Unicon is a successful arm of the multi-billion dollar International Tak Cheung Holdings Limited (ITC); domiciled and with its primary business dealings in Hong Kong. The company produces concrete slabs, facades, stairs and partitioning walls. The primary uses of these products are for commercial applications in the construction of industrial, residential, and office infrastructure.
Unicon has 12 construction companies in Hong Kong that comprise its market of buyers within the supply chain. These companies generally have a quantity supplied curve that has cyclical peaks and troughs that roughly correlate with the seasons. Unicon is experiencing an increase in orders. Revenues for fiscal year ending 1997 were HK$88mm with the following year's projected revenue expected to increase significantly as well as for the fiscal year ending in 1999. After 1999 sales demand is forecasted to stabilize.
Unicon has decisions on the table to make with regard to future investment opportunities. The company can elect to choose the option to invest in capacity expansion with the intention of doubling capacity. However, the completion of this project is expected to not be completed until after August of 1998. The second option was to pursue the strategy of blanket approval. The design has been used for a decade to which the cost of submission for approval each time with regard to submitting the technical schematics and paperwork did cost time and money. Receiving approval for future contracts without having to repeatedly pay for the approval would eventually reach the breakeven. Mr. Li expects the savings on a typical contract for one housing block would be approximately HK$150,000.
Given the constraints, should Mr. Li pursue the blanket approval for the slabs and facades contract? Why?
What will be the changes in Unicon's operation should the blanket approval be accepted by the HKHA?
What steps should be taken to increase production of slabs and facades? How should the plan be implemented?
Unicon has to render a decision with regard to the aforementioned questions. Additionally, Unicon has anticipated that sales demand generated from the Hong Kong government over a four-year time span will equate to an aggregate of 179 blocks, in just the first year alone! The current capacity that Unicon can currently manufacture is seven blocks per year. Indeed, Unicon would have to increase its productive capacity by a factor of over 25 to achieve this ambitious goal.
The lack of production capacity may be ostensibly addressed by either adding staff to increase man hours for a greater yield over time (t) or by utilizing 'spare' capacity within the current plant by taking the stairs manufacturing process offline and dedicating 100% of those resources to the development of the residential blocks.
Production of slabs could be increased to 101 units per day, which would make the order for 179 blocks complete in two days. However, this would ostensibly require the subcontracting the order to maximum capacity, and restructuring the facility to produce the additional units with all labor units engaged and working the overtime shift. The increase in costs is ostensibly offset by the increase in revenue generated by the government project
Approval for the blanket arrangement with the HKHA is expected to take approximately four months. The time is critical as the increase in market activity means an increase in contract generation. If the approval is not generated by the time the boom in contracts occurs, then the length of time for the project to commence increases which causes costly project delays.
Unicon does need to get going on a number of areas immediately. First is to go with the process of blanketing the approval process for the contract submission. By proactively engaging and securing the blanket process, Unicon avoids the potential for project delays, which will cause increases in labor costs as well as manufacturing and production costs. By attending to the blanket process early, the company avoids the potential for contract approval wait times.
Therefore, the use of facades and slabs within the superstructure construction would be expedited thus saving Unicon HK $150,000 per housing block. The lead times in terms of what the expected time reduction is approximately one month; product standardization is also extended with approval not being required each time minor changes to the moulds were made. These changes are also expected to reduce operational…