Operational Management - AB Machine Tools
The machine manufacture industry, exposed to the ever strengthening forces of globalization and international markets, has become extremely competitive in recent decades. Complex economic factors and a sensitive chain of supply and demand makes success in this industry a matter of very fine margins: of a even and fast flow of materials leading to greater production and expanded performance frontiers. Innovation too, in all its myriad forms, is a prerequisite for survival in this industry. It has been expedient therefore for many manufacturers both in the United Kingdom and globally to de-integrate their companies and re-structure their business models to include greater levels of specialization. Sometimes, serious ‘trade-offs’ are needed to engender these changes, and these trade-offs often carry grave risks. Nonetheless, they are necessary risks to bring about the reorientation of companies into line with the two largest economic forces of the twenty-first century: globalization and technology.
- Section 1: Introduction
- Section 2: Analysis of Questions
- Question 1
- Question 2
- Question 4
- Question 6
- Section 3: Conclusion & Recommendations
- Section 4: Bibliography
SECTION 1: INTRODUCTION
This report examines how one particular company – AB Machine Tools – has evolved to adjust to these new forces of technological progress and globalization of economic forces. AB Machine Tools now faces extremely tough competition from machine manufacture companies in other countries such a Japan, Germany and Italy. It is evident to the directors of the company that a radical re-structuring or re-focus of the company is needed to give is a chance of survival in this seething cauldron of international competition. The AB Machine Tools’ directors have proposed a controversial three-phase re-structuring of the company. According to this plan the company will cease to manufacture all machine parts itself, as it has done traditionally, but will rather delegate this manufacture to numerous sub-contractors. AB Machine Tools intends to focus upon its principal strengths: assemblage, marketing and commissioning. Thus, the company also intends to stop production of its less profitable TE and HE range and to concentrate on its LE and VN products. These decisions are highly controversial within the company: many people fear a too heavy dependence upon suppliers and the consequences of what would happen if there were any major faults with the LE and VN lines.
This report passes this three-phase plan through the filters of some seminal research in operations management: principally, Schmenner’s and Swink’s ‘Theory of swift even flow’ and theory of ‘Theories of performance frontiers’; also, the complex relationships between various trade-offs as explored by Da Silveira and Slack. The report further investigates AB Machine Tool’s use of innovation, and the future consequence of such innovation for its existence. The report looks specifically at the possible supply-chain problems raised by the proposition of phase 2.
The report concludes with recommendations as to the best future practice and direction of the company.
SECTION 2: ANALYSIS OF QUESTIONS
Schmenner and Swink (1998) state the central maxim of ‘The theory of swift, even flow’ like this: ‘(the theory) holds that the more swift and even the flow of materials through a process, the more productive that process is’ (Schmenner & Swink, 1998: p. 102). Very simply: the faster and the more even the flow of materials or commodities through a company, the greater will be that company’s productivity. Reversely: the more viscous and broken the flow of materials or commodities the lower will be production. (Schmenner & Swink, 1998: p102). Companies must seek further to avoid all types of materials ‘bottlenecks’ that might detain production and so profits. Schmenner and Swink also distinguish between the concepts ‘value-added’ and non-value-added’ work: the first being all types of work that result in a product ready for sale; the later being all work that leads to excess administration, storage and so on. Schmenner and Swink’s ‘Theory of Performance Frontiers’ adds further that a company should always understand the principles and financial mechanics whereby maximum input always leads to maximum out put. In short: a company must have perfect control and organization of its materials, staff and technology to turn these things into the most efficient possible product.
AB Machine Tools’ three-phrase strategy or renewal may be seen to generally accord with and confirm the ‘theory of swift and even flow’. Essentially, by concentrating in Phase 1 upon ‘assemble to order’ (ATO), and by dispensing with ETO, MTO and MTS, AB Machine Tools simplifies the number of materials coming into the business. By outsourcing all machine parts manufacture to sub-contractors, AB Machine Tools makes the supply of materials into its business far smoother. It no longer has to produce parts laboriously in-house; but can order them efficiently from groups of sub-contractors each specializing in the manufacture of specific parts. Keith Moreton, the author of the AB Machine Tools report (Moreton, 2002: 5), cites the example of CNC Systems: they attempted to produce all systems in-house, but found the extra costs incurred prohibitive. By sub-contracting, AB Machine Tools makes ‘bottle-necks’ in its production far less likely, for different parts are delivered from different suppliers and so it is unusual for one crisis in one sub-contractor factory leading to the slowing down of the whole AB Machine Tools’ production line. Moreover, sub-contracting allows AB Machine Tools to increase their value-added work and to reduce their non-value-added work; most obviously, because the company can now simply order parts from these sub-contractors whenever it likes, and so does not have to store, document and secure large numbers of parts in the factory itself.
AB Machine Tools hopes that adopting these phased stages at the supply level, and by modifying their business range to a slim more specialized product, that they will broaden and expand their ‘performance frontiers’. These phased changes will facilitate a purer and more efficient supply input and so guarantee a maximum or near-maximum output.
The innovations inaugurated by AB Tools phased changes are principally those of ‘business model innovation’ and structural innovation’; with ‘disruptive’ and ‘experiential’ innovations playing a less significant part.
Dealing with these in turn:
Business Model Innovation & Structural Innovation: AB Tools’ principal innovations relate to their business model and company structure. Phase 2 ‘De-Integration’ and Stage 3 ‘Rationalisation’ represent radical and highly controversial changes to the business model and structure of a company that has been run in a similar way since 1865 (in the case of Asquith). Phase 2 proposes to sub-contract the manufacture of all tool parts and to concentrate AB Machine Tools main work on the assembly and commissioning of machines. The new business model thought-up by AB Machine Tools management sees the company’s principal strengths as the designing, marketing and the building of the tools. This model represents a specialization of the company’s focus; something shown by the third even more radical phase of change ‘Rationalization’. AB Tools intends to retain only its LE and VN range of products, abandoning its less profitable HE and TE ranges. These last two phases will require major changes in the company structure: for instance, all spare parts manufacture will now be carried out away from the main factory.
Disruptive Innovation: A ‘disruptive technology’ is defined as ‘ . . . a new technological innovation, product, or service that eventually overturns the existing dominant technology in the market, despite the fact that the disruptive technology is both radically different from the leading technology and that it often initially performs worse than the leading technology according to existing measures of performance (Wikipedia, 2001). According to this definition it is obvious that this type of innovation is not applicable to AB tools; the company is not seeking to introduce a radically new technology into the machine-tools market, but rather to consolidate and specialize its existing products and services.
Experiential Innovation: The three proposed phases of change at AB Tools will bring some experiential innovations for customers and staff, but these will not be radical or major. AB Tools will, in one sense, because of cutting their manufacture range, decrease their customers’ experience of the company. AB Tools seeks to compensate for its decreased range by a higher quality and more specialized product.
It is evident from the sensitiveness and controversy caused by Phase 1 of the AB Machine Tools re-organization proposal, that many senior figures in the company fear the supply-chain consequences of delegating the total production of parts to sub-contractors. AB Machine Tools presently manufacturers its own machine parts; whilst this is expensive, it ensures that the company has a constant, if inefficient, supply of needed parts. The serious danger of complete sub-contraction is that these sub-contractors will prove unreliable and that materials supplies will be delivered sporadically or not at all thus creating ‘bottlenecks’ where, because of absent materials, production falls dramatically. As Schmenner and Swink suggest, increasing the smoothness and evenness of materials flow considerably boosts production if the supply of such materials is harmonized and synchronized with sub-contractors. If this harmony collapses however AB Tools will be in an extremely difficult position, with no parts to work with and with competitive margins at serious risk.
Proposition 1 is clearly relevant to AB Machine Tools. Ever since Skinner’s seminal work Manufacturing: The Missing Link in Corporate Strategy (1969) a plethora of theories and paradigms have been put forward to understand the phenomenon of the ‘trade-off’. Da Silveira and Slack argue in Proposition 1 that every manufacturing company is forced to acknowledge the reality of trade-offs: they state, ‘Given, that, for all practical purposes, manufacturing systems are technically restrained, focusing on a narrow set of competitive objectives will give levels of performance far superior to those possible with a broader set of objectives’ (Da Silveira and Slack, 2000; p.949). In short: to be successful modern manufacturer, you must be a specializing manufacturer.
AB Machine Tools has been forced to realize the reality of the ‘trade-off’ also. Their entire three-phase plan is recognition of the fact that specialisation upon the TE and HE ranges, and by sub-contracting to other specialists, will be necessary in future to meet very tough German, Italian and Japanese competition. Moreover, AB Tools’ decision to focus upon assembly and marketing of machines rather the manufacture of their every individual part is further evidence of this trade-ff.
Proposition 9 states that: ‘The relative importance of trade-offs will vary between companies’. This proposition is particularly relevant to AB Machine Tools. Whilst all machine manufacturers in AB Machine Tools sector – horizontal and vertical milling and boring machine centres – from Japan to Germany to England have had to trade-off their traditional business models by specializing in one part of manufacture or another, AB Machine Tools has had to implement its trade-off in a way that varies in extent from other competitors. AB Machine Tool’s management realised quickly, though controversially, that the company’s main professional areas of expertise and experience were marketing and assemblage of machine parts. In order to focus on these areas alone a comprehensive and high-risk strategy has been proposed by the management to bring about this change. The trade-off in AB Machine Tool’s case is very difficult, laborious and time-consuming to bring about. In contrast, companies in Japan or Italy might more easily, for instance, adjust their business to specialize in the manufacture of spare parts, by simply recalibrating their machines or reordering their workforce structure.
Proposition 11 states that ‘The relative sensitivity of trade-offs will vary between companies’. This proposition has a similar relevance to Proposition 9: for AB Machine Tools not only does the physical and organizational extent of their trade-off vary considerably from other machine manufactures; it also varies in the sensitivity it has kindled within the management team at the company and the likely sensitivity it may cause for customers. Senior figures at AB Machine Tools are extremely anxious as to whether sub-contracting all pare parts manufacture and whether restriction of company products to the LE and VN lines only will cause enormous and irreparable problems. Chiefly, AB Tools’ staff fear delays and problems with subcontractors will hamper and stifle production. In these senses, the sensitivity of AB Tools’ trade-off varies both in extent and sensitivity to the trade-offs of other manufacturers.
SECTION 3: CONCLUSION & RECOMMENDATIONS
In the final analysis, this report must acknowledge the necessity of the three-phase plan AB Machine Tools have brought forward. Were the company to remain with its present business model and organizational structure, there would be a far more serious risk of loss of competitiveness than the one feared by the implementation of the three-phase plan. Nonetheless, the question remains as to whether AB Machine Tools has drawn up the wisest plan for this re-structure. There are very great risks attached to this plan. Total sub-contraction, if administered incorrectly, could lead to a choking bottleneck for the company, leading later to a major drop in production and so competitiveness. But so too there are major rewards if this strategy is implemented successfully. AB Machine Parts would achieve the swift and even supply of materials that Schmenner and Swink discuss; moreover, ‘value-added’ work rise significantly. Moreover, specializing upon production lines LE and VN might prove lucrative if undertaken expertly.
This report therefore makes the following recommendations:
Phase 1 has near universal consent from the company’s staff: it should be implemented at once.
Phase 2 should be tentatively introduced gradually by gently sub-contracting the manufacture of various parts and observing as this happens how the swiftness and evenness of materials supply changes and whether this leads to greater production.
Phase 2 should be fully implemented if results from the gradual initial introduction of this phase are successful.
A consultation should be held after Phase 2 to decide whether production has increased significantly enough to justify the risks of implementing Stage 3. If this consultation agrees, Phase 3 should be implemented in two parts: first TE should be stopped and, later, HE.
SECTION 4: BIBLIOGRAPHY
Academic Books, Journals & Articles
- Eisenhardt, K. M. (1989). Building Theories From Case Study Research. Academy of Management Review. Vol. 14. No 4, pp 532-550.
- Ferdows, K., & De Meyer, A. (1990) Lasting Improvements in Manufacturing Performance. Journal of Operational Management. 92, 168-174.
- Hayes, R.H.&Wheelwright, S.C. (1996). Manufacturing Strategy: at the Intersection of two Paradigm Shifts. Production Operation Management 5 (1), 25-41.
- Moreton, K. (2002). AB Machine Tools.
- New, C. (1992). World Class Manufacturing Vs. Strategic Trade-Offs. International Journal of Operations and Production Management. Vol. 12 No. 6, pp19-31.
- Quirk, R. (et. al.) (1989). The Oxford English Dictionary. OxfordUniversity Press, Oxford.
- Skinner, W. (1974). The Focused Factory. Harvard Business Review, Vol. 52 No3, pp. 113-121.
- Schonberger, R. (1986). World Class Manufacturing. Free Press, New York.
- Schmenner, R. W. & Swink, M.L. (1998). On Theory in Operations Management. Journal of Operations Management, 17, pp 97-113.
- Encyclopaedia Wikipedia. www.wikipedia.com