Case analysis for a class assignment

1. Indalex Limited – Case Analysis

2. Indalex
Background
•Aluminum Extrusion maker
•Focused on quality and customers
•In contrast to wider industry
Pillar Holdings
practices
(1961)
Indalex & 46 other firms:
•Allowed autonomy subject
to certain conditions
•Limit on subsidiary
growth
•Acquired by RTZ in 1970
•Forward integrated to anodizing
and fabrication by 1973

3. Indalex – Situational Context
Stage Wise Costs and Selling Sales
Price Sales
Mfg Cost/Ton Selling Price 7,325,500
1545 4,860,000
1080 1200 1385
305 160 532,140
Extrusion Anodising Fabrication
Extrusion Anodising Fabrication
• Majority of sales to building construction material makers
• Holding Strategy Implications:
‒ No disproportionate power
‒ Limit to organic growth
‒ Tight individual control on cost and operations
‒ Multiple levels of plan scrutiny

4. What was the problem faced?
Issue was to decide on capacity expansion plan, considering
increased uncertainty about near term economic prospects
What were other objectives of the firm?
• Real growth rate of 10% per annum
• Flexibility and Quality: Competitive Advantage

5. Generation of options
• Option 1: Increase capacity of the extrusion process
– New extrusion plant operational in 1979. Old anodizing plant replaced in 1983
• Option 2: Increase anodizing capacity
– New anodizing plant operational in 1979. Another plant for replacement of old
in 1983
• Option 3: Build a recycling plant in the adjacent warehouse
– Plant functional from 1979
• Option 4: Increase capacity of both the extrusion and
anodizing process
– Extrusion plant from 1979
– Anodizing plant from 1980 – staggered due to investment
constraints, replacement anodizing plant in 1983

6. Evaluation Criteria
• NPV and Cash Flow Analysis
• Objective of 10% Pre-tax Growth
• Flexibility and Quality
• Feasibility
‒ Installation and operational issues
‒ Availability of manpower
‒ Environmental considerations
• Customer satisfaction and Customer Retention
‒ Maintain Reputation
‒ Meet growing demand of existing customers
• Strategic Issues

7. Evaluation of Options
• Criteria-1: NPV of the project
– Extrusion: £ 1.85 million
– Anodizing: £ 0.857 million
– Recycling: £ 0.916 million
– Extrusion & Anodizing: £ 1.6 million
• Criteria-2: Y-O-Y growth of 10% in PBT
– Management criteria
– Rank of projected growth in profits
• Extrusion & Anodizing, Recycling, Extrusion, Anodizing
• Criteria-3: Flexibility and Quality
– Source of competitive advantage for Indalex
– Option 1,2 & 4 offer machine flexibility
• Excess capacity used to better manage complex orders
• Advantage in focused differentiator strategy
– Option 3 offers process flexibility
• In house recycling as opposed to outsourced
• Better inventory management
• However, excess inventory of £ 1 million exist

8. Evaluation of Options
• Criteria-4: Feasibility of the project
– Operational Issues: Anodizing requires nearly 100% plant load in order to be
efficient, Completely new team required for recycling plant
– Manpower issues: Additional manpower with specialized skillsets will be
required for all four options
– Environment: Anodizing necessitates costly pollution control methods
• Criteria-5: Customer satisfaction and retention
– Relationships: Sales force is currently rationing customers, they will be
retained only if there is capacity addition. This will also free up the production
planning div.
– Growing demand: Currently construction-related work has taken up the
majority of anodizing work. If there is a slowdown in this sector, the entire
anodizing operations is affected. Managing capacity increase in extrusion is
easily manageable. Extrusion is the first capacity constraint that must be
removed.
• Criteria-6: Strategic Issues
– Success of the company has depended on the skills of small, highly qualified
and motivated management, all options require additional manpower and the
plant will be stretched to its limits.
– Pillar has not increased its extrusion capacity since tying up with RTZ

9. Evaluation of Options
Option:1 Option:2 Option:3 Option:4
NPV Good Bad Ok Good
10% growth before tax Fair Bad Good Good
Flexibility and quality Ok Ok Bad Good
Feasibility Good Ok Fair Bad
Customer satisfaction and Good Fair Bad Good
Retention
Strategic Issues Fair Fair Good Bad

10. Recommendation
Capacity Expansion Plan:
• Extrusion Facility (1979)
• Replacement of Anodising Facility (1983)
Reason for selection of Option-1: Extrusion plant
• Feasibility
• Flexibility and Quality
• 10% growth objective

11. How to convince management?
• Although company is making profits, capacity addition is
required to sustain profit (consumer reputation)
• Best option to meet consumer demand and achieve
objective of 10% pre tax growth
• More laborers will be hired, so the load of forced
overtime will reduce
• Option like addition of recycling plant, won’t solve
problem of increasing demand of existing consumers

12. Other Recommendations
• RTZ-Pillar should allow flexibility between various facilities.
• Two of the top three facilities belong to them, and if they allow
them to merge or work together they will have a stronger
bargaining power with suppliers and buyers alike.
• This may help them drive down rates and improve their profit
margins

13. THANK YOU

14. BACKUP
SLIDES

15. NPV Calculation

16. Who had to make the plans and how
decision was to be taken?
• Mr. Peter Mcllwraith, MD of Indalex Limited was to make plans to overcome the problem.
– He joined Indalex in 1973 (after Pillar joined RTZ Group)
How is decision taken?
Generally they have a 5 year rolling plan along either monthly
interim account audit for cash control
Operating Unit work with autonomy to achieve its budgeted profits
If growth is not achieved, existing management proposes activities
which can be grafted on existing facility. The plan is reviewed by RTZ
executive Director, which is then reviewed at divisional level and
finally by RTZ executive management as a whole

17. Timeline
• 4 large facilities operated in Extrusion Industry
• 60% Capacity Utilization
• 8-12 weeks delivery
1960 • Poor Surface Finish
• Indalex is incorporated in Extrusion business
• It intends to give 7 day delivery, design assistance and better surface finish
• James Paterson joins Pillar Holding as MD (Pillar Holding is collection of 6 companies with
1961 combined sale of £ 1 million
• New Extrusion Press installed(1962)
• First anodising plant set for finishing (1964)
1962- • 3rd Extrusion Press installed – Accommodated in original factory after major expansion(1969)
1969
• Pillar holding joined RTZ Group who had consolidated asset of £700 million(1970)
• New MD Mallwrath Joined (1973)
1970-76 • First Fabrication facility added (1973)

18. Current state in 1977
• 45% of total extrusion business was held by 3 companies namely:
Market Indalex, RTZ Extruder Limited & a subsidiary of Alan
• Total Installed Capacity of 160000 MT(Metric Ton) with 75% capacity
utilization
• It transformed from group of 6 companies to group of 47 companies
Pillar Holding • Out of 47 companies, there were 10 extrusion companies with total of 23
presses
• About 33% of extrusion companies were operating anodising plants
• It had 3 extrusion presses, 4 Anodising facility and a fabrication facility
Indalex • All three production stages were operating at almost full capacity
(Capacity utilization of 95%)
• About 400 people were handled by less than 10 management personals
Merger might have been initiated by RTZ, to restrict growth of Indalex in
extrusion and to allow RTZ extrusion Limited to have major market share