Heat-Treatment Single Point of Failure Strategy
Arctic Precision Components operates one machining plant in Ohio that supplies brake calipers to three automotive OEMs under contracts with $250,000 per day in late-delivery penalties. The plant runs two shifts and produces 18,000 units per day. A fire in the sole heat-treatment furnace would stop all output; the furnace has a 14-week lead time. The company's BIA set an RTO of 72 hours for order fulfillment and an MTPD of seven days. Management is comparing a $4.2 million contract with a nearby precision shop that can provide 30% of heat-treatment capacity within five days, a $9 million dual-furnace installation that would take 10 months, and a $600,000 cloud-based planning system that does not address physical production. The union contract requires 60-day notice for reassigning staff to an alternate site. Customers will not accept partial shipments without prior approval. The CFO asks whether the contract option meets the strategy requirement.
1. Evaluate whether the nearby-shop contract satisfies the RTO and MTPD. What quantitative and qualitative gaps remain?
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Test the option against both RTO and MTPD. The nearby shop can provide 30% of heat-treatment capacity within five days, so it does not meet the 72-hour RTO; it also arrives after the RTO but within the seven-day MTPD. Capacity is the larger problem: 30% of 18,000 units is 5,400 units per day, leaving a 12,600-unit-per-day shortfall. Over seven days that is 88,200 units not produced, which will trigger penalties and customer approval issues.
The contract is therefore an interim mitigation, not a complete strategy. It can reduce impact if combined with a finished-goods buffer, prioritized customer allocations, and pre-agreed partial shipment approvals. The dual furnace addresses the root cause but takes 10 months, so it is long-term risk reduction, not immediate recovery capability. The cloud planning system does not restore physical production and should not be counted.
The recommendation is a portfolio: contract now, buffer and customer agreements now, dual furnace approved as a capital project, and a trigger-based decision to qualify a second heat-treatment supplier.
2. Recommend a strategy portfolio and explain how you would present residual risk to the CFO.
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Present the CFO with a layered portfolio and a residual-risk statement. Layer 1 is immediate mitigation: the nearby-shop contract, a finished-goods buffer sized to the MTPD, and written customer agreements for partial shipments. Layer 2 is long-term resilience: dual-furnace installation and a qualified second source. Layer 3 is response: alternate processing procedures and prioritization rules.
Show costs against expected loss: the contract costs $4.2 million, the dual furnace $9 million, and penalties are $250,000 per day. Compare annualized expected loss under each option, including probability assumptions and the 10-month exposure window. State residual risk explicitly: even with the contract, the plant cannot meet full demand, so the CFO must accept customer allocation risk, penalty exposure, or both until the furnace is installed.
Recommend approving the contract and buffer now, funding the dual furnace, and setting a monthly review of supplier capacity and customer approvals. Document that the cloud planning system is not a recovery strategy.