You are on page 1of 405

Postgraduate Engineering Programmes

MANUFACTURING STRATEGY
Centre for Engineering Management M.S.Ramaiah School of Advanced Studies, Bangalore
Module Leader at MSRSAS V.G.S.MANI January 2010
1

MODULE AIMS & SUMMARY • Aims and summary – This postgraduate module is designed to pursue the linkages between manufacturing strategy and a company’s corporate strategy. Increasingly companies in global markets are competing through manufacturing, and to do this their strategies for manufacturing must support the company’s marketing objectives and be able to provide a competitive advantage in the market place.

2

MODULE AIMS & SUMMARY • This module helps a) manufacturing management to understand the strategic aspect of their role in realizing their organization’s business b) emphasis the manufacturing’s strategic role in supporting and realizing company’s business c) corporate management to better understand the complexity & interaction among the issues / challenges faced by manufacturing management

3

MODULE AIMS & SUMMARY
• The module equips participants with an understanding of corporate and manufacturing strategy, and prepares them for taking a strategic role in a manufacturing organisation

4

Module Syllabus
• • • Nature and Objectives of Strategy: Corporate strategy concepts, theories, models and tools of analysis; Product Life Cycles: BCG Matrix, Analysis of corporate strategy case studies. Manufacturing Strategy: Links between manufacturing strategy and company strategy, Contribution of manufacturing strategy to business performance and competitive advantage, Manufacturing strategy theories Market Qualifying and Order Winning Criteria: Quality, Delivery, Lead time, Flexibility, Innovativeness, Performance as order winners; Process choice, Study of Manufacturing Systems & their Characteristics: Fit between manufacturing systems and PLC; Product profiling, Manufacturing focus , Manufacturing infrastructure; Case studies Framework for Developing and Analysing Manufacturing Strategy: Study of product/ volume, Layout/ flow (PV/LF), Manufacturing levers, Levels of Manufacturing Capability, Competitive Analysis, Selection of appropriate Manufacturing systems, Supporting methodology for the design of a manufacturing strategy
5

• •

Module Syllabus
• • • • • Change Management: Strategy Implementation Business Economics, Costing and Budgetary Analysis Strategy Performance Measurement: ERP as a tool for evaluation Workshop to analyse and present a few manufacturing strategy case studies Laboratory Practice ERP (IC soft / SAP ERP) - Review of modules like Sales, Purchase, Manufacturing, Quality control and Maintenance

6

Teaching and Learning Methods
• Lecture Sessions • Class Presentation • Lab sessions on ERP (IcSoft)

7

Evaluation
• Assignment: 100% Weightage

8

Software and Manuals • IcSoft ERP 9 .

Module Delivery • Theory  V G S Mani & VijayKumar • Laboratory  Vijay Kumar 10 .

Count Your Chickens Before They Hatch . Financial Times/ Prentice Hall.John Miltenburg. Chennai. 2000 6. Lecture Notes on Manufacturing Strategy.Terry Hill..S. 1992 8.Steve Brown.Robert Grant. Vikas Publishing. The Free Press. U. Piramal. Contemporary Strategy Analysis .Penguin Books of India.Arindam Choudhuri. Manufacturing Strategy . 1995 5. Manufacturing The Future : Strategic Resonance for Enlightened manufacturing . Bartlett . Reinventing the Factory II . Blackwell Publishers. 2001 7. Strategic Management Theory . 2000 11 . Palgrave. 20000 4.Roy Harmon. U.. Radical Change: What Indian Companies must do to become world class .Ghosal. All India Publishers & Distributors.Module Resources 1.Charles W. Canada. Manufacturing Strategy.A. Productivity Press. Hill & Gareth Jones.S. 1998 9.A. Texts & Cases . MSRSAS 2. Managing World Class Factory . 1998 3.

New Delhi . Viswanadham. 2000 11. V. Hari Krishna Excel Books. Strategic Management .mit.com/tatamotors 12 .edu/ index.http:// ocw. Modern Competitive Strategy – Gordon Walker – Tata McGraw-Hill Publishing Co.tatapeoplescar.S. Rao.Module Resources 10. 2008 14. New Delhi.N.P. MIT: Manufacturing Strategy Concepts .V. 2003 13. http://www. Analysis of Manufacturing Enterprise: An Approach to Leveraging Value Delivery Process for Competitive Advantage . Kluwer Academic Publishers.html 12.Text & Cases .

1. INTRODUCTION V G S Mani Centre for Engg. Management 13 .

SESSION OBJECTIVES • This session provides an introduction to contemporary industrial scenario especially with respect to Indian situation • Students are also exposed to the role of manufacturing and its contribution to the growth of a Nation • Concepts regarding how industries are classified and types of manufacturing technology are also covered 14 .

• Many nations. while many new industrialized nations have emerged (e. Japan). have declined (e.g.g. who were industrial powers. • Manufacturing must allow companies to exploit market opportunities without becoming a constraint. China & South Korea) 15 .INTRODUCTION TO MANUFACTURING STRATEGY • Market forces are so powerful and strong that it will mercilessly punish unwise investment and weak enterprises.

INTRODUCTION TO MANUFACTURING STRATEGY • New issues are emerging –  Environment. VCD. robotics. increased automation vs the need for higher employment. 16 . cim. DVD.  Innovations such as CD. mobile phones etc. cam. growth of world trade at a higher rate than global gdp.  Removal of trade barriers.  Newer technologies like cad.

MANUFACTURING CHARACTERISTICS AT VARIOUS PERIODS Period 1940-50 1950-65 1965-80 1980-90 1990Characterized By Shortages Terminology PRODUCTION ERA National Excess Capacity MARKETING ERA Concentrated Earnings FINANCE ERA International Competition QUALITY ERA Global Excess Capacity PARTNERSHIP ERA 17 .

INTRODUCTION TO MANUFACTURING STRATEGY • Late 80s and early 90’s brought a new dimension to the industries – competition. whereas overspending on development by 50% will reduce profit by only 3%. Struggle to survive has become a way of life • Time has become another extremely critical factor. 18 . A delay of 6 months in launching a consumer product can reduce lifecycle profit by 33%.

have fallen by the way side (TWA.INTRODUCTION TO MANUFACTURING STRATEGY • Enterprises have to tackle all these issues and yet be successful. • It is the responsibility of the company to integrate industry specific and nation specific factors with company’s resources.HMT. DEC. In the same business. NGEF etc).g. For e. PAN AM AIRLINES. some companies fail while some others do extremely well. capabilities & strategies in order to enhance company’s performance. 19 . Companies that were successful earlier.

ENVIRONMENTAL ISSUES INFLUECING BUSINESS • Globalization • Time Compression • Technology Integration 20 .

ENVIRONMENTAL ISSUES INFLUECING BUSINESS • Over a 1-2 year period. company performance is affected by industry related factors • But over a 6-7 year period. industry factors play only a small part. Rest is management factors 21 .

22 .

INABILITY TO ESCAPE THE PAST • Track record of success • No gap between expectations & performance • Satisfied with current performance • Accumulation of abundant resources • Attitude that resources will win out • Resources substitute for creativity 23 .WHY COMPANIES FAIL .

INABILITY TO INVENT THE FUTURE • Optimized business • Success confirms practices systems • Deeply etched • Momentum is practices mistaken for leadership • Vulnerability • Failure to reinvent leadership 24 .WHY COMPANIES FAIL .

CONTRIBUTION OF MANUFACTURING STRATEGY • Manufacturing contributes to wealth creation activity of a nation. Germany and Italy have gained competitive advantage and high value additions through manufacturing route during the last decade and which was a key factor in their economic success 25 . Roughly 35 % of GDP is contributed through industries in newly developing countries • Many nations such as China. Japan. Korea.

assembly line techniques. reduction in product variety to reduce costs. SPM. . JIT and agile manufacturing etc were developed. cellular manufacturing. in response to competitive market forces.focus was on higher efficiencies through improvements in fits and tolerances. •Later. work force training to achieve single specialized skill. transfer lines etc. These developments have cut down inventories and work in progress 26 •Initially. developments such as FMS.

detail oriented and unexciting. its people are unsophisticated. its quality is never as good as it should be. there is little appreciation of the strategic role of manufacturing in corporate strategies. tedious. Many companies treat manufacturing function as an inevitable nuisance! It soaks up capital in facilities and inventories. it resists changes in products and schedules.Unfortunately. 27 .

(Icarus syndrome)  is simply not geared to company’s corporate objectives  is not designed to meet company’s needs. short-term issues  has a reactive approach to long term strategic planning  has focused exclusively on efficiency. manufacturing  has focused on day-to-day. it has hindered it from visualizing the “big picture”. 28 .CONTRIBUTION OF MANUFACTURING STRATEGY As a result. in spite of having good facilities.

J. it pulls in the opposite direction! •As a consequence.•At best. M & A. take over. top management has focused on improvements through non-manufacturing decisions such as outsourcing. has remained a neutral force or quite often. etc. •This anomaly requires to be bridged. Manufacturing can offer strategic strength to its organization in the following ways. 29 .V.

Provide manufacturing processes (including design of new products) that gives the business a distinct advantage in the market place. delivery. B.A. flexibility and innovativeness) 30 . Provide coordinated manufacturing output and support which provides competitive advantage & enables the organization to win orders in the market place (cost. quality and performance.

industry must cease to operate the way it has been doing for the last 50 years •The country must move to a new manufacturing ethos that is benchmarked to world size and class. •Indian 31 .

ICFAI) 32 .EXCESS COST OF DOING BUSINESS IN INDIA • • • • • • • • • High cost of materials Low productivity High interest costs Technological obsolescence Complex . irrational & multiple levels of taxes Complex regulations/ procedures Time delays/ corruption Nitpicking culture Poor managerial competence (Ref .Vision 2020 – Prof. Indiresan.

3) 51.1 33 .2 14.INDIA & CHINA – A COMPARISON INDIA FOR THE YEAR 2003 (% of GDP) CHINA (% of GDP) Agriculture Industry (Manufacturing) Services 22.3 (39.2 26.6 (16.3) 33.6 52.

2 26.0 12.6 (16.INDIA & CHINA – A COMPARISON China 2003 % GDP India 2003 % GDP India 2009 % GDP India 2020 % GDP Agriculture Industry (Manufacturing) Services 14.0 17.0 20.3) 51.0 63.2 17.3) 33.6 52.0 34 .0 71.1 22.3 (39.

customers & knowledge • Capacity driven industries  Physical Capital Investment is high in relation to cost or value addition  Competition takes place mainly on price  Pace of productivity improvement is modest  Register low profitability  Examples – Steel. Paper 35 . Textiles.CLASSIFICATION OF INDUSTRIES • Industries are dominated by different types of competitive resources – capacity.

beverages etc. 36 . food. these industries tend to be less mature & fragmented  Examples – household goods. publicity etc  Advantages gained by these aspects are only temporary – these are easily imitated  Generally.CLASSIFICATION OF INDUSTRIES • Customer driven industries  Investments in brands/ customer relations account for a large part of cost/ value addition  Companies compete across a number of non price aspects such as logistics. product positioning.

CLASSIFICATION OF INDUSTRIES • Knowledge Driven Industries  Highly investment driven especially in R & D. Electronics. Pharmaceuticals etc 37 . which accounts for a large part of its cost  Industries excel in innovation  Examples are Software.

more efficiently and in greater volumes 38 .MANUFACTURING TECHNOLOGY TYPES • Process Technology pertains to the techniques of producing and marketing goods and services • It also includes work methods. distribution and logistics • It is fully embedded in a firm’s value chain • Improvements are designed to produce and market goods & services faster. equipment.

MANUFACTURING TECHNOLOGY TYPES • Product Technology pertains to technology that is built into the product/ services • Changes in product technology add new features or provide new substitutes for existing products • Process Technology refers to the way the firm is doing its business. Product Technology refers to the output of an organization 39 .

SESSION SUMMARY • Following concepts have been covered during this session  Contribution of manufacturing to economies of Nations  Environmental issues influencing business  Reasons why companies fail  Manufacturing technologies  Classification of Industries 40 .

STRATEGY & ITS FORMULATION V G S Mani Centre for Engg. Management 41 .2.

participants are taught the following concepts  Definition & characteristics of Strategy  Role. Features and levels of strategy in an organization  Intended and Emergent strategy  Strategy Formulation  Strategic Choice  Missions and Goals 42 .SESSION OBJECTIVES • In this session.

and contingent moves by intelligent opponents. policies and action sequences into a cohesive whole • Managements plans to attain outcomes consistent with the organization’s mission & Goals • A well formed strategy helps to marshal and allocate an organisations resources into a unique and viable posture based on its relative competences and shortcomings. anticipated changes in the environment.STRATEGY DEFINITION • Strategy is the pattern or plan that integrates an organisations major goals. 43 .

STRATEGY .ADDITIONAL DEFINITIONS •Science and art of military commands as applied to overall planning and conduct of large-scale combat operations •Determination of the basic long term goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out the goals •The pattern or plan that integrates an organization’s major goals. policies and action sequences into cohesive whole 44 .

over a period of time. infrastructure and a set of specific capabilities • Moving from where you are to where you want to be in future – through sustainable competitive advantage 45 . enables a business to achieve a desired (market related) manufacturing structure (process choice). comprehensive and integrated plan which is designed to ensure that basic objectives of the enterprise are achieved • Pattern in a stream of decisions or actions • A sequence of decisions that.Strategy – Additional Definitions • An unified.

CHARACTERISTICS OF STRATEGY Associated with major issues Impact on the whole organisation Requires concentration of effort Long term 46 .

CHARACTERISTICS OF STRATEGY • • • • • • • It is high – level It is general Time span is long range Affects the whole organization Developed from the ground upwards Covers a wide range of activities Exploits a particular concept 47 .

Strategic And Operations Planning Strategic Planning Long Range Plans 3+ yrs Top Management Responsibility Broad Objectives Focus on planning & forecasting Tactical Planning Operational Planning Intermediate Short range < 1 yr Range 2 – 3 yrs Mid level Junior level management Departmental Internal day to day objectives activities Coordination Controls 48 .

WHY HAVE A STRATEGY? Optimise structural decisions Proactively plan for future changes Align capabilty to market needs Integrate sub-strategies holistically 49 .

50 .

STRATEGIC DIMENSIONS 51 .

STRATEGIC DIMENSIONS 52 .

It is usual for a ‘Strategic Business Unit’ to be treated as semiautonomous and therefore free to set their own strategy under the corporate umbrella.THE LEVELS OF STRATEGY Strategy Corporate Defines the business in which the organisation will compete. 53 Business Functional . determines the competitive approach and the strategies for each business unit of a multi-product organisation. Given the constraints set by the corporate and business strategies. determines the long term objectives and identifies the courses of action and allocation of resources. functional departments must develop strategies in which their activities and skills are harnessed for the improvement of performance. Aim of the functional strategy is to obtain the maximum productivity from resources. Focuses on how to compete in a given business. Focus often on cost leadership.

Management of growth Multinational .THE BUSINESS CONTEXT Small Business .Survival despite failure Professional practice .Entrepreneurial vision .Multi layer management .Political dimension .Slowness of decision making .Aligning operations with strategy .Complexity .Regional markets .Central v’s local control .Communications Public sector .Traditional structures and mindsets 54 .

STRATEGIC PRESSURES Customers who demand more sophisticated products and services The emergence and availability of new technical solutions Smaller business unit THE BUSINESS UNIT Strong collaboration with suppliers There is a need to optimise resource bases Time-to-market for new products is becoming ever more critical 55 .

etc.STRATEGIC MANAGEMENT MODEL Formulation Implementation Evaluation External analysis Establish mission Internal analysis Organisation control Structure Leadership Rewards Functional policies Production Marketing HR. Formulate objectives Identify strategy Feedback Measure and evaluate performance Corrective action Contingency planning 56 .

g. Haeber process for ammonia production • Intended strategy  deliberate strategy realized strategy 57 .INTENDED Vs. EMERGENT STRATYEGY • Planning assumes strategy as an outcome of rational planning • Ignores that strategy can emerge as response to unforeseen circumstances e.

• Most companies follow a combination of intended and emergent strategies 58 .INTENDED Vs. • Example of of emergent strategy . EMERGENT STRATEGY • Unrealized strategy  emergent strategy  realized strategy • Example of realized strategy.Sale of 50 cc Honda bike in USA. MTR ready made food in Bangalore • Emergent strategy is generally successful.missiles development in India.

59 .

60 .

DIFFERING PLANNING STYLES 1960’s Planning for a period of stability and growth Long term forecast Detailed planning Five year budgets Strategies for growth Manpower planning Gap analysis Product-market matrix Inflexible Over optimistic Alternatives not considered 1970’s Planning for business under attack Divisionalisation Exploratory forecasting Planning for change Environmental impact Sensitivity and risk analysis Too centralized No business linkage Too elaborate analysis Early 1980’s Planning for cutback and rationalization Top management in charge of strategy Attempt to manage strategic change Explicit business philosophy and objectives Resource portfolios Short-term views Employee backlash Late1980’s Planning for growth. global consequences Visible leadership Staff involvement Investment in new technology Company wide quality improvement Benchmarking Training Heavy staff demands Difficult integration Funding for new investments 61 Problems Techniques Elements .

DIFFERING PLANNING STYLES 1990's Setting strategic direction in an uncertain environment Current Issues Environmental awareness Crisis and recovery: managing turnaround situations Customer satisfaction Transforming cultures Emerging markets Achieving excellence Cost out initiatives Responding to deregulation and privatisation Legislation 62 .

stakeholders & strategies 63 .ELEMENTS OF STRATEGY & ITS FORMULATION Definitions – missions. goals. objectives. strategy Mission statement • Is a framework for strategy formulation • Identifies interrelationship between mission.

64 .Mission statement must include •Definition of business •State objectives •Attempt to satisfy both external and internal claimants. likely claim on the business by stakeholders •Identify critical strategic issues – reject strategies conflicting with the needs of critical stakeholders. identify their interests and concerns . resolve conflicts •Identify stake holders.

ESTABLISHING THE CORPORATE MISSION MISSION STATEMENT Inside Claimants Executive officers Board of directors Shareholders Employees Business definition Major goals Philosophies Outside Claimants Customers Suppliers Governments Unions Competitors Local communities General public Strategic Management guided by mission Statement 65 .

MISSION CRITERIA Specific enough to have impact on behaviour of organisation Focused more on customer need satisfaction than on product characteristics Able to reflect essential skills Attainable Flexible 66 .

• Usually companies mention increasing share holder’s wealth as a goal – but it can lead to short term practices. 67 . innovation. This can be rectified by having secondary goals such as market share. social and employee issues. measure of financial resources.GOALS • Goals specify how a company intends to go about attaining strategic intent.

B.traditional financial measures • Soft goals – role of S. wants to be No.E.U.1 or 2 in their line of business • Hard goals . as a social entity.GOALS • An example can be – leader in the business segment – G. • (Caution – making unrealistic statements & targets) 68 .

g. I.) • Consumer oriented rather than product oriented 69 .DEFINITION OF BUSINESS • What is our business. what should it be? • (e. what will it be. successfully transited from calculators/ typewriters to computers.B.C. but was not successful in transiting from main frame to P.M.

• e. identify vertical integration.g. 70 .DEFINITION OF BUSINESS • Multi-product company cannot just aggregate the individual businesses. Must identify the synergy & the reasons why business units are better off as a part of the multi-product company. commonality in marketing/ servicing etc.

71 .

swim every day Payoff for reaching objective Buy a new suit .TERMINOLOGY TERM Mission Goal Objective Strategies Action – Task Reward DEFINITION Value and expectation of all General statement of aim or purpose Quantification of goal Action to achieve objectives PERSONAL EXAMPLE Be healthy and look good Lose weight Lose 5 kgs by 31st December Diet and exercise BRITISH AIRWAYS To be the best and most successful…. Significant presence globally Take advantage of global expansion Create market alliances Acquire 70% stake in Sabena Profit sharing scheme 72 Implementation steps Eliminate desserts.

STRATEGY FORMULATION DRIVERS CAPABILITIES GAP ANALYSIS PROVIDERS Need strategic intent RESPONSIVENESS Company’s weaknesses Practices Methods Tools COMPETENCY INFORMATION INFORMATION ORGANISATION TECHNOLOGY PEOPLE INNOVATION INFORMATION INFORMATION FLEXIBILITY SPEED STRATEGY FORMULATION 73 .

STRATEGY FORMULATION External analysis Identify opportunities and threats Est ablish mission Internal analysis Identify strengths and weaknesses For mulat e object ives Ident ify and select st r at egy 74 .

STRATEGIC CHOICE I nt er nal analysis Ext er nal analysis M ission St r at egy select ion C om pat ibilit y w it h t oler ance O bject ives 75 .

FORMULATING OBJECTIVES Objectives Provide direction Aid in evaluation Allow co-ordination Financial Non Financial Measurable Communicable Realistic 76 .

SETTING GOALS Attainable Economic Applicable Consistent Understandable Measurable Stable Adaptable Legitimate Equitable Met with reasonable effort under the prevailing conditions Cost of setting and administering should be low in relation to activity Fit the condition under which they to be used Unify communication and operations throughout the company Expressed in simple. clear term to avoid misinterpretation Communicate with precision Long enough life to provide predictability and to amortise effort Designed so that elements can be added and brought up to date Officially approved Accepted as a fair basis for comparison Customer focused Address areas important to the customer (internal/external) 77 .

SESSION SUMMARY • Following concepts have been covered during this session  Various definitions of Strategy  Why have a strategy?  Strategic Pressures & Models  Strategy formulation Methodology  Establishing Missions & Objective  Mission Criteria 78 .

EXTERNAL ANALYSIS V G S Mani Centre for Engg. Management 79 .3.

participants are taught the following concepts  Broad /Macro Environment .T.E.P.S.SESSION OBJECTIVES • In this session. factors  Competitive Environment – Porter’s 5 F Model  Limitations of PEST & 5 F theories 80 .

S. Economic Competitive environment Political New entrants Customer power Substitutes Porter 5 force model Supplier power Competitors Social Technological 81 .EXTERNAL ANALYSIS Broad / Macro environment P.T.E.

S.T.E.MACRO ENVIRONMENT (P.) Political trends Change of governments Tougher legislation Resurgence of trade unions Conflict/Unification Economic trends Monetary union Exchange rates Inflation Shift of financial power Social trends Skill shortage Emergence of 'anti-growth' values Increase in home working Boom in leisure industries Technological trends Replacements for steel Development of public transport Information technology Communications 82 .

PORTER’S 5 FORCE MODEL Threat of new entrants New entrants Industry competitors Suppliers Intensity of rivalry Bargaining power of buyers Customers Bargaining power of suppliers Substitutes Threat of substitutes 83 .

PORTER’S 5 FORCE MODEL Determinants of supplier power Economies of scale Brand identity Switching costs Capital requirements Access to distribution Absolute cost advantages Government policy Expected retaliation Bargaining leverage Ability to backward integrate Substitute products Impact on quality/performance Brand identity Product differences Price sensitivity Industry Growth Fixed costs/value added Intermittent over capacity Differentiation of inputs Switching costs Presence of substitute inputs Supplier concentration Importance if volume to supplier Cost relative to total purchases Impact of inputs on cost differentiation Threat of forward integration Relative price performance as substitutes Switching costs Buyer propensity to substitute Entry Barriers Determinants of Substitution threat Determinants of buyer power Switching costs Brand identity Product differences Concentration and balance Diversity of competitors Exit barriers Rivalry determinants 84 .

Indian professionals working abroad. inspectors’ harassment for indian industries 85 .EXTERNAL ANALYSIS • Some companies do well because of external environment or country where they operate • Others do badly because external environment is hostile • E..G.

EXTERNAL ANALYSIS • Strategy must fit in with the environment or reshape the environment to ensure fit between intent and environment • Opportunities & threats constitute external factors. 86 . Opportunities arise when environment tends to create a competitive advantage to the company. Threats arise when the environment endangers the integrity of the company.

87 .

• Weaker that the forces are. the more it is an opportunity for the company. more limited is the ability of the companies to raise prices and be more profitable. • Company may alter the impact of 5 F through its choice of strategy 88 . Hence they can be construed as threats. • Impact of 5 F change through time.FIVE FORCES MODEL • Five forces shape competition within the industry • Stronger that any of these forces work (alone or in combination).

brand loyalty. 89 . which are not competing. marketing infrastructure. but can do so if they chose.POTENTIAL COMPETITORS • These are companies. technology. • Ability to enter business is a function of entry barriers (costs. economics of scale) • Companies discourage potential competitors by raising entry barriers and through disinformation.

 competitive structure  demand condition &  height of exit barriers 90 .RIVALRY AMONG ESTABLISHED COMPANIES • Price wars may result from intense rivalry • Extent of rivalry is determined by 3 factors viz.

It can be fragmented or consolidated • single dominant company is called monopoly while a few dominant companies is called oligopoly 91 .e.COMPETITIVE STRUCTURE • Refers to the number and size distribution of companies in an industry i.

FRAGMENTED INDUSTRY • Fragmented industry structure combined with low entry barrier results in boom & bust cycles (strong demand  entrants hoping to cash in  creation of excess capacity  price war  some companies are forced out  industry capacity matches demand  price stability) • Low entry barrier + fragmented structure represents a threat • Cost minimization & survival during bust cycle is the most apt strategy 92 .

companies are interdependent. • Competitive action of one company affects the business of its rivals. airlines in america lost more money than what they had made in the previous 50 years! 93 . • Can lead to dangerous competitive price spiral • Between 1990&92.CONSOLIDATED INDUSTRIES • In consolidated industrial situation.

94 . companies try to follow the price lead set by dominant company by tacit understanding • Do you accept that market sets the price? • But this arrangement can be unilaterally abrogated by one or more company during very adverse economic condition.CONSOLIDATED INDUSTRIES • Since price war constitutes a threat.

• However.CONSOLIDATED INDUSTRIES • Companies try to minimize the threat by highlighting non price issues such as quality/ special features and by building brand loyalty. Air travel. it may be difficult to distinguish between service providers e. Cable TV • Price is also used as a tool to increase demand 95 .g.

company can grow/ sustain only by taking business away from competitors. 96 .DEMAND CONDITION • Growing demand (addition of new customers or more purchase by existing customers) tends to moderate competition • In this situation. companies can increase business and revenue without taking business away from competitors. • When demand is declining.

g. • Common types of exit barriers are Investment in plant & machinery High cost of exit such as retrenchment compensation Emotional / sentimental attachment Strategic relationship between business units of a company  Economically dependent on industry  Political/ social factors (e. Kolar Gold Field/ NGEF) 97     . • Companies keep operating even if the business is not viable.EXIT BARRIERS • These can take the form of economic. strategic and emotional factors.

98 .

THE BARGAINING POWER OF BUYERS • Buyers represent a competitive threat. Increase in credit period. when buyers are large and few while suppliers are small and many (e. increase in quality etc) • Raising of demands on suppliers by buyers. entirely depends on their power relative to the suppliers. when their demand increases without commensurate price increase (e. reduction in price.g. Auto components) 99 .g. Buyers are powerful.

THE BARGAINING POWER OF BUYERS • Buyers purchase in large quantities • Supplier depends on the buyer for a large percentage of his business • Buyers can switch easily between suppliers • When inputs can be purchased from several buyers at the same time • When buyers can vertically integrate and supply their own needs 100 .

• Suppliers are powerful.THE BARGAINING POWER OF SUPPLIERS • When supplier can force the buyer to increase the price of inputs. they represent a threat. when  Suppliers’ product has no substitute & is critical to the company  Buyer is not an important customer to the company  It is difficult for the buyer to switch to another supplier  When supplier can vertically integrate and compete with the buyer  When the buyer cannot vertically integrate backwards and meet their own requirements 101 .

g. 102 . Coffee can be substituted by tea.THE THREAT OF SUBSTITUTE PRODUCT • The existence of close substitute product presents a competitive threat to the supplier industry e. • This restricts the price that the company can charge its customers.

) • Industries are embedded in a wider macroenvironment of Politcal.S.MACROENVIRONMENT (P. Social &Technological factors. 103 . • Demographic factors also play a role.T. Economic. These factors determine the health of a nation and its economy.E.

Inflation can slow down the economy and make prediction of future that much more difficult.S. Converse is also true.MACROENVIRONMENT (P.) • Economic – improvement of economy ensures growing business volumes and reduces competitive pressures. (Misery index = inflation + unemployment) 104 .E. currency value also contribute to the competitive factors and may pose a threat/ opportunity to the company. Other factors such as interest rates.T.

E. This factor also emphasizes the need for speedy product development and its introduction in the market.) • Technological.S. This is called a “perennial gale of creative destruction”. 105 . represents both an opportunity and a threat. As such.can make existing products obsolete and create demand for new products.MACROENVIRONMENT (P.T.

MACROENVIRONMENT (P. E. Liberalization of imports has created opportunities for traders but has threatened the industries. Health consciousness resulted in opening health clubs & reduction of demand for cigarettes.G. 106 . • Political – political factors also create opportunities and threats.E.) • Social – this also creates opportunities and threats.T.S. E. Similarly environmental concern has had its favourable/ adverse effects.G.

) • Demographic – changing composition of population has created opportunities and threats.E.T. pizza) and reduced demand for other products (formal clothes) 107 . Likes and dislikes of younger group has created its own demands (soft drinks.S.MACROENVIRONMENT (P.

MACROENVIRONMENT (P.) • There is a criticism that the two theories represent a static model in a dynamic world! • Innovation gives companies an opportunity to reduce costs & revolutionize the industry structure.E.T. Hence the industry undergoes a transition. 108 .S. when the theories are not applicable.

Convergence of PEST Factors P1 E P2 S1 T S2 System 2 Why are E & T factors becoming common? 109 System 1 .

• This is called “punctuated equilibrium & competitive structure”.T.g.LIMITATIONS OF P.S. & 5F • When the industrial structure is reshaped. • There are many industries where innovation is continuous (“hypercompetetive”) and there are no periods of equilibrium (e. Autos) 110 . it again attains a state of new equilibrium and the theories are again applicable.E.

Bargaining power of suppliers. Fragmented and consolidated Industrial Structure 111 .SESSION SUMMARY • Following concepts have been covered during this session  Macro & Competitive environment – PEST & 5F theories. Threat of substitute product. entry and exit barriers. their limitations  Elements of 5 Forces – Supplier Power.

INTERNAL ANALYSIS V G S Mani Centre for Engg.4. Management 112 .

Structural Changes  Control Systems  Culture. participants are taught the following concepts  Analyzing the internal organization  Structures and Systems.SESSION OBJECTIVES • In this session. Style & Value  Skills & Resources  Resources Capability 113 .

style and values Structure and systems 114 .ANALYZING THE INTERNAL ORGANISATION STRATEGY Skills and resources Culture.

Structure Culture Values Resources • Awareness of these is essential to develop an insight into the reality of our organisation and thus how we ought to look in the future. 115 .ANALYSING THE INTERNAL ORGANISATION • The strategy of a firm is influenced and constrained by the existing.

STRUCTURE AND SYSTEMS • Structure refers to the way in which a company is organised in terms of Work flow Communication Authority 116 .

STRUCTURE AND SYSTEMS Small company / narrow product range Larger company / diversified product range Divisional Matrix Mixture. usually taking the form of product and geographical divisions or functional and divisional structures operating in tandem Type Functional / Traditional Organisation based Organisation on the primary tasks subdivided into it has to carry out units which are usually responsible for defined market or product areas Form 117 .

FUNCTIONAL STRUCTURE

Managing Director

Manufacturing

Sales and Marketing

Engineering

Finance

118

DIVISIONAL STRUCTURE

CEO

Corporate Headquarters

Division A

Division B

Division C

Division D

Manufacturing

Sales and Marketing

Engineering

Finance
119

MATRIX STRUCTURE

Product / Centre A Manufacturing

Product / Centre B

Product / Centre C

Sales

Etc

Customer
120

MATRIX STRUCTURE • A matrix is a system that indicates not only a multiple reporting structure, but also aligned processes and an associated organisational culture and behaviour pattern.
– Focus on optimising customer relationships – Communication happens both vertically and horizontally – Intersections mean dedicated functional resources to product / centre – Better focus on product for customer
121

EMERGING STRUCTURES

Communication problems Conflicting priotities Lack of co-ordination

Functional
Functional Expansion

EMERGING STRUCTURES

CO-ORDINATION ACROSS THE ORGANISATION
Little specialisation Emergance of specialists Functional goals not linked

Expansion

122

ACHIEVING CO-ORDINATION

Create small units Co-ordination Co-ordinate activities across functions across the organisation Formalise roles in a matrix structure
123

STRUCTURAL CHANGE

Confusion

General management avoidance

Uncertainty

Retain historical structures

Anxiety

Reorganisation delayed

Consequence

Resentment

124

STRUCTURAL CHANGE

Management approval Systems hinder strategic implementation Job descriptions

Avoid taking responsibility

Uncomfortable in using initiative Used defensively Avoidance of new problems
125

CONTROL SYSTEMS Do they measure only the things you can count ? Do the control systems measure what is important ? Do they identify staff priorities ? Is action identified to meet the required level of performance ? 126 .

CULTURE. expectations and values shared by the organisations employees • Norms of behaviour will emerge. to which managerial hierarchy and the employees will follow • Shared values and expectations will establish the degrees of individual – Responsibility – Initiative – Innovation 127 . STYLE AND VALUES • Culture is the pattern of beliefs.

CULTURE. STYLE AND VALUES Effectiveness Competitive Edge Change Behaviour GUIDE 128 .

CULTURE, STYLE AND VALUES
Strategy making process influenced by management views Customers, reported performance, ex-employees, other managers, industry rumours Competition are formally rubbished Collective inferiority complex OBJECTIVE INFORMATION IGNORED OR DOWNGRADED IF IT DOES NOT FIT THE PREVAILING VIEW OF THE WORLD

129

CULTURE, STYLE AND VALUES

There is safety in being big Managers know what they are doing

Views that keep the company doing what it has done in the past, and is doing now

We are trained to avoid risks at all costs

Loyalty brings promotion
130

CULTURE, STYLE AND VALUES • Where Management is harmful to good decision making
– Believed wrong or bad form to criticise Management – Doubters are seen as not being ‘Team Players’ – Plain fear can prevent people from speaking their minds This predominant management style gets reinforced where Company’s generally promote from within
131

CULTURE, STYLE AND VALUES
High
8
Country club management Attention to needs of people, friendly atmosphere Team management People commitment leading to trust and respect

Concern for people

6

7

3

4

Middle of the road management Balancing necessity to get work out and maintaining morale

5

Impoverished management Exertion of minimum effort to get required work done

Authority-Compliance Minimum interference through procedures

Low Low 1
2 3 4 5 6 7 8 High
132

1

2

Concern for production

CULTURE, STYLE AND VALUES

Autocratic Use of authority by leader

Democratic

Area of freedom
Tells Sells to group Announces decisions & permits questions Consults group & decides Presents problem asks for ideas & decides Presents problem & boundaries group decides Gives group freedom to define problem & decide

Fast

Slow
133

AUTOCRATIC STYLE • Production-oriented leadership

Effective when - time is limited Ineffective when - members have a certain degree of skills-knowledge - group wants an element of spontaneity in their work - developing a strong sense of team is the goal
134

- individuals/group lack skill and knowledge - group does not know each other

DEMOCRATIC STYLE • Employee-oriented leadership

Effective when - time is available Ineffective when - group is unmotivated - no skills or knowledge is in members - high degree of conflict is present - group is well motivated - a sense of team exists - there is some degree of skills or knowledge among the members of the group

135

CULTURE, STYLE AND VALUES • Even when you believe democratic to be the correct style, pressure exists from
– Colleagues you would be considered as ‘weak’ – Bosses ‘you’re not in control’ – Staff ‘we don’t know how to respond to this unfamiliar approach’
136

SKILLS AND RESOURCES • Resources are those assets that form the input for the production of an organisations goods and services. – Personnel and managerial expertise – Financial assets – Physical plant and facilities 137 .

RESOURCE CAPABILITY
Value ValueChain ChainAnalysis Analysis
Resource Resourceaudit audit Measures Measuresof ofresource resourceutilisation utilisation(effectiveness (effectivenessand andefficiency) efficiency) Measure Measureof ofresource resourcecontrol control

Drawing DrawingComparisons Comparisons
Historical Historicalanalysis analysis Industry Industrynorms norms Experience Experiencecurve curve

Assessing AssessingBalance Balance
Product Productportfolio portfolioanalysis analysis Skills Skillsanalysis analysis Flexibility Flexibilityanalysis analysis

Identification Identificationof ofKey KeyIssues Issues
Strengths Strengthsand andweaknesses weaknessesanalysis analysis Distinctive Distinctivecompetence competence
138

SKILLS AND RESOURCES
Functional audit

Organisational capability audit

ORGANISATION

Distinctive competence = Competitive advantage

Inability to meet customer needs
139

SKILLS AND RESOURCES
Economies of scale

Linkages

Distinctive competence; Audit considerations

Response time

Learning and experience
140

SKILLS AND RESOURCES
Economies of Learning and scale experience
Can accrue in production, purchasing and distribution. Need to assess where competitors are exploiting scale economies more effectively. Do we communicate ideas and suggestions effectively? Do we thoroughly document changes and improvement?

Linkages

Response time
How rapidly can we respond to an order? How long does it take us to develop a new product? How soon can we deliver? Critical in creating competitive advantage.
141

Cost and performance of one activity is often affected by how other activities are performed. Eg Higher quality components can reduce production costs.

SKILLS AND RESOURCES
Internal ‘Functional Areas’ Audit R&D Marketing Finance
Are R&D efforts well planned, directed and controlled? Is the R&D effort based on customer needs as revealed by market research? Have enough new products been generated by the R&D process? What is the extent of the marketing effort? To what degree is the firm marketing oriented? How capable is the marketing in identifying new opportunities? What is the financial standing of the company and what is the quality of financial management? Is the company investing to create competitive advantage?

Production
Is the manufacturing process meeting current competition? Is it flexible to meet future competition? Is the plant and equipment appropriate? Does it embody the latest technology?

Personnel
Does the company have the right people with the right skills in the right place? Does the firm offer competitive rates of pay and conditions of employment? Is the workforce informed about company developments?
142

SKILLS AND RESOURCES

EFFECTIVE

EFFICIENT

Doing the right thing

RESOURCES

Doing the thing right

Deployed in the best way

Utilised in the best way
143

SESSION SUMMARY

• Following concepts have been covered during this session
 Analyzing the internal Organization  Strategy rests on a foundation consisting of – a)skills & resources b) culture, style & values and c) structure & system  Types of structures  Kills & Resources  Resource Capability

144

5. STRATEGY DEVELOPMENT

V G S Mani Centre for Engg. Management

145

SESSION OBJECTIVES • In this session, participants are taught the following concepts
 Combining External & Internal Analysis  Developing SWOT / TWOS matrix  Types of Strategies – Growth, Stability and Retrenchment Strategies  Generic Strategy and associated risks  Product Life Cycles  Product Portfolio – BCG Matrix

146

COMBINING THE INTERNAL AND EXTERNAL ANALYSIS • Strategy should arise from matching company strengths to environmental opportunities, while combating threats and removing its weak links
SWOT Analysis

STRENGTHS

WEAKNESSES

THREATS

OPPORTUNITIES
147

SWOT ANALYSIS
Many product lines Broad market coverage Manufacturing competence Good marketing skills Good materials management systems R&D skills Information system competences Brand name reputation Portfolio management skills Cost or differentiation advantage New venture management expertise Appropriate management style Appropriate organisational structure Appropriate control systems Ability to manage strategic change Well developed corporate strategy Good financial management
148

SWOT ANALYSIS
Obsolete, narrow product lines Rising manufacturing costs Decline in R&D innovations Poor marketing plan Poor materials management systems Loss of customer goodwill Inadequate information systems Inadequate human resources Loss of brand name capital Growth without direction Bad portfolio management Loss of corporate direction Infighting amongst divisions Loss of corporate control Inappropriate organisational structure / control High conflict and politics Poor financial management
149

SWOT ANALYSIS
Expand core business Exploit new market segments Widen product range Extend cost of differentiation advantage Diversity into new growth businesses Expand into foreign markets Apply R&D skills in new areas Enter new related businesses Enlarge corporate portfolio Reduce rivalry among competitors Make profitable new acquisitions Apply brand name capital in new areas Seek fast market growth

150

SWOT ANALYSIS Attack on core business Increases in domestic competition Increases in foreign competition Change in consumer tastes Entry barriers Rise in new or substitute products Increase in industrial rivalry New forms of industry competition Potential for takeover Existence of corporate raiders Changes in demographic factors Changes in economic factors Downturn in economy Rising production costs Slower market growth 151 .

SWOT/ TOWS MATRIX Strength Weakness Opportunities Threats S-O Strategies S-T Strategies W-O Strategies W-T Strategies 152 .

SWOT/ TOWS MATRIX • S-O Strategies pursue opportunities that are a good fit to company’s strengths • W-O Strategies overcome weakness to pursue opportunities • S-T Strategies identify the ways that the firm can use its strengths to reduce its vulnerability to external threats • W-T Strategies establish a defensive plan to prevent the firm’s weaknesses from making it highly susceptible to external threats 153 .

IDENTIFYING AND SELECTING STRATEGY • An organisations strategy describes its method for achieving strategic objectives • Corporate strategy alternatives can be classified as being concerned with – Growth – Stability – Retrenchment 154 .

GROWTH VECTOR MATRIX Product Present Market Market Penetration Product Development New Present New Market Diversification Development 155 .

unrelated (conglomerate). there is existing connections .related.GROWTH STRATEGIES Area How Market penetration Existing markets Winning a larger share with existing Existing products products/taking competitors business Low No investment in new products Little knowledge of market characteristics Market knowledge New product development Unknown market and product influences Risk Factors Market development New markets When existing markets offer few High Existing products prospects in growth/overcome loyalty Product development Existing markets New products New markets New products When there is low brand loyalty and/ or short product life cycles Low High Diversification Development beyond present markets High and products. outside the scope of its existing operations 156 . .

INTEGRATION STRATEGIES • Integration strategies are usually considered as part of related diversification Forward integration Control over distributors or retailers of its existing products or services Horizontal integration Control over competitors in the same business Backward integration Control over inputs to its existing business 157 .

GROWTH STRATEGIES ORGANIC Culture Fast rate Low risk Job creation Growth Type Immediate market Working business ACQUISITION 158 .

Growth Strategies • • • • • • Horizontal Integration Horizontal Diversification Unrelated Diversification Vertical (Forward/ Backward) Integration Mergers Strategic Alliances (Partnerships) 159 .

STABILITY STRATEGIES • Holding strategy – Company continues at present rate of development – Retains market share – Growth if the market grows – Continuation of functional strategies • Harvesting strategy – Dominant market share – Cost cutting and/or price increases to generate cash for future business expansion 160 .

Retrenchment Strategies 161 .

Reinvest resources in new market areas Divestment .Part of the solution being the liquidation of assets and/or divestment 162 .Business is failing and approaching bankruptcy .Threats towards the present position .Withdraw from a declining market .Conglomerates shrink back to their core business Turnaround .Retrenchment Strategies Appropriate to reduce overall scale of an operation.Selling off a business unit . or withdraw commitment to a particular market Liquidation .

BUSINESS STRATEGIES • How a ‘Business Unit’ can most effectively compete – Results expected – Resources required • Adopting a competitive position • Defending itself against the five forces in the industry environment 163 .

Selects a segment/group in the market place .Charge at premium price OVERALL COST LEADERSHIP .These are served to the exclusion of all others 164 .Avoid marginal accounts .Maximise cost reduction .Unique feature .GENERIC BUSINESS STRATEGIES STRATEGIC ADVANTAGE STRATEGIC TARGET Uniqueness perceived by the customer Low cost position DIFFERENTIATION Industry wide .Efficient scale facilities Particular segment only FOCUS .

Blue Ocean Strategy • • • • • Create uncontested market space Make the competition irrelevant Focus on non-customers Create and capture new demand Break the value-cost tradeoff (Seek greater value to customers and low cost simultaneously) • Align the whole system of a firm’s activities in pursuit of differentiation and low cost. 165 .

Red Ocean Strategy • • • • • Compete in existing market space Beat the competition Focus on existing customers Exploit existing demand Make the value-cost tradeoff (create greater value to customers at a higher cost or create reasonable value at a lower cost) • Align the whole system of a firm’s activities with its strategic choice of differentiation or low cost 166 .

Mercedes 167 .Competitive Advantage Competitive Advantage Low Cost Broad Target Competitive Scope Differentiation Cost Leadership Toyota Differentiation – General Motors Cost Focus .Hyundai Narrow Target Differentiation Focus – BMW.

COMPETENCE CHOICES AND GENERIC STRATEGIES Cost leadership Distinctive Market Product Competence segmentation differentiation Differentiation High (principally by uniqueness) High (many market segments) R&D Sales and marketing Focus Low to High (price or uniqueness) Low (one or a few segments) Low (principally by price) Low (mass market) Manufacturing and materials management Any kind 168 .

Price attack .There can only be one cost leader .Excessive unit costs Differentiation .Specialists targeting one segment .Target segment may disappear .GENERIC STRATEGY RISKS Cost Leadership .Costs of differentiating 169 .Easily imitated .Low cost positions can be copied Focus .Loss of customer focus .

THE PRODUCT LIFE CYCLE • It is important that companies are aware of the stage in the product life cycle that their various products and services are at. – Provides an indication of the most appropriate competitive and marketing strategies – Important determinant of profitability – Highlights the need for new products or services • It is not predictive but increases awareness and can indicate the need for change 170 .

THE LIFE CYCLE MODEL Sales demand / Competition Development Growth Shakeout Maturity Decline Users / Buyers Few: trial of early adopters Growing adopters: trial of product Entry of competitors Attempt to achieve trial Fight for share Undifferentiated products Growing selectivity of purchase May be many Likely price cutting for volume Shake-out of weakest competitors Few competitors Saturation of users Repeat purchase reliance Fight to maintain share Difficulties in gaining/taking share Emphasis on efficiency / low cost Drop-off in usage Competitive conditions Exit of some competitors Selective distribution 171 .

172 .

THE PRODUCT LIFE CYCLE • The length of the life cycle is decreasing for an increasing number of products  Technological changes in materials and processes  Changing tastes of customers  Competitive activity aimed at increasing market share in order to gain greater benefit from the experience effect • In evaluating product/service significance  Evaluate the current position  Establish future priorities and needs  Evaluate future potential opportunities 173 .

cost advantage or differentiation. Stepping in after a competitor has stimulated early can prove successful.PRODUCT STRATEGIES Introduction Pioneering: Organisations who pioneer need defence ie patent. 174 . or that existing users are persuaded to increase their consumption. Imitation: Large numbers of products fail in the development stage. These strategies are necessary during the growth phase and for extending the lifecycle once growth slows down Saturation Once demand for a product has reached saturation stage the appropriate strategy is to milk it by reducing expenditure on development and promotion and using the profits to fund the development of replacements. Future Expenditure on research and development should be aimed at having new replacement products available at the appropriate time. This requires constant awareness of competitor activity and changes in consumer tastes and insight into the new technological opportunities which might be available. Choice is in pricing high or low and the profitability effect. Growth Growth strategies require that new users and new uses are found for the product.

THE GROWTH – SHARE MATRIX (THE BOSTON MATRIX) Star business Wildcat business HIGH Market Growth LOW Movements of cash Cash generating business Dog business Movements of business HIGH Market Share LOW 175 .

develop the product further .invest heavily in selected products .emphasize product quality / service .do not view as a marketing problem HIGH Market Share LOW 176 .maintain prices .maintain or raise prices .accept moderate short term profits .improve market share .check consumer wants .work hard on selling Wildcats Opportunistic development .take product into new markets.prune less successful product lines . .cut costs ruthlessly .defend market leadership .limit marketing expenditure .improve productivity .introduce new products .maintain position in successful lines .check promotion HIGH Market Growth LOW Cash cows Maintain market position .THE PRODUCT PORTFOLIO (CHECKLIST OF STRATEGIES) Stars Invest for growth .maintain share of key segments Dogs Rationalisation .

177 .

their limitations  Elements of 5 Forces – Supplier Power. Bargaining power of suppliers. entry and exit barriers. Fragmented and consolidated Industrial Structure 178 . Threat of substitute product.SESSION SUMMARY • Following concepts have been covered during this session  Macro & Competitive environment – PEST & 5F theories.

CHANGE MANAGEMENT V G S Mani Centre for Engg.6. Management 179 .

participants are taught the following concepts  Understand the human factors behind change management  Motivating and preparing employees for changes  Force Field Analysis  Strategic Change Management Approach & Process  Employee Resistance & Coping Cycle  Collaborative decision making and employee empowerment 180 .SESSION OBJECTIVES • In this session.

STRATEGY IMPLEMENTATION Functional policies Organisational factors Guidance for decision making In terms of functional activities Link formulation with implementation Structure Leadership style Motivation & needs 181 .

MOTIVATION AND NEEDS • Motivators – – – – – Achievement Recognition The work itself Responsibility Advancement • Hygiene factors – – – – – Company policy Administration Supervision Salary Interpersonal relations – Working conditions 182 .

acceptance and affiliation A need for a safe working environment.MOTIVATION AND NEEDS • Need to challenge and develop leading to capability Recognition of good performance and the development of status through recognition A requirement for belonging. job security and other negotiated benefits The need for a basic living salary and the workspace in which to operate Maslow’s hierarch of needs 183 Self actualisation • Esteem needs • Social needs • Safety needs • Physiological needs .

MOTIVATIONAL FACTORS 50% 40% 30% 20% 10% 0% 10% 20% 30% 40% 50% Achievement Satisfiers or Motivators Recognition Work itself Responsibility Advancement Company policy and administration Dissatisfiers Or Hygiene Factors Technical quality of supervision Salary / Wage Relationship with supervisor Working conditions 184 .

CHANGE MANAGEMENT Obstacles to Change Present State Change Management Ideal Future State 185 .

s C h a lle n g e p e o p le to a lig n th e ir p u rp o s e cu U n rr e d e n t rs t si an tu at d io n a p la n o el e p v e D a ng ch 186 .CHANGE PHASES e m es e pl k r Im ra c t nt & ts ul E d e n li ve st o lo th p m e rs as .

CHANGE RELATIONSHIP Difficulty of managing HIGH Bottleneck Strategic LOW Non-critical Leverage Strategic importance LOW HIGH 187 .

FORCE FIELD ANALYSIS Pushing Forces Resisting Forces Present Situation 188 .

FORCE FIELD ANALYSIS Poor warehousing Customer pressure Good training programmes Inadequate documentation Pushing Forces Modern machinery Shopfloor attitudes Low quality reputation Proactive management Resisting Forces Poor internal relationships Motivated supervision Present Situation 189 .

Change Management Elements of Change Management VISION SKILLS INCENTIVE RESOURCES ACTION  PLANS ACTION  PLANS ACTION  PLANS ACTION  PLANS ACTION  PLANS Result Good Change Management Confusion Not present VISION VISION SKILLS Not present  SKILLS INCENTIVE INCENTIVE Not present  RESOURCES RESOURCES RESOURCES Anxiety Gradual Change Frustration VISION VISION SKILLS SKILLS INCENTIVE INCENTIVE Not present RESOURCES Not present  False Starts When all the 5 elements are fully deployed. there is a successful change management 190 .

That change is necessary. Search For meaning. New models created. 3. Shock Mismatch between expectations and reality. 4. Of new skills and behaviors 6. Integration Perceived Competence 2. And testing of new approaches and skills. Feedback. Experimentation competence. Denial That change is necessary. Awareness 1. Retreat/withdrawal. trying to do things differently. Practice phase. Understanding own 5.THE CYCLE OF CHANGE 7. Acceptance Is reality. “Letting go” of past comfortable attitudes Beginning of Transition Time 191 . Understanding reasons for success and failure.

clarify the necessity of ending .solicit upward feedback .encourage experimentation and don’t punish failure .don’t push for certainty or closure to quickly .reward people for successfully changing .compensate people for losses 192 . procedures and priorities are consistent .help people discover the part they will play .step back and reflect .identify and acknowledge losses .model desired attitudes and behaviours .verify that policies.CHANGE MANAGEMENT PROCESS Ending Neutral Zone Beginning .set short range goals .

STRATEGIC CHANGE ELEMENTS Reexamination Integration ELEMENTS Simplification Automation Adaption Reorganisation Communication 193 .

STRATEGIC CHANGE APPROACH Develop business vision and process objectives Identify processes to be redesigned Understand and measure existing processes Identify IT levers Design and build a prototype of the process 194 .

PROCESS INTEGRITY COMPONENTS INTEGRITY COMPONENTS Review of disaster recovery requirements Problem management procedures Batch scheduling procedures Security policies and procedures Change control procedures Operations procedures Report distribution procedures R eview of the general control environment 195 .

SHARED VALUES Top Management Where to go How to get there Company Employees 196 .

PRINCIPLES OF COLLABORATIVE RELATIONSHIPS Behaviour Attitudes People involvement Devolved authority Covert power Differentiated suppliers Pro-active innovation Prevention driven Mutual respect Committed Open and sharing Trusting Focus on group gain Collaborative Partnering Extended guaranteed life Multi dimensional Shared design Single sourcing Relationship positioning Open info exchange High switching costs Self regulation Hands on Total acquisition cost Learning organisation Infrequent re-sourcing Transaction history Process measurement Team based Supplier investment Measurements Processes Time 197 .

RISK SIGNIFICANCE PROBABILITY OF OCCURENCE LOW LOW Minor MEDIUM Significant HIGH Critical LEVEL OF IMPACT MEDIUM Significant Critical Fatal HIGH Critical Fatal Fatal 198 .

THE COPING CYCLE Denial Defence Discarding Adaptation Acceptance Performance Self-esteem UNFREEZE CHANGE FREEZE 199 .

– – – – – – Danger of losing job security Loss of power Skill or knowledge requirement Scepticism about results Functional unit’s interests Resistance of customers 200 .EMPLOYEE RESISTANCE • Resistance can be caused by.

COLLABORATIVE DECISION MAKING Separate the PEOPLE from the problem Focus on INTERESTS behind positions REFLECT on what you have learnt Invent OPTIONS for mutual gain Consider ALTERNATIVES Develop an AGREEMENT Apply OBJECTIVE criteria 201 .

COLLABORATIVE DECISION MAKING • Separate the PEOPLE from the problem – – – – – – – – – – Soft on the people. Different Ask why? Why not? Assert your interests not your position Formulate shared objectives 202 • Focus on INTERESTS . Opposed. hard on the problem Put yourself in their shoes Listen before you talk Involve them from the start Help them save face Don’t blame 3 kinds: Shared.

time value of money.COLLABORATIVE DECISION MAKING • Invent OPTIONS – Invent before you judge – Invent a wide range of options – Leverage differences: Different interests. efficiency. corporate principles 203 . forecasts • Apply OBJECTIVE criteria – Criteria: External standards of efficiency and fairness for deciding among options – Examples: Market value. core values. costs.

COLLABORATIVE DECISION MAKING • Consider ALTERNATIVES to agreement – What will you do if you don’t reach agreement – Review the costs to you and to them • Develop an AGREEMENT – Aim for a higher level solution – Are there other possibilities? • REFLECT on what you have learnt – – – – What worked / didn’t work What would you do differently Ways to improve agreement What skills should you work on 204 .

• Empowerment is a sense of PURPOSE which motivates people to stretch. enabled. 205 . held accountable and recognised for their contribution. • Empowerment is PERFORMANCE in which everyone share responsibility for exceeding expectations.EMPOWERMENT • Empowerment is a PROCESS by which freedom and control are balanced so that supervisors and employees are authorised. be innovative and fully utilise their potential.

Freedom .Development Performance .Evaluation .Resources Autonomy .Alignment/Outcome .Standards .Responsibility Support .TEN STEPS TO EMPOWERMENT Direction .Coaching .Delegation .Reward/Recognition 206 .

“whole focus .stronger structure .shared decision making .special interest actions Functional Management -“part focus” .special interest actions .shared resources Product Management .short term decision making .longer term strategic decisions .negotiated process results 207 .agreed shared priorities From.longer term focus .MATRIX FORMULA Top Management To. .competitive .short term focus .owned resources .weaker structure . .collaborative .unilateral decision making .

the ethos and spirit of the organisation must be consonant with the new form .rapid deployment of human resources .takes buy-in. changes occur within 12 to 18 months Behaviour .focus effort on two or more essential tasks simultaneously .must operate along two dimensions simultaneously .commitment to a balanced reasoned response .collocation is essential . changes within 5 to 10 years 208 .success requires empowerment .opportunity for more flexibility. greater choice and increased power Processes . changes occur within 2 to 4 years Culture .MATRIX FORMULA Managers with two bosses .takes buy-in.the behaviours must become institutionalised .takes longest to evolve.

verticalisation of supply chain .performance enhancement systems development .membership is disparate supply chains .cross-functional team and project orientation .new realities of performance measurement .flatter management structure .FUTURE STRATEGIC CONTENT ORGANISATIONAL STRUCTURE .concurrent learning and job performance 209 POLICIES.strategic cost management .strategic focus .market/customer focus .internal integration across the value chain .key supplier strategic alliances .greater reliance on IT .emphasis on time based strategies .distance education and knowledge exchange . PRACTICES AND PROCEDURE EDUCTION AND TRAINING NEEDS .managing teams in parallel .fragmentation of functional expertise .

overcoming employee Resistance  Force Field Analysis  Strategic Change Management Approach  Collaborative decision making and employee empowerment 210 .SESSION SUMMARY • Following concepts have been covered during this session  Human issues affecting change management process  Motivators & Hygiene Factors.

Management 211 .7. MANUFACTURING STRATEGY V G S Mani Centre for Engg.

participants are taught the following concepts  Levels in Strategy – Links between Corporate and Manufacturing Strategy  Integration of Strategy  Conflict between Marketing & Manufacturing – future strategy  Price/ Delivery/ Quality as order winners  Manufacturing Strategy – Process Steps 212 .SESSION OBJECTIVES • In this session.

trade barriers.LINKS BETWEEN CORPORATE & MANUFACTURING STRATEGY • Industrial – (concerned with external environment) concerned with government policies. policies on inflation/ employment. banking policies. investment incentives. but it does not explain how the company has grown enormously after 1991 – post liberalization period) (good project management skills. and good financial engineering ?) 213 . Reliance is supposed to have managed the external environment very well. infrastructure etc. interest rates.G.(E.

global operations (manufacturing.LINKS BETWEEN CORPORATE & MANUFACTURING STRATEGY • Corporate – defines business in which the organization will compete. 214 . In today’s context. sourcing etc) (global strategy) must form a part of the corporate strategy. determine the long term objectives and identify the course of action and allocation of resources. marketing.

LINKS BETWEEN CORPORATE & MANUFACTURING STRATEGY • Business – focus by individual business within a corporate (SBU) on how to compete in a given business. • It is usual for a SBU to be treated as semi autonomous and therefore free to set their own strategy under the corporate umbrella. determines the competitive approach and the strategies for each business unit of a multi product organization. 215 . • It is common to emphasis on cost leadership/ cost differentiation and focus.

g.LINKS BETWEEN CORPORATE & MANUFACTURING STRATEGY • SBU’s strategy must support the corporate strategy and not work at cross purpose(e.g. Development of moly metal nozzles for rockets by one of the defence unit while the other one across the road was working on replacement of moly metal in all applications!) • Functional – aim of functional strategy is to obtain the maximum productivity from resources by individual functional units within a business – e. 216 . Marketing. manufacturing and administration etc.

functional departments must evolve strategies in which their activities and skills are harnessed for the improvement of performance. 217 . • Role of manufacturing fits into this category and it must attempt to develop order winning outputs.LINKS BETWEEN CORPORATE & MANUFACTURING STRATEGY • Within the guidelines defined by the corporate and business strategies.

management and control. They have neglected strategy (“minding the store”).LINKS BETWEEN CORPORATE & MANUFACTURING STRATEGY • Traditional approach was to ensure that • Functional role – did things right (efficiency) • Corporate/ business role – did the right things (effectiveness) • Functional managers have confined their role to efficiency. This has led to a reactive role on their part. 218 .

Operating effectiveness alone cannot be a strategy 219 .LINKS BETWEEN CORPORATE & MANUFACTURING STRATEGY • Business managers have also contributed to the problem by a) treating planning as their exclusive domain (ivory tower approach) & b) by assigning low caliber personnel to manufacturing function • But focusing only on functional strategy without adequate attention to corporate/ business strategy is harmful to the organization in the long run.

Hence corporate strategies stop at the interface between functions. It could be caused by an underlying belief that corporate improvement can be achieved by working solely at the corporate level. 220 . This is a serious weakness in strategy formulation and leads to failure of realizing a company’s potential and their getting outperformed.INTEGRATION OF STRATEGIES • Functional strategies are not often linked to each other. Especially apparent is the failure to link manufacturing and marketing. This fault may be by design or default.

structures. controls. procedures and people. This should form the basis for a manufacturing strategy and it should be well integrated with the marketing and corporate strategies. • The attractiveness – strength. It cannot function as a servicing unit for company’s requests for products.contribution graph illustrates the issues 221 .INTEGRATION OF STRATEGIES • Manufacturing must support a company’s market into appropriate collection of facilities.

222 .

223 .

224 .

225 .

The product itself Manufacturing control Managing movement. Manufacturing technology. Low inventory. People. Markets Demand. 226 . Continuous improvement.MANUFACTURING STRATEGY Manufacturing systems The way we manufacture. Innovation Management of change Methods. Product technology Design methodology. Meeting demand.

STRATEGIC INTEGRATION Corporate Objectives Marketing Objectives How do you win orders Manufacturing Strategy Process choice Infrastructure 227 .

SCOPE OF STRATEGY Corporate Objectives Marketing Objectives How do you win orders Manufacturing Strategy Process choice Infrastructure 228 .

timing .location Function Support Systems Procedures Agreements Structure 229 .I.O. Marketing Objectives Product market and segments Range Volume Mix Level of Innovation How do you win orders Price Quality Conformance Delivery Product range Design Brand name Technical support After sales support Manufacturing Strategy Process choice Infrastructure Alternative Processes Role of inventory Make or buy Capacity .STRATEGIC INTEGRATION Corporate Objectives Growth Survival Profit R.size .

MARKETING TO MANUFACTURE Design Yes Maybe Marketing No Manufacture 230 .

THE DEGREE OF MATCH THE CURRENT MANUFACTURING SYSTEM AND INFRASTRUCTURE VERSUS THE SYSTEM NEEDED TO SUPPORT THE ORDER WINNING CRITERIA • Do nothing and live with the mismatch • Change marketing strategy to improve the mismatch • Change manufacturing strategy • Change both 231 .

low cost producer without flexibility 232 .MARKETING CONFLICTS • Marketing view – All sales are good sales and contribute to increased turnover – Promise customers short delivery times – Disregard Economic Order quantities • Manufacturing view – We make some products more effectively than others – We do not have process flexibility – We are a high volume.

MANUFACTURING ISOLATED • In the Past – Manufacturing was told what to do – There was no manufacturing strategy – There was little investment in manufacturing facilities – Manufacturing management excluded from decision making • Result – Manufacturing was ineffective – Manufacturing was not matched to market needs – Manufacturing was reactive “Can’t say no” “Just do as you’re told” 233 .

equipment and infrastructure to cope with the future changes in market conditions – The organisation improves its competitive position. market share and profitability CREATE ORDER WINNING CRITERIA 234 .FUTURE STRATEGY • Manufacturing must develop a strategy in conjunction with other functions and on a equal basis • Manufacturing personnel must be capable and be trained to think strategically • This results in. – Manufacturing matched to market needs – Manufacturing gets its share of investment – Manufacturing invests in people. training.

– Costs and prices to reduce – Organisations to retain or improve its competitive advantage Kaizen or continuous process improvement leads to improvements in both productivity and quality 235 . this enables.PRICE AS AN ORDER WINNER • When organisations compete on price it must continuously improve its productivity.

non value added activities) 236 . but increases delivery time – Assemble to order enables low stocks and reduces delivery time – World Class production system (TPS) enables fast delivery speed.DELIVERY AS AN ORDER WINNER • Delivery speed enables customers to – Meet short delivery requirements – Manufacture with shorter lead times – Deliver new products earlier – Make to stock enables delivery speed but incurs high stocks – Make to order enables low stocks. with no risk and with low stocks (Reduced process time. inter process delays.

QUALITY AS AN ORDER WINNER Dimensions Performance Features Reliability Conformance Durability Serviceability Aesthetics Perception Products primary operating characteristics Secondary characteristics Probability of a product failure within a given time Degree to which a product is manufactured to the specification A measure of a products life in terms of both its technical and economic dimensions Ease of servicing to include the speed and provision of after sales service How the final product looks How a customer views the product 237 .

PRICING & PROMOTION • VOICE = FIRM’S PROPORTION OF TOTAL PROMOTIONAL EXPENDITURE IN THE MARKET • DISTRIBUTION = INCREASE THROUGH MORE INTENSIVE DISTRIBUTION 238 .MARKET SHARE • SHARE OF THE MARKET = SHARE OF PREFERENCES X SHARE OF VOICES X SHARE OF DISTRIBUTION • PREFERENCE = PRODUCT.

BUILDING BLOCKS FOR COMPETETIVE ADVANTAGE BUILD Resources Functional Differen tiation Value Creation Superior Profitability S H Distinctive A Competences P E Strategies •Quality •Efficiency •Innovation •Responsive Low Cost Capabilities BUILD 239 .

MANUFACTURING STRATEGY PROCESS STEPS 240 .

MANUFACTURING STRATEGY PROCESS STEPS 241 .

MANUFACTURING STRATEGY PROCESS STEPS 242 .

MANUFACTURING STRATEGY PROCESS STEPS 243 .

MANUFACTURING STRATEGY PROCESS STEPS 244 .

MANUFACTURING STRATEGY PROCESS STEPS 245 .

MANUFACTURING STRATEGY PROCESS STEPS 246 .

SESSION SUMMARY • Following concepts have been covered during this session  Links between corporate 7 manufacturing strategy  Conflict between manufacturing and marketing – future strategic content  Price/ Quality/ Delivery as order winners – building blocks of competitive advantage  Manufacturing strategy steps 247 .

Management 248 .8. MAKE OR BUY V G S Mani Centre for Engg.

SESSION OBJECTIVES • In this session. participants are taught the following concepts  Make or Buy Decision as a part of Manufacturing Strategy  Economics of Make or Buy  Reasons for status-quo in make or buy decisions  Factors to be considered in decision making  Buyer – Supplier relationship 249 .

MAKE OR BUY 250 .

MAKE OR BUY CHOICE • One of the key strategic issue in manufacturing is the decision regarding what to make and what to buy • Companies rarely make their own products/ services from start to end • Mostly these decisions have been taken on an adhoc manner and lack adequate strategic consideration 251 .

MAKE OR BUY CHOICE Traditional reasons for choosing between make or buy • Inability to make in-house (technical capability/ high investment / low utilization) • Retaining core technology e.g. Process valves and automobiles (retaining assembly stage onwards in order to ensure design security. link with the customer etc) 252 . final product quality & its testing.

MAKE OR BUY • Which process has to be done in-house and which to subcontract (strategic level make-buy decision) • This is not just based an analysis of costs • There are strategic implications for  Span of processes  Management and technical skills  Complexity of manufacturing operations 253 .

MAKE OR BUY CHOICE • Cost factors.when sources outside the company work out cheaper • Especially true of highly labour oriented services • BREAK EVEN ANALYSIS TOTAL COST -BUY COST TOTAL COST MAKE MAKE-FIXED COST MAKE-VARIABLE COST BREAK -EVEN VOLUME 254 .

MAKE OR BUY CHOICE • Transaction cost of outsourcing has to be factored in • This is especially true in the Indian context where excise duty is locked up and cost of paper work is quite laborious • In industries involving high cost materials. Metal processing & jewellery 255 .G. material balances have to be accurately tracked e.

Also the benefit of specialist & better technology • Cost is more accurately measurable when parts are outsourced • But Activity Based Costing (ABC) approach indicates that the true cost of outsourcing to be higher than what has been assumed 256 .MAKE OR BUY CHOICE • This factor is offset by freeing of resources when supplies are bought.

response to a make/buy decision is automatic.REASONS FOR STATUS QUO IN MAKING/ BUYING DECISIONS • It is always easier to tell than do! • Normally. based on technology and then cost considerations • Historical reasons that have not been reviewed 257 .

REASONS FOR MAKE OR BUY STATUS QUO • Inertia & non-availability of executive resources to review the decisions taken earlier • Avoiding of short term problems consequent to the changes • Dominance of cost & technology factors 258 .

in the long term.G.REASONS FOR MAKE OR BUY STATUS QUO • Shedding of jobs is quite difficult – hence “make” is easy way out! • Many manufacturing units take a short term approach & off load the difficult part of the job! • However. this involves loss of skills . know-how gets transferred to the supplier e. Ship building in Germany  Japan 259 .

G. Such as environmental impact.REASONS FOR MAKE OR BUY STATUS QUO • Companies also off-load jobs in order to escape associated government regulations e. safety/ health issues etc • Many companies off load service functions in order to avoid dealing directly with the authorities 260 .

MAKE OR BUY . delivery. reliability. has to be carefully evaluated 261 .FACTORS TO BE CONSIDERED • Make or buy decisions need to be made within the strategic context of the business – do we create new strategic capabilities or outsource? What is the lead time? What is the effect on current vendors? • Effect of the decision on company’s order winners/ qualifiers (manufacturing outputs) (cost. quality etc).

FACTORS TO BE CONSIDERED • Similarly.MAKE OR BUY . assurance of supplies through “make” decision cannot be overlooked. if it is an order winning factor • Issues concerning process and product technology needs to be factored in • Current capacity utilization & implications of adding capacity 262 .

it buys it in the form of components.FACTORS TO BE CONSIDERED • Where a company does not possess product/ process technology. Purchase of abrasive grains in manufacturing grinding wheels) • This is especially true for companies which want to apply newer technologies 263 .MAKE OR BUY .G. (E.

based on “make or buy” decisions • Whether to integrate backward and gain the value addition or live with the current value addition by outsourcing needs to be considered. • Threat of component supplier integrating forward and taking away the business of the company has to be considered 264 .MAKE OR BUY .FACTORS TO BE CONSIDERED • Internal span of processes get narrowed or widened.

it is a strategic advantage to make rather than buy • Many multinational companies having manufacturing units in multi locations have changed the strategy of making/ buying to take advantage of reduced local tariffs and economy of scale of operations of the parent organisation 265 .MAKE OR BUY .FACTORS TO BE CONSIDERED • Where a wide span of activities creates entry barrier advantage to a company.

FACTORS TO BE CONSIDERED • When the volume of a product gradually diminishes and reaches a low level.MAKE OR BUY . it can be outsourced. In the final stages. This reduces the span of operations within the company. company only provides drawing to the buyer and indicates likely sources • Supply chain & inventory issues are related to make/ buy decision 266 . Typical examples include automobile and machinery spares.

example 267 .MAKE OR BUY CHOICE .

Outsourcing 268 .

SPAN OF PROCESS 269 .

SPAN OF PROCESS SPAN WIDE NARROW MATERIAL DIVERSITY PROCESS DIVERSITY TECHNOLOGY LEVEL SKILL VARIETY COMPLEXITY THROGHPUT TIME DEPENDANCE FOCUS HIGH HIGH LOW HIGH HIGH HIGH LOW LOW LOW LOW HIGH LOW LOW LOW HIGH HIGH 270 .

lose 271 .MANUFACTURER – SUPPLIER RELATIONSHIP • • • • Traditionally seen as adversarial Objectives seen to be in conflict Strategy is seen to be win-lose Actual result is lose .

trust. reliability & better information flows • One of the common method to achieve these objectives is by merger (vertical integration) or by having financial tie up (typically automobile companies have part ownership of tier i suppliers) 272 .MANUFACTURER – SUPPLIER RELATIONSHIP • Modern approach is collaborative • Strategy is win – win • Based on confidence.

SESSION SUMMARY • Following concepts have been covered during this session  Make/ Buy as a part of manufacturing strategy  Role of cost vs. volume relationship & its impact in make/ buy decision  Reasons for not reviewing make/ buy decisions  Span of process & buy decisions  Importance of collaborative relationship between buyers and suppliers 273 .

Management 274 . MANUFACTURING PROCESSES V G S Mani Centre for Engg.9.

Job. participants are taught the following concepts  Manufacturing Process Types – Project.SESSION OBJECTIVES • In this session. Line . Batch.Continuous & Hybrid processes and their characteristics  Volume – Process relationship  Implications and trade-off in process choice decisions 275 .

Hence this decision is left to the engineering/ technical specialists. is determined by the choice of manufacturing process that it adopts • The way a business decides to make its products is generally quite strongly influenced by technological factors alone. 276 .PROCESS CHOICE • The way business organizes its manufacturing. in order to ensure the required manufacturing output.

Products have to not only meet their technical requirements. business will take the following steps.PROCESS CHOICE • But it overlooks the fact that manufacturing is a business related function. • When choosing the appropriate ways in which to manufacture products. but they also have to be supplied in ways that can win orders.  identify appropriate engineering/ technology alternatives  choose between alternative manufacturing approaches. 277 .  decide on how much to buy and how much/ what to make.

low to medium volumes. • Jobbing – products custom built for the users • Batch .many products.MANUFACTURING PROCESSES • There are 5 generic types of • Project – large scale. product manufactured at site (e. Civil construction) products are provided on a project basis. orders are generally repeated 278 . one-off.g.

Petroleum refinery) 279 . This system presupposes a very high volume and an ability to continuously move the products through the process. In fact.g. dedicated facilities are built for producing the same or similar products • Continuous – basic material is passed through successive stages of operations and which ends up as a single or multiple products. there are many products which can be manufactured only this way ( e.MANUFACTURING PROCESSES • Line – when the volumes are large and the orders are repetitive.

fms. group technology. transfer lines. Hybrids include nc. cnc. which is usually achieved by the use of cnc machines.MANUFACTURING PROCESSES • Hybrid systems: They are mix of the processes listed above. These are developed in response to the market needs by combining the advantages of two processes. machining centres. cellular manufacture and agile manufacturing etc. One of the disadvantages of these systems is the high initial cost associated with the some of the systems. 280 .

fms.MANUFACTURING PROCESSES Simpler classification • Craft production (job shops. batch production) • Mass production (line flow. continuous flow) • Lean production (cnc. agile manufacture 281 . jit.

PROCESS CHOICES Project Jobbing Batch Line Continuous 282 .

PROCESS CHOICE & VOLUME Process Choice Project Jobbing Batch Line Continuous Low Petro-chemicals Civil engineering Purpose built equipment Engineering Consumer durables Volume High 283 .

VOLUME Vs VARIABILITY High Civil engineering Purpose built equipment Variability Determined by markets Engineering Consumer durables Determined by company’s Low Low Petro-chemicals Volume High 284 .

HYBRID PROCESSES Process Choice Un connected machines Jobbing Machining centres Batch FMS and cells Linked batch Dedicated use of purpose built machines Line Low Mixed mode assembly Transfer lines Volume High 285 .

TRADE-OFFS IN PROCESS CHOICE Process Choice UC machines M/C centres Cells Mixed mode Transfer Low Volume High 286 Decreasing process flexibility and product range variety. higher investment cost and lower unit cost .

287 .

Characteristics of Manufacturing Systems Process Craft Batch Sp eed ETO – Engineer To Order MTO – Manufacture To Order Line ATO – Assemble To Order MTS – Manufacture To Stock xib ilit y Continuous Fle Volume 288 .

Autos Complexity (Ref: Manufacturing Strategy: An adaptive perspective.g.MANUFACTURING PRACTICES Make to order Lot Based Mfg.g. SAP White Paper – www. Chemicals/ petroleum Assemble to order Repetitive mfg. e.sap.com/contactsap MSRSAS 289 289 . High end autos with options Engineer to manufacture e. Projects Capital equipment Variability Make to stock Process mfg.

Jan – Feb1979) Discontinuous Flow Estimating cost and Delivery General Purpose Machinery Highly Skilled Labour Loading Plant and estimating Capacity Long Lead Time Disconnected Batch Flow Systematizing diverse elements Developing Standards and methods Limited Scheduling Balancing Process Stages Connected Batch Continuous Flow Flow Options and configurations Meeting material requirements Semi finished goods inventory Maximize throughputs & balance flexibility Demand Planning Long term capacity management and capital funding Standardize materials and processes 290 .Product Continuum. HBR.Key Issues (Ref – Robert Hayes & Steven Wheelwright. Link Manufacturing Process and Product Life Cycles.

Service and scheduling flexibility Distribution Distribution planning and short lead time 291 . Link Manufacturing Process and Product Life Cycles. Jan – Feb1979) Introduction Growth Growth Maturity Unique Products Low Volume. product mix. No Variation Custom design is key to value proposition Custom Design Volume. and scheduling flexibility Low Cost is key value proposition Integrated customer relationship QC. Less Variation Highest Volume.Process Continuum (Ref – Robert Hayes & Steven Wheelwright. High Variation Higher Volume. HBR.

performance. flexibility & innovativeness in manufacturing (manufacturing outputs). • Each system is uniquely suited to produce a particular mix of products and volumes.IMPLICATIONS OF PROCESS CHOICE • Each of the above system is able to provide a unique set of cost. 292 . delivery. quality. This provides an opportunity for companies to compete effectively in the market.

IMPLICATIONS OF PROCESS CHOICE • It is the responsibility of manufacturing to select the best production system to meet the given market needs. 293 . A company that fails to make such commitment is at a disadvantage in the market. manufacturing will not change unless there is a conscious decision to this effect and additional investment is committed. • This factor must be viewed n the light of the fact that markets are continuously changing with time and is an almost automatic process. On the other hand.

294 .

Adaptive Manufacturing Manufacturing  Key Market  Practices Differentiator Performance  Indicator Production  Throughput Cost  Management Segment  Market Share Customer  Satisfaction 295 Period 1970s 1980s 1990s Beyond  2000s Push Lean Flexible Adaptive Cost Quality  Availability Lead Time .

296 .

297 .

equipment.SESSION SUMMARY • Following concepts have been covered during this session  Manufacturing Process Types – Project. layout. Line . employee and organization types 298 . Job. Batch. fixed and variable costs. material flow.Continuous & Hybrid processes and their characteristics  Process characteristics – effect of process on product variety. volume.

Management 299 . OTHER MANUFACTURING RELATED TOPICS V G S Mani Centre for Engg.10.

participants are taught the following concepts  Product Profiling  Manufacturing Focus  Manufacturing Levers  Manufacturing Infrastructure 300 .SESSION OBJECTIVES • In this session.

301 . a lot of trade-off is involved.PRODUCT PROFILING • When a company selects and invests in a process. • Product profiling enables a company to test the current or anticipated level of fit between the characteristics of its market and the characteristics of its process and the infrastructural investment.

PRODUCT PROFILING • The purpose of this assessment is as follows. • To evaluate and improve the fit between the way a company wins orders in the market place and the ability of its manufacturing process to support this criterion • It helps the company to evaluate fit between various functional strategies. if these had not been properly integrated into a corporate/ business strategy in the initial stages. 302 .

• Profiling helps to identify and highlight the mismatches and alert the company. • Thereafter.PRODUCT PROFILING • It is not possible to have each and every aspect of the strategy absolutely correctly in place. it is a matter of conscious strategic choice for the company. 303 . whether to live with the mismatches or to correct them.

business needs to become aware. • On the other hand. • Changing nature of the markets is in opposition to the fixed nature of manufacturing investments. In addition. 304 . recognize and act.PRODUCT PROFILING • Mismatches are brought about by the fact that markets are very dynamic. the process choice gets fixed once a decision is taken and implemented. company can alter its marketing decisions relatively easily. In order to reconcile this.

305 .PRODUCT PROFILING • Product profiling can be undertaken either at the Business or the Process Level • Business level – provides an overview of the degree of fit between significant parts of the business and existing manufacturing facilities. • Process level – checks the fit between the products that requires to be made and the equipment used.

• Profile the product by positioning each of the product against the selected criterion.PRODUCT PROFILING • Procedure • Select relevant aspects of the criteria (products/ markets/ investment/ cost/ infrastructure) from the matrix. Criteria selected must relate to issues at hand and must be small enough to allow the key issues to emerge • Display the trade offs of process choice for each of the criterion selected. 306 .

PRODUCT PROFILING • Resulting profile illustrates the consistency between products and processes. 307 • . Responses to product profiling 1) live with the mismatch 2) redress the profile mismatch by altering the marketing strategy 3) redress the profile mismatch by investing in and changing manufacturing and its infrastructure 4) apply a combination of 2 & 3. Straight line indicates more consistency.

308 .

309 .

310 .

It is attempting to cover too many technologies or too many products and markets. Taken together. there is a distortion in coordination • The organization lacks focus. but it continues the old manufacturing policies and structure • Managers in manufacturing have no clear consistent definition or understanding of the manufacturing task facing the organization • The Manufacturing policies and infrastructure being employed are inconsistent.Reasons for Inconsistent Manufacturing Structure • Manufacturing has a new manufacturing task. too wide range a volume and more than one manufacturing task 311 .

they can put the company at a very serious disadvantage. This situation is not harmful if the competitors have also adopted the same process. But when the competitors organize their plant into small units specializing in a specific group of products or organize production in plant-within-plant concept (pwp).MANUFACTURING FOCUS • Many companies try to do too many tasks in the same plant with the result that it does not do anything too well. 312 .

with a view to attain a greater competitive position.MANUFACTURING FOCUS • Linking company’s manufacturing facilities to the appropriate competitive factors of its business. is defined as manufacturing focus. Along with other strategies of cost leadership & product differentiation. this method provides a company with competitive advantage. 313 .

314 . System which is most capable of providing market winning outputs.MANUFACTURING FOCUS • Manufacturing is said to be focused by organizing PWP system and using the most appropriate production system i.e.

315 .MANUFACTURING FOCUS • Benefits of focused manufacturing include 1) ability to use the best production system appropriate to marketing needs 2) effective cooperation between functional areas 3) efficient flow of materials 4) improved reactions to problems 5) closer ties with the market 6) more opportunities to improve 7) better costing system • There are situations where focus is not beneficial e.g when seasonal products are produced or where the products are in their declining life cycle.

gaining the benefits of expertise available and improved utilization of equipment. 316 .APPROACHES TO FOCUSED MANUFACTURING • Products/ markets – this orients the manufacturing towards a particular customer or generic products. • Process – this groups together products that are made with similar processes. • Manufacturing’s strategic tasks – this allocates products to a particular unit on the basis of different order winner/ qualifier that manufacturing must provide. • Plant Within Plant (PWP) – this involves physically dividing the resources & facilities so that each segment can cater to a different business segment.

BARRIERS TO FOCUSED APPROACH • Marketing/ sales – prefer to create demand by selling a very broad product line and adopt this as a strategy • Manufacturing is also opposed to focusing due to inherent liking for flexibility and uncertainty regarding capacity utilization 317 .

Establish P-W-P concept • Restrict task to meaningful & manageable limits • Concentrate on focus progression (moving towards greater focus) and avoid focus regression • Create awareness of benefits of focus and provide annual review 318 .FOCUS METHODOLOGY • Develop manufacturing strategy • Split processes and infrastructure to suit manufacturing strategy.

Organization structure & controls . participation in problem solving & improvement. Human resources . role of line and staff functions. use of profit/cost center concepts) 319 .(mix of skilled/ multi skilled/ unskilled employees. performance measurement.MANUFACTURING LEVERS • Effective manufacturing finds it useful to divide a production system into six sub systems A.(hierarchical / flat. delegation of authority. delegation of authority. job classification. levels of supervision. employee growth opportunities) B.

continuous improvement. support departments’ role) 320 . Facilities – (small or large. process used. Process technology – (layout. finished goods. Production planning & controls – (centralized or decentralized. capacity planning. Sourcing . quality control) F.(numbers of suppliers and their capability. maintenance systems. relationship with suppliers. design system) E.MANUFACTURING LEVERS C. automation levels. special or general purpose facilities. push or pull systems used. make/ buy decisions) D. size of wip.

in order to ensure that the changes are capable of providing the required output. Also certain amount of trade off will be necessary while making changes. 321 .MANUFACTURING LEVERS • Adjustments to manufacturing levers should consider the interaction among the factors before making any adjustment to any of the levers.

• They are equally necessary for deriving a competitive advantage in the business. 322 .MANUFACTURING INFRASTRUCTURE • After developing a manufacturing strategy. • Building infrastructure on a manufacturing strategy base provides this input. company must ensure that the structure and composition of various constituent functions are also simultaneously developed to ensure successful implementation of the planned strategy.

(e. 323 .. • Roles of individual functions and how they fit together is part of strategic overview.MANUFACTURING INFRASTRUCTURE • The high level of investment and their fixed nature is characteristic of infrastructure. • It consists of a complex set of interacting responsibilities and functions. Manufacturing levers). • Fitting together their roles in a piece-meal fashion can lead to uncoordinated approach and defective infrastructure design.g.

g. 324 .MANUFACTURING INFRASTRUCTURE • Hence some companies prefer a top-down approach. which addresses the issue of the role and need for various functions. Ministry formation in government rarely follows this principle!) • Failure to provide adequate infrastructure can result in  business getting affected due to lack of timely and accurate information which comes in the way of preventive/ corrective actions  key infrastructural facility may not be available when it is needed most. (e.

325 .

SESSION SUMMARY • Following concepts have been covered during this session  Product Profiling  Manufacturing Focus  Manufacturing Levers  Manufacturing Infrastructure 326 .

11. Management 327 . FRAMEWORK FOR DEVELOPING A MANUFACTURING STRATEGY V G S Mani Centre for Engg.

SESSION OBJECTIVES • In this session. participants are taught the following concepts  Miltenburg’s Manufacturing Strategy Framework 328 .

FRAMEWORK FOR DEVELOPING A MANUFACTURING STRATEGY • A framework (also called PV-LF matrix) has been developed for analyzing manufacturing and developing a strategy for improving it. • This helps to  Analyze an existing problem  Generating and evaluating alternate strategies  Analyzing competitors’ strategies  Develop a complete manufacturing strategy 329 .

FRAMEWORK FOR DEVELOPING A MANUFACTURING STRATEGY • This matrix incorporates some important characteristics a) b) c) d) e) f) product & volumes (PV) factor layout & material flow (LF) factor manufacturing levers manufacturing outputs competitive analysis levels of manufacturing capability – infant. average. adult & world class 330 .

LF matrix. a) Where am I? b) Where do I want to be? c) How shall I get from where I am to where I want to be? 331 .FRAMEWORK FOR DEVELOPING A MANUFACTURING STRATEGY • The procedure starts by asking the following questions & mapping the responses on the PV .

332 .

333 .

334 .

335 .

336 .

development of manufacturing strategy using these elements. including trade-off between the elements 337 . average. adult & world class  Case Study .SESSION SUMMARY • Following elements of manufacturing strategy have been covered during this session       product & volumes (PV) factor layout & material flow (LF) factor manufacturing levers manufacturing outputs competitive analysis levels of manufacturing capability – infant.

12. Management 338 . STRATEGY IMPLEMENTATION & EVALUATION V G S Mani Centre for Engg.

Measures of performance  Performance measurement tools  Value stream mapping 339 . Characteristics of Evaluation  Performance measurement information.SESSION OBJECTIVES • In this session. participants are taught the following concepts  Strategy Evaluation Pyramid.

PERFORMANCE MEASUREMENT INFORMATION • • • • • How well are we doing Are we meeting our goals and targets Are our customers satisfied Are our processes in statistical control Where are improvements necessary 340 .

MEASURES OF PERFORMANCE • • • • • • Productivity Effectiveness Efficiency Quality Timeliness Safety (Value Added) (Conformity to requirements) (Output) (Indicated by attributes) (Time for production output) (Health and working environment) 341 .

quality. For each area all major causes must be logically documented 342 .CONTINUALLY MEASURING PERFORMANCE • Baseline measurement – To determine its current operating position and serve as a zero point to measure the success of the continuous improvement effort • Prioritise improvement areas – Select important areas to improve. productivity and profitability • Root cause analysis – Understand barriers to improvement. those especially critical to safety.

Key Performance Metrics • One of the most powerful ways to change behaviour is by changing the metrics by which people are evaluated and rewarded • Metrics: Integrating and leveraging data consolidated from many sources and the ability to transform that data into actionable information • Metrics are also known as KPIs (key Performance Indicators) 343 .

How To Keep Your Finger On The Pulse Of Your Business In Challenging Times.Key Performance Metrics • Metrics/ KPIs are like steering wheels – they can turn company in the right or wrong direction! • They need to be aligned company’s strategy. should be monitored continuously and revised as necessary Ref: Exact holding USA. 2009 344 .

Key Performance Metrics • Inventory Levels • Fixed Manufacturing Costs • Average Cycle Times • Scrap & Rework • Variable Manufacturing Costs • Profitability of Products/ mix across manufacturing sites • Performance of key production assets • Supplier on time delivery • SPC • Schedule cycle variance • First pass yield 345 .

Key Performance Metrics • Raw Material Quality • Finished Goods Quality • Demand/ Demand Variance • Manufacturing line scheduling visibility • Transportation logistics. schedules & Visibility • Manufacturing Line capacity visibility • Cycle time variability • Asset availability/ maintenance related metrics • OEE (Overall equipment effectiveness) 346 .

Resources Drive Business Results Resources Processes/ Activities Output Costs Business Results/ Value Addition I I N F O R M A T I O N Good business results are ensured by acting on timely & continuous flow of information about DEPLOYMENT OF RESOURCES FOR ACTIVITIES  RESULTS OF THESE ACTIVITIES (OUTPUT/ COSTS ) VALUE ADDITION TO THE CUSTOMER 347 .

STRATEGY EVALUATION Measure and evaluate performance Contingency planning Corrective action 348 .

data systems reports. indexes Upper management sensors to evaluate broad matters. index Broad measurement. time to launch new products Measures to establish quality goals and evaluate performance against them Technological units of measure for individual elements of product. derived from inspection and test Technological instruments to measure technological product and process features 349 .EVALUATION PYRAMID Units of measure Corporate reports: Money. process. ratios. service Sensors Composites of data expressed in such forms as summaries. observations Summaries of product and process performance. against competition. ratios. audit.

control function ensures that actions are moving in the right direction and the results are as planned • Need for control is due to  Assess how well the firm is performing  Uncertainty of prediction and corrections needed in implementation process (minor corrections or drastic changes) 350 .STRATEGIC CONTROL • Based on the feedback while implementing strategy.

CHARACTERISTICS OF EVALUATION Evaluation must be integrated with other aspects of strategy As goals and policies. available-understandable Practical Fair Reflect factors that can be influenced or controlled 351 . relevance and representation Adaptable Clear Simplicity: indicators in an easy-to-use form. evaluation systems must adapt to reflect changes Carefully weigh the value of evaluation to the investment in collection Connected Credible Confidence of accuracy.

EVALUATION IMPLEMENTATION Identify the process flow and critical activity Identify the performance targets and goals Establish performance measurement Collect relevant data Analyse result and report actual performance Compare actual performance to goals Integrate with management processes Communicate results Continue review if a new set of goals is needed Feed into the strategy 352 .

CRITICAL EVALUATION ACTIVITIES CATEGORY Productivity User utility Value chain Competitive performance Business agility Investment targeting Management vision DEFINITION Efficiency of expenditure of company resources Customer satisfaction and perceived value of services Impact of company on functional goals Comparison against competition Company operating systems and portfolio of operations Impact of investment on cost structure and revenue Understanding of the strategic value and ability 353 .

to create a positive environment to fuel the improvement process. team probelem solving) move towards the ultimate goal 354 . but plans can and must change when needed • Work-the-Process – Focusing on the various root causes and utilising a variety of management tools (pareto. Goals must be accompanied by well focused action plans to guide the process improvement effort. statistical capability analysis. cause and effect. Action plans must be direct and specific.CONTINUALLY MEASURING PERFORMANCE • Goal Setting and Action Planning – Goals must be established in an incremental manner and set in both the short term and the long term.

the baseline measurement system must be continuously tracked for verification Communicate Results Take the initiative to communicate results internally to improve coordination and increase the focus of workers and managers. Leverage results by sharing them with the top management to obtain support and continued funding.CONTINUALLY MEASURING PERFORMANCE • Performance Measurement – In order to determine if the action plan is having a positive effect on the process. Communicate results with customers to sustain partnerships. 355 .

I Profit margins Share price Rate of failure 0 Defect delivery Conformance Preventative maintenance Figures accuracy Debtor days Creditor days Stock turnover Defects per mill. FMEA.PERFORMANCE MEASUREMENT TOOLS Departments FINANCE Quality Cost Delivery R. Quality records Certification Tools (SPC.O.teams) Cost of PM Cost of procedures QUALITY LOGISTICS Routings Expediting Response Transportation Service On-time delivery Customised delivery 356 .

PERFORMANCE MEASUREMENT TOOLS Departments HUMAN RESOURCES Quality Performance Turnover Motivation Recruitment Behaviour Culture Mission Customer satisfaction Efficient benchmarking Cost Training Disruption Wage rate Bonus Absence Delivery Training days Efficiency Promotion SALES & MARKETING Market surveys Communication Advertising Correct segmentation Conformance 357 .

PERFORMANCE MEASUREMENT TOOLS Departments DESIGN & ENGINEERING Quality Innovation rate Product life Development duration Cycle time Right first time Process control JIT Cost Innovation cost R&D Conformance Delivery Production ready Response to market demand Time to market Breakdowns Schedule adherence MANUFACTURING OPERATIONS Productivity Cost of quality Product costing Stock Flexibility Floor space Development Alliances Order size SUPPLY CHAIN Partnerships Integration Communication Lead times Location 358 .

THE ADVANTAGES OF BENCHMARKING • It provides information on what standards must be surpassed in order to achieve a competitive advantage • Benchmarking is motivating since it indicates standards and targets that have been achieved by others • Resistance to change may be lessened if ideas for improvement come from other enterprises or competitors • Benchmarking is broadening in that it prevents insularity and self-satisfaction 359 .

Appropriate to the circumstances INTERNAL Measuring how close we are to achieving what is our ideal goal Leads to fads which often fail due to Copying the appropriate way of thinking and adapting this to our problems Providing a basis for internal continuous improvement Generalising from subjective experience Not understanding what is appropriate under given circumstances 360 .TYPES OF BENCHMARKING Appropriate and Effective Inappropriate and ineffective Unthinking direct copying of what others do EXTERNAL Understand why and what others do.

return to 1 ANALSYSIS STAGE INTEGRATION STAGE ACTION STAGE Leadership position attained Benchmarking practices are fully integrated into your organisation 361 .BENCHMARKING PROCESS STEPS PLANNING STAGE Step 1 Step 2 Step 3 Step 4 Step 5 Step 6 Step 7 Step 8 Step 9 Step 10 MATURITY STAGE Identify what is to be benchmarked Identify competitive companies Determine data collection method/collect Determine current performance gap Project future performance levels Communicate benchmarking findings Establish process improvement goals Develop action plans Implement specific actions and monitor progress Recalibrate benchmarks.

VALUE CREATION A Value V-P Price Cost P-C B V-P • B creates more value (V-P) • B can charge higher price • B is more profitable (P-C) • B has lower cost 362 P-C .

materials management – have a role in creating a value for their products 363 . HRM.VALUE CHAIN • Value chain refers to the idea that an organization consists of a chain of activities for transforming inputs to outputs to which customers attach some value • All the functions within an organization – such as production. quality.

VALUE CHAIN • The process of transformation is composed of a number of primary activities and support activities that add value to the product • Value addition can be arise from differentiation or from lowering of cost 364 .

Materials Management etc. Marketing. • Examples of support activities are HRM. After Sales Service etc.VALUE CHAIN • Examples of Primary Activities – Production. IT. 365 .

such as too many employees. too much equipment. excess quality maintenance 366 . or by working too far ahead Tertiary Waste Waste from excess stock Quarternary Waste Waste from excess transportation. or excess stock Secondary Waste Waste caused by producing too much. warehouse management.WASTE LEVELS Primary Waste An excess of production capacity elements. excess warehouse inventory.

ROADMAP Manufacturing Strategy Awareness revolution Workplace organisation TPM SMED Automation Process flow Level production Standardise operations World Class Manufacturing 367 Employee Involvement Visual Control Multi skilling Pull Systems Foolproof Systems .

g. Waste levels  Value stream mapping  Road map for improvement 368 . bench marking.SESSION SUMMARY • Following concepts have been covered during this session  Need for Evaluation of progress of strategy implementation  Measures of performance  Performance measurement tools e.

BUSINESS ECONOMICS V G S Mani Engineering & Manufacturing Management 369 .13.

“ 370 . engineers must:  Technically be very competent & be a leader  Work and Network with Good Communication Skills  Learn to be business oriented  Learn to Diagnose and Manage Marketplace changes  Beware of Competition  Understand the Relevance of Profit  Learn the sense of money  Understand the "Cost of Doing Business.How To Be A Successful Engineer? • To succeed.

371 371 .MANI.Evaluate Output AND Costs Of Any Activity Resources Processes/ Activities Output Costs Business Results/ Value Addition V.G.S.

ROI. • Middle level managers must be bi-lingual 372 . downtime etc.Language Of Money Vs. Language Of Things • Senior managers speak the language of money – EPS. NPV. • Operating staff speak the language of things – quantity. PBT etc. defect rates.

airbags at $ 50/ unit instead of traditional $ 100/ unit) 373 .g. parts sourced for nano car .Changing Concept of Costing • Old concept: Cost + Profit = Price • New concept : Cost = Price (market driven – what the traffic will bear) – profit (business policy) • Cost is only one of the aspect that determines the price • Leads to concept of target costing. especially when sourcing custom designed new products (e.

Costing System • Linking the cost of resources to products is called the costing system Resources Material Products Product A Labour Manufacturing System Product B Services Product C Ref: The Managing Budgets Pocket Book –Research Press. 1997 374 . New Delhi.

Costing System • • • • • Primary Objective – To assist decision making Costs needed for a) day to day operational decisions b) medium and long range strategic decision c) forward predicting cost implications 375 .

remains constant. irrespective of the output 376 . cost of defectives. Material .g. welfare. Power/ Utilities.g.  Variable overheads: varies less than proportionately with output – e. bank charges  Fixed overhead – Salaries. Consumables. demand charges for power. lighting. rent.Elements of Product Cost • Sum of  Direct / Variable Cost : directly varies with output– e. subcontracting cost etc.

. this appears very good! 377 . 100/. 10/kg) • Actual Cost is 100/.Direct Standard Costing • Process Standard is the starting point for cost estimation • Direct Standard costing converts process standards into costs (standard quantities used x standard prices) • Standard direct product cost – Rs.(using 10 kg of material at Rs.

analyse price and usage variance also! 378 . price variance is Rs 100 – favourable).Price & Usage Variance • But 20 Kg of materials purchased at Rs. 5/. • Conclusion 1 – smart buyer but a lousy user! • Conclusion 2 – Don’t look at total cost only.100 – unfavourable .per kg has been used – (Usage variance Rs.

Price & Usage Variance SITUATION MATERIAL PRICE/ KG (Rs) MATERIAL USAGE .00 Price Usage Price Usage 125 0.80 100.25 100.00 80 1.00 379 .00 100.KG COST (Rs) STANDARD COST 100 1.

result – higher product cost (price variance) Poor Manufacturing Practice – higher usage.Price & Usage Variance Sr./ kg Cost Rs.0 1.5 18 45 Only an ERP system can trace costs to manufacturing practices and to systems 380 . but inefficient purchase system – higher price.5 20 28 40 42 3 2. 1 2 Usage – Kg/Pc Price – Rs. efficient purchasing system – lower price./ pc Comments Standard Cost Good Manufacturing Practice – Low usage. result – higher product cost (usage variance) 2. No.

Overhead Costs • What are overhead costs? • Running costs of operations such as wages. rent. telephones etc. which are not directly related to production/ output • Depreciation is a non cash expense added as an overhead cost • Overheads can be classified as variable and fixed (see earlier slide for explanation) • There is no clear methodology available for distributing overhead costs on the products 381 .. power.

Apportionment or Absorption • Each of the above method is arbitrary and not accurate! • Activity based costing (ABC) is a rational method of distributing overheads to products 382 .Overhead Costs • They are distributed by Allocation.

Breakeven point Total Sale Total Costs 383 .

Working Capital Cycle cash Creditors payables debtors RM FG WIP 384 .

Working Capital Cycle • Working capital is usefully portrayed as a cycle of money through the business. starting and finishing with cash • Complete the cycle as quickly and frequently as possible (velocity of cash circulation) • Working capital is current assets less current liabilities • “Make your working capital WORK! 385 .

which does not cover any of the overhead • Adopted when there is low demand or when there is intense competition • Lot of business decisions are based on this concept 386 .Marginal Costing • Price realized which fully covers the direct cost but only a part of variable + fixed overheads • Better than keeping the plant idle.

Budget 1. 2. 4. 3. Sales/ Manufacturing review deviations in 4 & 3 8. Standard Cost of products Estimates of variable & fixed overheads Total of 1 + 2 gives the ex factory cost Units sold x standard price = Revenue Revenue (4) – Cost (3) = Estimated Profit before tax PBT 6. Total actual revenue – total actual cost = actual PBT 7. 5. Top management continuously monitors 6 for evaluating business performance 387 .

Sale of (assets.Scrap).Typical Profit & Loss Account • Income: – Turnover – Other income • Jobwork • Int.Dividends 388 .

Cont’d • Expenditure: – – – – – – – – Raw Materials & Consumables Personnel Operating and other expenses Inventory incr /Decr Depreciation and Amortisation Impairment of Assets held for sale Financial Expenses Tax 389 .

Some Recap • We will recap our understanding of – Profit – Cash flow – Breakeven point • Even during NORMAL times above issues are at the core of good business mgt but during RECESSION managing above issues could make difference between going under or surviving 390 .

Some fundamentals of Profit and cash flow • Profit is not cash. • Profit=cash when customers don’t ask for credit and you don’t take credit from your supplier and you don’t keep stocks. This obviously is not a reality for companies though it is true for petty traders • Many profitable businesses run out of cash and this danger is more in a recession • Both Profit and Cash have to be managed very carefully in a recession 391 . • It is a matter of timing • Profit is assessed when we sell a product-ie when business makes the sale NOT when customer pays and cash is assessed when cash receipts exceed cash outflows.

pps supply chain etc – Negotiate and manage credit terms – Track aggressively your debtors 392 .Use ideas learnt in project mgt.Few steps to improve cash flow • • • • • • • • Increase operating profit Sell unused/impaired assets Decrease stock and debtors Increase creditors Reduce interest burden Reduce Tax and Dividend Reduce/Resch Capital exp Manage working capital – Complete working capital cycle fast and as frequently as possible (use measures or ratios to track the trend).

• Also thinking will start to diversify into other areas of business OR some countercyclical products.specially during a recession the main objective of MGT is to reduce General and Cash Breakeven point. 393 .BUT.For Understanding Breakeven • Normally Top line growth is the driver for profits.

which will.000 • Variable costs: £ 2. To do this. you multiply: • variable cost per unit × number of units 394 . you plot a horizontal fixed costs line (it is horizontal because fixed costs don't change with output).Contd • Breakeven chart • Here is how to work out the breakeven point. using the example of a firm manufacturing compact discs. On to this. and costs and revenue on the vertical (y) axis. in effect. You can assume the firm has the following costs: • Fixed costs: £10.00 per unit • You first construct a chart with output (units) on the horizontal (x) axis. This is because the fixed cost added to the variable cost gives the total cost. be the total costs line. • Then you plot a variable cost line from this point.

you multiply: sales price × number of units (output) If the sales price is £6. you can assume that the variable cost per unit is £2 and there are 2 000 units = £4. you are ready to plot the total revenue line. • In this example of the CD manufacturing firm. To do this.000 = £12.000 items were to be manufactured.000 M S Ramaiah School of 395 . the calculation is: £6.00 × 2.000 total revenue Where the total revenue line crosses the total costs line is the breakeven point (ie costs and revenue are the same). and everything above it is produced at a profit. Everything below this point is produced at a loss.00 and 2.Contd Once you have done this.

Variable costs: £2 per unit.000 396 .Contd • Fixed costs: £10.000. Sales price: £6 per unit • If you read downwards. it tells you how many units you need to produce and sell at this price to breakeven: 2.500 CDs • If you read across. it tells you how much money you must spend before you recover your outlay: £15.

500 CDs Calculating in costs/revenue Learn this equation: For the breakeven point in costs/revenue.Contd • • • • • • • • • • • • • • • Breakeven calculations As with any calculation. You can calculate the breakeven point in: units costs/revenue Either way. it is easy to make a mistake. which you have just calculated. Calculating in units Learn this equation: Breakeven point in units = Fixed Cost/(Sales Price .2)= 10000/ 4 Breakeven point = 2. 2. There are two simple equations you can use to double-check your answer. the result should be the same. by the sales price.Variable Cost) So using the CD example: Breakeven point = 10000/(6 .500 × 6 = £15.000 397 . you then multiply the breakeven point in units.

Contd • What happens when: – – – – Fixed cost is reduced Next Slide Variable cost is reduced Combination of Both Sales also decreases (Vol +Value/Piece) 398 .

Y R E V + C O S t Breakeven Analysis TC=Total cost FC=Fixed cost VC=Var Cost Sales Rev BEP 1 Tc1 original TC3 Red VC Tc2 Red FC Tc4 Red vc+fc 3 Reduced Sales 2 4 X Volume 399 .

Road To Profitability • Learning? – Fixed cost has to be dramatically reduced – Actions should be to reduce Fixed costs and also to convert FC to VC – VC also to be reduced 400 .

Quality Costs 401 .

Quality Costs 402 .

buy a new machine • Results in short term asset turns • But results in increased output in the futur • Long term improvements in asset turn and ROS 403 .g. Long Term • Spend money now for future benefits e.Short Term Vs.

g. additional shifts a) Reduces capital expenditure/ accelerates depreciation b) Increased sales & overhead absorption increases increases increases increases increases increases increases increases increases 404 Increase Selling Price .Performance Improvement Actions Asset Turn Return on Sales ROS Return on Capital Employed ROCE Supplier Rationalization a) Reduce Prices b) Increase Credit Period increases increases increases increases increases increases Increase Capacity e.

Internal Rate of Return (IRR) More about financial evaluation in Project Management module! 405 . Net Present Value (NPV) 3.Evaluating Capital Expenditure 1. Pay Back Period (PBP) 2.