Indalex Ltd Case Study

This executive summary explains how Indalex Ltd will yield benefits to the firm by buying a new press and adding an anodizing plant.

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Indalex is a company that since 1961 provides quality products and flexibility to their customers. However, Indalex success has been mostly attributed to “service”. Understanding this is one of the key factors to conclude that the strategy mentioned above is the most beneficial for the firm when it comes to increase capacity through an expansion plan for 1978-1980. I proceed to explain how, based on both quantitative and qualitative analysis of the firm and its market, I came up with this recommendation.  

The internal situation Indalex is facing in late 1977 is as follows. Forecast of future firm’s demand points that sales will increase by 20% in 1978. However, by this time Indalex is working full capacity. It must increase production capacity quickly to keep on doing what they have always done: “meet customers’ needs”.  Main income stream of the firm is extrusion 83%, followed by anodizing 16% and fabrication 1%. In terms of profit margin, they are 10%, 26% and 20% respectively. Should be noticed that construction sector contributes to 2/3 of current Indalex Sales. This means that a change in construction demand would imply a change in capacity balance. In addition, during 1975 and 1976 the firm has purchase anticipated aluminum billets to hedge an increase in price. Regarding workforce, Indalex has high overtime. However, it seems that opposite to what should seem, overtime is perceived internally as an opportunity to earn high wages.

In terms of the market, aluminum sector is very stable and growing. Annual average world growth in the use of aluminum is 8% whereas sales extrusions are 15% per annum. Indalex has a 7,5% market share. Its main competitors are Alcan Subs. (30%). And RTZ-Extruders (7,5%). And this year there is an important fact that should be taken into account when selecting an increasing capacity strategy: UK allows companies to write off the initial cost of most processing equipment.

After this analysis, there seems to me that there are three possible strategies for Indalex in order to increase capacity: Subcontracting, buying a new press and anodizing plant or expanding in other direction. A cost-benefit analysis of each option follows:

• Subcontracting. It is an option for the short term. Taking this option implies low initial investment but higher costs in the long term and high reliance in subcontractors. Thus, I believe that this option is very risky as customers may not like it and it may lead to a future decrease in customer loyalty at first and in sales later.
• Buying a new press. By doing this the firm achieves a 33% capacity increase. If demand grows as expected, new press capacity would be filled in 3 years approximately. And even though demand doesn´t grow there are other options for filling the capacity such as: pulling in, buying demand and entering the small batch business. However, this option implies a high initial investment and an additional investment in adding an anodizing plant if Indalex doesn’t want to alter al current balance of operations.
• Expanding in other direction: buying Indalex own recycling plant. This option leads to high operating savings and it is very environmentally friendly, in contrast to press and anodizing processes. It also allows total control over supply of secondary billet and in times of shortage is a great opportunity. However, this strategy doesn´t give the firm at all the opportunity to continue growing in the same direction it has been doing for the last 16 years. Therefore, I believe that stop increasing capacity in extrusion and anodizing is tremendously risky. Firstly, because those are your main income streams. Secondly, because there is not available information of Pillar Companies that have already success by doing this. Thirdly, there are not personnel and resources to face this big change and new marketing problems.

In light of the analysis, buying new presses and anodizing plants is how Indalex has always run his current business. Any of the other two options would be much riskier and not as profitable as it should be for such high uncertainty. In addition, during 1975 and 1976, the firm has been purchasing aluminum billets in anticipation of price increases and possible shortages. By installing new machinery, we would be able to fill capacity earlier than we would If we hadn´t purchased them. Moreover, assuming that there won’t be major changes in product mix, over the long term, both anodizing and press machines will fill capacity despite what happen in the UK market. Thus, the recommendation I provide after the analysis findings is that the best capacity expansion plan for Indalex for 1978-1980 is buying both a new press and adding a new anodizing plant.