Lack of Profitability in Gulf States Metal - Case Study Example

ANSWER NO. 1 INTRODUCTION GSM stands for Gulf States Metals. It is basically a nickel refinery located in the southern part of USA. The refinery not only produces nickel but also, copper, cobalt and ammonia sulfate. It is a ten year old company which inherited its nickel expertise from its parent company namely IMI. IMI stands for International Metals Incorporated. BACKGROUND OF THE PROBLEMS Like any other new project or acquisition, there is a certain time period during which there are various kinds of costs incurred in the development of the project. After that certain payback time period, the project starts to generate revenues. Same goes for GSM. As IMI acquired GSM, after the company and project analysis it assumed that GSM would be costly for two years and then will start generating revenues. However, something either got into the way or hindered their profitability because according to the case study, GSM has not been able to generate any profits for the parent company to date. This lack of profitability has been contributed to various factors. DIAGNOSIS OF THE PROBLEMS 1. DEMAND AND PRICE OF NICKEL Over the years there has been a comparatively low demand for nickel and copper which were expected to be high in demand. The change in demand was not expected by the company and ended up in over production having huge supply of something that had negligible demand in the market. This can certainly be blamed at the research and development departments of the company. This decrease in demand from this company due to the other companies comparatively low prices. The other competitors’ low priced nickel is not a mystery. The started buying nickel at a low price and hence sold it at a price lower than that of GSM. The point to consider here is that the cost of the raw material that GSM was buying was high in relation to the market price that it would have had to provide in order to compete with its competitors1. If GSM would have set the same price as that of its competitors then GSM would have gone in a loss and if it sets a price to have a certain amount of profit covering all its operating and raw material costs then again it would not be profitable for the company. Either way, there was more supply of the nickel and copper by GSM and a low demand due to the high price in comparison to its competitors. 2. PLANT AND EQUIPMENT As mentioned in the case study about the shabby condition of the plant and equipment, I quote “the physical environment of the plant can be best described as rough. The building and equipment are old and corroded. The atmosphere smells of chemicals. Leaky valves and pipes spray chemical and vapors into the air. Chemicals drip from overhead pipes.” The condition o the equipment as defined in the case study is rather horrifying. How can such a huge company are operating in such conditions. The condition of the equipment is also at times to be blamed. The equipment as mentioned earlier is old and any intelligent person would suggest its replacement. However, considering the current financial situation of the company it is not feasible for the company to halt it’s on going production for a couple of months till the equipment are replaced and into place. This would increase the depreciable costs of the equipment which includes the replacement costs, setting up and shipping cost and of course the depreciation cost of the equipment. The shipping and setting up cost is of course one time expenditure however, it is not something that the company would prefer over halting its operations for a couple of months. Bottom line, the company mangers will have to deal with the current equipment. 3. LABOR PROBLEMS However, the company also claims to have some labor problems. As far as the labor problems are concerned, they started walking in rallies protesting against the tough policies of the company. This was a sheer result of the middle managers not being able to either adjust or not willing to adapt their tough policies which were simply for the company to prosper and for the employees to keep their eyes on the company vision and mission at all times2. This resulted in a lot of the employees to walk out and also a lot of them to be kicked out of the company. As quoted in the case study “the result was a 30 percent reduction in the work force.” If the people would only adapt to the new policies or rather the company’s so called tough policies then the company would have been stably been generating enough profits. 4. SUPERVISORS CAN NOT BE TRUSTED ALONE One of the employee interviewed said that the supervisors as well should not be trusted at all especially if they are left to make a decision on their own. It is true that when an individual is left to make decisions without a team, it is highly likely for that individual to favor its personal objectives first and then the companies. Maybe that is what they meant when they said “supervisors can not be trusted to make decisions on their own”. The place will probably fall apart if every individual who is a supervisor starts to work for his or her own personal interest. 5. DIRECTOR OF ENGINEERING SHOULD BE REPLACED The director of engineering is soft spoken and is not very rigid in to making people follow orders. It is shocking to know that the company’s orders are not been followed by the employees and is rather said to be a tough policy. The company’s rules are to be implemented in all circumstances so that the company can prosper. However, the director of engineering was a hindrance in this regard as he could not impose the rules and get results from the employees. ANSWER NO. 2: LACK OF EMPOWERMENT OF EMPLOYEES The company managers never get to make decisions in the company. No company can work this way. It is always a joint effort of the managers to come up with a decision which can make the company prosper. This clearly shows the lack of communication and flexibility in the company. If something has been said, it happens at all costs, and as said by a manager “no one dares to say anything against an order.” It is not like the managers are illiterate that they are unable to help out the other top level management in making decisions. NOT INVOLVED IN DECISION MAKING PROCESSES All the officials and managers are well trained and have sufficient knowledge to judge a decision that is being taken. However, they are merely never given the opportunity to talk to the top level management and hence, without any input from managers not only do they feel left out but also they do not feel motivated to work. If the mangers are not motivated to work for the company, then the company will not prosper. OLD PLANT AND EQUIPMENT INCREASES COSTS There should be alternative found to the rotting conditions of the plant and other equipment that is in the refinery. There is no way the production of the materials can be of a low cost with highly depreciating machinery. Infect there will be more costs as the costs and frequency of repair would have increased. They should take one step at a time and replace the machinery. But for starters they should look for a new buyer for their raw materials. The raw materials that they buy right now cost much higher than that of what their competitors buy because of which they can sell it at a lower price in the market and also make a higher profit. TEAM BUILDING ACTIVITIES There should be vocational training systems and seminars in the company which would increase the interaction of the company individuals so that they get used to the team building concept. There should be team building activities taking place among the various departments but at the same time keeping in mind the goal of the organization has to be achieved.3 The increase in communication of the employees in various departments would help them achieve their objectives. Also the company can introduce stock options in which the managers will have an incentive to work for the company and increase the value of the company so that they can sell the shares that they have at a discounted price provided by the company. The company should be more encouraging when the employees want to take a step forward and give their opinion on a decision. They should be empowered in which they would feel responsible of the outcome and hence would benefit the company in the future. Also the company can introduce stock options in which the managers will have an incentive to work for the company and increase the value of the company so that they can sell the shares that they have at a discounted price provided by the company. ANSWER NO. 3: The employment involvement program would solve most of the problems. If the employees of the company are empowered and more involved and engrossed into the company’s activities it is likely that they will end up wanting to do what is best for the company. Also the company can introduce stock options in which the managers will have an incentive to work for the company and increase the value of the company so that they can sell the shares that they have at a discounted price provided by the company. The plant managers will be more empowered and involved in the production processes and into making the vital decisions for the company. Although this is a really good idea but at the same time there are trust issues that the company will be facing however, it all depends on the company’s involvement into everything that is happening top to bottom in the organization. Bibliography Schein, E., 2006, “Organization Development: A Jossey-Bass Reader,” Jossey-Bass, pp. 83-92 APPENDIX DIAGNOSTIC MODEL USED IN THE ANALYSIS As mentioned in the case study, over the years there has been a low demand for nickel and copper which were expected to be high in demand. The change in demand was not expected by the company and ended up in over production having huge supply of something that had negligible demand in the market. This problem can easily be analyzed by the supply and demand model. The decrease in demand has caused an excess supply of the products. Also the competitors’ role in the pricing of the product has also been discussed in the analysis above. The firm needs to lower its costs of production by one way or another in order to lower its selling price to beat its competitors. If the company would have set the same price as that of its competitors then the company would start losing money and would have gone in a loss. However, if it sets a price to have a certain amount of profit covering all its operating and raw material costs then only it can be profitable for the company. It is simple supply and demand situation where if the company does not meet the two ends then the company will either undergo a loss or will be at a break even point where it will be barely covering its costs. At the break even point the costs are equal to the revenue or sales that are being generated. If there had been any additional sales or revenue resulting in a profit, then the difference between the cash inflows and outflows would be positive, if vise versa, then negative. Read More