STRA 6201

CHARIT BHATT

10-Apr-2013

Case FAFCO, INC. (A) 1. What should FAFCO do regarding the production of the plastic panels? Why? FAFCO should vertically integrate the production of the plastic panels. There is an incomplete contracting between FAFCO and the supplier due to the demand or volume uncertainty. There is also an element of technological uncertainty due to the failure of the panels and the required changes in the product design. There are many reasons for FAFCO to vertically integrate the production. Hercules is the only supplier that supplies the panels to FAFCO. Thus, FAFCO has a very little control over price. They were concerned about a probable price increase. Moreover, deliveries from Hercules were often late. Some shipments had a high rejection rate and refunds were rarely granted. Hercules was not interested in investing in the assets or activities because FAFCOs volume of business was relatively insignificant to Hercules. Thus, FAFCO has very less control over investment decisions. Fining new suppliers in the market would be both difficult and time consuming. The limited potential volume discouraged companies to make the investment. FAFCO was already granted a patent in fabrication of panel and its engineer has worked together with Hercules to making product changes to improve the panel performance. This means FAFCO has the expertise to make this panel in-house. This along with the strategic value of the activity makes it a MAKE decision in the strategic sourcing framework. 2. What should it do regarding the distribution and sales activity? Why? FAFCO should utilize the newly developed network of independent distributors, concentrated largely on the FAFCO line. These distributors are typically specialized for the job and were attracted to the business due to the margin and growth prospects. Moreover,

STRA 6201

CHARIT BHATT

10-Apr-2013

the distributors had limited financial strength and required substantial assistance form FAFCO in organizing their sales and installation departments. This implies that FAFCO would have high control and the distributors would be willing to give FAFCO the power to make strategically important decisions. They should try and recruit people who can be trained on both the sales and technical aspect of the product. This would help them lower the sales commission, while getting the accurate system estimates as well as convincing the customers. This would make the sales force more competent and help FAFCO in its growth without forward integrating into distribution. FAFCO can also use an automated estimation system which might reduce the technical expertise required. 3. How are the logics behind the decisions for the panels and distribution similar? How are the logics different? The logics are similar in the sense that they are based around FAFCOs boundaries. These are very important for FAFCOs performance and growth. The decisions are also based on uncertainty and asset specialization. In both the cases, OLear has to take the MAKE or BUY decision. This decision would then shift the boundary. They are also similar on the need of control that FAFCO required for both panel manufacturing and distribution. The logics are not similar in the sense that even though it would benefit from controlling an activity, it may lack basic competencies to perform it. For panel manufacturing, FAFCO has the talent and expertise while in case of distribution; it doesnt have that expertise (while the independent suppliers are specialized for FAFCOs distribution). Vertically integrating the panel manufacturing with a high control over the suppliers distribution would help FAFCO in the short term as well as long term.