CoolIT Systems Case Analysis

MAN 433
Kaan Bistren
Selen Bayrakci
Usama Ahmad

Introduction

CoolIT Systems was founded in 2001, with a focus on producing liquid cooling systems for
gaming laptops. Their unique technology proved successful in replacing traditional heatsink
fans due to its ease of installation, quiet performance, and effectiveness in improving CPU
performance. To compete with strong rivals and expand their market to Europe and Asia,
they partnered with the California-based company Corsair. This partnership helped generate
approximately $10 million in revenue annually by 2014. CoolIT outsourced production to a
Chinese company, XIT Industries, which provided flexibility, simplified supply chain
operations, and kept capital costs minimal. For CoolIT, providing high-standard and reliable
products was crucial, as their customers were executive-sensitive and highly conscious of
product delivery time.

In 2015, management began exploring the new market of data centres, recognizing its
significant profit potential. Data centres were using expensive traditional HVAC systems to
cool down their computers, and CoolIT developed a new Direct Liquid Cooling (DLC)
technology to replace them. While the data centre represented only 10% of the market,
capital spending was increasing and was expected to reach $120 billion by 2018. Industry
forecasts suggested that the data centre market would continue to grow at a rate of 17%.
The potential for CoolIT to gain market share and profitability was expected to be significant
yet uncertain. They forecasted profits of $30 million for the current year and anticipated an
increase to $85 million by 2022. Due to the high potential for growth in data centres, CoolIT
is exploring options for producing their products, including in-house production, finding a
contractor in North America, or adopting a hybrid approach that splits production. This
assignment will analyse their options.

Organisational Capabilities of the CoolIT Systems

The article provides information on the operational capabilities of CoolIT Systems, including:
1. Manufacturing: CoolIT Systems has a manufacturing facility in Calgary, Canada, with
approximately 18,000 square feet of production and material warehouse space. The facility
has manufacturing lines for each of CoolIT's five product types, including passive coldplate
head, passive coldplate loop, coolant distribution unit, chassis manifold, and rack manifold.

2. Direct Liquid Cooling (DLC) Technology: CoolIT Systems has developed a direct liquid
cooling (DLC) technology for data centre applications. These systems have three
components: passive coldplates that cool the CPU and other computer components, chassis
and rack manifolds that circulate the liquid distribution in the system, and coolant distribution
units that control the pumping system and heat exchanger.
3. Scalability: The company has concerns about its ability to scale up effectively to meet
demand and has identified options such as identifying a North American contract
manufacturer, producing in-house, or adopting a hybrid approach that splits production
between a contract manufacturer and its Calgary operation. Overall, the article suggests that
CoolIT Systems has strong operational capabilities in manufacturing, supply chain
management, and technology development, but faces challenges in scaling up to meet
demand in the data centre market

Analysis of the Scenarios

Forecasted Product demand

PCH 75,000 137,000 210,000 270,000 340,000 353%

PCL 13,000 24,000 36,000 48,000 60,000 362%

CDU 500 850 1300 1700 2100 320%

Chassis 230 425 65 850 1050 357%

Rack 130 235 350 460 560 331%

1. In House Production

TABLE 1

TABLE 2
TABLE 3
If invested to add more production lines
2x PCH
2x PCL
1x CDU
Double shift

CoolIT has a production facility in Calgary which is of 18,000 square feet space. They initially
have a production line of each of its five products and a total of 46 workers working on each
of the five lines (22 workers related to direct cost and rest working on maintenance and
packaging). The manufacturing space has the potential to be further expanded if needed to
cater the increasing demands of the products. The initial production capacity has been
shown in TABLE 1 and the total cost of production is highlighted in yellow at the end of the
table ($25,233,000). If we compare the numbers of their capacity with the expected sales for
the upcoming years, it can be seen that Coolit cannot cover the demand entirely on their
own as it would only be feasible for the first year and they will not be able to capture a
substantial amount of market share for the next few years. As suggested by one of the
management, if we employ double shifts, there would be an increase in the total production
and the total cost. Even though the total cost ,which is now double than the cost of actual
production ($50,466,000), seems feasible and can provide a profit margin, it is still not
enough to produce the forecasted demand till 2024. It can cover the sales up until 2021.
Hence this option alone is not feasible too
The other option is to invest in expanding which would include increasing the production
lines of PCH and PCL by adding 2 more, and one addition of production line for CDU and
also implement the double shift. According to table 3, the cost of producing the five products
would increase significantly and will be around 126,724,000 which is way more than the
expected revenues for the upcoming years. And besides the production units produced after
the expansion would be much more than what is demanded in the market leaving a lot of
unsold inventory in the warehouse giving rise to storage costs too. And if the company does
not utilise its manufacturing assets at full capacity and just produce almost the same amount
of its units as demanded by the market,this might increase the per unit cost of each product,
hence further increasing the cost. Although there is not much information regarding that so it
is impossible to make an assessment for that case.

2. Finding a contractor in North America

Due to the restrictive measures imposed by the Trump administration, CoolIT is unable to
outsource its production to China. As a result, the company must seek out a North American
contractor or purchase services from a local supplier. Based on the prices outlined in TABLE
4, the cost of producing each unit will be significantly reduced, resulting in higher profitability
for the company. In addition, the company will no longer be burdened with handling and
warehousing expenses, and will not be required to invest in expansion or other production
requirements.
However, there are potential challenges associated with relying on contractors for
production. Product quality is of utmost importance to CoolIT, and any shortcomings in this
area could negatively impact the company's brand recognition. Additionally, managing a
large number of suppliers can be difficult, particularly given that the company will need to
work with 87 different suppliers for its data centre product line. CoolIT has a strong track
record of effectively managing its supply chain while in the gaming market, where it dealt
with only one supplier, XIT. However, the shift to data centres presents a new set of
challenges that must be addressed, as even minor oversights can lead to inventory delays or
stockpiling.

3. Hybrid option
CoolIT could potentially adopt a hybrid production model to cater to the needs of both the
gaming and data center industries. By producing a certain number of units in-house at their
Calgary facility and outsourcing the remainder to a reliable contractor, they could satisfy both
target markets. This approach would be particularly effective given that the gaming industry
typically requires less stringent quality and execution standards, while data centers demand
high-quality, precision products.
To implement the hybrid model, CoolIT could operate a double shift at their Calgary facility to
manufacture the required number of units, as specified in TABLE 2. Outsourcing the
remaining demand would allow the company to minimize costs, which could be covered by
revenue generated from sales. While hybrid production would entail more costs than
outsourcing entirely, it would be more cost-effective than relying solely on in-house
production.
Moreover, the hybrid model would enable CoolIT to maintain full control over the quality of
in-house production, providing an opportunity to supply more discerning and loyal
customers. However, this approach would require the establishment of a new department to
manage the production process, including coordination with outsourced supply chain
partners. Additionally, workers would need to be trained in executing this strategy effectively.
Overall, adopting a hybrid production model would enable CoolIT to satisfy the needs of both
target markets while maintaining cost-effectiveness. The company should carefully consider
the potential advantages and challenges associated with this approach before implementing
it.

Conclusion
The recommended solution for the CoolIT is to have a hybrid system, where they produce
some of the products where they have the control over the quality and outsource the rest of
the demand to be produced by North American contractors. The option of producing entirely
in house is not feasible as it will increase the cost extensively and the company cannot earn
profit through this way. The other option of outsourcing the entire production to the number
of suppliers is also not feasible because the company might not be able to manage that
many suppliers and it can cause stockpiling and inventory delays. If the company is able to
find just one contractor that can cover the whole production, then the option of outsourcing
all operations seems feasible but dealing with 80+ suppliers can cause problems in the
supply chain.