Description

Barbco Engineering Co.: Strategy-Driven Costing and

Lean Management

HISTORY, CHANGE, AND ENSUING LOSS

Reading the 2008 financial statements, Barb Lutz’s sons knew their company was in trouble. Their family-owned

California manufacturing company had just experienced a reported loss of $350,000—a loss that was approximately

one-third of the company’s equity. The company is small, with $4-6 million in sales. Although it had sought business

with original equipment manufacturers (OEMs), sales are primarily to custom-designed equipment end-users. Sales

are obtained through bids based on the custom design characteristics ofthe partsBarbco manufactures.

The company is now in its second generation of family management and adheresto the same strategy initiated by Barb

Lutz, the company’s founder—making sales by adding value to customers’ equipment. Its foundry-castings business

segment is largely outsourced for manufacturing and is not the focus of this case. Barbco’s other activity, and now its

largest business segment, isthe manufacture of uniquely specified steel bladesthat are bolted to the edges of customers’

heavy equipment, such as road grader original-equipment blades or earth-moving tractor buckets. Barbco’s engineers

work with customers and add their expertise to design the application of tungsten carbide to these add-on blades (called

“bolt-ons”). Their unique tungsten carbide process hardens the edge and saves the equipment from abrasion and wear.

The manufacturing process is called “tungsten carbide impregnating,” or TCing.

Barbco competes based on custom-design engineering, timely delivery, and its proprietary manufacturing process. It adds

value to customers’ equipment since its relatively inexpensive bolt-ons extend the life of the much more expensive OEM

equipment. For example, a $3,000 Barbco bolt-on protects a $50,000 tractor bucket. Generally, it takes two to three times

longer for a Barbco-TCed blade to wear out compared to competitors’ replacement blades. Thus Barbco’s bladeslengthen

the in-service time of heavy equipment, and Barbco’s currently fast cycle time helps customers avoid extended downtime

for difficult-to-replace blades.

Barbco has a strategic advantage with the process that melts the bolt-on blades’ edges and impregnates them with

tungsten carbide. Its TCing operations are in-house, and it typically processes small orders with lot sizes of 1 to 10

units. Single-unit orders are common. Barbco was profitable from the beginning and has always focused its efforts on

its competitive advantage in designing custom products. For its TCing business, it historically paid little attention to

critically evaluating and managing material ssourcing,manufacturing processes, cost control, and job profitability. It

wasn’t until the 2008 financial loss that Barbco’s owners were forced to deal with fundamental business changes in the

nature of their business and the importance of operating issues, job profitability, and information support.