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Case Study: The World In Motion Wind Turbine Company, 20081 - page 6 / 11





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middle ground: if you are willing to pay the price and eat the transportation costs, there are foundries for castings in S. Korea, Brazil, Poland, Slovakia, and China, among other places.

The Situation Heats Up: Overbearing Suppliers

Alice Cooper, a sales representative for one of the major bearing manufacturers was contacted by WIM’s lead procurement manager, James Taylor. When James finally caught Alice at her desk, she informed James that bearing prices had increased by 25%, effective immediately. James protested and Alice suggested that James try her competitor.

Sure enough, when James got hold of Ozzy Osbourn of the competitor bearing manufacturer, Ozzy told James that his company had raised prices 30%. Both of them said that any new orders would be back ordered for at least 3 months and would require a guaranteed funds transfer as prepayment in full in order to reserve a place on the production schedule. They said that Chinese mining companies had placed the largest order in the history of bearings, split between the two companies. Alice and Ozzy independently said that the Chinese miners seemed desperate, because they had production shut down as a result of a lack of bearings. In addition, because of the consolidation of the gearbox manufacturers, the restrictions on gearbox availability were at least as bad.

As a backup, Jackson had contacted start-up gearbox and bearing manufacturers in China and Brazil about a collaborative arrangement. These young firms offered products with similar performance claims to WIM’s current suppliers at half the price. Transportation would be costlier and lead times longer. But when they sent some sample product, 50% was out of spec and the variability was even worse! He would never have dealt with start-ups when he was in the automotive industry, but now things were different. The start-ups were anxious to gain business, and Jackson had good process engineers available. However, that kind of debugging and quality system establishment could take a year to deliver acceptable bearings and gearboxes. More importantly, Jackson knew that the ops guys were desperate for components—now!

The Order Book and the Payoff?

WIM had orders on the books that were already being delayed, waiting for parts and production. The first 25 WIM turbines in 2006 had been a success in the sense that they were producing electricity reliably, but WIM had accepted firm orders for 100 units total, not just the 25 produced. All orders included cash deposits of 25% up front, plus payments based on production progress. In addition, impatient customers had production options, which meant that these customers had placed a 10% deposit for the privilege of waiting to see if there was excess capacity for the year. The 75 delayed turbines slid into 2007, where orders for 225 and options for 100 more were waiting; only 150 were completed. Due to the burgeoning costs of inventory (see accompanying financials), the order books for 2008 had been held to just 250 firm orders, but when 2007 fell 150 short of the firm orders, the 150 backordered turbines slid to 2008. The

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