The Identification and Pricing of Risk in the South African Pressure Vessel Manufacturing Industry
Date
2013-10-22
Authors
Ribeiro, David Ferreira
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Abstract
The South African manufacturing industry has faced several challenges as a direct
result of the global recession and, although the worst of the global economic recession
may have passed, international recovery still remains fragile with fears of a double-dip
recession still remaining in various developed economies, (Burns, Shaw, & Janse van
Rensburg, 2010).
As a result of this increased level of competition, Lo, Lin, & Yan (2007:1) confirm that
contractors end up submitting abnormally low bid prices (to win the work) only to end
up “cutting corners or raising claims” to recoup financial losses. Similar approaches by
Manufacturers of Pressure Vessel equipment could be catastrophic and with ever
increasing levels of Risk being transferred to these critical suppliers under post-2008
market conditions, understanding the impact that such Risk transfer has on these
suppliers is of critical importance.
It was in this context that it was decided to identify Risks applicable to Manufacturers
of Pressure Vessels in South Africa and to evaluate the impact that those Risks have on
the pricing behaviour of Manufacturers.
To support the research, the broader population of Pressure Vessel Manufacturers in
South Africa was identified by evaluating various approved vendor lists from major
petrochemical refineries in South Africa. Manufacturers in the final sample were
selected using a convenience sampling technique based on the authors contacts within
the industry and then extended through the use of snowball sampling, where
additional Respondents’ were selected based on referrals from the initial Respondents.
iii
Secondary data from a comprehensive literature review was used in order to
formulate an online questionnaire sent to the nine identified Respondents. Overall,
seven responses were received, one Respondent failed to complete the Risk
Identification section of the questionnaire. A response rate of 67% was achieved,
which, according to Moser & Kalton (1971), is acceptable.
Primary data received from the survey was cross-referenced to secondary data from
the literature review in Chapter 2. This was done to determine whether new
information uncovered, supported or contradicted academically accepted theories.
The data analysis approach used was similar to that of Zou et al. (2007), with the
exception of using the approach presented by Shen, Wu and Ng (2001) for the
calculation of the Risk Significance Index.
The following include the main findings from the research:
It has been shown that Risks related to cost, schedule and quality, which are
typically experienced in the international construction industry, are closely
correlated to the Pressure Vessel manufacturing industry.
Risks associated with environmental and safety, however, did not correlate well
with the construction industry.
Respondents remain concerned about the poor competence and general lack of
skilled labour and professionals within the industry; with four out of the top ten
Risks being attributed to these factors.
A clear correlation exists between Risk and the price of Pressure Vessel equipment.
Despite technological advances, most Manufacturers still rely on intuition and
judgment rather than quantitative methods available under contemporary Risk
Management theory to quantify the extent of financial exposure to Risks involved
in the manufacturing of Pressure Vessel equipment.
The lack of adoption of quantitative-based Risk Assessment has been ascribed to a
lack of understanding of such quantitative methods, as well as to insufficient time
allocated for Manufacturers to prepare bids.
iv
There is a clear reluctance from Manufacturers to make Risk contingency
allowances during a competitive tender process, although they conceded this
decision would be different under a single-source tender process. This would also
imply a tendency to make necessary Risk allowances in times of reduced levels of
competition.
The impact of Manufacturer workload was also found to be a significant
consideration, with almost all Respondents confirming that their decision to price
Risk would vary depending on workload at the time of tender.
The preferred method for pricing Risk contingency by Manufacturers is to allocate
the Risk into the overall profit margin; although some Manufacturers price Risk
separately as a percentage of the estimated costs.
It was found from general agreement among Respondents that competitors do in
fact price for Risk during competitive tender processes; which did not correlate
with the findings from the literature.
Manufacturers do occasionally rely on contractual change order provisions as a
mechanism to recoup financial losses and believe their competitors adopt a similar
strategy.
Although it was Respondents’ experience that End Users are amenable to
favourable payment terms, the Risk associated with negative cash flow was
nevertheless ranked in the top five perceived Risks for Manufacturers.
Overall, Manufacturers tend to agree that there is some level of Risk associated
with the manufacturing of Pressure Vessel equipment, although the degree of
perceived Risk is probably considered low to moderate. This perception is assumed
to differ for new entrants into the market.
Description
MBA thesis
Keywords
Pressure vessel manufacturers, Engineering