be the that the company should outsource their production so that they can aggregate

inventory, transportation and information in the organization.

Documents

SCM Climax