Engineered Extraction Systems Australia Pty Ltd designs and manufactures custom-made high performance automotive exhaust extraction systems for the Australian motor racing industry and the automotive after-market. The business was established in Adelaide by two part-time motor-racing drivers in 1997. Silvio De Luca was an automotive mechanic by trade and Andy Hamilton was a mechanical engineer. The business operated originally in Port Adelaide, but relocated to Elizabeth in 2010. Whilst the move created some marketing issues, the new premises were much larger than the old factory in Port Adelaide, and the rent was a lot cheaper. The new premises gave the firm much needed room to grow. The relocation put the company in the heart of the Adelaide automotive industry. The company was originally a part-time venture created to supply specialty exhaust extraction systems to the motor racing industry, specifically, the Supercar V8 circuit. But as Engineered Extraction's reputation grew, more and more demand came from other sectors of motor racing as well as private motorists seeking to improve the performance of their street cars. Whilst originally specialising in custom V8 exhaust systems for Holdens and Fords for V8 Supercars racing, Engineered Extraction quickly developed the expertise to design and manufacture systems for several of the more popular makes and models of car common to motor racing in Australia. This ability to meet a diverse range of market demands helped to create a solid company that quickly became a full-time operation. Now days, Engineered Extraction is a well-respected supplier to the motor racing industry, as well as a supplier to the performance street car sections of the automotive after-market. Traditionally, the company had focussed entirely on custom-built systems; each being specifically tailored to the engine in question. This process involved fitting, calibration and tuning of the system individually to each engine. But as the company's reputation grew, more and more requests were received for high performance systems that could be bought off the shelf. Individual fitting and tuning was an expensive process and many potential customers were put off by the cost. Customers knew that they could buy off-the-shelf systems from other manufacturers, but the Engineered Extraction brand was very attractive to many performance motoring enthusiasts. Seeing an opportunity for expansion, in 2008 Silvio and Andy started manufacturing a few systems to stock to meet this small but growing demand. Initially, this production was limited to the two main systems (Holden and Ford), and only occurred when the work schedule permitted. The move into offthe- shelf products resulted in Engineered Extraction producing a more standardised line of performance extractors and exhaust systems. These systems were not specifically tuned to the engine in question, and were designed to fit standard production cars. Whilst they were still high performance systems, their performance was slightly inferior to that of the custom-made extractors that were carefully tuned to the engine in question. Customers were more than happy to trade-off a small drop in performance for a substantial saving in the purchase price. These customers appreciated the brand value offered by Engineered Extraction but expected good value for money. Silvio and Andy felt however that the off-the-shelf products should reflect the same quality of engineering as the custom systems that sold for a great deal more, and attracted a much healthier profit margin. Notwithstanding the increasing demand for off-the-shelf product, the custom-designed and made systems continued to dominate the company's sales. Engineered Extraction operates a single manufacturing facility in Elizabeth, where both custom-made and off-the-shelf systems are manufactured. The high-tech engineering equipment used to manufacture the systems is mainly general purpose in nature in order to provide the flexibility needed for producing custom systems. The factory layout grouped tube cutters together in one section of the facility, tube benders in another, a swaging and flaring section, a separate welding section, and so on. The machine shop that produced header and exhaust flanges and other machined components was housed in its own internal section, well away from the hustle and bustle of the assembly areas. The facility also has three dyno-equipped service bays that facilitate the tuning and fitting of custom systems. The majority of the staff are highly skilled tradespeople who take pride in the quality of design and the quality of manufacture of their products. Both the custom and the off-the-shelf systems compete for processing time on the same equipment by the same tradespeople using the same processes and procedures. A few months ago the firm was approached by Hotrod Performance; a national car parts distributor specialising in the supply of high performance automotive components to both motor racing MGMT19126 3 Term 1, 2015 enthusiasts and the general public. Hotrod Performance was seeking supply of a limited range of high performance exhaust systems for the 5.0L Ford "Boss 302" SVO and the 5.0L Chevrolet small block racing engines (the same basic engines used in the V8 Supercars). After due consideration and careful analysis, Engineered Extraction entered into an agreement with Hotrod Performance that required an initial stocking of the supply chain, and regular replenishment of stocks in line with sales. The Hotrod Performance estimated demand to be regular but of low volume. The initial stock requirement of 200 units of each system was met by scheduling overtime production across several weekends. Retail pricing was expected to be the same as the off-the-shelf systems sold by Engineered Extraction, but with a small premium to cover distribution costs. Even though the wholesale price received from Hotrod Performance was substantially less than their own retail price, the gross profit margin on the products was still quite viable, and represented not only an increase in revenue, but also an increase in net profit. The Hotrod Performance sales forecasts suggested that the day-to-day demands for stock replenishment could be met during normal production time augmented with some occasional overtime. Overtime costs were factored into the modelling based on Hotrod Performance demand forecasts. In an effort to increase efficiency, it was decided to produce the standardised systems in small batches of two to five systems. This would reduce machine setup time and allow for faster assembly. Silvio and Andy were confident that these arrangements would ensure that the new contract would not disrupt operations whilst providing a useful new income stream. During the past few months however, sales of performance systems through Hotrod Performance steadily increased, leading to more regular scheduling of this line of products. To achieve some economy of scale, off-the-shelf systems were often produced in small batches of two to five systems. However, when scheduling trade-offs had to be made, the custom-made systems were always given priority because of the higher profit margins these products attracted or because of the urgency of the job. Thus scheduled lots of components for the Hotrod Performance systems were often left sitting around the factory in various stages of completion. Occasional stock-outs were also occurring with Engineered Extraction's own over-the-counter systems but as a rule, the Hotrod Performance requirements were always met on time. The overall increase in demand had however, created an increase in the level of raw material stocks as well as purchased components such as catalytic converters and mufflers. As the owners reviewed the progress of Engineered Extraction, both Silvio and Andy were pleased to note that the company was growing. Sales of custom-made systems remain strong, and sales of made to stock systems were steadily increasing. Currently the custom systems were accounting for 60 percent of the production volume and 75 percent of the revenue. However, Amanda Singh, the company accountant, had recently indicated that profits were not what had been forecast. Amanda's latest financial report recommended that manufacturing costs be reviewed as gross profit was slipping. Costs associated with the off-the-shelf and Hotrod Performance systems were rising. Money was being tied up in increased inventory; raw materials, components, work in process and finished product. Expensive nearby warehouse space has been rented to accommodate the growing inventory volume. Silvio was also concerned with increased lead times for both custom and Hotrod Performance orders. It was becoming more and more difficult to meet promised delivery times. Stock-outs had also occurred with their own off-the-shelf retail products. Capacity was being pushed, and with the current layout, no space was available in the plant for expansion. Andy was worried that it was getting increasingly difficult to meet the demand created by their new contract with Hotrod Performance and decided that the time had come to take a careful look at the overall impact this increased demand for exhaust systems was having on operations. MGMT19126 4 Term 1, 2015 Task Write an essay discussing the operational issues facing Engineered Extraction Systems Australia. The essay should identify and discuss the operational aspects that are affecting the organisation, paying attention where appropriate to any strategic implications. The essay should discuss the following issues with responses integrated within the essay.  Current production processes used by Engineered Extraction Systems Australia (technical analysis).  The effect of the new contract with Hotrod Performance on Engineered Extraction Systems Australia's operations (problem identification and specification).  The daily operational decisions required under current operating conditions for the company's operations to run effectively (day-to-day operational issues).  The effect that the move to producing off-the-shelf systems may have had on the company's financial structure1 (broader organisational issues caused by operational problems). It should be noted that the situation at Engineered Extraction Systems Australia is typical of growing businesses, and it is not a major disaster situation. The company is sound, but there are issues that need to be addressed fairly quickly. The purpose of this analysis is to work out what those operational issues are. Your essay should be a properly constructed academic essay. It should contain an effective introduction, body, and conclusion. The introduction should introduce the essay and include your argument (based on your root cause analysis). The body should present the evidence you have collected to support your argument, and the conclusion should restate your argument, summarise the evidence and make a conclusion regarding your argument. The essay should contain a coherent, but necessarily restricted review of the academic literature on the Production and Operations Management topic in question. The literature review should be integrated into the essay, not a separate section. Advice regarding formatting of the essay can be found on the Academic Learning Centre website. Do not use headings or include an abstract. A reference list is compulsory. Do not include a bibliography. This assessment item involves researching your assigned topic to enhance your understanding of Production and Operations Management (POM) concepts and utilisation of academic literature. AVOID using only textbooks, but the prescribed textbook for the course must be cited in regard to broad operations management principles highlighted by the case. You are expected to present information and evidence from, and cite, at LEAST eight (8) relevant peer-reviewed, academic journal articles (eight relevant and well applied academic articles will gain a pass mark for this criterion – 8/15). Refer to the recommended readings for examples of academic journals. While you can cite these you must find eight (8) journal articles not listed in the course materials. Your citations will show the breadth of the literature used to answer the questions. Your marker is interested in the analysis that you have developed from YOUR review of the literature and how well you use the literature to respond to the topic