Case Problem OM JKT Aug_2014_Jan_2014-1.doc

Cases of Operation Management

CASE PROBLEM OPERATION MANAGEMENT

Fahmy Radhi, MBA, PhD

Magister Management ProgramThe Faculty of Economics and Business

Gadjah Mada University2014/2015

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Case #01: Operations Strategy in a Global Environment

“Motorola’s Global Strategy”

For years Motorola and other U.S. firms such as RCA, Magnavox,

Philco, and Zenith were among the world’s most successful

consumer electronics firms. In the face of withering competition from

the Japanese, however, these firms began to fall by the wayside.

Motorola has remained the exception: Today it is one of the world

leaders in mobile communication technology, including the

manufacture of cellular telephones, paging devices, automotive

semiconductors, and microchips used to operate devices other than

computers. Motorola has taken on the Japanese head-to-head.

Although it may have lost a few battles here and there, the firm has

won many more.

Motorola heard the call to battle in the early 1980s. The firm then

controlled the emerging U.S. market for cellular telephones and

pagers but, like many other firms at the time, was a bit complacent

and not aggressively focused on competing with the Japanese.

Meanwhile, Japanese firms began to flood the U.S. market with low-

priced, high-quality telephones and pagers. Motorola was shoved

into the background.

At first, managers at Motorola were unsure how they should

respond. They abandoned some business areas and even

considered merging the firm’s semiconductor operations with those

of Toshiba. Finally, however, after considerable soul searching, they

decided to fight back and regain the firm’s lost market position. This

fight involved a two-part strategy: First learn from the Japanese and

then compete with them.

To carry out these strategies, executives set a number of broad-

based goals that essentially committed the firm to lowering costs,

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improving quality, and regaining lost market share. Managers were

sent on missions worldwide, but especially to Japan, to learn how to

compete better. Some managers studied Motorola’s own Japanese

operation to learn more fully how it functioned; others focused on

learning about other successful Japanese firms. At the same time,

the firm dramatically boosted its budgets for R&D and employee

training worldwide.

One manager who visited Japan learned an especially important

lesson. While touring a Hitachi plant north of Tokyo, he noticed a

flag flying in front of the factory emblazoned with the characters

P200. When he asked what it meant, he was told by the plant

manager that the factory had hoped to increase its productivity by

200% that year. The manager went on to note somewhat dejectedly

that it looked as if only a 160% increase would be achieved.

Because Motorola had just adopted a goal of increasing its own

productivity by 20%, the firm’s managers soberly realized that they

had to forget altogether their old ways of doing business and

reinvent the firm from top to bottom.

Old plants were shuttered as new ones were built. Workers

received new training in a wide range of quality-enhancement

techniques. The firm placed its new commitment to quality at the

forefront of everything it did. It even went so far as to announce

publicly what seemed at the time to be an impossible goal: to

achieve Six Sigma quality, a perfection rate of 99.9997%. When

Motorola actually achieved this level of quality, it received the

prestigious Malcolm Baldrige National Quality Award.

Even more amazing have been Motorola’s successes abroad,

especially in Japan. The firm has 20 offices and more than 3,000

employees there. It is currently number three in market share there

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in both pagers and cellular telephones. Worldwide, Motorola controls

much of the total market for these products, has regained its

number-two position in semiconductor sales, and is furiously

launching so many new products that its rivals seem baffled.

Today, Motorola generates over 56% of its revenues abroad. Major

new initiatives are underway in Asia, Latin America, and Eastern

Europe. The firm has also made headway in Western Europe

against entrenched rivals Philips and Thomson. But not content to

rest on its laurels, Motorola has set new–and staggering–goals for

itself. It wants to take quality to the point where defects will be

counted in relation to billions rather than millions. It wants to cut its

cycle times (the time required to produce a new product, the time to

fill an order, and/or the time necessary to change a production

system from one product to another) tenfold every five years. It also

wants over 75% of its revenues to come from foreign markets by

2002.

DISCUSSION QUESTIONS

1. What are the components of Motorola’s international

strategy?

2. Describe how Motorola might have arrived at its current

strategy as a result of a SWOT analysis.

3. Discuss Motorola’s primary business strategy.

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Case #02: Product and Service Design

The Technocratic Hamburger

Nowhere in the entire service sector are the possibilities of the

manufacturing mode of thinking better illustrated than in fast-food

franchising. Nowhere have manufacturing methods been employed more

effectively to control the operation of distant and independent agents.

Nowhere is "service" better. The thriving nationwide chain of hamburger

stands called "McDonald's" is a supreme example of the application of

manufacturing and technological brilliance to problems that must ultimately

be viewed as marketing problems.

The explanation of McDonald's thundering success is not a purely

fiscal one- i.e., the argument that it is financed by independent local en-

trepreneurs who bring to their operations a quality of commitment and

energy not commonly found among hired workers. Nor is it a purely geo-

graphic one- i.e., the argument that each outlet draws its patronage from a

relatively small geographic ring of customers, thus enabling the number of

outlets easily and quickly to multiply. The relevant explana6on must deal

with the central question of why each separate McDonald's outlet is so

predictably successful, why each is so certain to attract many repeat

customers.

Entrepreneurial financing and careful size selection do help. But

most important is the carefully controlled execution of each outlet's central

function-the rapid delivery of a uniform, high-quality mix of prepared foods

in an environment of obvious cleanliness, order, and cheerful courtesy. The

systematic substitution of equipment for people, combined with the

carefully planned use and positioning of technology, enables McDonald's to

attract and hold patronage in proportions no predecessor or imitator has

managed to duplicate. Consider the remarkable ingenuity the system,

which is worth examining in some detail.

To start with the obvious, raw hamburger patties are carefully pre-

packed and pre-measured, which leaves neither the franchisee nor his em-

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ployees any discretion as to size, quality, or raw material consistency. This

kind of attention is given to all McDonald's products. Storage and prepa-

ration space and related facilities are expressly designed for, and limited to,

the predetermined mix of products. There is no space for any foods, bev-

erages, or services that were not designed into the system at the outset.

There is not even a sandwich knife or, in fact, a decent place to keep one.

Thus the owner has no discretion regarding what he can sell-not because

of any contractual limitations, but because of facilities limitations. And the

employees have virtually no discretion regarding how to prepare and serve

things.

Discretion is the enemy of order, standardization, and quality. On an

automobile assembly line, for example, a worker who has discretion and

latitude might possibly produce a more personalized car, but one that is

highly unpredictable. The elaborate care with which an automobile is

designed and an assembly line is structured and controlled is what

produces quality cars at low prices, and with surprising reliability

considering the sheer volume of the output. The same is true at

McDonald's, which produces food under highly automated and controlled

conditions.

French-Fried Automation

While in Detroit the significance of the technological process lies in

production, at McDonald's it lies in marketing. A carefully planned design is

built into the elaborate technology of the foodservice system in such a

fashion as to make it a significant marketing device. This fact is impres-

sively illustrated by McDonald's handling of that uniquely plebeian

American delicacy, french-fried potatoes.

French fries quickly become soggy and unappetizing; to be good,

they must be freshly made just before serving. Like other fast-food

establishment, McDonald's provides its outlets with precut, partially cooked

frozen potatoes that can be quickly finished in an on-premises, deep-fry fa-

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cility. The McDonald's fryer is neither so large that it produces too many

French-fries at one time (thus allowing them to become soggy) nor so small

that it requires frequent and costly frying.

The fryer is emptied onto a wide, flat tray adjacent to the service

counter. This location is crucial. Since the McDonald's practice is to create

an impression of abundance and generosity by slightly overfilling each bag

of French-fries, the tray's location next to the service counter prevents the

spillage from an overfilled bag from reaching the floor. Spillage creates not

only danger underfoot but also an unattractive appearance that causes the

employees to become accustomed to an unclean environment. Once a

store is unclean in one particular (area), standards fall very rapidly and the

store becomes unclean and the food unappetizing in general.

While McDonald's aims for an impression of abundance, excessive

overfilling can be very costly for a company that annually buys potatoes

almost by the trainload. A systematic bias that puts into each bag of

French-fries a half ounce more than 'is intended can have visible effects on

the company's annual earnings. Further, excessive time spent at the tray

by each employee can create a Cumulative service bottleneck at the

counter.

McDonald's has therefore developed a special wide-mouthed scoop

with a narrow funnel in its handle. The counter employee picks up the

scoop and inserts the handle end into a wall clip containing the bags. One

bag adheres to the handle. In a continuous movement the scoop descends

into the potatoes, fills the bag to the exact proportions its designers

intended, and is lifted, scoop facing die ceiling, so that the potatoes funnel

through the handle into the attached bag, which is automatically

disengaged from the handle by the weight of the contents. The bag comes

to a steady, non-wobbling rest on its flat bottom.

Nothing can go wrong-the employee never soils his hands, the floor

remains clean, dry, and safe, and the quantity is controlled. Best of all, the

customer gets a visibly generous portion with great speed, the employee

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remains efficient and cheerful, and the general impression is one of extrav-

agantly good service.

Mechanized Marketing

Consider the other aspects of McDonald's technological approach to

marketing. The tissue paper used to wrap each hamburger is color-coded

to denote the mix of condiments. Heated reservoirs hold pre-prepared

hamburgers for rush demand. Frying surfaces have spatter guards to

prevent soiling of the customer. Nothing is left to chance or the employees'

discretion.

The entire system is engineered and executed according to a tight

technological discipline that ensures fast, clean, reliable service in an

atmosphere that gives the modestly paid employees a sense of pride and

dignity. In spite of the crunch of eager customers, no employee looks or

acts harassed, and therefore no harassment is communicated to the

customers.

What is important to understand about this remarkably successful

organization is not only that it has created a highly sophisticated piece of

technology, but also that it has done this by applying a manufacturing style

of thinking to a people-intensive service situation. If machinery is to be

viewed as a piece of equipment with the capability of producing a

predictably standardized, customer satisfying output while minimizing the

operating discretion of its attendant, that is what a McDonald's retail outlet

is. It is a machine that produces, with the hell of totally unskilled machine

tender, a highly polished product. Through painstaking attention to total

design and facilities planning, everything is built integrally into the machine

itself, into the technology of the system. The only choice available to the

attendant is to operate it exactly as the designers intended.

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QUESTIONS:

1. What are the characteristics of the McDonald's "product" that make it

successful?

2. Explain how the design of the product and the design of the service

delivery are intertwined in the McDonald's example.

3. McDonald's approach to assembly-line service has become the norm

for the fast-food industry. There are, however, variations to their

approach that competitors emphasize as a marketing tool. How do

the design of the product, design of the service, and design of the

service delivery system differ for a company such as Wendy's? In

other words, how are the marketing strategies of Wendy's versus

McDonald's reflected in their product/service/delivery system design?

Source: Murdick, Render, and Russell, 1990, Service Operation Management, Prentice Hall, Englewood Cliffts, pp. 101-103

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Case #03: Quality Management

“Quality at the Ritz-Carton Hotel Company”

Ritz-Carlton. The name alone evokes images of luxury and quality.

As the first hotel company to win the Malcolm Baldrige National

Quality Award, the Ritz treats quality as if it is the heartbeat of the

company. This means a daily commitment to meeting customer

expectations and making sure that each hotel is free of any

deficiency.

In the hotel industry, quality can be hard to quantify. Guests do not

purchase a product when they stay at the Ritz: They buy an

experience. Thus, creating the right combination of elements to

make the experience stand out is the challenge and goal of every

employee, from maintenance to management.

Before applying for the Baldrige Award, company management

undertook a rigorous self-examination of its operations in an attempt

to measure and quantifies quality. Nineteen processes were studied,

including room-service delivery, guest reservation and registration,

message delivery, and breakfast service. This period of self-study

included statistical measurement of process work flows and cycle

times for areas ranging from room service delivery times and

reservations to valet parking and housekeeping efficiency.

The results were used to develop performance benchmarks against

which future activity could be measured.

With specific, quantifiable targets in place, Ritz-Carlton managers

and employees now focus on continuous improvement. The goal is

100% customer satisfaction: If a guest's experience does not meet

expectations, the Ritz-Carlton risks losing that guest to competition.

One way the company has put more meaning behind its quality

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efforts is to organize its employees into "self-directed" work teams.

Employee teams determine work scheduling, what work needs to be

done, and what to do about quality problems in their own areas. In

order that they can see the relationship of the specific area to the

overall goals, employees are also given the opportunity to take

additional training in hotel operations. Ritz-Carlton believes that a

more educated and informed employee is in a better position to

make decisions in the best interest of the organization.

Discussion Questions:

1. In what ways could the Ritz-Carlton monitor its success in

achieving quality?

2. Many companies say that their goal is to provide quality products

of services. What actions might you expect from a company that

intends quality to be more than a slogan or buzzword?

3. Why might it cost the Ritz-Carlton less to "do things right" the first

time?

4. How could control charts, Pareto diagrams, and cause-and-effect

diagrams be used to identify quality problems at a hotel?

5. What are some non-financial measures of customer satisfaction

that might be used by the Ritz-Carlton?

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Case #04: Supply Chain Management

“Dell’s Supply Chain and the Impact of E-commerce”

Dell, the personal computer manufacturer highlighted in

chapter 7’s Global Company Profile, has long embraced the internet

and e-commerce in its supply chain. The figure at the bottom of this

page shows Dell’s unique e-commerce model.

Dell sell high-volume, low-cost products directly to end users.

Assembly begins immediately after receiving the customer order.

Traditional PC manufacturers, in contrast, have previously

assembled PCs ready for purchase at retail stores. Dell uses direct

sales, primarily the internet, to increase revenues by offering a

virtually unlimited variety of PC configurations or customize them.

Customization allows Dell to satisfy customers by giving them a

product that is close to their specific requirements. Options are easy

to display over the internet and allows Dell to attract customers that

value this choice. Dell also uses customized Web pages to enable

large business customers to track past purchases and place orders

consistent with their current needs. In addition, Dell constructs

special Web pages for suppliers, allowing them to view orders for

components they produce as well as current levels of inventory at

Dell. This allows suppliers to plan based on customer demand and

as a result reduces the bullwhip effect.

Products in the PC industry have life cycles of only a few

moths. But PCs across different manufacturers are highly

substitutable because they often have the same components. Thus

a firm like Dell, which brings products to market faster than the

competition, enjoys a huge early-to-market advantage. Competing

firms that sell through distributors and retailers have to fill shelves at

retailers before a product reaches the customer. Dell, in contrast,

introduces a new product to customers over the internet as soon as

the first of that model is ready.

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By using direct sales (phone and Internet) to sell PCs, Dell is

able to eliminate distributor and retailer margins and increase its

own margin. The direct sales model allows Dell customers to place

orders at any time of the day from anywhere in the world and is

much cheaper; retail stores have a huge array of additional costs

because of their bricks-and-mortar model. Direct sales allow Dell to

collect payment for its PCs in a matter of days after they are sold.

However, Dell pays its suppliers according to the more traditional

billing schedules. Given its low levels of inventory, Dell is able to

operate its business with negative working capital because it

manages to receive payment for its PCs an average of 5 days

before it plays its suppliers for components. A PC supply chain that

includes distributors and retailers finds it nearly impossible to

achieve these results.

Dell’s order processing, products, and assembly lines are

designed such that all components on which customers are offered

customization can be assembled in a matter of hours. This allows

Dell to postpone assembly until after the customer order has been

placed. As a result, Dell holds inventory in the form of components

that are common across a wide variety of finished products.

Postponement, component modularity, and tight scheduling allow

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low inventory and support mass customization. Dell maximizes the

benefit of postponement by focusing on new PC models for which

demand is hard to forecast.

PC manufacturers who sell via distributors and retailers find

postponement virtually impossible. Therefore, traditional PC

manufacturers are often stuck with PC configurations that are not

selling while simultaneously being out of the configurations that are

selling. Dell, in contrast, is better able to match supply and demand.

Dell’s e-commerce model results in higher shipping costs

than, selling through distributors and retailers, however, Dell sends

individual PCs to customers from its factories. Because these

shipments are small (often one or a few PCs), manufacturers selling

through distributors and retailers ship with some economy of scale,

using large truck shipments to warehouses and retailers, with the

end user providing the last portion of delivery. The Dell supply

chain’s outbound transportation costs are higher, but relative to the

price of a PC, transportation cost is low (typically 2% to 3%), and

thus the impact on the overall cost is low.

Discussion Questions

1. Although it might seem that Dell, with its build-to-order model,

is best equipped to benefit from e-commerce, a traditional PC

manufacturer, selling through distributors and retailers, may

also have a lot to gain from e-commerce. Why?

2. How has Dell exploited the advantage of the internet to

improve performance?

3. What is the main disadvantage of Dell’s selling PCs over the

internet?

4. How does Dell compete with a retailer who already has a PC

in stock?

5. How does Dell’s supply chain deal with the bullwhip effect?

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Case #05: Jus-In-Time

TOYOTA, FORD, GM, AND VOLKSWAGEN-SOME DIFFERING OPINIONS ABOUT WORKING WITH SUPPLIERS

It is interesting to see how the large automobile manufactures

differ in their opinions about working with suppliers and standardization

of parts. Consider the following.

WORKING WITH SUPPUERS

Tadaaki Jagawa, a Toyota executive vice president, said the

number one Japanese automaker "received an invitation" from Ford to join

the Ford Internet-based marketplace, tentatively called AutoX-change,

where auto makers and their suppliers hope to do business more efficiently

and cut costs. Ford and GM are in a race to build the largest online

marketplace to achieve greater economies of scale, and both are trying to

woo other automakers. The two companies have argued that creating a

marketplace in which hundreds of billions of dollars in goods and services

are traded would give their suppliers access to more business globally,

allowing suppliers and manufacturers to slash costs.

Toyota considers the Internet marketplace only a means to effi-

ciency and not an end in itself, Jagawa said. Because the procurement

process involves not only the price, but also the quality, lead, and delivery

of components, Jagawa said Toyota doesn't want to put competitive

components on an open market, such as GM TradeXchange; it would go

against Toyota's philosophy of treating suppliers as partners. "We help

suppliers cut costs through a guarantee of a long-term contract putting

those parts on the open market pits us against suppliers in an adversary

relationship”. Jagawa stressed that Toyota is in discussions with GM "with

an open mind." Although it may mean Toyota would trade only raw ma-

terials and commonly used parts on either the GM or Ford system, Toyota

is interested in making its buying more efficient, he said.

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STANDARDIZING AUTO PARTS

Some of Toyota's talks with GM also involve standardizing compo-

nents. That would allow the two companies and GM's other participants to

share a common electronic procurement infrastructure and maximize the

online network's effectiveness.

Toyota and Volkswagen are also trying to hammer out an agree-

ment to standardize select components for vehicles sold in Europe.

Jagawa said the two companies launched the talks last summer to identify

specific parts they can standardize. He added, however, that the process

has been slow because of a "wide gap" between what the two companies

consider common components. "VW put on the table 20 to 30 parts as

possible targets for standardization, we identified several at most," said

Jagawa.

Toyota had said it was considering standardizing components and

platforms with the German automaker to cut operating costs in Europe,

where the Japanese company has had trouble reducing costs because of

its limited sales volume. Toyota sold fewer than 600,000 vehicles in

Europe last year.

In Toyota's discussions with both GM and Volkswagen, Jagawa

said one problem that could potentially delay an early agreement is their

difference over the definition of "competitive" components. Toyota

considers a wider range of parts competitive, including steering wheels

and in some cases even wire connectors, whereas GM and Volkswagen

seem to believe many components can be standardized without hurting

competitiveness. "They think we can compete on things like styling and

packaging of vehicles; we believe we compete component by component

in creating a competitive vehicle," said Jagawa.

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QUESTIONS

1. GM and Ford have quickly pushed the development of large Internet

sites to create an environment where suppliers must compete for

business. Ford and GM argue that these Internet sites should

reduce cost because the negotiations are streamlined. How do you

think the suppliers view these sites?

2. Rather than having vendors compete against one another, Toyota is

interested in treating suppliers as partners. Is Toyota just being old-

fashioned in its views?

3. A major reason for the differences in opinions may be the difference

in what Toyota considers "competitive" components. These are the

components that would mostly be bought using the Internet trading

sites. Who is right? Are steering wheels and wire connectors

competitive components?

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Case #06: Project Management

“ Managing Hard Rock’s Rock Fest

At the Hard Rock Cafe, like many organizations, project

management is a key planning tool. With Hard Rock’s constant

growth in hotels and cafes, remodeling of existing cafes, scheduling

for Hard Rock Live concert and event venues, and planning the

annual Rockfest, managers rely on project management techniques

and software to maintain schedule and budget performance.

“Without Microsoft Project,” says Hard Rock Vice-President Chris

Tomasso, “there is no way to keep so many people on the same

page.” Tomasso is in charge of the Rockfest event, which is

attended by well over 100,000 enthusiastic fans. The challenge is

pulling it off within a tight 9-month planning horizon. As the event

approaches, Tomasso devotes greater energy to its activities. For

the first 3 months, Tomasso updates his MS Project charts monthly.

Then at the 6-month mark, he updates his progress weekly. At the

9- month mark, he checks and corrects his schedule twice a week.

Early in the project management process, Tomasso identifies 10

major tasks (called level 2 activities in a work breakdown structure,

or WBS):† talent booking, ticketing, marketing/PR, online promotion,

television, show production, travel, sponsorships, operations, and

merchandising. Using a WBS, each of these is further divided into a

series of subtasks. Table 3.8 (see page 100 in textbook) identifies

26 of the major activities and sub activities, their immediate

predecessors, and time estimates. Tomasso enters all of these into

the MS Project software.‡ Tomasso alters the MS Project document

and the time line as the project progresses. “It’s okay to change it as

long as you keep on track,” he states.

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The day of the rock concert itself is not the end of the project

planning. “It’s nothing but surprises. A band not being able to get to

the venue because of traffic jams is a surprise, but an 'anticipated'

surprise. We had a helicopter on stand-by ready to fly the band in,”

says Tomasso.

On completion of Rockfest in July, Tomasso and his team have a 3-

month reprieve before starting the project planning process again.

Discussion Questions

1. Identify the critical path and its activities for Rockfest. How long

does the project take?

2. Which activities have a slack time of 8 weeks or more?

3. Identify five major challenges a project manager faces in events

such as this one.

4. Why is a work breakdown structure useful in a project such as

this? Take the 26 activities and break them into what you think

should be level 2, level 3, and level 4 tasks.

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References

Brian McWilliams, “Reengineering the small Factory,” Inc. Technology, March 19, 1996

Griffin, R. W. and M. W. Pustay, International Business: A Managerial Perspective, Second Edition, (pages 647/648) © 1999, 1996 Addison Wesley Longman. Reproduced by permission of Addison Wesley Longman. All rights reserved.

Heizer, J. and Render, B, 2004, Operation Management, Seventh Edition, Prenhall, p. 185.

Horngren, C. T., Foster, G. and S. M. Dator, Cost Accounting, 11th ed. (Upper Saddle River, NJ: Prentice Hall, 2003).

Krajewski and Ritzman, Operations Management: Strategy and Analysis, 6th ed., Addison-Wesley Publishing Company, 2001

Murdock Robert G, Render Russell Barry and Roberta S., Service

Operation Management, Prentice-Hall, Inc, 1990

Presentation of the Alternative Work Structure Team, “Huffy Bicycles, at the Case Studies in Team Excellence Competition,” The Ohio manufactures’ Association, Columbus, Ohio, October 6, 1993

Ricard B, Chase, Robert Jacobs, Nicholas J., Aquilano, Operation Management for Competitive Advantage, tenth edition, 2006

Russell Roberta S. and Taylor III, Bernard W., Operation Management, 3rd ed., Upper Saddle Rivers, NJ: Prentice-Hall, Inc, 2000

Saladin, Brooke, case prepared as a basis for classroom discussion, at Wake Forest University,

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