OCEA - ISSN 1940-204X Kenco Engineering Corporation...

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HISTORY, CHANGE, AND ENSUING LOSS Reading the 1988 financial statements, Ken Lutz’s sons knew their company was in trouble. Their family-owned California manufacturing company had just experienced a reported loss of $350,000—a loss that was approximately one-third of the company’s equity. The company is small, with $4-6 million in sales. Although it had sought business with original equipment manufacturers (OEMs), sales are primarily to custom-designed equipment end-users. Sales are obtained through bids based on the custom design characteristics of the parts Kenco manufactures. The company is now in its second generation of family management and adheres to the same strategy initiated by Ken Lutz, the company’s founder—making sales by adding value to customers’ equipment. Its foundry-castings business segment is largely outsourced for manufacturing and is not the focus of this case. Kenco’s other activity, and now its largest business segment, is the manufacture of uniquely specified steel blades that are bolted to the edges of customers’ heavy equipment, such as road grader original-equipment blades or earth-moving tractor buckets. Kenco’s engineers work with customers and add their expertise to design the application of tungsten carbide to these add-on blades (called “bolt- ons”). Their unique tungsten carbide process hardens the edge and saves the equipment from abrasion and wear. The manufacturing process is called “tungsten carbide impregnating,” or TCing. Kenco competes based on custom-design engineering, timely delivery, and its proprietary manufacturing process. It adds value to customers’ equipment, since its relatively inexpensive bolt-ons extend the life of the much more expensive OEM equipment. For example, a $3,000 Kenco bolt-on protects a $50,000 tractor bucket. Generally, it takes two to three times longer for a Kenco-TCed blade to wear out compared to competitors’ replacement blades. Thus Kenco’s blades lengthen the in-service time of heavy equipment, and Kenco’s currently fast cycle time helps customers avoid extended downtime for difficult-to-replace blades. Kenco has a strategic advantage with the process that melts the bolt-on blades’ edges and impregnates them with tungsten carbide. Its TCing operations are in-house, and it typically processes small orders with lot sizes of 1 to 10 units. Single-unit orders are common. Kenco was profitable from the beginning, and has always focused its efforts on its competitive advantage in designing custom products. For its TCing business, it historically paid little attention to critically evaluating and managing materials sourcing, its manufacturing processes, cost control, and job profitability. It wasn’t until the 1988 financial loss that Kenco’s owners were forced to deal with fundamental business changes in the nature of their business and the importance of operating issues, job profitability, and information support.
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