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Operational Strategy Case document sample
Operational Strategy Case document sample
Operational Strategy: Balancing Planning and Control Vish V. Krishnan The University of Texas at Austin Recapping from Last Class • Coordination across functions and business units is a major challenge. – Creating incentive compatibilities is key. – Minimizing incentive incompatibilities essential for smoother functioning. • Firms organize themselves to minimize transaction costs. – Markets motivate, Hierarchies coordinate. • Double marginalization is the phenomenon under which profits in a vertically integrated firm is higher than the combined profit of unbundled firms (with monopoloy power). • Transaction characteristics, Value chain profit patterns, and Channel structures should influence scope decisions. 2 Profits in a Vertically Integrated Company p Marginal Cost = $30,000 100,000 Marginal Revenue = 100,000-1000q demand 100,000-1000 q*= $30,000 curve q* = 70 p* = $65,000 Maximum Profit = 70* (35,000) = $2,450,000 30,000 Marginal Cost = $20,000 + ps Marginal Revenue = 100,000-1000q q 100,000-1000 q*= $20,000 + ps 200 80,000-1000 q*= ps Marginal Cost = $10,000 Marginal Revenue = 80,000-2000q Marginal Cost = $65,000 80,000-2000 q*= $10,000 q* = 35 q*= 35 p* = $82,500 ps = $45,000 Maximum Profit = 35* (17,500) Newco’s Profit = 35*35,000 = $1,225,000 = $ 612,500 Total System Profit = SepCo’s Profit + NewCo’s Profit = 1,837,500 < $2.45 million 3 Double Marginalization in the Microsoft Case Excerpts from "An Expensive Pig in the Poke: Estimating the Cost of the District Court’s Proposed Breakup of Microsoft”, 9/21/00. Stan Liebowitz , Professor of Economics , University of Texas at Dallas. "“ • There are several reasons to believe that the price of Windows would rise. As has been noted in a declaration by the government’s expert Carl Shapiro, and in an Amici brief by Litan, Noll, Nordhous and Scherer, there is a well-known problem that economists refer to as double marginalization. The double marginalization problem occurs when two firms, each with market power, produce complementary products. Each firm attempts to charge a markup that would maximize its profits, taking the other firm’s markup as given, and in so doing the price for the two combined goods contains a higher markup than if a single firm had set a profit maximizing markup for the two goods jointly. Thus, if one believes that both the AppCo and the OpCo will have market power, prices after the breakup would be expected to increase." [at pages 3-4.] "A detailed analysis of Microsoft’s pricing clearly demonstrates that Microsoft’s behavior in application markets can be classified as that of a price cutter, or a firm following a low-price strategy. After the breakup, new leadership will exist in one or both companies and each will have to choose a pricing strategy. It is impossible to know in advance what pricing strategies will be adopted by these companies. Although it is possible that both the OpCo and AppCo will follow the same type of low price strategy used by Microsoft, it is likely that at least one, and perhaps both companies, will adopt a different, higher-price strategy, perhaps due in part to the double marginalization factor mentioned earlier." [at page 10.] 4 Roadmap for the Day 1. Discussion of the Goal 2. Push and Pull Control Systems 3. Toyota Case Discussion 4. Review of other Operational Items • Robust Quality • Time Pacing 5 Principles of The Goal: Jonah’s Wisdom Maximize throughput while simultaneously reducing inventory and operating expenses. Learning Objectives • Performance Measures From The Goal • Managing Bottlenecks: Setups, Lot sizes • Managing Uncertainties, Statistical Fluctuations • Revising Cost Accounting Concepts... From Firm Level To The Plant Level... “The Goal of a firm is, of course, to make money” Language of Processes Language of Money The goal is translated to the plant level using the three performance measures (listed in the order of importance): 1) Throughput 2) Inventory 3) Operating Expenses These objectives must not be considered in an isolated fashion - they must be considered jointly. The Goal and Sub-Optimal Decision Making • Decisions in companies are often sub-optimal. – Sales chooses to sell products that maximizes commissions – Marketing/Manufacturing may be interested in maximizing gross margin per unit. • The product mix that maximizes profit may be different from the above. – Product takes more time on a bottleneck. – Product is more complex to design. Conventional Cost Accounting Vs Goal Issues raised by Goal regards Cost Accounting • • A B 1 min./part 2 min./part 10 min. setup 10 min. setup Consider how cost-accounting evaluate the reduction in batch size on A: • Batch size, Q =100 • Q=10 Marginal Value of Time on Various Resources • Marginal value of time on a non-bottleneck is ---- • Marginal value of time on a bottleneck resource = • Activation and utilization are not one and the same. • Lot size calculated using economic order quantity idea overestimates value of time on non-bottlenecks. – economic order quantity helps determine the optimal batch size given setup times and inventory carrying costs. Bottleneck Management • By now, we know the enormous significance of bottlenecks. What are some ways to detect a bottleneck? – – – – – Getting More Out of a Bottleneck • What are various ways, identified by The Goal to manage bottlenecks effectively? 12 Impact of Uncertainty on a Production Line • Fluctuations accumulate on the negative side instead of canceling out. – Remember the boy-scout line – The Goal calls it “Dependent Events” • A balanced line creates a managerial nightmare. – Queues build up. – Bottleneck shifts. 13 Takeaways From The Goal 1. Identify the system constraint(s) 2. Decide how to exploit the system constraint(s) 3. Subordinate everything else to the system constraint 4. Elevate the system constraint 5. Do not allow inertia to become the primary system constraint Balancing Planning and Control in Production Stockless Production at Hewlett-Packard • From the HP video, you see that the process is as follows: Raw Gus Terry Mark Dave Materials (Packaging) (Dave) Push(6) Pull(3) Pull(1) Space 2 tables 2 tables 1 table WIP 30 units 12 units 4units Does Pull (1) dominate other systems? Cycle 3:17 min. 1:40 min. 0:19 min. Time* Rework 26 units 10 units 3 units Quantity Quality Hidden Visible Visible Problems PUSH AND PULL CONTROL STRATEGIES Two basic control strategies: Push and Pull When does a server work? PUSH PULL anticipating future demand reacting to current demand forecast demand and produce to replace the then produce to meet that number of units withdrawn estimated future demand from the downstream buffer Demand Forecast PUSH A B PULL (1) A 1 B 1 Virtues of Pull Control • Tightly linked production system; Low safety nets – Low inventory – Low wastage of space and materials • Quality problems low due to immediate feedback. Problems bubble up to the top. • Cycle time lower in a Pull system • What capabilities do you need to run a system like this? • Embodied in Just-in-Time Production System Just-in-Time Systems: Sailing Metaphor Water level represents inventory level When water level is high, ship can sail smoothly. But problems (rocks) are hidden. Only lowering the water level (reducing the buffer size) exposes the rocks. The Toyota Production System (TPS) • What was the historical context in the late 1940’s when Toyota began working on TPS? – – • The key objective of TPS: Elimination of Waste (muda) • Elements of TPS: • Jidoka and Kaizen: • Just in Time • Heijunka 20 How Toyota Implements/Transplants TPS? • At its heart, TPS is a Pull system (which is reactive, does not plan). • How does Toyota implement TPS? – Is there no inventory in the plant? – Is there no planning? – How long is the line shut down normally? • How did Toyota transplant TPS? • The operating word to describe Toyota is “pragmatic”. 21 The Seat Problem • What is the seat problem? – – – – • The key dilemma in solving the seat problem • Cost of stopping the line versus veering away from TPS 22 Quantifying the Dilemma • What is roughly the cost of stopping the line? – Lost sales? – Overtime - entire plant? – Overtime parts of the plant • What is the cost of not stopping the line? – Can it be quantified?! 23 Recommendations to Doug Friezen... • How should the seat problem be solved pragmatically/smartly?! –Immediate term –Medium Term –Long term 24 What Toyota Did • Doug Friesen formed a team that did a 5-Why’s exercises on the seat problem. Discovered that: – Seat reordering form was illegible to supplier. – Supplier plant conditions needed changes (poor lighting etc.) – Product needed redesign for manufacturing. • To resolve the problem, Toyota – Installed poster boards on the overflow area that displayed the number of cars in the area. – Set itself goals to gradually reduce the overflow area size to zero. If the size went beyond the goal, an andon-like action was triggered. – Sent a Toyota team to the supplier to help them make production changes (involve workers more deeply in the process), streamline Toyota’s interaction (ordering form), and redesigned the seat for optimum production. • As a consequence of these actions, the seat problem was largely solved in the next few months, but product variety was continuing to pose challenges in the plant in other areas. Lean Production • The Toyota case exemplifies the workings of a lean enterprise - a term coined by MIT’s International Motor Vehicle Program (IMVP), and described in the book “The Machine that Changed the World” • The thesis of IMVP is that production management policies are key determinants of plant operating performance. Plants that are lean are capable of simultaneously achieving quality, productivity, and variety (“mix complexity”) much more easily than non-lean (buffered) plants. – A lean enterprise is characterized by low (but not zero) inventory levels, quality as a part of the process, and broad spans of worker control. – Geographic location of the plant does not influence a plant’s performance as much as its corporate parentage and its management. – In the absence of management infrastructure, technology seems to have little effect on operating performance. A well-trained flexible work force, product designs that are easy to build, and a high performance supplier network are far more important. Where the Field is Currently: • Performance variations among global firms in the automotive industry have substantially narrowed. – World-class firms take about 11-15 hours to assemble (per vehicle). – Product development cycle time down to 18-36 months. • Flexibility and variety are becoming increasingly important. Leanness + Flexibility is being called Agility. – The key is to plan for variety carefully, and maximize differentiation while containing component proliferation. • Some recent observations suggest that there are limits to leanness [Cusumano, 95, SMR]. – Pushed too far, a lean enterprise may become fragile! – Striking a balance continues to require fine judgement, and is an eternal challenge!! TPS Takeaways • Leanness: Elimination of Waste – Jidoka, Heijunka (flexibility) – Tight link between production and detection • Implementation is very pragmatic – Planning and forecasting present – Opportunity for recovery – Exception handling – Line does not stop very long • Applications to Other Domains – Services – Software 28 TPS Takeaways • Appropriate Technology Utilization • Leanness: Elimination of Waste – Jidoka, Heijunka (flexibility) – Tight link between production and detection • Implementation is very pragmatic – Planning and forecasting present – Opportunity for recovery – Exception handling – Line does not stop very long • Applications to Other Domains – Services – Software 29 Key Takeaways • The choice between Push and Pull is a false choice. What managers need is a blend of Push and Pull to take advantage of the planning capabilities of Push and the excellent control capabilities of Pull. – Use planning for long lead time items, deciding buffer sizes, managing transitions&changes – Use Pull for normal production of one particular product in set volumes Toyota illustrates how to pragmatically combine planning and control • Entire line does not stop for each andon pull • Line segments are buffered from each other (with small size buffers) • Close communication with suppliers about plans. • Immediate problem resolution and prevention. Introduction to Quality AGENDA Different Dimensions of “Quality” and Competing On Them Total Quality Management Re-Engineering Old-Fashioned Product Design Attitude • Design product for maximum performance. – Producibility is unknown until after launch. – Design can be modified after launch to make it producible. • If you can build one prototype, you can easily build 1000’s • Product quality is manufacturing’s job. • What are the problems with the old attitude? – Does design have impact on quality? – 32 One of the difficulties: Tolerances! • How tolerances evolved? – Because it is very difficult to make parts consistently to the same dimension and because we don’t want to throw away many parts that exhibit only a minor deviation from the target dimension, a tolerance window was specified within which products could lie without being thrown away. – The tolerance window was merely being tolerated, the desire was to make parts to the target dimension. Over time, this idea degenerated and the general impression in the shop floor was that the goal is to be within the tolerance window. – Sony plant in San Diego and Tokyo 33 Get As Close to Target As Possible • Taguchi’s main argument : the customer hardly cares about whether a product falls just outside or inside the tolerance window. – “Customers do not give a hang about staying in spec… For customers, the proof of a product’s quality is in its performance when rapped, overloaded, dropped, splashed. You gain nothing in shipping a product that barely satisfies corporate standards over one that just fails…” – In other words, a firm must strive to set good, robust targets and get as close to this target as possible. Taguchi’s solution: The Notion of Quality Loss 34 Quality Loss • The costs of a product’s failure in the field (“external failure”) are much greater than fixing it in-house or even preventing failure altogether. • For assembled products, failure often arises from tolerance stack-ups. – Even when individual components are within the tolerance limits, subassemblies fall out of tolerance due to stack-up of tolerance limits. Taguchi’s Quality loss functions penalize all deviations from target values including those within the tolerance limits. 35 Quality Loss Function Conventional View of Quality Loss Taguchi’s Quality Loss Function Lower Target Upper Tolerance Tolerance Limit Limit 36 Not all Deviations from Target are Equal • Who’s the Better Shot: Sam or John? Sam John Consistent deviations (such as that of Sam’s) can be much more easily adjusted to target than scattered deviations. –“There is much higher probability of catastrophic stack-up from random/scattered deviations than from deviations that show consistency” 37 Setting Targets • While the shop-floor should be focused on getting as close to the target as possible, it is impossible to always keep deviations to zero. • Designers should ensure targets are set such that deviations from them do not lead to large performance fluctuations. “Design Quality in” Performance Design Parameter Values 38 Robust Design • Robustness is the property of a product to function under a variety of operating conditions. – Even amidst uncontrollable disturbances in the shop floor, and in the customer's environment. – These uncontrollable disturbances coming from outside are called noise. . • What the customer wants from the product is highsignal despite noise. A robust product has a high signal to noise ratio 39 Lessons Learned • Lessons from the Goal: Translating financial measures into operational measures, prioritized problem-solving. • Toyota System in Action: Pragmatic Implementation; Balancing planning and control; Holistic thinking. • Design has huge impact on quality (Taguchi’s main contribution). – Make sure strong, robust designs enter the factory floor. – Ensure parameter target values are set so as to maximize robustness – Tolerances are merely being tolerated; Customers want the product to be closer to target. Seek to get as close to target as possible • Questions: How does Re-engineering and TQM fit in this picture? • Challenges in Mass Customization. The National Bicycle case.
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