Share
Explore

icon picker
Traveloka TPM Case Study

Case Study

Oxygen which is a bottled water company that sold 1 billion bottles last year, purchasing these bottles from a vendor at $0.05 per bottle. This year, the vendor has increased the price to $0.06 per bottle. Given this price increase, Oxygen is considering whether to continue purchasing from the vendor or to build their own bottle manufacturing plant. The CFO of Oxygen's company has specified that if they decide to build the plant, the payback period must not exceed 2 years. You have been asked to evaluate these options and provide a recommendation.
Data Summary
Sales Performance
Last year: 1 billion bottles
Past three years: Consistent 5% annual growth in the number of bottles
CAPEX for Building & Equipment: $10 million
OPEX
COGS: $50 per 1000 bottles.
Utilities & Maintenance: $6 million per year
Labor: $1 million per year

Financial Analysis

Current Scenario: Using Vendor
Cost for last year (1 billion bottles at $0.05 each): $50 million
Projected cost for this year (1.05 billion bottles at $0.06 each, due to 5% growth): $63 million
Scenario: Building Own Manufacturing Plant
CAPEX: $10 million
Annual OPEX:
COGS: $52.5 million (for 1.05 billion bottles at $50/1000 bottles).
Utilities & Maintenance: $6 million
Labor: $1 million
Total OPEX: $59.5 million (COGS + Utilities & Maintenance + Labor)
Payback Period Calculation for Building the Plant
Total Initial Investment: $10 million
Annual Savings by Building the Plant:
Cost with Vendor (current year): $63 million
Total Operational Cost of Own Plant: $59.5 million
Annual Savings: $63 million - $59.5 million = $3.5 million
Payback Period: $10 million / $3.5 million = 2.86 years

Evaluation

The payback period for building the plant is approximately 2.86 years (exceeds the 2-year limit). Based on this financial metric alone, building the plant is not advisable if adhering strictly to the 2-year payback.

Strategic Recommendations for Oxygen

Vendor Negotiation Strategy

Oxygen should prepare for negotiations by gathering extensive purchase history and growth data to demonstrate their value as a consistent customer. The goal is to negotiate a price reduction close to the original $0.05 per bottle or better. Oxygen can propose longer contractual terms, which provide stability for the vendor, in exchange for more favorable pricing, possibly including volume discounts that capitalize on the company's consistent growth.

Alternative Vendor Exploration

Oxygen should conduct a thorough market scan to identify potential vendors who can meet their capacity and quality standards. They should initiate a Request for Proposal (RFP) process to evaluate these vendors based on price, delivery reliability, quality, and scalability. It’s practical to negotiate trial runs with shortlisted vendors to test their reliability and product quality without fully committing, ensuring a seamless transition if a switch is necessary.

In-House Manufacturing Feasibility

Oxygen should revisit financial models for setting up a manufacturing facility, focusing on potential cost reductions through advanced manufacturing technologies and sustainable practices like using recycled materials. They should calculate updated ROI and payback periods based on these efficiencies. Additionally, Oxygen could consider a partial implementation of in-house production, starting small-scale to test feasibility before full-scale implementation, ensuring the operation aligns with financial goals.

Operational Efficiency Improvements

Investing in process optimization we can help Oxygen identify and eliminate inefficiencies in their current operations. Adopting automation and IoT technologies could significantly enhance production efficiency and provide real-time production metrics, leading to better-informed decisions and reduced costs.

Long-Term Strategic Partnerships

Oxygen should look to develop strategic partnerships that go beyond typical vendor relationships, focusing on co-innovation in bottle designs which could reduce material costs or enhance consumer appeal. Integrating supply chain operations with key suppliers through just-in-time inventory principles can also improve efficiency, reducing lead times and better managing inventory.

Implementation Timeline

Short-Term (0-6 months): Oxygen should focus on renegotiating terms with the current vendor and beginning their search and evaluations of alternative suppliers.
Medium-Term (6-12 months): Start trials with potential new vendors and pilot partial in-house production to assess feasibility and refine operational strategies.
Long-Term (1-2 years): Depending on the success of trials and initial implementations, Oxygen should scale up their in-house production or transition fully to a more suitable vendor, while continuously optimizing operations based on ongoing evaluations and market conditions.

Conclusion

Given the constraints of a 2-year payback period and the recent price increase from their vendor, Oxygen should prioritize negotiating better terms with their current supplier while exploring alternative vendors. Simultaneously, conducting a feasibility study for partial in-house production allows them to test its viability and potential cost benefits without a full-scale commitment. Enhancing operational efficiencies and forming strategic partnerships will further reduce costs and improve supply chain agility. This multi-faceted approach ensures Oxygen can adapt to market conditions, secure better pricing, and maintain sustainable growth and profitability.

Want to print your doc?
This is not the way.
Try clicking the ⋯ next to your doc name or using a keyboard shortcut (
CtrlP
) instead.