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case study 2 • aztec component supplies
Case study
2 aztec component supplies

nigel slack

The senior management team at Aztec Component Supplies knew that they were facing
a decision that was crucial to the future of the company. A plastic injection mouldings
manufacturer, they had for the last 20 years specialised in providing industrial mould-
ings for domestic appliance manufacturers. They were especially adept at moulding
relatively large components, such as the outer casing for carpet cleaners. Large compo-
nents were difficult to make to the high levels of tolerance and finish which custom-
ers demanded. Because of this ability, they had increasingly focused on the few large
customers who were willing to pay their prices. Five years ago 12 customers accounted
for around 80 per cent of Aztec’s sales, now three customers accounted for over 90 per
cent of sales.
The decision concerned an approach that had been made to them by their largest
customer, the Desron Corporation. One part of Desron was already their largest cus-
tomer, with around 65 per cent of their output. Desron now wanted Aztec to become a
sole supplier for a wider range of their larger components. It would, in the first instance,
be a three-year deal, whereby Aztec would devote manufacturing cells for each compo-
nent type exclusively to supply Desron. Although Aztec would not be prevented from
dealing with other customers, the amount of business Desron was promising would
initially be 5 per cent more than its current total sales and (according to Desron) could
double within five years. Because Aztec would be manufacturing parts currently made
by other suppliers, the total variety of parts would increase by around 40 per cent.
Prices would be held at current levels in the first year but then would be reduced by
5 per cent per year.
Aztec would be responsible for reducing costs in line with price reductions (average
cost savings at Aztec had averaged between 2 and 3 per cent per year in the last few
years). If Aztec accepted the deal it would also mean them purchasing some new larger
machinery to cope with the increased proportion of physically large parts. Ethan Con-
dos, Aztec’s CEO, did not see this as a problem.
‘We need to replace many of our machines anyway. This provides us with the stimulus to do
it and our calculations indicate that the deal would give us a good return on the investment.
Investment isn’t the problem; it’s the risks of doing the deal which worry me. How do we
know that we can cope with the increased variety? We will need to increase the flexibility
of our manufacturing operations to cope with this variety, while at the same time reducing
costs and maintaining quality levels. And can we achieve a minimum of 5 per cent annual
cost reduction? It’s higher than we’ve ever done before. They will help us by providing their
own engineers to reconfigure our production system, but that will mean exposing ourselves
to their scrutiny. I’m nervous about that; the next thing they will be wanting is to examine
our financial accounts. Also, what if they ditch us after three years? If we accept this deal we
cannot keep much of our other business. Just coping with the Desron business will mean us
expanding by 5 per cent. Once we have dropped our other customers I doubt if we could get
them back easily. Most of all, are we prepared to act as a servant to such a large corporation?

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