Terry Hill's framework: Corporate objectives

Friction materials is enjoying a new lease of life as seen by their ability to make substantial profit partly due to the renaissance of the motorbike (scooter) as a source of transportation by the middle aged. Thus the corporate objectives are:

• Gain market share in the OE market through manufacture and supply of DBP in 2 years.
• Entering the Far East market as a Long Term Strategy to increase profitability and to wrestle for International Market Share in 3 years
• Superior Product Performer thereby securing the contract on a Long term Basis
• Improve Research and Development for the OEM for incremental business.
• Increase ROCE to 30% 3 years.
• Increase Profit Margin to 30% in 3 years.
• Increase ROI to 40% in 3 years.

Order Winners and Qualifiers Criteria

Discussion of the Criteria and the Implication for Operations

BRAND IMAGE

This is true for the motorcycle manufacturing company as demonstrated by their attention to detail and their strong Quality Policy and culture. It is therefore pertinent for Friction materials to maintain their already lofty heights of Quality to be able to tap into the sea of opportunities of OEM.

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For the AM, it is a guide to the potential customers of the qualities attached to the brand. With a Quality rating in the industry, the brand image does help win some of the customers over to the product range.

For the SM, Brand Image could play a role in the choice of the DBP because the customers may want the best quality DBP for their automobiles which would help in marketing (word of mouth). This is a strong basis for our core competency being retained rather than outsource.

COST

For the OEM, Cost is the major order winner here as the company has to be highly competitive on cost to ward off potential competitors from the market. But with the prospect of Research and Development for new ways of making DBP, Friction Materials would be able to charge pre

For the AM, Cost is highly competitive as well. The company must be able to get DBP to the market at affordable prices as the company has to be highly competitive on cost to ward off potential competitors from the market.

For the SM. Cost is not competitive and almost not relevant. The cost of the DBP should be reasonable enough and not charge ridiculous amounts though the customer is willing to pay for the value of the DBP.

Q & QQ

QQ: Performance quality flexibility in design dependability and volume are sensitive order qualifiers such that a drop in one of the characteristic specification could cost them the order. These criteria are key to their winning over the OE market thus we have a QQ which denotes (order loser). On the long run (3 years on) some of the values would change because Friction would have acquired a certain volume of market share and the direction of the market would tend to shift. For instance with a breakthrough in R&D, the value of design flexibility and cost would change. This signifies that

For design flexibility, it would be a new order winner, a display of our competency and thus they would be able to charge premium price, or at least increase the price of supply.

Cost would be a dominant order winner as competitors would seek to drive down cost hence stiff competition.

On the other hand, Q is not as sensitive as QQ. You would not lose the order if you cannot meet the demand. For Instance the durability of the DBP is a qualifier because it must be able to perform for a period of time but not too long to be considered absurd. 2 years is good but no one would want to design DBP for 10 years so if the life span of 2 years is attained then it is fine.

For instance delivery speed is not required as you would have agreed to sign the deal to deliver at an agreed period failing which you would be fined.

MARKETING STRATEGY

SWOT Analysis

Strengths

Credible supplier network

Modern managerial input

Good debtor to creditor days

Good current Ratio; indicates cash flow

Ability to expand current location

Centralized location to market and to ports for export

Fully depreciated machine cost, hence they machine cost £0

Skilled Labour force as can be seen in Specialist Manufacture

Brand Image recognition for quality

Close relationship with the tool specialist fabricators.

Weakness

Inventory levels

Friction between top management (cronton and whitson)

Long changeover period on press machine

Poor personnel management

Poor use of work packages leading to unused raw materials

Underutilization of MRPII systems

Inability to do online payment

Poor space utilization

Over reliance on entry into OE market

Opportunity

Potential global leader in OEM

Local sourcing of materials (when they gain social status)

DBP direct supplier to industry manufacturer’s thus increasing market share

Expansion of production range

Threat

Competitive Labour Market

Stiff competition from the Far East

Potential Environmental threat on noise and waste disposal

MARKETING STRATEGY

Expansion of Market channeled to an increase in both local and global supplies of DBP.

Revolutionize the OEM to a Quality competitive market based on cost management.

Improve Research and Development capabilities

After sales customer feedback as a way of getting closer to the customer and improving on quality and performance.

MANUFACTURING STRATEGY

VERTICAL INTEGRATION

This is the level of incorporation in a supply chain for the various stages of the supply process. It could be forward or backward integration. A vertical integration could be to bolster the technological front based on competition or for to emerging markets.

Make / Buy: The make or buy analysis is a strategic analysis that helps top management to decide what they want to produce, what they want to stop producing or what they want to outsource to a third party. In practice, core competence is not outsourced because that is the uniqueness of the product; if you let it go, you could just be setting up future competition for your company.

The various decisions taken and the reason are as follows;

For the supply of raw materials; a single supplier was preferred. This would prevent re-testing for the quality of the supplied materials as the testing phase takes a couple of weeks to get the right mix for the required braking performance. This would increase lead time and consequently reduce the ability to deliver on time. It also helps reduce the variation in quality that could arise from multiple sourcing

For the mixing operation, that is the core competence and could be detrimental to the growth and the corporate objectives of the company.

For the Press Operation, the Press tool manufacture is done by a local specialist firm. This could lead to delays in taking up the tool fabrication hence building up lead times for the OEM. When the design team finishes the design, they would have to wait for the Press fabricators to be available to work. Communication gap is also a threat to the smooth running of the design of the tool for the OEM. The specialist firm is also prone to take over by large BP manufacturers who are direct competitors and once competitive advantage is lost to them, it affects the market share of the OE and consequently the ability for Friction Materials to compete. Thus the decision is to Vertically Integrate the Local Specialist; this helps build competitive advantage in the OE market.

For the baking operation, it would be kept in house. Outsourcing baking increases the time the operation takes; from 3 hours to a potential 5-6 hours. The cost of transport, labor and the payment of the operation together with the time trade-off make it very complicated and unsuitable for outsourcing. The chemical properties of the brakes at high temperatures could be altered during transportation and thus could lead to a failure in testing which results in the company losing the order. It is therefore a critical operation in-house and not outside.

For the machining operation, the decision is to be kept in house. This is because an automated 100% dimensional check is required after machining. If you machine in house, there is a greater chance of achieving that accuracy than to outsource to a specialist that could be overlook little details that could lead to test failure. Since the machines are running at full capacity, an extra machine is required for the OEM manufacture. The machine would be second hand quality as accustomed to the company. The fully depreciated machines make extra budget available for this purchase and would in no time be fully depreciated as well. Thus we practically are paying less to do more.

For the painting, the operation would be carried out in house. The reason is to be in control of the goods produced. Also the painting operation is a low skilled task hence a contract staff could be employed for the sole aim of painting. This helps specialization on the long run and reduces costs due to transportation and material handling. It also reduces labor cost as the company is only bound by the contractual agreement without benefits.

For the packaging, the short term objective would be to continue in-house but re-brand the lot size so as to accommodate more DBP. This reduces the burden of having to pack several hundred of DBP at any time. The lot sizes could be increased and standardized as there is no obligation to supply with the current range of boxes but simplifies the current packaging operation. This helps reduce the number of boxes supplied for packaging and hence the time and cost of transportation and material handling.

However the long term plan would be to source for a packing company that would agree to package as close to our production site as possible. This helps free up space for increased production and other value added work.

FACILITIES

The design of the operation would take into consideration the item to be produced, vary the different possible ways to produce it and come up with the best and most efficient way of producing it. The characteristic of the operation is determined by the 4 V”s

VOLUME

HIGH

LOW

HIGH

LOW

VARIETY

LOW

HIGH

VARIATION

LOW

HIGH

VISIBILITY

The OE market involves long production runs with product specification and low variety, there is need to implement a high volume low variety manufacturing process which is the category of the OE market.

Volume: This is the production capacity within a particular time frame. The volume is set prior to production in order to plan for capacity. The current forecast of 150,000 in the first year is a high volume compared to the normal few hundreds that are currently produced. Therefore it is a high volume process operation and adequate capacity should be provided as required.

Variety: this can be described as the different combinations of products that a production process can accommodate. There is limited variation in the demand of DBP for the OEM due to the standardized requirements. Basic changes can be made in the design but it is practically the same spine and technology that is used. This depicts a low variety production.

Variation in Demand: This is the ability of the production process to change with little notice to the forces of demand and supply or product design and specification. Orders are requested a year prior to production thus a stable demand profile which makes effective capacity utilization probable. Therefore it is a low variation demand production.

Visibility or Customer Interaction: this could be described as the level of participation of the customer in the production process. The ultimate goal of any production of the process is to satisfy the customer. Since the customer is not expected to be at the factory every time, we settle for a low visibility production process. This has no bearing on the type or quality of DBP produced as the company would be ratified fit for the production of the OEM before proper production can commence.

Location

The current location of Lutterworth is perceived as a central location both to the potential and to the international market. The town has a rich history of manufacturing work and is in a central location for transportation of finished goods and raw materials and assess to the factory very easy. It is also close to a large motorcycle manufacturer who is the potential customer. This is an ideal location for a growing company and the rate of development could become attractive for immigrants due to the emerging facilities.

TECHNOLOGY

Product Profiling

The product profiling approach is an analysis understands the requirements for production and the characteristics available for each process to meet production specification. A comparative analysis helps in process choice the layout structure to adopt.

Original Equipment Manufacture would be done through the batch production process. The process type helps utilize the standardized production format due to low variety. It also helps improve the efficiency of production and spreads the overhead costs over more units.

The Specialist Manufacture is a jobbing type process while the Aftermarket production is Batch Production therefore if we go for a flow line production process; it would impede our production process. Thus if for OEM, a flow line is chosen then Specialist Manufacture must be outsourced to compensate for the complexity of the production process. However the Specialist manufacture is the core competence of Friction Materials and to let go of it would be synonymous to throwing your market share away. If a competitor comes by and vertically integrates that section of your company, then there is a potential buy-out of Friction Materials.

Therefore it was sensible to use a flexible Bach production process currently which could move into a flow production process with enough investment to justify the resources required to change it.

Process Choice

Project

SPECIALIST PARTS

AFTER MARKET

Jobbing

ORIGINAL EQUIPMENT

Batch

Line

Continuous

High

Volume

Low

Alex and Terry Hill 2009

Volume

High

Low

Low

High

Low

Variety

Fixed Position

Process

Cell

Feasible Flow

Product

High

High

Low

Regular Flow

Dr Watt 2010

However, for a long-term capacity planning, investment decision and availability of funds could make OEM be more flow line suited. This occurs when there is a huge volume to justify the investment and good forecast of an emerging market hence a growing demand and a comfortable market share to control. The OEM batch process tends towards the flow line production section.

Process Choice

SPECIALIST PARTS

Project

AFTER MARKET

Jobbing

ORIGINAL EQUIPMENT

Batch

OEM

Line

Continuous

High

Volume

Low

Alex and Terry Hill 2009

CAPACITY

A capacity strategy is a review of how the personnel would work effectively with the resources and machinery available. For the OEM, there is a predictable demand known a year prior to production, hence a level capacity strategy typifies the production. There is no lead or lag in production and demand hence the make to order plan.

LEVEL CAPACITY PRODUCTION

The capacity is set at 3000DBP per week at standard working week of 40hours. This helps both capacity and personnel utilization and a tight budget schedule. If there is a change in capacity planning, shift hour or overtime can be used to compensate for such. However this plan is for the current production target of 150000.

INFRASTRUCTURE

HUMAN RESOURCES

These are specialists in the area of recruiting people for various job functions. From a manufacturing point of view, an IE is the right person for this task. This is because he has been trained to understand the right work contents the workforce required to achieve maximum capacity utilization and the performance measurement attached to each job function. However the HR specialist understands how to tie the salary structure and the benefit (both money and material) attached to him.

Therefore the strategy would be to employ the unskilled workforce and train them to a basic minimum skill level required to do the basic non skilled operations like printing, packaging and painting and machining while we use a higher wage structure to lure the skilled workers; should we need them. The unskilled workers could be temporary workers or permanent workers depending on the requirements while the skilled workers would be made permanent to increase core competency.

Periodic training like safety and their specific job functions would be necessary to update the level of skill and technology across board.

PERFORMANCE MEASUREMENT

THE BALANCED SCORE CARD

It is a framework that converts the vision of the company into performance measures that can be interpreted and monitored. The mission statement should thus be seen as the action plan that drives the company on the journey to the destination it hopes to achieve in future.

LEARNING AND GROWTH

FINANCIAL PERFORMANCE

CUSTOMERS’ PERCEPTION AND EXPECTATION

INTERNAL STRUCTURE AND INFRASTRUCTURE

STRATEGIC OBJECTIVES

Fig : The balanced Score Card

Slack, chambers & Johnston 2007

Strategic Objectives

Strategic Measurements

Core outcomes

Performance Drivers

1

Financial

Increase Profitability

Increase Revenue

Project Cost

Reduced Cost

Compete Based on Cost

Operational Efficiency

2

Customer

Increased market share

Share of segment

% presence in the OE sector

Customer satisfaction

Customer feed back

% satisfaction, positive feedback

3

Internal

Revenue mix

Research and Development

collaboration

Prototype designs success rate

Increase ROCE

High ROCE

Higher utilization of resources

4

Learning and growth

Employee capability

Staff productivity

Reduced scrap rate

Upgrade of facilities

Systems Audit

Improved cycle times

Adapted Balanced Scorecard, Kaplan and Norton 1996

Financial perspective

Growth: The dream of every business is growth; and so is Friction Material. The growth of the company is the gate way to expansion in other markets and could be a factor in increasing the Market share which has been set as at 2 years.

Increased Profitability:

The profitability of a company is its ability to satisfy the demand of production; output, overheads and cost of production and still make a margin. Most businesses are set-up with an aim to make money; either primary or secondary. Friction Materials made profit this year and the OEM is a lee-way to guarantee constant volumes of production and with a high efficiency system, the OEM would be the source of revenue for the company. This is because the OEM has a huge potential to turn the fortunes of the company around from a small company to a Large company with huge revenue and large market share. In an emerging market like the OEM, the first to enter the market usually dominates a great percentage of the market share. Therefore it is pertinent for Friction Materials to be in the market as one of the pioneer members. The OEM would generate huge revenue as they have a huge volume of production thus reducing the cost accrued to the production costs and overheads and consequently drives down the cost of production and hence increases profitability

Profitability of the OEM is vital to the existence of the company as it helps to generate a funds through production that could be ploughed back to the operation of the other product range and with good decision making and investment policies; the company will be transformed into a World Leader in the manufacture of DBP.

Profitability of the company also helps it satisfy its personnel commitment; paying of salaries and bonuses to the workers for increased motivation. If a business is not profitable, the management of the company could struggle to pay wage and this would ultimately impact on the shop floor reducing the productivity of the workers; as most workers would lack the motivation to continue work without pay. Ultimately the customers; the motorcycle manufacturers would get affected as Friction Materials could end up not meeting the demand target and are imposed heavy fines. Gradually the company would lose its competitiveness and could end up being bankrupt if it continues to fail to meet the target. The contract would be cancelled and the production would be hampered. The end result could be the administration of the company, since it cannot meet its basic obligation.

Cost Reduction

Sustaining growth is all about meeting the expectation of the shareholders, those responsible for the investing money and time to the success of the company. In Sustaining the growth of the company, good asset utilization and cost reduction policies like getting depreciated machines to work effectively, helps to reduce the overheads and unwanted cost attached to the daily running expenses of the company. The OEM is a cost-competitive market and imploring a strategy to drive down cost is worthwhile. Trade-offs associated with low cost production should be properly weighed before decisions are made else it could eventually cost more; both for the cost of rework and the excess and unnecessary man-hours used. For instance, if the cost of a standard back plate is $10 and you get a supplier for $6, it is possible that the manufacturer might not be able to meet production target. So if you hire him for your supplies and he fails to deliver, in panic, you might need to get another supplier who would end up charging you more than it would cost and you might have to run extra man-hours to cover up for production time lost. All these could cost more compared to the stable $10 who is guaranteed to deliver when needed.

Customer Perspective

Increased market share

The market share is a portion of a business sector where you dominate. In reality, big companies like McDonalds have almost all the market share between them leaving the remaining for smaller companies. The idea is that every company sells a particular volume of the product in the market. Companies with dominant shares sell high volumes of stock periodically.

Friction Materials has market share as one of its targets because it aims to be a profitable business. If they can churn out large volumes of DBP and exhaust their production capacity in terms of sales; then they would be able to get the overhead cost driven low. This helps put the Cost reduction strategy in check and increases the viability for profit making. A large market share increases the brand image of the company and opens doors for wider reach to the Far Eastern and Global markets on a whole. It also helps increase the possibility of dominating the Local market.

Based on the operational capabilities of the company and the entry into the OEM market, Friction Materials could boast of a sizeable market share so far as other factors are favorable. With percentage market share dominance, plans like marketing drive sales promos and exhibition events like auto fares can be used to boost their brand image and ultimately sell the product to the market. The market share volume determines the amount of profit and volume of DBP that could be sold over a period of time.

Customer satisfaction

“Customer is king”, should be at the back of the mind of every employee of Friction Materials. This is because the customer makes it possible for the employee to be paid; if the DBP’s are not quality ones or the customers are not satisfied, they could easily turn to a competitor and this affects the market share of the company.

Since we regard the customer as king, and production is based on customer needs; it is imperative that Friction Materials delights its customer base by going the extra mile to meet with them, to have a personal experience with them. This helps the company reach out to potential customers and at the same time get a good understanding of the performance of the DBP in the market and ways to improve the current production specifications and designs without altering the standard specification requirement for manufacture.

It also helps identify potential areas of strengths and weaknesses as emerging opportunity that abound but have not been fully utilized.

For the OEM to succeed, the customer must be delighted exceptionally and satisfied with the unique qualities of the DBP else Friction Materials would lose ground to their competitors and could lose their competitive advantage to poor human relationship. Therefore the company should make the customer the aim of the production process and in pleasing a customer that could be a potential chain of new customers. It is widely said that it costs a lot to get a new customer compared to retaining one of them. Thus it is more profitable to secure already existing customer base by delighting them exceptionally while looking for incremental business than to look for more business and neglect current customer base.

Internal Process Perspective

Research and development

For Friction Materials to remain relevant in the OEM, the R&D team would be expected to design and develop new lines for production. The ability to meet this requirement is one of the basic tasks of Friction Materials as an OEM. Therefore it is an important aspect of the company that needs to be restructured. Currently, there is no department for R&D and since it is a major requirement by the contractor, a new R and D department be formed. The design engineer as well as the local specialist firm that was integrated needs to be incorporated in this department to work together for the progress of the company. A good R & D enables breakthroughs which can yield huge revenue. Similar to this is the Astra Zeneca R & D who charge premium price for discoveries in their R&D that are able to sail through to the production stage.

R&D also increases skill level of the company and takes the competitiveness to a higher level. Thus it gets to a point where they could re-define the characteristic qualities of performance of DBP as seen by the 5 seconds telephone response employed by Zenith bank to attend to customer enquiries.

High ROCE:

A high ROCE for Friction Materials signifies a good balance of employee strength. The ROCE is a financial tool used to understand the extent of effective utilization of resources. If the employees are trained well and given the right resources to work with and appropriate incentives and benchmarks to go with, then they would be well motivated to achieving company targets. When the targets are met, they can be used as benchmarks to be built upon. With a steady growth rate in ROCE, investment on raw materials, machines and personnel would be justified.

Productivity, efficiency and proper scheduling of the production process are the hallmark to achieving a high ROCE.

An Acid test ratio can be used to measure the liquidity of the company, the more liquid a company is; the stronger it is. Thus using a benchmark as a source of strength makes the top management of the company a focused one.

Growth

Employee capability reskilling people

Upgrade of facilities buying new machines

ORGANIZATION

The organizational structure of Friction Materials should change from a process based leadership to a functional matrix organizational structure where the operations personnel have easier access to top management for decision making and policy formulation.

For a small company like Friction Materials, the Organizational hierarchy is very visible. Too many management port-folios or positions; as is seen here, creates a communication problem such that escalating issues or problems as seen on the shop floor could take a while before it gets to the appropriate table and this makes flexibility very low.

If friction arises between the managers, it could trickle down to the shop floor. Besides there is unclear definition of roles and responsibilities and this is a potential disaster because of the ownership of responsibility for failure or damage. Thus instead of creating an operations unit, they are building a potential silo. This hampers effective communication between the operations crew.

The dual role for the sales manager could also be detrimental to the progress of the company as there might be sub-optimization of the sales department and biased decision making; should he be in contest with another manager.

There should be a common focus of top-management on the direction, aims and objectives and the vision should be shared collectively. Time out on team building and holiday trips could be scheduled to help foster relationships of employees of Friction Materials. Having grudges against people is a reality of life, but when it affects the productivity of the company, it becomes questionable.

Job roles and functions should be well defined and the performance; measured. This helps make the workers responsible for the daily activities and could improve productivity. A good reward and compensation scheme (bonus) could be employed but it must be properly structured to avoid sub-optimization of departments or resources.

PRODUCTION AND PLANNING CONTROL

The planning and control system of Friction Materials Ltd is the MRPII but is underutilized at the moment as there is no skilled clerical worker that can handle the software. The clerical workers need to proceed on a flexible training schedule to learn the latest version and application of the MRP II system. There should also be an online order and portal system where purchase orders and payments can be made and reduce the over reliance on the telephone order or fax as there could be ambiguity in communication.

The capacity planning features of the MRP II system was not in use and the WIP records for an on-going production process is not recorded which makes it almost impossible to be able to plan for adequate capacity and schedule for raw materials hence the high inventory levels.

A kanban pull system can be implemented for the production of the OE market to meet production targets until a full scale imp