Running head: PRECISION STEEL FABRICATION 1

Precision Steel Fabrication: Business Case Analysis

Alejandro Suarez

Sullivan University

Managerial Communications Skills MGT510

November 8, 2017
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Executive Summary

A simple question, fundamentally remains and it is very difficult decipher for many large

companies today. As mentioned by Smith, & Ulu, (2012), “Technology adoption decisions are

notoriously difficult, and history is full of examples where firms and consumers have been “slow” to

adopt a new technology” (p.262). Upgrade or not? Does the cost justify the possible production gains?

What other areas of the company will be affected by the changes? Will the company be perceived

differently as many workers will lose their job? Will you be better off without new equipment?

Considering that an entire organization can be dissolved if the pieces just don’t fit, these are important

questions that must be answered. In order to ease the situation, this article aims to discuss the analysis of

PSF business possible future acquisitions drawbacks and benefits.

Since many factors will be included in this analysis that could affect the fate of the company in its

entirety, we must carefully explore every option to its fullest to ensure a thorough determination. Progress

is a measurement we can all set to achieve, but getting there is a completely different story. In the case of

PSF, progress can be determined by technological advances that reduce average total cost and increase

our total revenue. The total cost of acquiring technological advances must be fully justified as this will

include any opportunity cost that could result in a loss associated with actions that could potentially close

our doors in the long run.

Current situation

First, I would like to assess the current situation, Precision Steel Fabricators (PSF) is a steel

fabricator that specializes in the office furniture industry. The company has experienced a great deal of

success, however, due to a downturn in the economy sales dropped 35.60 percent between 2001 and 2003.

Further market share was lost during the next couple of years, leaving nothing but questions for most of

us (Levenburg, & Scalabrino, 2010, p.2).

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Weakening sales and a constantly besieged market set forth the layoff of many of our trusted

employees. PSF was forced to operate at minimum cost, regardless of production levels, just trying to

overcome the economic downturn. By the end of 2004, sales were regaining strength again; however,

many things had change amongst us. It led to forced layoffs that affected our morale and standards.

(Levenburg, et al, 2010, p.3). The economic downturn inflicted a serious hit on PSF, and as stated by

Andreeva, Brenner, Theorell, & Goldberg, (2017), “…the reduction of personnel in organizations, was

almost inevitable for survival of many companies during the Great Recession of the late 2000s” (p.2).

Had our management been affected by recent changes and forced to deal with issues beyond their scope?

Simply, there is no way to answer this question. The article by Andreeva, et al, (2017), stated that

“The manner in which organizational downsizing is implemented can make a substantial difference as to

whether the exposed workers will suffer from psychological ill health” (p.2). However, the increase in

sales in the coming years will change the way we could be conducting business and change our

perception of what is acceptable and what is not. One distinguishable factor after the slow economic

recovery was the focus on price. As cited in the article by Linkner, (2014), “A willingness to shatter

conventional wisdom about the way things have always been done is key. To create a competitive

advantage, successful companies are committed to ‘operational innovation,’” (p.4). Never before has our

production needed to be more cost driven; thus, in order to produce at a lower cost, changes needed to be

made.

Endorsing new technology has always been difficult. For example, when the early humans

developed the wheel, it took time crafting, and days were spent hammering and cutting. Along with the

great sacrifice they had to endure, their families will starve, their tribes will suffer, however the end result

was a kind of a wagon that could transport large animals that will feed the tribe for many days ahead.

Tasks that were not physically achievable for an entire tribe can now be done by a few men. They can

now hunt an oversized animals and carry it for miles with minimal effort, while the women, children and
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elders perform other tasks. The key in this parable is that technology always comes with a cost; this cost

is fixed and necessary, otherwise the organization as whole suffers or fails.

PSF Company is my tribe, and what I am suggesting is we endure the sacrifices ahead for the

greater good of our corporation. Indeed workers will be terminated; entire segments of our current

operation will be closed; however, the positive impact PSF will have on the economy will balance the

scales and bring wellbeing to our localities. In the article by Reksulak, Shughart II, & Tollison, (2008), it

was expressed that “society is assumed to gain from greater productive efficiency because scarce

resources no longer employed in the manufacture of the good or service in question can be redeployed to

other industries” (p.621). Society gains resources as positive changes are developed for the greater good

of company, this relationship passes a positive effect onto society.

Reasoning

Given the previous unstable state of the market, the company is swimming in troubled waters. In

the past, the focus has been on the design, logistics, and assemblage of products leaving pricing at the

shadows of the table. In the future, a more aggressive pricing strategy will be needed to reestablish PSF

market share in the office furniture business. With this new pricing strategy constraint in place, PSF must

focus the attention on the forthcoming acquisition of a tube laser cutter. According to Reksulak, et al,

(2008), “Given no change in demand, the output expands to Q1 and the price falls to P1: Both the owners

of the firm and its customers are better off: profits increase…” (p.621). In other words, the process

innovation greatly benefits owners and customers. It is adversely beneficial to workers and this is in my

professional opinion is the main cost associated with this purchase.

Why a laser cutter, when this is an intolerably pricy piece of equipment, which requires a lot of

specialized maintenance? A tube laser cutter will do the job of many workers and machinery, far more

efficiently, thus fewer workers will be needed at the plant. According to Linkner, (2014), “Very

successful organizations and individuals embrace a culture of reinvention…" (p.2). Furthermore, the
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various models are all capable of combining processes that increase production times, relieving the

pressure on workers, speeding handling times, eliminating tooling cost, and reducing labor cost. The

machine is expected to perform the job of three of our current machines.

The criterion to purchase this equipment is based on how quickly the company will recover its

investment. The second criterion is how much of a competitive advantage will be realized if acquired.

Lastly, the level of readiness PSF can commit to in increasing production needs to be matched with a

large in increase in logistics.

Alternatives

Worldwide, there are presently only three major manufacturers that can provide PSF this kind of

technology: JLS/Brodure from France, Nakamura from Japan and Luxembourg from Germany. The

similarities in the technology of this equipment is relevant; however, it is necessary to point out their

differences.

JLS/Brodure from France has the following advantages:

 Specializes in smaller diameter cuts and thinner tubing, similar to PSF cuts

 Has an autoloader with the ability to run separately

 Can be purchased and set to production at PSF by the end of 2004

 There is a tax incentive if purchased before 2004, as PSF can attain possible tax savings in capital

expenditures for 2004

 Established in US market, there are 15 of these machines already being used for production in the

United States

Nakamura from Japan has the following advantages:

 Current leader in laser cutting edge technology, producing cutters and other machinery for 17

years
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 Previous history with this company, in 1996 PSF acquired machinery from this company

 This machine can cut thicker and larger steel than the other two companies

 Possible expansion to new markets by using its features

Luxembourg from Germany has the following advantages:

 Experience manufacturing laser cutters for 10 years

 Similar production rates to the JLS/Brodure

Furthermore, PSF will explore the disadvantages of the three in order to make the best decision

with the information given. Keeping in mind that PSF focus is in productivity and readiness availability

of the machinery, the following weaknesses had been identified:

JLS/Brodure from France has the following disadvantages:

 Limited to smaller diameter cuts and thinner tubing

 Limited possible expansion to other markets

 Limited ability to gain a much greater competitive advantage over companies that already own

the laser cutter

Nakamura from Japan has the following disadvantages:

 Lower production rates partially due to its bigger size and varied capabilities

 Automatic loading can be added for extra expenditure and uncertainty on its reliability

 The Nakamura Company does not have the capability to install and set to production the laser

cutter by the end of 2004, resulting in a loss of the possible tax savings in capital expenditures

 Presently, only two working models are in operation

 The cutter is significantly larger than the competition, restricting our space at the factory

Luxembourg from Germany has the following disadvantages:

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 Even though Luxembourg has established itself very well in the market, the laser cutter segment

of the market is relatively new to them, resulting in a much less knowledgeable service team. This

is very important should the cutter have any issues; the company needs to have the ability to solve

them quickly.

 The Luxembourg Company does not have the ability to set in production a laser cutter by the end

of 2004, like the Japanese counterpart, this will result in a loss of tax savings in capital

expenditures

Recommendations

Given the current level of production, it is recommended that PSF acquires a tube laser cutter.

The boost in performance will be rewarded with higher sales and the ability to reduce current prices to a

more attractive and competitive one. Along with further savings given by specific circumstances to the

case, it is in my professional opinion that PSF should act on it and benefit from the preceding economic

downturn. According to Levenburg, et al, (2010), “The IRS has made the decision a little easier to

swallow by allowing a 50 percent depreciation bonus on all equipment purchased before December 31,

2004” (p.6). Clearly, the government is trying to boost the economy by giving companies a chance to

recover, and this opportunity could be greatly maximized by PSF if acted on now. If the company decides

to maintain current output levels, PSF will be forfeiting the right to keep up with current technology,

losing the competitive edge, and market share.

Other enterprises will move forward with this technology, thus becoming capable of offering

lower prices and better products to their customers. PSF eventually will be run out of business, driven by

the lack of customers due to its high prices and inconvenient fees. Maintaining current output levels will

lead to disaster in the long run; it is possible to turn a profit in the short run, which will decrease gradually

as other more capable companies enter the market utilizing this technology.
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The laser cutter I recommend acquiring is the JLS/Brodure from France. The main benefit related

to my decision is the availability of the product. PSF is in a stretched time frame to take advantage of the

tax incentive; therefore, it only makes sense to acquire the machine that will provide PSF the greater

benefit. Another factor associated with my decision was the proven record of success in America by this

company. Fifteen of these had already been deployed in the USA, increasing productivity accordingly.

The machine currently specializes in the same type of tubing PSF utilizes; therefore, a speedier process

will take place without the need for major adjustments as opposed by the Nakamura laser.

The Nakamura laser cutter has potential and should not be overlooked. It has the power to expand

to different markets and establish our brand in different segments. However, making it our first

investment would be financially devastating, due to restrictions in productivity; conversely, it would

make a great second investment, henceforward, after sales have become stable.

Action Plan

For your consideration, I propose the acquisition of the JLS/Brodure tube laser. It has been

demonstrated that it could be significantly helpful to increase PSF’s operating potential. Its benefits

conveniently fit our company profile. In addition to the forecasted tax savings, this purchase will help us

continue as prime source of office furniture for years ahead. Although this decision will encompass the

reduction in our labor force, it necessary for our company’s long term survival. The relatively small

investment in acquiring this equipment will be offset by the future opportunity of gaining a much greater

competitive advantage.
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References

Andreeva, E., Brenner, M. H., Theorell, T., & Goldberg, M. (2017). Risk of psychological ill health and

methods of organisational downsizing: a cross-sectional survey in four European countries. BMC

Public Health, 171-12. doi:10.1186/s12889-017-4789-3

Levenburg, N., & Scalabrino, B. (2010). Precision Steel Fabrication: An equipment purchase decision

(NA0101). Case Research Journal 30(3), 1-11.

Linkner, J. (2014). The road to reinvention. Road to reinvention, 1-7. Retrieved from EBSCOhost.

Reksulak, M., Shughart II, W. F., & Tollison, R. D. (2008). Innovation and the opportunity cost of

monopoly. Managerial & Decision Economics, 29(8), 619-627. doi:10.1002/mde.1425

Smith, J. E., & Ulu, C. (2012). Technology Adoption with uncertain future costs and quality. Operations

Research, 60(2), 262-274. Retrieved from EBSCOhost.