Wallace Industries

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This case is important because the supply function is frequently given responsibility for investment recovery. As a leader in the supply organization, you need to understand mechanisms for pricing scrap and alternatives for surplus disposal.

Read the following case on Wallace Industries and then answer the questions that follow.

Wallace Industries

As their meeting concluded on January 18, Ivan Mahkovic, supply chain manager at Wallace Industries (Wallace), offered the following suggestion to Adeline Cheng, plant controller: Let me look into this situation further, and I will get back to you next week with my recommendations. Ivan and Adeline had been discussing potential changes to the approach used at the Wallace plant in Mississauga, Ontario, for scrap material recycling.

WALLACE INDUSTRIES

Wallace served the industrial and transportation industries, designing, developing, and manufacturing highly engineered products. Total company sales were $8.1 billion,¹ with more than 30,000 employees in 67 manufacturing locations around the world. The head office purchasing group located in Indianapolis, Indiana, was responsible for negotiating corporate contracts for raw materials, capital equipment, and construction. Each plant had a purchasing department with responsibility for indirect purchases, such as travel and office supplies, small-value production purchases from local suppliers, materials management, and scrap and surplus disposal.

The Mississauga plant manufactured precision machined and assembled components used in automotive powertrain systems. Annual sales were approximately $45 million and the plant employed 110 people. Ivan had been hired at Wallace in October after working for several years at an automotive parts supplier in the Mississauga area. Other members of the purchasing department at the plant included a buyer and materials planner. Ivan reported to the plant manager, Ryan Dent.

SCRAP RECYCLING

Operations in the Wallace plant in Mississauga involved the use of computer numerical control (CNC) machines for milling, grinding, and drilling, which generated aluminum and steel scrap as a by-product of the manufacturing process. Scrap disposal had been one of Ivans responsibilities at his previous employer, and after settling in at his new job at Wallace, he decided in early December to investigate how Wallace handled scrap recycling. Ivan noticed that Vannier Recycling (Vannier) provided several self-dumping hoppers used in the plant to handle scrap materials. Material handlers dumped scrap into two large lugger containers in the exterior shipping area. One lugger was marked aluminum turnings and the other was labeled mixed scrap.

Unable to locate a contract or purchase order, Ivan asked Adeline if she had any documentation about the relationship with Vannier. Adeline responded that Vannier had handled scrap recycling at Wallace for many years and she was not aware of a formal arrangement, stating: The only documentation I have is the confirmation from our bank when Vannier deposits money into our account through electronic funds transfers. Scrap sales might amount to a couple of thousand dollars a monthnot really enough to worry about. As far as I know, we do not have a contract with them. The arrangement is they haul the material away, so we do not have to worry about it.

After his discussion with Adeline, Ivan met with the production manager, Conrad Bell, who seemed satisfied, commenting that, I am happy with Vanniers service. They provide us with self-dumping hoppers to handle scrap whenever we ask. We probably have more than a dozen of their hoppers in the plant, ranging in size from one-half to three cubic yards capacity. Conrad was not aware of any arrangements to have documentation prepared when the lugger containers of full of scrap were removed by Vannier from the exterior shipping area.

Vannier Recycling was a division of Vannier Steel Corporation, a large steel company headquartered in France with global revenues of $12 billion. The company operated 12 mini-mills and 25 scrap yards in North America. Scrap steel was the main input for the companys mini-mills.

On December 17, Ivan sent an email to Carman Reid, Conards contact at the Vannier scrap yard in Mississauga, asking for a summary of the transactions for the previous 12 months. Carmens response a few days later indicated that she was busy with issues related to year-end, but she would reply with the information in the new year.

An email from Carman on January 11 contained a spreadsheet that summarized shipments of scrap from Wallace to Vannier during the previous 12 months. Exhibit 1 shows the email from Carman, and Exhibits 2 and 3 provide shipment details from Carmans spreadsheet.

EVALUATING POTENTIAL CHANGES

After receiving Carmens email, Ivan collected information on the prices for aluminum scrap from the American Metal Market (Exhibit 4). He also gathered data on the price for raw aluminum from the London Metal Exchange during the previous year (Exhibit 5). Ivan shared the information from Carman (Exhibits 13) and the pricing data (Exhibits 4 and 5) with Adeline in their meeting on January 18. During the discussion, Adeline observed that, I must admit, this is an area that has been largely ignored, but we should have better processes in place for scrap recycling. Given your experience in this area, I would appreciate if you could consider what changes we should adopt. I am sure that Ryan will also be interested in your recommendations.

1 Currency amounts are in US$ unless otherwise specified.

Scrap disposal at Wallace Industries ________blank.

Multiple Choice

is a priority for management

generates significant value to the company

adds costs to the manufacturing processes

is a significant environmental concern

is an afterthought and not seen as important to management

The price paid by Vannier Recycling to Wallace Industries for its scrap is ________blank.

Multiple Choice

based on pricing from the London Metal

based on pricing from the American Metal Market

set unilaterally by Vannier

negotiated monthly

set on an annual basis

The cost of handling the scrap in the Wallace Industries plant is likely ________blank.

Multiple Choice

less than the revenue received from Vannier for the material

an insignificant amount

included in Vanniers contract

greater than the revenue received from Vannier for the material

a major area of concern for management