Analysis of Operations Management Case Study Paper

Analysis of Operations Management Case Study Paper

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Analysis of Operations Management Case Study Paper

Analysis, Operations, Management, Case, Study, Paper

Introduction

This case study covers the strategic, organizational and operational decisions involved in an automobile manufacturer’s efforts to balance its goals of productivity and high quality with the more elusive goal of supplier-development integration.

The case material is based on the real-life experiences of supplier development, integration, socialization and trust, which are core and integral components of a global vehicle manufac- turer’s overall direction.

Background

The global vehicle manufacturer was built upon a cost-management culture from the time the company began. The company founder sought to move into the automotive industry from a motorcycle base, despite government blockades, and found that the automotive supply base in Japan was unwilling to support his business.

As such, he developed his motorcycle-component suppliers into automotive-component suppliers through supplier development, fi nancial support and, most importantly, relationships and trust.

This loyalty to suppliers, under any circumstances, still exists today. The global vehicle manu- facturer will not ‘fi re’ a supplier unless the supplier requests them to do so. They will support and

Strategic cost management Lean production at a global vehicle manufacturer

Gerard Chick

AUTHOR BIOGRAPHY

GERARD CHICK is Chief Knowledge Offi cer at Optimum Procurement Group. He has considerable experience working with some of the keenest minds at the most senior level in supply management today. He is regularly invited to make keynote presentations and deliver workshops on strategic procurement issues to senior executive teams across the world.

invest in suppliers who are going through difficult periods, but expect the same leeway when economic times become difficult in the automotive industry. This long-term view towards co- destiny has paid off.

Moreover, like a strict but loving parent, the manufacturer demands a lot from its suppliers, including multiple visits to their site to drive improvement with a refusal to take ‘no’ for an answer. This concept of supplier development, integration and ongoing socializa- tion and trust is a core and integral component of the manufacturer’s business model.

The business model

The global vehicle manufacturer’s business model has always been focused around:

A six-year plan, which is highly dependent on a small group of committed suppliers who are involved upfront for the entire six years.

100 per cent understanding of all factors of product cost, with a high level of precision.

Lean supplier development engineering, with a large population of field engineers working closely with key suppliers on every aspect of their production process.

Flawless new product launch – the manufacturer is a firm believer in extreme attention to detail in every aspect of component, subsystem and system development.

A ‘same part, same place, same process’ mind-set with an emphasis on multiple visits and meetings with suppliers during prototype development and ramp-up, to ensure that products coming off the supplier’s line are of ‘first product’ quality and ready to go to market when production conditions occur.

Communication: the quality, frequency, and content of every communication that takes place between the manufacturer and its dealers, suppliers, and stakeholders is reviewed, and is systematically controlled for in every aspect of their business model – communications are seen as the foundation for inter-organizational relationships.

The global vehicle manufacturer’s ‘deep smarts’

Measurement systems support all cost-management decisions. Initial metrics in the design include the price that the final product could be introduced at in the market. The price/value relationship for the manufacturer’s customer is a focal point for debate and discussion.

What price level at the retail level can provide the required profit at the manufacturing level? A produc- tion cost is established at a high level as a target, and then R&D, manufacturing and supply chain work on how to achieve it, separating manufacturing and supply cost to make that unit.

They breaks costs down component by component in building up to the target price. Certain types of quality characteristics are set in stone (five-star crash ratings, eight airbags, and so forth).

There is then an ongoing effort by suppliers and supply management to share ideas and innovation with R&D teams early on to discover how to reduce expense, along with adding more value and features. Price is the first differentiator, followed by quality.

Target cost elements are based on activity based costing procedures, derived from historical analysis conducted by key R&D groups who are capable of estimating realistic manufacturing and supplier expenses.

These are broken down into budgets developed by category teams. Trade-offs are always a point of discussion at category team meetings. This is a stressful and rigorous process, as multiple teams each work on their own target costs, all seeking to meet the market price.

Cost engineers (procurement) at the manufacturers are aligned by the specific types of suppli- ers they work with, and are dedicated to this role with the objective of becoming global experts. For example, a cost engineer can visit any given supplier of stampings, and produce a lengthy report documenting the level of capability associated with that supplier, based on one visit. There is a high level of capability and knowledge regarding what to look for, which is designed into the culture.

All of the procurement groups meet regularly (once a quarter) to discuss integrated global supply management strategy. At this meeting, the discussion focuses on opportunities for commonality and standardization, coordination with marketing’s export strategy, new product planning, cost management and technology transfer issues within the supply base.

An important part of this strategy meeting also focuses on development of a truly ‘global’ supply base. All divisions and business units come together on a regular basis to discuss and share global platform development, common supply strategies and ongoing cost management objectives. Opportunities for learning and identification of lessons learned are a major part of this effort.

The manufacturer continues to measure cost against attributes such as customer value, ensur- ing that its new vehicle costs do not rise even though global material costs are rising, and also to add features that ensure customers have a safe, innovative and fulfilling driving experience.

The corporate influence included the firm’s highly effective version of lean manufacturing, which it and other Japanese manufacturers pioneered. Lean practices had, of course, been largely adopted in the manufacturer’s US operations. A corporate policy of localization, however, per- mitted some lean practices and other manufacturing practices to be modified and adapted to local conditions in the Ohio plants.

Conclusion

Overall, the global vehicle manufacturer case illustrates the difficulty of balancing competing internal factors (such as a lean manufacturing strategy) and context considerations (such as environmental regulatory pressures) in strategic decision-making and organizational design considerations.

A central idea to take away from the case is the complexity of managerial decision- making when carrying out these balancing acts. Such challenges often resist simple quantifica- tion and involve high levels of uncertainty.

Questions

1 What are the benefits of lean?

2 Lean production emphasizes waste reduction. Generally, what are the implications of ‘lean’ for the environment?

3 Is the manufacturer’s goal enough to meet all social or corporate environmental goals?

4 Organizational design: the manufacturer vs Toyota: What are the benefits and drawbacks of the manufacturer’s approach to organization with respect to other issues such as environment regulations?

Answers

1 What are the benefits of lean?

The implementation of lean manufacturing in a business enables value to flow through the com- pany’s manufacturing process. This is known as just-in-time (JIT) manufacturing and is ‘pulled’ by customer demand. JIT prevents or rather eliminates waste in the manufacturing process.

Here waste is categorized into seven distinct activities:

1 transport;

2 inventory;

3 motion;

4 waiting;

5 over-processing;

6 overproduction;

7 defects.

All of these activities directly impact on costs. This is because they add no value to the manufac- turing process. Since they add no tangible value customers would not be happy to pay for what is essentially wasteful expenditure in your process or service.

The accepted view in manufacturing is that businesses only add value for around 5 per cent of the time within their operation. It follows then that the remaining 95 per cent of that time is regarded as waste. The goal in a lean manufacturing process is to find ways of reducing as much of the 95 per cent wasted time and effort, and as a consequence improving:

performance, fewer defects and rework (in house and at customer);

• Reducing process interruptions;
• Reducing levels of inventory;
• Improving stock turnover;
• Reducing storage space requirements;
• Improving efficiencies, more output per hour;
• Improving delivery performance;
• Improving manufacturing developments;
• Greater customer satisfaction;
• Improved employee morale and involvement;
• Improved supplier relations;
• Increased profits;
• Increased business demand.

2 Lean production emphasizes waste reduction. Generally, what are the implications of ‘lean’ for the environment?

Areas in which lean production may complement the environment are outlined in the case. This concept points to the win–win scenarios for business and the environment. Additional complementarities and many trade-offs between the two can be envisioned. They can be organized in three areas:

3 measurement and continuous improvement.

The waste reduction mentality, which permeates the manufacturer’s operations globally, can have obvious benefits for the environment, such as reducing the use of toxic chemicals that involve expensive waste disposal and recycling more materials that would have become waste.

However, the lean waste reduction ethic may hinder some environmental goals. While encourag- ing efficiency, waste reduction on its own does not provide a sufficient mechanism to meet all social or company environmental goals. Waste reduction can increase environmental perfor- mance but only up to a point.

The environmental goal of reducing industrial toxic chemical use is not served well by lean production strategies. Lean production seeks to reduce the costs of waste, an activity that does not minimize toxicity correspondingly because environmental regulations and markets do not see theses toxic materials in the same way.

Cross-boundary working can lead to more creative and pragmatic solutions to environmental issues because workers who know the details of plant operations can have an input into environ- mental decision-making. Cost reduction is one example. Employees may have ideas about how to reduce scrap waste, which benefits everyone; however, they may be less able to contribute to a discussion regarding how to make sophisticated equipment at the plant more efficient.

The use of information systems that focus on measurement and continuous improvement allows documentation and tracking of environmental issues within the plant by showing the progress that can be made.

They can also help link environmental benefits to cost reduction and other manufacturing advantages. However, an emphasis on measurement and continuous improvement could be problematic when applied to the environment.

Striving for continuous improvement in manufacturing may interfere with environmental performance. The just-in-time element of lean production, in which parts are continually shipped to the manufacturer in batches just large enough to meet the current demands of the consumer, can have significant implications not only for traffic congestion (owing to increased trucking deliveries) but also for air emissions and energy consumption.

3 Is the manufacturer’s goal enough to meet all social or corporate environmental goals?

The student needs to determine the real problem presented. There are two possible (broad) responses:

First, the problem is to articulate how the manufacturer might optimize the trade-off between lean manufacturing and the environment, because both are important, and different approaches have different implications for manufacturing success. With regard to the environment this would involve the student discussing the manufacturer’s approach to the organization of their plant to reflect both the integration of lean manufacturing and giving full consideration to the environment impact of that decision.

Second, to examine how to optimize a trade-off because in pure business terms no trade-off should be made. The core business is making the best cars at least cost. The environment needs to be served, but it should be addressed through an organizational structure and activities that do not interfere with the lean manufacturing practices.

4 Organizational design: the manufacturer vs Toyota: What are the benefits and drawbacks of the manufacturer’s approach to organization with respect to other issues such as environment regulations?

Discussing the positive and negative interactions between lean production and the environment helps address the question of: how to design the organization to maximize complementarities and minimize trade-offs. As is so often the case there is no right answer to this question.

It is analogous to other issues in which core business activities have to be balanced with pressures to behave in a socially responsible manner and the general business context has to be incorporated into strategic thinking about the organization’s design and activities.

This question has several aspects, two of which are considered here. One gives consideration to the overall level of control afforded to local manufacturing plants. The broad options for corporate versus local control are suggested by looking at the manufacturer and Toyota:

A top-down and centralized management ensures uniform quality and control over procurement policies. This option can easily capitalize on an optimized system of production put into place globally, often leading to economies of scale and lower costs. However, inflexible systems can suffer when facing local constraints and contextual variation.

Management that is flexible and able to respond to local environmental regulations, input prices and stakeholder demands is the other option. However, flexibility may lead to greater variation in local production costs, and average costs may be higher across all plants because core activities are allowed to be disrupted to adapt to local conditions.

Another aspect of organizational design is the extent to which environmental activities are integrated into manufacturing activities. Integration can be achieved through goal-setting policies (such as waste reduction), human-resource practices (such as training and quality circles) and the use of information system methods (such as developing metrics for comparing environmental and other performance in areas of manufacturing). Broad options here include:

An integrated approach, in which environmental activities and staff are blended or dispersed across departments in the organization. For example, responsibility for environmental regulations might be assigned as a part-time duty of a team member within procurement or at a lower level.

A buffered approach, in which environmental activities and staff are centralized. For example, a team of regulatory compliance specialists housed in a headquarters building or plant management building would rarely interact with other staff. Changes to improve environmental performance might more likely originate from this department and become part of the working practices of other staff.

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