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Chad's Creative Concepts is a designer and manufacturer of wooden furniture in Ohio, USA. Initially, the company manufactured custom made wooden furniture for vacation cabins, but it later diversified into a standard line of furniture. The rationale for introducing this line was to cater to the needs of price sensitive customers who are unable to afford Chad's custom made furniture. Over the years, the company gained a reputation for its innovative designs and high quality workmanship. Business is brisk and sales are continuously rising.
However, all is not rosy at Chad's, especially for its standard line of furniture. One of the problems it faces is escalating production costs which reduce profit margins. Also, there are numerous problems associated with the production of standard furniture, for instance poor inventory management and inefficient production process. While these problems may not be critical at the moment, if left unattended, they will worsen and affect the company's survival in the long term.
This report outlines some of the key problems faced by Chad's Creative Concepts and outlines suggestions on how to overcome them.
2. KEY PROBLEMS
Clearly, the problems at Chad's Creative Concepts are associated with poor operations management. Indeed, effective operations management would have prevented many of them from occurring or solve them quickly. The discussion here will focus more on the standard line of furniture since the company does not face any serious problem with its custom made furniture.
2.1 Poor Inventory Management
Materials requirement planning is an important aspect of operations management. It should be done in a systematic and accurate manner. However, at Chad's it is done on an ad hoc basis using simple software. This is inadequate for a rapidly growing organization. As a result of poor inventory management, there is a pile up of raw materials, which adds to operating costs in terms of warehousing and lost opportunity cost. The same problem exists for work in progresses or unfinished production.
An efficient inventory system is essential to ensure that too much stock is not held as this would mean too much capital is tied up unnecessarily and increased cost of storage (Drury, 2006). Conversely, there should not be too little stock as this would result in production hold-ups due to insufficient stock. Materials should also be protected against pilferage or deterioration which results in losses. Effective warehousing also ensures that materials can be recovered and issued speedily so that production is not held up. It also enables materials to be located speedily. This in turn requires proper planning of the layout so that no delays to production would arise and that materials can be identified speedily (Das and Junaidah, 2007). Therefore, materials need to be classified and coded properly so that wrong materials are not sent to production.
Inventory investment decisions involve tradeoffs among the conflicting objectives of low inventory investment, good customer service and high resource utilization (Horngren et al, 2000). Benefits of good customer service and high resource utilization may be outweighed by the cost of carrying large inventories, including interest or opportunity costs, storage costs and others. Normally, order quantity decisions result in a tradeoff between the cost of holding inventories and the combined cost of ordering, setup, transportation and purchased materials.
2.2 Poor Scheduling
Even though the sales volume of standard furniture has been increasing steadily, the main source of the company's revenue and profit is its custom made furniture which typically accounts for 60% of turnover and 75% of income. The equipment in the factory is used for all manufacturing so there is often a trade off between manufacturing standard furniture and custom made furniture as both have to compete for processing time. As a result, the production slots scheduled for standard furniture pieces were reduced, since it is a less profitable line and many incomplete furniture pieces were left sitting around the plant in various stages of completion.
As a result of poor scheduling, the manufacturing process takes a longer time, thus contributing to a longer lead time. Consequently, the delivery time is stretched which means that customers have to wait longer to receive their orders. This is bad for the company's reputation and will affect it in the long run if customers tire from waiting for too long and opt to competitors' products. In addition, poor scheduling contributes to bottlenecks and delays in production, which will be discussed in the next section.
2.3 Poor Capacity Planning
The production capacity at Chad's has reached its limit and there is no room for the company to grow further, which will constraint the company's expansion plans in future. Long-term capacity planning is crucial to an organization's success because it often involves large investments in facilities and equipment and because such decisions are not easily reversed. Capacity can be stated in terms of either input or output measures (Krajewski and Ritzman, 2002). Output measures giving the number of products or services completed in a time period are useful when a firm provides standardized products or services. However, a statement of the number of customized products or services completed in a time period is meaningless, because the work content per unit varies. Demand for customized products and services must be translated into input measures, such as labour hours, machine hours and material requirements.
Operating at peak capacity calls for extraordinary effort, using marginal production methods that usually is not sustainable. Maximum output under normal conditions is called effective capacity. The operation having the lowest effective capacity is called a bottleneck and limits the capacity of the entire system (Das and Junaidah, 2007).
2.4 Quality Issues
Quality is a perennial problem in a manufacturing organization. When there are few products manufactured with standardized production runs, it is much easier to manage quality. At Chad's, the main concern is the quality of its standard furniture which suffers as a result of equipment and labour being focused on the manufacture of custom made goods. The quality of a product is an abstract concept which can be best explained by the customer driven definition of quality. Accordingly, quality is defined as the ability of the firm to meet and possibly exceed customer expectations (Jacoby et al, 1971). This can be examined from a number of angles.
First, quality consists of the ability to conform to specification (Kalonsky, 1990). All businesses advertise their products or services to contain certain features and customers expect the actual product or service to conform to these claims. For example, Duracell batteries claim to have longer lives than other brands so customers will expect this of the company.
Second, the product or service must have value. This refers to the ability of the product or service to perform its intended purpose for the price that is willing to be paid by customers, and is largely influenced by preconceptions customers have before actually purchasing the product (Kalonski, 1990). For example, if a customer pays RM1.50 for a ballpoint pen that does not blot and can be used for almost a year, then the product is perceived as being of superior quality as prior expectations have been exceeded. However, if the pen were to spoil after one day, then the customer would be disappointed.
The manufacturer is constantly worried about having poor quality. The costs of having poor quality are high. They include prevention costs that are avoidable if the production process was more effective (Horngren et al, 2000). The second type of costs is appraisal cost which is the costs that are spent determining the quality level of production. The third type is internal failure costs. These are costs that result from defects discovered during the production process, while the fourth type of costs is external failure costs (Atkinson et al 2007). These are costs that take place when defects are discovered after purchases are made by customers. Finally, some products come with warranties which tend to escalate when quality is low.
2.5 Under-Utilization of Information Technology
Information technology is a vital component to the success of any organization. However, Chad's employs the most basic of IT functions. IT is used in a very limited way and this is unfortunate because effective usage of IT has the potential to give the company a competitive advantage. For example, IT can be harnessed to promote e-commerce and to improve the manufacturing process and supply chain. While the top management is aware of this major shortcoming, nothing has been done so far to remedy the situation.
The following recommendations are proposed to overcome the various problems at Chad's Creative Concepts.
3.1 Improved Process Management
Process management deals with how to make a product or service. Many choices must be made concerning the best mix of human resources, equipment and materials. Many of the problems at Chad's arise from poor process management. Process management is of strategic importance and is closely linked to a firm's long term success. It involves the selection of inputs, operations, work flows and methods used to produce goods and services (Kalonsky, 1990).
Focusing operations avoids confusion among competitive priorities, process choices and technologies. This is much needed because the custom made furniture is given priority over the standard line. Focused facilities, plants within plants and cells are ways to achieve focus at Chad's. Three basic techniques for analyzing process activities and flows are flow diagrams, process charts and simulations (Shapiro, 1997). These are ways to organize the detailed study of process components.
Alternatively, the company can use process reengineering. Process reengineering uses cross functional teams to rethink the design of critical processes. This is used to overcome weaknesses in the current production process for standard furniture to improve yield, prevent bottlenecks and facilitate the timely production of products. Process improvement is a systematic analysis of activities and flows that occur continuously.
3.2 Improved Layout Design
Another solution to overcome the problems at Chad's is improved layout design. Layout designs go beyond placement of economic activity centres. Equally important are which centres to include, how much space they need and how to configure the space. The effect of a layout on people is particularly apparent in offices. Layout affects productivity and the quality of work life.
In product layouts, workstations are arranged in a somewhat naturally occurring, common sense sequence as required for high volume production of only one product or a family of products (Krajewski and Ritzman, 2002). Because the physical arrangement is determined by the product's design, management concerns become line balance, pacing, behavior, number of models and cycle time.
Designing a process layout involves gathering the necessary information, developing an acceptable block plan and translating the block plan into a detailed layout. Information needed for process layouts include space requirements by centre, available space, the block plan for existing layouts, closeness ratings and performance criteria relating to absolute location concerns.
3.3 Inventory Management
Clearly one of the main problems at Chad's is poor inventory management. To overcome it, the company could use the economic order quantity (EOQ) concept. The EOQ is used to determine how much material should be ordered. It is the quantity which is most economic to order.
The EOQ enables users to arrive at the order size that will minimize the total cost of stock which include carrying and holding costs. EOQ also attempts to eliminate stock-outs. Stock-outs happen because of delays in receiving orders. Cost of stock-out or running short of stock include loss of sales and customer goodwill as well as disruptions in production. Thus a firm may carry additional stock or safety stock (Daniels et al, 2007), which is precisely what happened at Chad's. Safety stock increases the average stock held and thus increases the carrying costs. A firm may also increase its order to take advantage of quality discounts. Discounts will reduce the purchase price but may increase the total inventory cost. When the order quantity increases, the carrying cost will increase while ordering costs will decrease. Therefore, managers at Chad's must compare the savings due to decrease in purchase price with the increase in total inventory cost.
3.4 Just-in-Time (JIT)
A key concern at Chad's is excessive stock pile up. Another way of overcoming massive stock pileup is to implement a Just-in-Time (JIT) system. JIT requires the precise scheduling of raw materials and sub-assembly purchasing, production or supply planning, manufacturing, physical distribution and delivery to the customer (Silver, 1996). Orders will only be manufactured or supplied once they have been received.
The basic philosophy underlying JIT is that materials should be delivered to the factory just in time to be used. Production or processing should be completed just in time for the goods to be sold or delivered to the customer. Physical distribution systems should be sufficiently sensitive and flexible to permit a JIT response to meeting customer demand, minimizing inventory levels held throughout the channel of distribution but avoiding the incidence of stock-outs.
The many benefits of having a JIT system include low processing time, less rework needed and reduction in stockholding costs. There is also reduction in waste, scrap and defective items and manufacturing lead time, throughput time and set-up times are reduced (Drury, 2006). Efficiency and productivity are increased, administrative expenses are reduced as is investment in inventories. Since inventory is reduced, floor space is saved and there is quality control.
3.5 Effective Supply Chain Management
Manufacturers do not operate in isolation as they rely on a multitude of suppliers. Supply chain management serves to control inventory by managing the flow of materials that create it. Three main categories of inventories are raw materials, work-in-progress and finished goods (Fisher, 1997). An important aspect of supply chain management is materials management which coordinates the firm's purchasing, production control and distribution functions.
A supply chain is a set of linkages among suppliers of materials and services that span the transformation of raw materials into products and services and delivers them to the firm's customers. Supply chains can be very complicated, involving thousands of firms at various tiers in the chain. Both service providers and manufacturers have supply chains to manage.
The supply chain is critical for the success of any organization. One way of having effective supply chain management at Chad's is developing an integrated supply chain. This links purchasing, production and distribution to create an internal supply chain that is the responsibility of a materials management department (Sawhney, 2001). Then, they link suppliers and customers, and external supply chain to the internal supply chain to form an integrated supply chain.
The internet has dramatically changed the way companies can manage their supply chain. The order placement processes can be reengineered to allow for more customer involvement and less employee involvement, to remain open for business 24 hours a day and to enable the firm to use pricing as a means to control for material or product shortages (Troy, 2003). Designing the order fulfillment process involves decisions regarding the postponement of customization until the last possible moment, forward placement of inventories and final assembly of orders in the distribution channel.
Electronic purchasing is changing the way many firms are handling the purchasing function. Electronic data interchange (EDI) has been used for some years. It is now more accessible through the internet and will enable firms to include more suppliers in their supply chains. Catalog hubs, exchanges and auctions are among the latest innovations brought on by the internet (Werner et al, 2004).
3.6 Utilizing Information Technology
Innovation and technological change is a primary source of productivity improvement and a driver of global competition. Organizations more experienced at adapting to changing technologies tend to enjoy stronger competitive positions worldwide. Managing technology in the production process at Chad's is important because technologies are involved in all the processes along a firm's supply chain and in each of the firm's functional areas (Berry et al, 2002).
One key area in the manufacturing process is research and development (R & D), although this is often overlooked. R & D creates and applies new technologies, leading to better products, services and processes (Afuah, 2002). For example, R & D could be used to come up with new furniture design, test the structural strength of existing designs, come up with better processes or even manufacturing equipment. Apple invests heavily in R&D and this contributes to its success. The question is whether Chad's is capable of having its own R & D. Basic research is performed more in labs by government agencies, some large firms and universities. Applied research and development are performed by many firms, even small ones, so there is no reason why Chad's should not have its own R & D department.
How technology is acquired is an implementation issue. Instead of performing the R & D itself, Chad could gain access to new technology from others through research grants, licenses, alliances, outside suppliers or the acquisition of another firm.
3.7 Total Quality Management (TQM)
Product quality is a concern for Chad's. Due to problems in the production process, the quality of its standard furniture falls below expectations. This is unacceptable. One solution is to implement Total Quality Management (TQM). TQM is characterized by manufacturing at 100% quality specification with zero defects with the objective of seeking to obtain total customer satisfaction with zero customer complaints (Berry et al, 2002). There is also the widespread diffusion of corporate values based upon customer orientation and customer care.
The implementation of TQM has a number of important benefits including improving the marketability of the product and enhancing brand image (Carpenter et al, 1994). Waste is also cut or eliminated through the improvement of the use of resources and cost reduction. The cost of inspection is also reduced and quality assurance activities are allowed to concentrate on bought-in items. TQM can also motivate the workforce and the channels of distribution as they will see the clear commitment of the enterprise to marketing and operations management that is characterized by professionalism and excellence (David, 2009).
Chad's Creative Concepts is a thriving company but it has many problems in operations management. These problems range from poor inventory management, poor scheduling, quality issues and under-utilization of information technology. They need to be addressed seriously of the firm wishes to achieve sustained growth in the long run. Some of the key recommendations to overcome these problems include implementing effective process management, improved layout design, effective supply chain management and inventory management as well as utilization of information technology. It is believed that the implementation of these recommendations will contribute to overcoming these problems and lead to long term organizational success.