A small business venture producing high-performance pumps for 'off-highway' equipment had established itself as a successful and profitable manufacturer in what was essentially a specialized market

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A small business venture producing high-performance pumps for 'off-highway' equipment had established itself as a successful and profitable manufacturer in what was essentially a specialized market. The product specification was very demanding in terms of performance, quality, and reliability. Together with providing an effective back-up service, these were in fact the key order winning criteria. The products range from relatively small three-inch (diameter) pumps to large stand-alone specials, some 12 inches in diameter. The smaller pumps were produced in batches of 100 while the large specials were produced in small batches of five, but generally utilizing the same equipment in the production process.

All pumps had a 'camshaft', which was a major component. The size of the camshaft was determined by the pump size. The business developed a high level of production and process 'skills' relating to the operations tasks for producing camshafts. The production process was also (apparently) cost-effective when compared with competitors. So successful was the 'camshaft' business that the other companies who used camshafts as a component in their own products began inquiring about design, costs, and delivery of camshafts. Over a period of time (some six years) the production of camshafts increased four times. Virtually all the increase was for customers asking for a 'special' to be produced in a variety of volumes. The high and low volume camshafts were produced approximately following the same process plan and machine routing.

However, over the same six-year period, as camshaft production increased, profits slumped. Work-in-progress increased by a factor of three and the trend was towards a major cash flow crisis. On the surface, it appeared that all three major products (small pumps, large special pumps, and the camshafts) should be profitable. The problems were discussed in detail at a special meeting. The production manager came under very severe pressure during the meeting to come up with ways of reducing costs. He argued that major problems had been created by sales and product design. These included:

1.    Sales had over the previous two years 'chased orders' to fill the gaps in the order books following a general downturn in the industry when volumes for standard pumps dropped by 10 percent.

2.    been that the new orders, won against 'tough competition', were mainly for non-standard pumps and camshafts where volumes tended to be smaller.

3.    Product design had carried out a value analysis program with the objective of reducing the costs of 'standard products' by a target figure of 10 percent.

4.    The value analysis changes had been introduced into production at the time as the variety was increasing and volume generally was reducing. New jigs and fixtures had to be made to accommodate the newly designed components and assemblies.

5.    Production had been disrupted through both the value analysis exercise and the increased number of the set-ups to cope with the variety increase and volume drop. The result was that delivery performance had suffered, priorities kept changing in response to customer pressure, and the work-in-progress was at an all-time high.

The production manager, therefore, argued that he could not achieve cost savings without a great deal of collaboration with sales and design. Both these functional managers, however, refused to accept any 'blames' for poor production performance and suggested the factory required a new planning system and a great deal more discipline on the shop floor. To what had become an acrimonious and increasingly emotional debate the managing director's response was to appoint a young planning analyst to report on the problem and suggest solutions.

The analyst was a highly qualified production engineer, well respected by the shop floor supervision. They gave him a great deal of co-operation in identifying key problems, bottlenecks, and all the major process excesses. The main problem, however, occurred when the analyst came to identifying product costs. Many components used common processes, irrespective of values. Because the management accounting system could not provide detailed component and process costs, engineers worked to estimate cycle times and applied 'blanket' overhead rates on the major production processes. The analyst discovered that standards and 'specials' were costed using the same 'standard costs. Further investigation showed:

1.    The larger (12 inches plus) pumps were generally given high priority because: (a) they took up so much floor space that production tried to push them through quickly; and (b) the major customers tended to press hard for delivery.

2.    An average of six weeks in-progress production time was recorded for small, standard pumps as well as large, non-standard pumps. The estimators, however, are working on lead times of one to two weeks for small pumps.

3.    Camshaft production had more than doubled since subcontracted work had been undertaken. This had required the purchase of additional grinding machines and necessitated a  reorganization of the pump, machine, and assembly shops. This, in turn, had put pressure on the available assembly floor space.

4.    Labor tended to be shifted to the camshaft production from the general machine shop whenever there was a 'big order' of subcontract work, in the belief that fast delivery meant more profitable business. The engineer reported his findings verbally to the managing director, together with his own conclusions. He said that in his view the major problem was the failure to recognize that within one factory there were three separate businesses, each competing in different markets, against different order winning criteria, and making different and conflicting demands on the same production processes. His proposal was to more fully investigate the issues based on the concept of separating the three businesses (small pumps, large pumps, and camshafts) by rearranging production on an autonomous product basis and building walls physically to separate the plant and managing them totally independently. This would require a relatively high investment in the new plant in order to create the three separate units.

Questions: If you are tasked to assess this company as an external consultant in operations, describe what is the problem and perform an analysis faced by the company, and how the operations management decisions both strategic and tactical strategy can be achieved. Summarizes the results of your investigations which includes your findings, solutions, and recommendations. (Be specific in your recommendations).