An Operations Strategy and Process Selection Case
Production and Operations Management: An Applied Modern Approach
This case is intended to be the basis for a business analysis and
class discussion rather than to illustrate either effective or
ineffective handling of a business situation. Companies and
characters are fictitious and are not intended to represent actual
companies or people.
Copyright 1997 by Joseph Martinich. All rights reserved. No part
of this publication may be reproduced, stored in a retrieval system,
or transmitted in any form or by any means without the permission of
Joseph Martinich or the distributor, John Wiley & Sons, 605 Third
Ave., New York, NY 10158. Printed in the U.S.A.
Copyright 1997 by Joseph Martinich. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means without the permission of Joseph Martinich or the distributor, John Wiley & Sons, 605 Third Ave., New York, NY 10158. Printed in the U.S.A.
From 1984-1993 Randy Billingham worked as a sales engineer for a major producer of microprocessors. As advances in microprocessor technology led to smaller processors with ever increasing speed and capabilities, the applications of microprocessors exploded. Randy saw this phenomenon first-hand as he visited customers. Microprocessors were no longer the realm of only computer companies; they were making their way into automobiles, electronic appliances, industrial equipment, home security systems, and even toys. Working with customers to develop new microprocessors for these applications was exciting and financially rewarding work. Randy was arguably the finest engineer in the company because he had a knack for understanding quickly his customers' needs, and he knew how to design and to produce the products. He spent almost all his time either with his customers or in his company's manufacturing plants checking on the quality of products being made.
As microprocessor applications spread during the early 1990's, Randy saw a need for customized microprocessors that the major producers were not satisfying adequately. Many of his existing and potential customers wanted processors to perform more sophisticated functions, but the products in which they were used were often made in small quantities, from a few hundred to a few thousand at a time. His company discouraged such orders because they were not considered profitable to make in their highly efficient, but inflexible production facilities.
In 1991 Randy decided that a company specializing in these small-volume processors could be profitable. He approached his supervisor and asked for permission to start his own small company (to be called Silitech) to make these processors. Randy did not want to give up his current job, but he did not want to create a conflict of interest. His supervisor recognized the value of Randy to the company and did not want to lose him as an employee, so he gave Randy permission because the company did not plan to compete for the business Silitech would be seeking.
In 1992 Randy started Silitech in a small business incubator facility. He hired and trained two part-time employees, and he spent his nights and weekends meeting with customers, designing processors, and supervising production. With the low overhead costs, Silitech was able to be the price leader and still earn extremely large profit margins on the microprocessors. (There was so little competition for this business, Silitech could set almost any reasonable price it wanted.) Randy used these large profit margins to invest heavily in training and equipment to make sure he was producing products that no other producer could surpass. His goal was to discourage any other companies from entering the market, and he wanted to establish a reputation with his customers as the supplier of choice for quality and overall value.
Randy's strategy was successful and the company began to grow rapidly. By early 1993 Randy had increased his staff to eight full-time employees, including a production manager, and he found that he could no longer manage the company on a part-time basis. So Randy resigned his position with his employer and decided to stake his future on Silitech.
As Silitech continued to grow its customers began expanding the variety and size of microprocessor orders they placed with Silitech. The customers were so satisfied with Silitech's products that they began asking Silitech to bid on medium and large volume microprocessors. Silitech was able to accommodate some of the orders, but it did not have the production capacity or the facilities to compete for most of the orders. In 1994 Randy decided to "take the plunge". Silitech issued stock to the public to raise capital. It used the funds to move into its own building, to buy new equipment, to expand its workforce, and to completely redesign its production process. Although not quite as specialized and sophisticated as the large companies in the industry, Silitech created two medium to high-speed repetitive flow processes. The new production lines were fast and technically advanced enough so that Silitech could now compete on price for all but the largest microprocessor orders. Yet the company and the productions lines themselves were small enough to have good teamwork and employee involvement, which kept Silitech's quality and responsiveness among the best in the industry.
By 1995 Silitech's sales exceed $80 million and were still growing fast. The company had expanded operations to two shifts, and it had most of its staff working overtime. At this point some problems began to occur. Clearly there was a capacity problem. Randy recognized this and was already making plans for a major expansion of capacity. Of more immediate concern was a growing problem of late deliveries, especially for the larger orders. This was the first time Silitech encountered this; in the past Silitech was always able to deliver on time by working overtime if necessary. As part of the planning for the capacity expansion Randy met with his top managers to get their input on how to proceed. Randy was especially concerned about what to do in the short-term to satisfy customer demand, until the new capacity came on stream in 6-8 months.
John Stalward, the plant manager, was the first to speak. "Randy, the problem, as I see it, is the large amount of set-up time we're incurring. Over 90% of our production volume is now medium to large-volume, semi-commodity processors. But we haven't given up any of the small customized business. With our new production lines, every time we change over to a new processor we're losing 2-6 hours setting up. For some of these products we set up for 5 hours just to make a few hundred processors, which may take an hour or two. I don't mean to be critical, but this is especially a problem because marketing is always pushing us to deliver the customized orders as soon as possible. I know these orders are from some of our earliest customers, but if we could knock out these orders, at least for a while, and just keep the large-volume products on the lines, we could probably make 30% more product, which would carry us through until the new capacity comes on stream."
"We can't just stop taking these orders," said Francine Ault, the marketing vice-president. "Many of these small orders are from the same companies that are placing the large orders. We got their big orders because of our custom work. If we stop taking their custom work, they may take their big orders somewhere else. Let's face it; our strength has always been in the custom area; we're not that much better than our competitors in the large-volume products."
"But this can't be very profitable for us," John contended. "We tie up one of our lines for a shift to make 500 processors. If we just kept running one of the commodity products, we could make thousands in the same amount of time."
"Yes, but the customers are paying for it," Francine responded. "We're not losing anything by doing a lot of set-ups. We charge every customer the full set-up cost plus margin. We're getting very good prices for the custom processors. The profit per item is at least twice as much as we get from the large-volume ones."
"Let's not get off on a tangent," Randy interjected. "We own the custom market, and I think that strength gives us a real advantage. We're not going to stop taking custom orders, even for a short while. That would kill us. We've established great relationships with most of our customers because of how well we handled their custom products. So we're not discussing whether or not we should be in the custom business. What we need to decide is how are we going to accommodate our product line, and the growth in business, in the short term and then in the long term. What should we do now, and what should we do with our new production facilities to handle our growth? I want us to remain a leader in product quality and reliable delivery."
Ronald Yu, the director of engineering, floated some ideas. "There's some space open at the south end of the plant and in the maintenance shed outside the south entrance. Maybe we could use that space to expand production in the short-term."
"But that's not big enough to put in a full line. And it would take six months to set up a production line there, even if it were big enough," John countered. "Furthermore, we couldn't get the specialized equipment we need that quickly. At best, we would have to buy used equipment or general-purpose off-the-shelf stuff."
Randy closed the meeting with the following request. "Why don't we all go think about this for a while and meet again on Thursday at 8:30. Bring your ideas for what we should do in the short term. And bring me any suggestions you have about what we should do in the new facilities. I would like to have a long-term solution to these problems too."
1. Should Silitech leave either the custom processor business or the larger-volume semi-commodity processor business? Why or why not? What would be the advantages and disadvantages of staying in both?
2. If Silitech maintains its product line (or expands it), what should the company do in the short-term to accommodate the increasing product demand? What marketing actions might be taken? What production actions should be taken?
3. Describe the marketing and operations strategies that Silitech should follow in the long term. Explain and justify your recommendations.
4. Describe the production system you would recommend Silitech develop. What production structure(s) should it use. How might Silitech coordinate and schedule production of its products better?
Copyright 1997, John Wiley & Sons, Inc.