Fonderia Ditorino Case Study

Fonderia Di Torino

John Molson School of Business

FINA 405 BB

Presented to:

Date: February 9, 2017

By:

To: Francesca Cerini

From: JMSB Interns

Date: November 2000

Subject: Vulcan molder capital project analysis

Main Issues

Should Fonderia di Torino purchase the new mold making machine or continue operations with their current machines and how will this affect the firm as a whole?

1)What are the economical benefits of the new machine?

2)What are the internal non-financial benefits of going through or not going through with the investment?

Recommendations

Replacing the old machine is suggested, because beside its increase in production capacity, it also generates positive cash flows from operating savings that will be realized over the course of its useful life.

However, the recommendation takes into consideration that both parties, your firm and the employee’s (including the employees’ union) can reach an understanding where everyone benefits from the investments.

Our suggestions made throughout this analysis and plan of action highlight what we think is the optimal situation where both parties are respected.

Qualitative Analysis

Company Culture:

Capital investments can have a big impact on the way work is performed in an organization. Some capital budgeting decisions that make sense based on financials can sometimes cause undesired results because of incompatibilities with the company’s corporate culture. For instance, adding automation into a business’ product line can change the team dynamic on the factory floor, how hard employees desire to work, and how efficiently they work. By adding these new automatic Vulcan Mold-Maker machines, Fonderia di Torino will have to “lay off 24 operators of the semi-automated machines” (Appendix 7).  Although these new machines would be more efficient and would allow Fonderia di Torino to have “even higher levels of product quality and lower scrap rates” (Appendix 7), one might also assume it would have a negative effect on the morale of the remaining employees. However, if you are given approval to lay off the 24 employees, the only positions needing to be filled would be “those of janitors” (Appendix 7). Therefore, investing in these new and more efficient Vulcan Mold-Maker machines wouldn’t be causing detriment to company culture in regards to employee morale.

Product/Service Quality:

Although change is not always welcome in certain companies, capital investments can be made to help boost a company’s ability to produce more goods/to deliver services. In general, it is beneficial to embrace certain technological changes that are occurring in the industry if they will help create a balance between cost and quality in capital resources. Fonderia di Torino has “acquired a reputation for quality products” (Appendix 5), so if it decides to purchase this new top of the line technology, they would be in line with their focus on producing better quality products for clients, presenting a positive image to customers and vendors who visit the factory, and in turn creating opportunity for company growth and new clientele. Also, the OEMS (Fonderia di Torino’s customers) are becoming “increasingly insistent about product quality” (Appendix 5). Therefore, purchasing these new Vulcan Mold-Maker machines would be advantageous for Fonderia di Torino because it would help it maintain this reputation amongst its current clientele, and generate interest in new customers. The current machines require more than 30% of floor space. However, the new machines would free up almost half of that space in the factory (Appendix 7). However, although Fonderia di Torino doesn’t necessarily have a present need for new space, this would be a great opportunity to delve into expanding the current product offerings. Optimizing space with these new machines is beneficial because if the company wants to develop new products, they won’t have to put extra effort to clear up space for new machines to develop these new product lines. All in all, the new Vulcan Mold-Maker machines will help the company maintain their high quality product reputation, reduce scrap rates, optimize factory space, and also create opportunities for expanding their product line.

Environmental Concerns:

Many companies have chosen to make capital investments in response to consumers’ as well as the government’s increasing expectations about the implementation of proper environmental practices. By adding the new Vulcan Mold-Maker machines, Fonderia di Torino’s consumption of electrical power would go from a rate of €12,300 a year with the semi-automated machines to €26,850 yearly (Appendix 7). Assuming that the amount electricity consumed is increasing with the same proportion as the rate that is being charged for this electricity, we can say that electricity consumption is doubling with the purchase of these new Vulcan Mold-Maker machines. Although these new machines aren’t drastically increasing Fonderia di Torino’s power consumption, it is still a considerable increase and may be a reason for environmental concern. Moreover, capital investments can have a wide variety of impacts, but it seems that options that are less costly for the company are the ones that have more of a detrimental effect on the environment when compared to the more expensive alternatives. These new machines are meant to be more efficient, reducing scrap rates, and improving labor efficiency - they don’t seem to present any detrimental environmental concerns for Fonderia di Torino.

Reputation:
Fonderia di Torino was founded in 1912 and has been specializing in the field of castings ever since. Companies today have come to know and recognize Fonderia Di Torino for its high quality casting parts, so much so that they have won quality awards from reputable automakers such as BMW and Ferrari. Not purchasing the machine would result in quality levels dropping off to those of competitors should these competitors buy the newer machine. Buying the new Machine would help its customers have continued confidence in the production quality of Fonderia Di Torino products. This can have a positive effect on company share prices as the new machine would help them have even higher quality levels and greater confidence from investors looking into the future.