Acme Manufacturing is a B2B company located in Riverside, CA, designs and manufactures several product lines which

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Question:

Acme Manufacturing is a B2B company located in Riverside, CA, designs and manufactures

several product lines which are mainly supplied to the OEM (Original Equipment

Manufacturer) Market. One of their core strengths and competencies is their engineering

design capability.

One of their major products (#145) is semi-custom product that is a critical part of medical

sensor equipment. Product # 145 uses several off-the-shelf components, as well as some

custom components, and has in-house developed Intellectual Property that is critical for

Acme to protect.

This is a profitable product, with a Gross Margin of 60% (after Cost of Goods Sold).

The Order to Delivery (OTD) time (for the Customer( is:

2 weeks if Acme has all the components in stock

4 weeks if they have to acquire components (except for Chip sets)

Chip set lead times are 12 weeks

Acme's costs of financing its working capital needs (mainly Receivables and Inventory) is

20% per annum, and the funds are provided by a local Southern California bank.

Acme uses 365 days per year as the basis for their calculations

The Customers

Product #145 has 2 major customers - Company A and Company B. Both A and B use this product as a critical component of their own end products to market. Both Company A and Company B negotiated the price of the product based on "Should-Cost" analyses that they conducted, and Acme agreed to these prices following a round of negotiations.

Acme has different supply contracts with each of them.

Acme insists on long-term commitments of 6 months, with rolling forecast updates monthly to update quantities, and firm orders for he coming month. Acme does this because of the long lead times for chip sets.

Company A, a very large consumer electronics company, is headquartered in Southern California, and has manufacturing sites in different parts of the country, Asia and Europe. It's main plant, where it uses Product # 145, is located in Riverside.

Company B is a much smaller company, with its headquarters and primary manufacturing site located in Northern California. It is wholly owned by a Chinese company with primary products in electronics and networking.

The core of Acme's supply contracts with Companies A and B, and the Business dealings (and demands) with the two customers, are provided in the following pages.

Acme Mfg: Supply Contract Elements and Business Conditions Schedule Changes:

Company A's contract terms state that schedules cannot be changed more than once a month, but they often change their

schedules at short notice.

Company B, who has the same terms, are much better in this regard and rarely change their schedules within the time period.

Payables (these are Receivables for Acme):

Company A specifies 30 days payables from approved receipt to invoice approval

Company B's contract specifies 60 days from approved receipt to invoice approval.

Company B typically finds fault with the shipments and takes a longer time to settle claims. Acme has found that many of these

disputes have no basis in fact and believe that they are done deliberately as a matter of policy. This leads to the actual Payables

days (Acme Receivables) being a lot longer than specified in the contract. In fact, Acme has found that these payments disputes

and claim resolution increases the effective Payables (Acme Receivables) times to 35 days for Company A and 75 days for

Company B.

Volume:

Company A has a quoted price of $80/unit delivered to their inbound warehouse dock, and contracts for 8,000 units per year.

Company B has a quoted price of $72/unit delivered to their inbound warehouse dock, and contracts for 12,000 units per year.

Acme Mfg: Supply Contract Elements and Business Conditions Schedule Changes:

Company A's contract terms state that schedules cannot be changed more than once a month, but they often change their

schedules at short notice.

Company B, who has the same terms, are much better in this regard and rarely change their schedules within the time period.

Payables (these are Receivables for Acme):

Company A specifies 30 days payables from approved receipt to invoice approval

Company B's contract specifies 60 days from approved receipt to invoice approval.

Company B typically finds fault with the shipments and takes a longer time to settle claims. Acme has found that many of these

disputes have no basis in fact and believe that they are done deliberately as a matter of policy. This leads to the actual Payables

days (Acme Receivables) being a lot longer than specified in the contract. In fact, Acme has found that these payments disputes

and claim resolution increases the effective Payables (Acme Receivables) times to 35 days for Company A and 75 days for

Company B.

Volume:

Company A has a quoted price of $80/unit delivered to their inbound warehouse dock, and contracts for 8,000 units per year.

Company B has a quoted price of $72/unit delivered to their inbound warehouse dock, and contracts for 12,000 units per year. Acme Mfg: Supply Contract Elements and Business Conditions

Intellectual Property:

Company B has also developed a reputation (some of it earned) that they pass on IP to their parent company who has been known to use it in their own products to market. Sales Resources and Spend: Acme has estimated that it takes 1 Full-time Sales Account person (total compensation $90,000 per year) to service both A and B. B, however, demands more attention and requires much more of the person's time. Acme estimates that it takes approx. 1/3 of the Account Manager's time to service Company A, and 2/3 of the time to service Company B. Order Processing and Invoicing Costs: Acme conducted an ABC analysis of the Order processing Costs and Invoicing Costs for Product # 145. They found that, owing to Company A's frequent Schedule Changes and smaller orders, the Order Processing and Invoicing costs for them were $8,000 and $6,000 respectively, compared with $10,000 and $8,000 for Company B, despite the differences in volumes. Costs of Returns: Company A is much more rigorous in terms of incoming inspection and quality - including incorrect paperwork, partial shipments and packaging than Company B. Company A prefers to return whole lots if they find a problem, rather than individual SKUs. As a result, the total Costs of Returns (including overhead allocation) is the same for both customers ($30,000 each annually) despite the differences in volume. Acme Mfg: Supply Contract Elements and Business Conditions

Inventory: Company A does not require Acme to carry any additional inventory for them (mainly because they believe in changing their schedules - in violation of their supply contract with Acme - and placing small orders to meet changing demand). Company B, on the other hand, mandates that Acme hold 30 days of finished goods inventory for them - mainly to hedge against changing demand. Delivery And Fulfillment: Both Company A and Company B have standard delivery costs built into their price contracts. However, Acme incurs extra shipping costs for both customers because of non-planned demands. Company A has most of their shipments delivered by standard truck loads, despite their frequent schedule changes. Company B, however, frequently asks for many of their shipments to be expedited, despite their requirements for Acme to hold inventory for them. Expedited shipments, of course, cost a lot more than standard shipments. The total (standard and expedited) incremental shipment costs Acme incurs for Company A is $18,000 annually and, for Company B, $30,000 annually. These are costs that Acme currently treats as a cost of doing business. Market and Environment: A cause of concern for Acme is that Company B's sales shows signs of declining - it has declined by 5% over the past year. This has been attributed to bad publicity and pressure owing to Company B's parent company's violating International Labor Organization's (ILO) worker safety and exploitation standards. These violations have been documented by a few NGOs (Non- Government Organizations) and publicized. Various governments, including the US, Brazil and the EU have discussed imposing sanctions against B's parent company. Company B assures Acme that these CSR (Corporate Social Responsibility) issues have been taken care of, and it seems to be true because sales appear to have stabilized and the market is improving. However, new findings have revealed that the CSR situation with Company B's Chinese parent is still continuing and that the violations may actually be increasing. 2. Which Customer (A or B) is better for Acme? Why? 3. What actions (internal and external) should Acme take to increase Customer Profitability, decrease Costs to Serve and decrease (or mitigate) Risk?