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Chad's Creative Concepts is the brainchild of Thomas Chad. The company is an American designer and manufacturer of wooden furniture for vacation cabins. The company began by manufacturing custom made wooden furniture which was immensely popular and the company garnered a reputation for excellent workmanship and innovative design. As the company expanded, a decision was made to diversify operations by manufacturing standard furniture.
This decision was made because as the company's reputation grew it was able to sell some of its more popular designs to retailers around the region. At the same time, this allowed the company to penetrate a new customer segment that is more price-sensitive. In spite of the relatively high prices of custom made furniture, they still constitute the bulk of customer order because customers are able to choose the type of wood and design they like.
Even though the company is growing rapidly, it is beginning to experience some problems. All of Chad's furniture is manufactured at the same plant using the same equipment, which means that both lines of furniture must compete for the same resources. Since the profit margin and sales volume of custom made furniture is higher, the equipment and labour are shifted towards the manufacture of this furniture, even though the production of standard furniture is scheduled. As a result, the production of standard furniture is slowed down, causing quantities of work in progress to accumulate. Orders take longer to process and manufacture and customers end up waiting longer than promised. In addition, the quality of the standard furniture suffered as a result of shoddy workmanship.
These problems are growing especially acute. Thomas Chad is aware that the production problems need to be overcome. Also, the company does not use much information technology and this puts it at a disadvantage in the long run as IT is a useful tool in helping a business to achieve its goals.
This report examines some of the critical issues at Chad's Creative Concepts. It adopts a holistic view on solving these problems by going beyond the functional areas.
2.0 Main Issues
2.1 Capacity Constraints
Many organizations operate at below their maximum processing capacity, either because there is insufficient demand to completely fill their capacity or as a deliberate policy so that the operation can respond quickly to every new order (Shore, 1994). Often, though, organizations find themselves with some parts of their operation operating below their capacity while other parts are at their capacity ceiling. This is what is happening at Chad's. It is the parts of the operation which are operating at their capacity ceiling which are the capacity constraint for the whole operating.
Decisions made in capacity planning and control affect costs, revenues, working capital, quality, speed, dependability and flexibility performance (Srihan and LaForge, 1994). The first step in the capacity planning and control task is to understand and measure the likely fluctuations in demand and the extent of available capacity in the organization. Forecasting demand is characterized by high levels of uncertainty, whereas measuring capacity is characterized by high levels of complexity.
The most common type of demand fluctuation which operations have to cope with is that due to seasonality. Seasonality affects may different types of operation and can be caused by climatic, economic, social, political and festive factors. Some operations also have shorter-cycle seasonality type fluctuations in demand over a month, week or even on an hourly basis.
The second step of capacity planning and control is to identify the plans for coping with demand fluctuation. The third step in capacity planning and control is deciding which of the approaches to capacity planning are appropriate. Two techniques are useful in this task. The first is cumulative representations, which allow demand and capacity to be compared for feasibility. The second is the queuing theory, which is able to evaluate the consequences of capacity decisions in many queuing type service operations.
At Chad's the capacity constraints are caused by the limited number of employees and equipment. Even though sales are improving, the company maintains the same production workforce which is insufficient to cater to growing demand. The company should consider hiring more employees and buying more equipment.
2.2 Ineffective Supply Chain Management
A supply chain is a strand or chain of operations within an organization's supply network which passes through the organization. Supply chain management is a broad and strategically important concept which includes the entire supply chain from the supply of raw materials, through manufacture, assembly and distribution to the end customer (Nolden, 1987). It includes the strategic and long-term consideration of supply chain management issues as well as the shorter term control of flow throughout the supply chain.
2.3 Poor Quality Control for Standard Line
Good quality control is essential for any organization. A business must ensure the quality and uniformity of its products and services to ensure customer loyalty. While the quality of its custom made furniture is not compromised, the same cannot be said for the standard line of furniture at Chad's. The lack of quality may cost the company potential customers.
2.4 Poor Usage of Information Technology
It is unfortunate that Chad's Creative Concepts has such a low usage of information technology (IT). As pointed out in the case, many businesses have turned towards e-business to gain competitive advantage. Since Thomas Chad is ignorant of the matter, he should find out more information to comprehend just how effective and useful IT can be for a business.
At face value, the problems faced by Chad's Creative Concepts seem to revolve around operations management. However, if we dig deeper, we find other fundamental flaws in the whole business. Hence, while some of the following recommendations serve to solve the problems associated with operations management, others are directed towards overcoming weaknesses in the core business.
3.1 Implement a Just-in-Time (JIT) System
The materials procurement process at Chad's is inefficient, particularly for the standard line of furniture. The overall aim of just-in-time (JIT) operations is to meet demand instantaneously with perfect quality and no waste. It must be stressed however that this is an aim rather than a short term realistic target (Karmakar, 1989). Nevertheless, JIT does aim to produce parts and products just in time for them to be needed by customers and not earlier than they need them nor later than they need them.
The central justification for just in time delivery is that the low inventory levels it produces not only save working capital but also have a significant impact on the ability of an operation to improve its intrinsic efficiency. This leads to a broader definition of JIT which can be seen as an operation's philosophy which attacks all kinds of waste in the operations.
JIT can be seen both as an overall philosophy of operations and also as a collection of tools and methods which supports its aims. As a philosophy, JIT can be summarized as concerning three overlapping elements (Zipkin, 1991). These are the elimination of waste in all its forms, the inclusion of all staff in the operation in its improvement and the idea that all improvement should be on a continuous basis.
3.2 Improve Scheduling
Scheduling involves the timing and coordination of operations. Such activities are fundamental to virtually every organization. Chad's could use Gantt charts to help managers visualize workloads and they are useful for describing and analyzing sequencing alternatives (Stevenson, 1999). In addition, both heuristic and optimizing methods are used to develop loading and sequencing plans.
3.3 Reconfigure the Value Chain
The value chain is defined as a sequence of activities that should contribute more to the ultimate value of the product than to its cost (Atkinson et al, 2007). When value is added in the form of the value chain, it can be utilized to develop Chad's sustainable competitive advantage. All organizations consist of activities that are linked together to develop the value of the business, and together these activities form the organization's value chain. Value chain analysis is a useful tool for companies to identify the key activities within the organization which form the value chain and have the potential of achieving a significant and lasting competitive advantage for Chad's Creative Concepts.
Short term cost advantages can also be obtained by reconfiguring the value chain. This can be done at Chad's by making structural changes in the value chain such making improvements in its capacity utilization, reducing processing time, and enhancing vertical integration. As a result, costs are lowered and value is added (Huff et al, 2009). All these result in lower costs, competitive furniture prices and greater customer satisfaction.
3.4 Maximize the Impact of Information Technology
Chad's has very low utilization in its operations. It should overcome this weakness as the internet has the potential to create new opportunities for it to achieve low cost leadership by allowing it to manage costs and achieve better efficiencies. Transaction costs are greatly lowered through IT. Paperless transactions reduce procurement and other paper costs. Transaction costs can also be lowered by removing intermediaries that add costs. Collaborative design efforts that employer internet technology can link designers, suppliers and customers, thus reducing costs and speeding the process of new ideas generation.
Chad's can go one step further by introducing more applications and e-business. One way this can be done is through the extended value chain by using IT to link the company's own value chain with the value chains of suppliers and customers. As a result, value is added not just through Chad's own value creating activities, but those for its suppliers and customers as well. This is also part of the virtuous business cycle.
However, Chad's should be aware of the pitfalls of using this strategy. The main threat is imitation by competitors, especially when business is done online. This is because many of the advantages related to connecting directly on a real time basis to the customers, such as software can be easily duplicated by others without any real threat of copyright infringement (Dess et al, 2008). Another pitfall is that companies become so enchanted with using the internet to cut costs that they lose sight of the big picture. When one business activity such as cutting costs is given a priority over others, then the whole organization will suffer from lopsided and myopic strategic planning (Timmons and Spinelli, 2009).
3.5 Deleting the Standard Line of Furniture
If Chad's is unable to overcome its production problems, it must seriously consider whether it should continue with the standard furniture line. After all, this range accounts for a mere 40% of volume and 25% of sales. Plus, the profit margin is considerably lower compared with that for custom made furniture. Therefore, the company should consider deleting this line if it proves to be unprofitable.
Ultimately, the decision to determine whether or not to delete the standard line of furniture must be based on sound management accounting principles. It must be remembered that some fixed costs are unavoidable costs and in fact, the contribution earned from an unprofitable division can be used to offset these fixed costs. Therefore, Chad's must determine whether the loss in revenue from the deletion of standard furniture would lead to improved overall profitability.
3.6 Rethinking the Business Model
All businesses have some form of business model. Some take great pains to craft it while others improvise as they go along. However, a business model is the heart and soul of the company for it is what directs all the company's actions. Therefore, Thomas Chad should ask himself, "What is my business model?" Is it to specialize in custom made wooden furniture or to be a manufacturer of all types of wooden furniture? Once, this is clear, the company is than able to formulate its strategies towards achieving this goal. If a company has a haphazard and confused notion of what it stands for, it will not succeed in the long term.
When strategic moves are contemplated by a company, they normally involve some variation of Porter's generic strategies or other approaches. One approach that is increasingly popular now is rethinking the business model. According to a recent survey, nearly 70% of American companies are trying to create innovative business models whereas 98% are in the midst of modifying existing models (Casadesus-Masanell and Ricart, 2011).
Still a majority of these companies view the creation and evaluation of business models as an isolated activity, devoid from how they will impact the business and how they will connect with the business models of rivals (Huff et al, 2009). Consequently, companies fail to achieve their strategic goals. In addition, many companies are oblivious that virtuous business cycles can be created through business models, in the manner of high technology companies like Microsoft, Google and Facebook. Competitive advantage is reinforced when these cycles are aligned with company goals.
When the right choices are made, a company can strengthen the virtuous cycle of its business, transform rivals into complementary enterprises or even weaken rivals (Burns and Mitchell, 2006). This strategy is using business models to gain competitive advantage.
A good business model has three characteristics (Casadesus-Masanell and Ricart, 2011). One, it is aligned with company goals. When designing a business model, the choices made should reflect the outcomes that help a company achieve its targets. Two, it must be self reinforcing. Each of the choices made through a business model must reflect each other. There must be internal consistency. For example, if AirAsia were to decide to provide a level of comfort comparable to that offered by a full fare carrier such as Malaysian Airlines, the change would require reducing the number of seats on each plane and offering food and drinks. These choices would undermine the company's low cost structure and wreck its profits. If there is weak reinforcement, the business model should be tweaked by discarding certain choices and adopting new ones.
Three, a good business model is robust. It must be able to maintain its effectiveness over a long period by shaking off four main threats. They are imitation (whether competitors can replicate the company's business model), holdup (the ability of customers, suppliers or other players to capture the value that is created by taking advantage of their bargaining power), slack (complacency within the company) and substitution (whether alternative products or services can lower the perceived value customers have about the company's products or services). Even though the period of effectiveness is shorter nowadays than it once was, robustness is still a critical parameter.
Based on these criteria, Chad's Creative Concepts should rethink its business model. It must display enough humility to know that all is not perfect and find ways to overcome weaknesses.
3.7 Reinventing the Business
All businesses, even the most successful ones, will inevitably stop growing. There are many reasons why this could happen. A company could stray from its core business activity or stay with it for too long. It may have difficulty in realizing its strategy, or customer tastes could change, or the company could obsessively cut costs just for the sake of cutting costs. As a result, they need to reinvent themselves from time to time (Pearce and Robinson, 2000). The ability to move from a maturity stage of one type of business to the growth stage of another type of business is what separates the long term success stories and the 'one hit' failures.
All businesses undergo what can be described as a financial S curve, which is similar to the product life cycle curve (Nunes and Breene, 2011). This occurs when a company grows slowly at first then experiences a period of rapid growth before facing a period of decline. Most companies focus far too much on one S curve without realizing that they should actually create multiple S curves in order to stay competitive. This means that a company should move from one financial S curve which is its maturity or decline stage to another which is in the growth stage (Atkinson et al, 2007). Such an approach is most prevalent in the mobile phone industry in which companies periodically reinvent their product offering. On the other hand, successful companies like Google seemed stuck in a trap in which it cannot move from its existing business model and strategy, though it is not for want of trying.
To move from one S curve to another, Chad's needs to be aware of some 'hidden' curves (Nunes and Breene, 2011). While this may seem premature for a company that may not even have crossed its first S curve, the company needs to stay ahead of the game and think for the long term. The first is the hidden competition curve. This means that a company's competitors constantly change from the time it was founded to when it achieves peak profitability. Successful companies realize that there are shifts in customer needs and wants and therefore create the next platform for new competition.
The second hidden curve is the capabilities curve. Each successful company has its own sets of capabilities that permit it to succeed at business. These can range from production methods, employment of IT and human resource. Here, it is worth noting that its workforce is an invaluable asset at Chad's. The employees are extremely loyal and show great dedication. There is excellent teamwork and members are free to exchange ideas. The company should build up on this major strength and unleash the full potential of its human capital.
However, the competitive advantage attained from these capabilities is not permanent so companies need to formulate new capabilities to jump on to the next S curve.
The third hidden curve is the talent curve. Many companies make the fatal mistake by not retaining critical talent at a time when it matters most. For example, when companies are approaching their peak, they might opt for a leaner structure and eliminate many employees. As a result, they could lose talented people who might be needed in helping the company move on to its next S curve. Luckily, this is a mistake Chad's avoided making even during the worst times of the financial crisis.
To succeed at reinventing its business, Chad's Creative Concepts needs to balance its short-term and long term thinking. It needs to realize that measures that may be successful in the short term may not necessarily be the best to sustain long term growth. It needs to organize its strategies well to prevent overload. Tasks and responsibilities should be delegated to the extent possible and the company should not overburden top executives as that will impair their strategic thinking abilities.
Business reinvention also calls for taking advantage of surplus talent (Robbins and Judge, 2007). As mentioned earlier, Chad's has a strong workforce of talented and capable people and it is a waste to leave such talent unutilized. All too often, talented individuals feel stifled when they are not allowed to harness their talents and may move to another organization. These people may be the ones who are crucial to the company's ability to move to the next level. For this purpose, employee development programs are essential to bring out the best in everybody.
Chad's Creative Concepts is a growing company that is experiencing growing pains. When it first started out business on a small scale, it faced few problems. However, as it expanded and diversified operations, the company finds itself facing a myriad of problems. From an ineffective business model to poor inventory management, the company finds itself at a critical crossroad, even though it is growing rapidly. To overcome these problems, the company needs to do some soul searching. It must be able to articulate its raison d'etre and formulate its strategy from there.