Fonderia di Torino S.p.A.

Fonderia di Torino is geared toward producing products of high quality. Safety parts, what the
company is known for, are crucial for automotive, aerospace, and construction equipment.
Should safety parts fail, operators would lose control of their machines. Thus, Fonderia di Torino
requires the utmost precision in its products.
A proposal is being made discussing the possible purchase of a Vulcan Mold-Maker
automated molding machine. If purchased, the Mold-Maker would replace a semi-automatic
stamping machine currently being used in the factory. The primary reasons for the acquisition
are (1) that the new machine could increase quality and (2) that it could add some capacity for
expansion.
Context: The Company
Fonderia di Torinos customers are original equipment manufacturers (OEMs). OEMs are are
companies whose products are used as components in another companys products. This
means that Fonderia di Torino manufactures parts or components to be used in the OEMs
products, then OEMs buy the components and resell them under their own brand.
The longstanding priority of the OEMs is product quality, an area where Fonderia di Torino has
clearly excelled. Only 70 parts out of every million produced have been rejected by the OEMs,
an impressive rate of only 0.007%. The S.p.A. has also earned notable quality awards from
prestigious automobile manufacturers BMW, Ferrari, and Peugeot.
Boston Consulting Group Matrix
The Boston Consulting Group Matrix is a tool we shall use to evaluate Fonderia di Torinos place
in the market. Using the results of the evaluation, we shall arrive at a strategy.
Fonderia di Torino sells a generic product in a slow-growing industry where it has a high market
share. It is therefore in the cash cow quadrant, and its strategy is to compete through lowering
costs. The company must be especially wary of taking on new investments.

Context: The Economy

Part of this analysis is a look into the state of the economy, not only in Fonderia di Torinos
location in Italy, but also in areas where the companys products are in demand. Italys GDP
growth rate evidently declined toward the end of 2000. Fellow members of the European Union,
Germany and France, show similar trends: the GDP rose from the beginning to the middle of the
year, then declined afterward.

Gross Domestic Product (GDP) is one of the primary measures of an economys output, health,
and growth. As shown on the graph above, Italys GDP increased by approximately 0.8 in the
earlier part of 2000 and decreased by the end of 2000. A lower GDP growth rate signifies that
the economy is experiencing a slowdown. It leads to lower profits for companies and lower stock
prices. The downward GDP trend until 2000 discourages the purchase of the Vulcan
mold-making machine since it would not be necessary for Fonderia to increase its
capacity during an economic slowdown.
Context: The Industry
There are other countries around the globe which produce metal castings. China, Japan, Korea,
Thailand, Taiwan and India are among the Asian countries which produce metal castings. The
countries Brazil, US, Mexico, and also Canada are active in the metal castings industry.
Although Fonderia di Torino has a foothold in the European market, importing from these
countries is not impossible if the quality of the products of Fonderia di Torino declines
significantly.
To get an idea of how sales of metal casting fare, we shall analyze the automotive sales in
Europe over the years, since automotives form a considerable share of the market for metal
castings, and it is relatively feasible to retrieve information on car sales. Demand for metal
castings in the aerospace and constructions might have been found as well, if not for the time
constraint.

A study by the Organization for Economic Cooperation and Development yielded the following
graphs (OECD). The dark, solid lines signify actual car sales, in millions, and dotted lines
represent trend sales as forecasted by the OECD.
Actual and trend car sales, in millions, 1995-2000

Although France demonstrate an increasing demand for cars toward the end of 2000, Italy and
Germany exhibit declining sales in cars, indicating that the economic downturn may have a
direct effect on automotive sales, and therefore, metal casting sales.
New car registrations in the European Union, in millions, 1990-2000

The rest of Europe is affected, too. The number of new car registrations in 2000 dipped visibly
from a high in 1999.
Thus, an economic downturn must already caution against investing in production
capacity, to prevent oversupply.

Six Sigma Computation

Defects or Errors per million opportunities = 70 parts per million
Sigma Level = NORMSINV(1-70/1,000,000) + 1.5
= 5.31 ~ 5 sigma level (3.41-233 defects per million opportunities)
Given that Fonderia is working within a 5 level sigma range, it can be observed that they already
have improved on the rejection or defective metal castings for every million batch they produce.
Even though they already have reached the fifth sigma level, they still have a lot of
developments to work on to obtain the efficient and optimal six level sigma with only 3.4 or less
defects per million opportunities. Since they are currently operating at a 90% of capacity, they
should refine their processes to optimize the use of their available metal castings and effectively
reach their desired level of intensification.
In addition to this, Fonderia should implement a Pull System for their Demand Management with
their original equipment manufacturers so that they would be able to have a smooth process
flow in the floor space of their factories. This would enable them to produce only the number of
castings needed in response to customer demand. With this, even though they maintain a floor
space that is 30% filled with wide galleries that the machines required, raw materials, and inprocess inventories, they would be able to maximize the level of production that they currently
maintain.
A diagram of the Pull System for Demand Management is provided below for better
understanding:

Another strategy that could be implemented in the current production management of Fonderia
di Torino is the use of Lean Operations and Scheduling. With the use of lean operations, they
would be able to have a flexible system that uses minimal resources and produces high quality
metal castings and focus on the elimination of wastes or non-value-added activities in all forms.
This is also known as the Just in Time System that would provide an efficient flow of their

materials and information throughout their value chain to obtain faster customer response,
higher quality and lower costs.

SWOT Analysis of the Vulcan Mold-maker Machine

Strengths
Higher quality products
Lower raw materials scrap rate
The company will employ less
workers
Issues with union employees
will be decreased due to the lower
number of employees
Opportunities
Increased sales
its maximum capacity is 30%
higher than that of the six
semiautomated machines

Weaknesses
High initial costs
Layoff of the 25 employees
under the semiautomated machine
Additional electrical power
rates and maintenance supplies

Threats
Economic slowdown
Opposition of the employees
union

Financial Analysis
Cost of Equity=rf+(beta)(rf-rM)
=0.053+(1.25)(0.06)
=12.8%
Cost of Debt=before tax cost of debt (1-tax rate)
=0.068(1-.43)
=3.876%
WACC= Return on debt(1-tax)(weight of debt)+(return on equity)(weight of equity)
=(0.03876)(.33)+(.128)(0.67)
=9.86%
Book value= cost of asset-accumulated depreciation
=415,000-130,682
=284,318
Capital loss=Resale value-book value
=130000-284,318
=154,318
Capital expenditure=cost of acquisition of new machine-resale value-tax savings
1010000-130000-(0.43*154318)=813,643

Cost of capital=WACC*Capital expenditure

=9.86%*813,643
=80,225.2

Cost Comparison
Old Machines

Vulcan Mold-Maker

Operators
12 workers
7.33 per worker
8 hours for 2 shifts
210 days
= 12 x 7.33 x 8 x 2 x 210
= 295545.60/year

Operators
2 workers
11.36 per worker
8 hours for 2 shifts
210 days
= 2 x 11.36 x 8 x 2 x 210
= 38169.60/year

Maintenance Workers
3 workers
7.85 per worker
8 hours for 2 shifts
210 days
= 3 x 7.85 x 8 x 2 x 210
= 39564.00/year

Contract maintenance
1 personnel

Maintenance Supplies
4000.00/year

Electrical Powers
26850.00/year

Electrical Powers
12300.00/year

Save of Automatic Machine

5200.00/year

Total = 351409.60/year

Total = 119319.60/year

= 59500 for a year

Difference = 232090.00
Cash Flow Difference
Old Machines = x

Vulcan = y

Difference

Sales (A)

Variable

Variable

Cost (B)

Cost of old machine

Cost of New Machine

232090.00

Depreciation (C)

47520.00

1.01 million / 8
years = 126250.00

78730.00

EBIT

(Ax - Bx - Cx)

(Ay - By - Cy)

Net Income

(Ax - Bx - Cx) - [(Ax Bx - Cx) x T ]

(Ay - By - Cy) - [(Ay By - Cy) x T ]

Cash Flow

(Ax - Bx)(1-T) + (Cx x

T)

(Ay - By)(1-T) + (Cy x

T)

43%

(Bx - By)(1-T) + (Cx Cy)T

Difference Cash Flow

= (Bx - By)(1-T) + (Cx - Cy)T
= 232090(1-.43) + 78730(.43)
= 166145.2
Prevailing discount rate=4.75%
Discounted Cash Flow=166145.2/(1.0475)^6=125766.10
Given the data provided, the best kind analysis to use is the marginal cash flow analysis. This
was done by comparing the difference between the cash flows from the old machine and the
new machine by netting them against each other.
RECOMMENDATION
Based on our analysis of the economy, industry, and company, we recommend that Fonderia di
Torino not purchase the Vulcan Mold-Maker. Given the anticipated economic downturn,
related effects on the industry, and the current position of the company, it is best to withhold
investments and focus on lowering costs.