Question

RANDLEMAN, N.C. -- The future of century-old bearing maker Timken Co. rests on an old axiom: The sum is greater than its parts.
Examples fill the shelves of a squat, 10-year-old factory here crammed with computerized metalworking machines that stretch and scorch bearings. Take Timken's cylindrical bearings, which reduce friction in giant dump trucks and industrial windmills. These days, they're married with flap-like parts that will lubricate moving pieces. Combining the friction and lubrication functions is something Timken's customers once did. By assuming that task, the company hopes to distinguish itself from its foreign competitors and add enough value to make more money.
"There are factories around the world that are focusing on one simple product, and they're killing us on price," says Mark Esposito, the plant's product manager. The key now, he says, is to surround the company's basic product with additional components in order to provide customers with exactly what they need.
It's not just Timken that is following this strategy to fight imports. Manufacturers are increasingly assembling customized products that take one standard part and surround it with casings, pins, lubrication, and electronic sensors. In many cases, manufacturers offer installation and maintenance services, as well as ongoing engineering, all in the name of offering something the imports can't or don't.
The strategy, often called "bundling," began in earnest in the 1990s in the auto industry. Parts suppliers saw it as a way to increase profits and make themselves indispensable to ever more demanding and stingy car makers. According to at least one study, the approach worked. Companies that sell integrated systems rather than discrete parts to auto makers posted better sales results than those making commodity products, according to a recent survey of more than 100 auto parts suppliers by Oracle Corp. and the University of Michigan's Office for the Study of Automotive Transportation.
"The more critical and key the supplier is, the harder [price reductions] are to enforce," says Michael S. Flynn, the office's director. For domestic suppliers, the strategy has the added benefit of requiring proximity to stay current with a customer's changing needs, giving them a big advantage over foreign competitors.
The bundling process can benefit buyers as well, reducing the number of suppliers they must deal with and relieving them of routine labor and cost intensive tasks like finishing and assembly. Caterpillar Inc. began to push bundling among its suppliers, including Timken, a year and a half ago, and it hopes to have about 100 bundling agreements before the end of the year, compared with about a fifth that number now.
"It substantially advances quality," says Daniel Murphy, vice president, global purchasing division. "It's a source of cost reduction, and it leads to improved reliability." But he adds that, with so much work going to fewer suppliers, Caterpillar and other companies must be cautious in choosing partners.
Taking two parts and putting them together isn't as easy as it may sound. Significant investment in research and development is required to devise ways to take core parts and fashion them into smart assemblies. Existing factories also have to be flexible enough to produce integrated systems.
The idea for a bundled product typically begins with a Timken salesperson identifying a customer need. On a recent afternoon here at Timken's Randleman facility, the sales staff and engineers are involved in a conference call with a customer. Engineers at Timken headquarters in Canton, Ohio, listen in. The customer wants to know if it's possible to add casings and caps to a bearing used in machine tools. Faxes detailing desired specifications fly back and forth between the three offices. "We looked at it and said, 'we can provide you with some value,' " says Mr. Esposito.
At this point, Timken, which makes more than 90,000 types of bearings, holds 11% of the world-wide bearing market, which has become increasingly competitive. Imports into the U.S. doubled to $1.4 billion last year, compared with $660 million in 1997, according to Freedonia Group Inc., a Cleveland research firm. Timken says the uniqueness of its product insulates it from the worst effects of foreign competition, but it is still being hurt and has pressed the Bush administration to crack down on what it calls dumping by bearings makers in Japan, Romania and Hungary.
Like other auto suppliers, Timken began bundling prelubricated, preassembled bearing packages for car makers in the early 1990s. But by the late 1990s, industrial business customers, which accounted for about 38% of its sales last year, had begun putting the same pressure on suppliers that car makers were: Cut prices or lose business to lower-price foreign producers. In addition, they wanted their suppliers to handle an increasing number of tasks. "The days of 'we do everything in-house'
are going by the wayside," says Erik Paulhardt, a Timken general sales manager for industrial equipment.
Bundling for the industrial market is more complex than doing it for automotive customers. The auto industry requires huge volume and largely adheres to certain manufacturing standards. But makers of big-ticket industrial equipment, like gigantic dump trucks used by mining companies to move earth, buy fewer pieces of equipment at a time.
In addition, customers weren't aware of the bundling possibilities, especially after Timken's acquisition this year of the Torrington bearings operation of Ingersoll-Rand Co. Torrington increased Timken's sales by nearly 50% and added entirely new products to its portfolio. "One of the challenges is getting customers to think of us as more than a bearings supplier," says Mr. Paulhardt. To help facilitate that, Timken reorganized its sales staff, creating project managers who know both the capabilities of their particular products and the potential for other Timken products to be bundled with them.
Timken has also launched an effort to advertise its abilities to its longtime customers. It invites customers to an open house at its Canton research facility. A Timken van also tours the country and sets up displays in customer lobbies to show the breadth of Timken products.
Timken's bundled products "are helping the company's ability to fully participate in this next economic recovery," says Mark Parr, an analyst for KeyCorp Co.'s McDonald Investments Inc. unit, who has a "buy" rating on the stock. Timken could use the help: Its second-quarter net income of $3.5 million, or five cents a share, disappointed Wall Street as the company grappled with higher costs, continuing weak demand in U.S. manufacturing and complications from its acquisition of Torrington.

What factors in the economic environment, in addition to foreign imports, contributed to Timken's new strategy in 2002 and 2003?

How does this strategy relate to the discussion of bundling presented in Chapter 11 (ME)? What are additional factors presented in this case that should be considered?

How has this strategy served Timken in the years since 2003?

Answer 1

Solution

a.In addition to the foreign imports,factors like :

1.Selling integrated systems instead of discrete systems to the customers has increased the sales.

2.Customizing the parts supplied according the needs of the customer and

3.Providing allied / supporting services like installation,maintenance and engineering services along with the parts to the customers

b.contributed to Timken's new strategy between 2002 and 2003

So,Timken as per it's strategy began bundling it's bearings with other parts to provide businesses with customized products as per their specific needs.

Additionally as part of this strategy,Timken also focused on remaining in proximity to the customers which will clearly lead to them having an edge over their peer i.e cheap imports.

c.The price elasticity of demand in this industry is less as per the description given above.In other words,the the variance in demand in response to variance to the price is very low and almost negligible in this industry.

Two reasons were put in support to this argument:

a.All the companies / players in the industry are well established over years and they have built a very deep relation with their customers.

b.In view of the customers,the cost of the analog chips is not more than 5 % of the total cost of producing their end product,so they do not feel the necessity for putting rigorous efforts / focus on bargaining / looking for low cost.

This market model is a kind of oligopoly because there are a number of players in the industry and all the players are providing the same product.

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