Panmar Air Handling and Engineering Limited

Executive Summary:

As Charles Herman, my decision is to increase the profitability of the organization by establishing best practices in procurement throughout the supply chain. In an environment of market demand for our products, our cost of goods sold is increasing and profitability is decreasing. In order to take PanMar public it is recommended to increase the current profit margin from its current level of 7.1%. The systemic issues I will address are: the organizational silos in engineering, operations and procurement divisions; our inefficient procurement strategies; and the lack of effective material sourcing, negotiation and leveraging. Over the next two months I recommend we create a Procurement Division headed by a new VP of Supply Chain who will hire SSCMP procurement professions, and who will be supervised by Penny Lane. Each plant's capacity utilization, direct material purchasing practices and defect ratio will be revealed with solutions that can be provided by implementing an effective Procurement Division. Results from an aggressive approach to our procurement practices will be increased supplier and customer relations, decreased defect ratios, and increased profitability to more than 10%. By following the plan in the following pages we will be eligible for IPO within six months and can use the injection of funds to upgrade our plants, which will further improve our supply chain and profitability.

Issue Identification:

Immediate Issue

Nature: Strategic Timing: Short and Long Term

The immediate issue is to increase our profitability. In an environment of market demand for our products, our cost of goods sold is increasing and profitability is decreasing. In order to take PanMar public it is recommended to increase the current profit margin from its current level of 7.1%. A higher profit margin will result in a higher IPO valuation. This will produce an injection of capital to finance ongoing operations and implement growth plans.

Systematic Issues

Nature: Strategic Timing: Short Term and Long Term

Organizational silos in engineering, operations and procurement divisions have created managers with protective strategies for their own departments. Organizational silos are self-serving, counter-productive and obstruct corporate vision and strategy.

Nature: Strategic Timing: Short and Long Term

Inefficient procurement strategies have increased the cost of goods sold. Procurement processes need to be created and in doing so assures company compliance. There are three important aspects of strategic services procurement: spend analysis, statements of work, and service level agreements.

Nature: Tactical Timing: Short and Long Term

Effective material sourcing, negotiation and leveraging needs to be applied within the Procurement Department. Tactical methods of procurement must support the strategy of procurement. Procurement processes need to be developed ensuring a common set of policies and operating procedures, vendor contracts, asset data, industry information, pooling of information about requests, and qualified procurement skills to ensure cost effective deals.

Environmental & Root Cause Analysis

Qualitative Analysis

When PanMar purchased Westwind they acquired a sophisticated procurement process. Westwind's Procurement Division was responsible for all purchasing transactions, quality inspection for inbound parts, materials and supplies, and payment processing. One of the synergies that attracted the purchase of Westwind was the strength of their procurement processes. After purchasing Westwind, the procurement team was terminated with quality and inspection delegated to the plant manager, and finance to the head office in Sherbrooke. This lead to procurement viewed as an administrative position executed by clerks, not a value added division.

The procurement's tactical approach lacks efficiency. It is not centralized, and professional procurement practices are not applied. One example of is there are four layers of purchase approvals required ranging from purchases from $250 to $40,000.

The hiring of unqualified procurement staff has created to a lack of systematic analysis (i.e. trend, spend, supply risk, and goods spend to name a few) and a loss of faith from other departments to work with procurement. Organizational silos are the result with procurement, engineering and operations not working together. Specific Human Resource issues are: Penny Lane, Manager of Procurement, as she administrates the President's, Gerard LaFamboise's, decisions without discretion to procurement procedures; and Peter Kamadaliitis, Senior VP of Engineering, who leads his team by leveraging his position and bypassing procurement entirely.

It would also appear Penny is aware her Bachelor of Arts is insufficient for the scope of her position and she has compensated by hiring relatively young and less educated staff than herself as a means of maintaining her position. Furthermore, Peter's actions may have contributed to engineers and operations divisions working with no less than 201 suppliers while producing only five products. The lack of strategic procurement practices has resulted in low to no leverage with suppliers, inconsistent product quality, a wide range of material cost and decreased profitability.

Each plant produces the full PanMar product line which facilitates prompt product delivery to local markets. It is important to note that last years' sales in Sherbrooke increased only 5.2% at 105% capacity utilization, and represents only 10% of the PanMar's total sales. This means that PanMar's three other plants provide 90% of the company's total sales without the additional expense of overtime. On a positive note, Sherbrooke's Controllers are the most cost effective in the company. This is an opportunity to change this plant's operation from the full line to only Controllers which can be provided to each of the three other plants.

Quantitative Analysis

Three out of four of PanMar's plants have outdated equipment. This may explain why Sherbrooke, while operating at 105% capacity is producing only 1254 units. This is two-thirds less than the Montpelier plant which is operating at 95% capacity with a defect