Harvard Case - Terrell Manufacturing: Buying a Machine
"Terrell Manufacturing: Buying a Machine" Harvard business case study is written by Bhavesh Patel, Vincent Palombo. It deals with the challenges in the field of Accounting. The case study is 8 page(s) long and it was first published on : Aug 31, 2018
At Fern Fort University, we recommend that Terrell Manufacturing proceed with the purchase of the new machine, but with a revised implementation plan that prioritizes cost control and employee training. This plan should include detailed financial analysis to assess the machine's impact on profitability and robust communication with employees to address concerns and build support for the change.
2. Background
Terrell Manufacturing is a small, family-owned business operating in a competitive market. The company is considering purchasing a new machine to increase production capacity and improve efficiency. This decision is driven by the need to meet growing customer demand and stay competitive. The case study highlights the internal debate within the company regarding the purchase, with concerns about the machine's cost and the potential impact on employees.
The main protagonists are:
- John Terrell: The company's owner and president, who is eager to invest in the new machine to secure the company's future.
- Mary Terrell: John's daughter and the company's financial manager, who is concerned about the machine's financial impact and the potential for job displacement.
- Tom Terrell: John's son and the company's production manager, who is excited about the technological advancements the new machine offers but is worried about the training required for its operation.
3. Analysis of the Case Study
This case study can be analyzed using the framework of Financial Analysis, Strategic Planning, and Change Management.
Financial Analysis:
- Cost Analysis: The case study presents a detailed breakdown of the machine's purchase price, operating costs, and potential savings. However, it lacks a comprehensive activity-based costing analysis to assess the true cost of production before and after the purchase. This analysis would consider the impact of the machine on various activities, including labor, materials, and overhead, and provide a more accurate picture of the machine's financial impact.
- Financial Statements: The case study mentions the company's balance sheet and income statement, but it does not provide enough information to conduct a thorough financial statement analysis. This analysis would assess the company's financial health, liquidity, and profitability, and help determine the feasibility of the investment.
- Cash Flow: The case study mentions the machine's cash flow implications, but it does not provide a detailed cash flow statement. This statement would project the machine's impact on the company's cash flow over time, considering the initial investment, operating costs, and potential revenue increases.
- Profitability: The case study focuses on the machine's potential to increase production and reduce costs, but it does not quantify the impact on the company's profitability. A detailed profitability analysis would assess the machine's impact on the company's net income and return on investment.
Strategic Planning:
- Growth Strategy: The purchase of the new machine aligns with the company's growth strategy, which aims to meet increasing customer demand and expand market share. However, the case study does not provide a clear understanding of the company's overall corporate strategy and how the machine purchase fits within this strategy.
- Competitive Advantage: The case study suggests that the new machine will provide Terrell Manufacturing with a competitive advantage by improving efficiency and quality. However, it does not analyze the competitive landscape and the potential impact of competitors adopting similar technologies.
- Emerging Markets: The case study does not explicitly discuss the company's plans for emerging markets, but the purchase of the new machine could potentially support expansion into new markets.
Change Management:
- Employee Incentives: The case study highlights the potential for job displacement and employee resistance to the new machine. It is crucial to develop a change management plan that addresses these concerns and motivates employees to embrace the change. This plan should include employee incentives and training programs to ensure a smooth transition.
- Communication: Open and transparent communication with employees is essential to build trust and support for the change. The company should communicate the benefits of the new machine, address concerns, and involve employees in the implementation process.
- Organizational Structure: The case study does not provide information about the company's organizational structure. However, the purchase of the new machine may require adjustments to the structure to ensure effective management of the new technology and processes.
4. Recommendations
Proceed with the Purchase: Based on the potential benefits of increased production capacity, improved efficiency, and cost savings, Terrell Manufacturing should proceed with the purchase of the new machine.
Develop a Comprehensive Financial Plan: Before finalizing the purchase, the company should develop a comprehensive financial plan that includes:
- Activity-based costing analysis to accurately assess the machine's impact on various production activities.
- Detailed financial statements to analyze the company's financial health and the feasibility of the investment.
- Cash flow statement to project the machine's impact on the company's cash flow over time.
- Profitability analysis to quantify the machine's impact on the company's net income and return on investment.
Implement a Robust Change Management Plan: To ensure a smooth transition and minimize employee resistance, Terrell Manufacturing should implement a robust change management plan that includes:
- Employee training programs to familiarize employees with the new machine and its operation.
- Performance indicators to track the machine's impact on production, efficiency, and quality.
- Employee incentives to motivate employees to embrace the change and contribute to its success.
- Open communication with employees to address concerns, build trust, and ensure transparency throughout the implementation process.
Develop a Contingency Plan: The company should develop a contingency plan in case the machine does not meet expectations or faces unforeseen challenges. This plan should include alternative strategies to address potential problems and ensure the continued success of the business.
5. Basis of Recommendations
These recommendations consider the following factors:
- Core Competencies and Consistency with Mission: The purchase of the new machine aligns with Terrell Manufacturing's core competencies in production and its mission to provide high-quality products to customers.
- External Customers and Internal Clients: The machine is expected to improve production efficiency and quality, which will benefit both external customers and internal clients.
- Competitors: The purchase of the new machine is expected to provide Terrell Manufacturing with a competitive advantage by improving efficiency and quality.
- Attractiveness ' Quantitative Measures: The financial analysis, including activity-based costing, cash flow statement, and profitability analysis, will provide quantitative measures to assess the machine's attractiveness.
- Assumptions: The recommendations are based on the assumption that the new machine will perform as expected and that the company will effectively implement the change management plan.
6. Conclusion
Terrell Manufacturing should proceed with the purchase of the new machine, but with a revised implementation plan that prioritizes cost control, employee training, and open communication. By taking these steps, the company can maximize the benefits of the new machine while minimizing the risks associated with change.
7. Discussion
Other alternatives not selected include:
- Delaying the purchase: This option would allow the company to gather more information and potentially negotiate a better price. However, it would also delay the benefits of the new machine and potentially put the company at a competitive disadvantage.
- Investing in a different machine: This option would require further research and analysis to determine the most cost-effective and efficient machine for the company's needs.
- Outsourcing production: This option would eliminate the need for a new machine but could have significant drawbacks, such as loss of control over production and potential quality issues.
Key assumptions of the recommendations include:
- The new machine will perform as expected and meet the company's production needs.
- The company will effectively implement the change management plan and address employee concerns.
- The market conditions will remain favorable and support the company's growth strategy.
8. Next Steps
- Conduct a comprehensive financial analysis: This should be completed within the next two weeks to assess the machine's financial impact and determine the feasibility of the investment.
- Develop a detailed change management plan: This plan should be developed and communicated to employees within the next month to address concerns and build support for the change.
- Implement the change management plan: This should be done in a phased approach over the next six months, with a focus on employee training and communication.
- Monitor the machine's performance: The company should monitor the machine's performance and track key performance indicators to ensure it is meeting expectations.
By following these steps, Terrell Manufacturing can make a well-informed decision about the purchase of the new machine and ensure a smooth transition for the company and its employees.
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Case Description
Terrell Manufacturing (Terrell) was a small-scale producer of manifolds in Cleveland, Ohio. In late 2015, one of its clients decided to outsource the manifolds it had been producing in-house and approached Terrell with a proposal: Terrell could buy its equipment and produce the manifolds for the client. Terrell needed to quote a production rate based on the hourly cost of operating the equipment to make the client's manifolds. The rate needed to include the total cost of production, which involved processes in addition to those that were carried out on the purchased equipment. Terrell also needed to propose a payment plan for the machine.
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