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Chad Thomas has a relatively successful wood furniture business. Originally, his company began making furniture based on custom customer orders. As his company matured the company branched out and began making standard furniture. As such, this decision to branch out into the ‘ready to buy’ sector has put additional pressure on the company. Specifically, the pressure on the production line to trade-off between low-profit, high demand products versus the high-profit, low demand products. Inevitably, Mr. Thomas is now reviewing the decisions he has made.
Through this paper we will explore in detail the decisions Mr. Thomas has to makes daily and over the long run to ensure his company’s operations are running effectively. Next, how sales and marketing are affecting the operations of the company. Thirdly, how the decision to produce standard furniture affect the company’s financial structure. Lastly, what alternatives or decisions Mr. Thomas could have made to avoid some of the problems the company now faces.
Running a company is daily task that requires a great amount of judgment to make an informed decision (Froeb, McCann, & Shor, 2014). This assumption is based on my own years of experience leading Marines in combat. There is a direct correlation between leading Marines and running a business: the decisions you make today have lasting impacts tomorrow. For Mr. Thomas this is no less a reality when deciding to branch out into the standard furniture market. Whether Mr. Thomas realized it or not he made a set of decisions within the framework of the nine competitive priorities (Krajewski, Ritzman, & Malhotra, 2013). Originally, the company was arguably based firmly in customization and top quality when Mr. Thomas was starting out. As the business progressed the company then took on the consistent quality and variety aspects of the competitive priorities once Mr. Thomas decided to produce standard furniture.
Therefore, instead of focusing on one or two competitive priorities, his company is now focusing on four or maybe five. Mr. Thomas is now faced with the daily dilemma in production scheduling and productivity when compared to what to produce; custom furniture over that of standard furniture. What is actually happening is the sales of the standard furniture are being cannibalized by the custom orders or vice versa (Investopia). The sales of custom furniture is eating up the sales of the standard furniture however, the custom furniture is been given priority in the production line. At risk is Mr. Thomas’ good name. If one customer’s order suffers over the production of another customer’s order his company’s reputation will be damaged (Lomax, Hammond, East, & Clemente, 1997). Over the long run Mr. Thomas has to make decisions that will increase customer value and to ensure his company is running efficiently. Decidedly, there must be a decision on how to balance the custom orders with standard production fulfillment. In order to balance the company’s operations, Mr. Thomas must make operations management decisions based on the ability to measure productivity (Krajewski, Ritzman, & Malhotra, 2013).
It is unclear how Mr. Thomas is or even aware of the productivity measurements he should be utilizing to maximize his company’s capabilities. Based on the productivity measurements, Mr. Thomas must decide how much time is given to standard and to custom furniture orders. In this way the production line can allocate the worker’s time and measure the average time to make each standard piece of furniture and have an approximate measurement for custom orders. Without the basic measurements of productivity Mr. Thomas cannot truly analyze the operation and make an effective decision on scheduling. Additionally, Mr. Thomas has inventory in various degrees of completion or work in process. While waiting inventory could be attributed directly to scheduling/capacity it is also an indication of supply chain management. Raw materials are sitting waiting to be transformed thus; we can conclude Mr. Thomas has not implemented a standardized output matrix on his standard furniture line.
As raw materials sit waiting for transformation, the situation ties up dollars in housing and inventory maintenance to the point Mr. Thomas is paying additional rental fees for added storage space. Mr. Thomas needs to close the time where raw materials sit waiting for transformation as well as work in process for the standard furniture line. He can do this if he knows the production time it takes to produce standard furniture as well as the production capacity of the production floor. Once this is accomplished Mr. Thomas can allocate production time appropriately to both custom and standard furniture. This, of course, is all based on a single production facility utilizing the same workers. However, the best long term solution would to separate the two production lines in order to increase capacity as the standard furniture line’s demand is steadily increasing.
Mr. Thomas’ challenges are not solely rooted capacity and inventory however. There is a major disconnect between the sales/marketing team and the operations/production team. Evidently, the sales/marketing team is working well creating value to the customer which is in indicative of the steadily growing sales of the standard furniture line (Froeb, McCann, & Shor, 2014). However, the operations and production team is not addressing the additional demand of labor, capacity, and inventory. There is definitely a split in business strategy between sales and production. Sales is pushing and growing the demand for standard furniture however, the production team is giving priority to the custom furniture on the assembly/production line. Mr. Thomas has to address the business strategy for both the sales and production teams.
Given the problems as presented, Mr. Thomas has a SWOT dilemma where capacity is a weakness (LoRé, 2010). This can be transformed into strength if the standard furniture is marketed as ‘limited edition’ and the amount that is sold is balanced with the production line. Thereby, Mr. Thomas can throttle the growth of the standard line into a manageable variable and still create a demand for the product to more high-end buyers on a wider source scale. As the company grows and can afford more labor and capacity the amount of units the sales team can sell will also be increased in the manageable increments paced with the production line.
With sales rising in the standard furniture line it would be a logical assumption that the company’s finances should also rise. As indicated in the study text, this is not the case. In fact the company profits are not what or where they ought to be for the volume of sales realized. Mr. Thomas’ decision to produce standard furniture itself may not adversely affect the company’s financial profile however; the operation to fulfill the decision is having an adverse effect on the company’s financial standing. The incremental variable costs to produce the standard furniture would naturally rise however; the cost of goods sold should be offset by the profit of the sales.
This is not the case as the profits are being utilized in the operation somewhere else. In this example a drain on the company’s net operating profit after taxes (NOPAT) is being drained away in the additional cost in storage in the form of renting a warehouse to store excess inventory volume, in the form of unrealized sales of furniture still in various stages of work in process, and the raw materials purchased sitting awaiting transformation (Harrison, 2011). All these factors are hindering the company’s ability to add value to the customer in the form of increased capacity and labor to produce the desired furniture. If Mr. Thomas allows the current situation to continue unchecked the company’s financial profile will be reduced to an unsustainable financial situation and ultimately fail.
In this particular situation Mr. Thomas cannot go back in time and change the past. Hindsight is always 20/20. Mr. Thomas can make some incremental changes which should improve the various operational problems his furniture company is experiencing. The recommendations are as follows: 1. Slow the growth of the standard furniture line and set its pace with the capacity and schedule allocated. The company has a major bottleneck in production and at this point and must subject the production of the standard furniture to it. 2. Mr. Thomas must clearly indicate the company’s strategy to both the sales and production team in order to achieve organizational congruency. 3. Measure and determine standard furniture production line capacity and assign a schedule to the line. 4. Reduce raw materials ordering in order to reduce storage capacity requirements. 5. Hire additional labor or consider separating the two lines into two completely manufacturing lines with additional capacity and space.
Froeb, L., McCann, B., & Shor, M. (2014). Managerial Economics: A Problem Solving Approach. Mason, Ohio: CENGAGE. Harrison, S. (2011). What Does a Change in Net Operating Profit Mean? Retrieved October 2014, from Chron: http://smallbusiness.chron.com/change-net-operating-profit-mean-32972.html Investopia. (n.d.). Market Cannibalization. Retrieved October 2014, from Investopia: http://www.investopedia.com/terms/m/marketcannibilization.asp Krajewski, L., Ritzman, L., & Malhotra, M. (2013). Operations Management: Process and Supply Chains. New Jersey: Pearson. Lomax, W., Hammond, K., East, R., & Clemente, M. (1997). The measurement of Cannibalization. Journal of Product & Brand Management, 27-39. LoRé, C. (2010, June 2). Strategy Execution Tips: Turn Weaknesses into Strengths by Updating Your SWOT. Retrieved October 2014, from OnStrategy: