Post Graduate Programme (Term II, 2011)

OPERATIONS MANAGEMENT
Assignment 1 Case: Chaparral Steel (Abridged) Weight: 10 % Questions:
1. Why do you think the company is contemplating the major (step) capital investments (as stated in para 2 in page 1, and in para 5 in page 7 of the case) during September 1979, considering the context of the continuous but incremental capacity growth that were happening at the company over the previous four years? Considering the very high cost as well as the risks involved in such large expansion proposals, discuss its justifiability. [2] 2. If the company actually decides in principle to go for such a major/step capacity expansion, do you think that September 1979 made the best timing for launching the major (step) capacity expansion project, or that that better timing for it could be further down in the future? Explain. [2] 3. Discuss, in a more general sense, as of 1979 (the case date), and in a practice of evolutionary management at Chaparral for the future, possible Operations strategies that may be considered in respect of the various Operations dimensions, and of Operations as a whole, as both [2] a. Pursued proactively (i.e., through required planning, decision making and implementation) as deliberate, and b. Expected to be experienced reactively (i.e., through the resulting actual organizational processes) as emergent. 4. Discuss what roles the human processes and their inherent human skills of quality management, maintenance management, project management, continuous improvement, etc., [2] a. Would have played, in the past, in the companys strategic management of operations, and b. Will need to play in any major future change management process, such as the major capacity expansion programme at the company as was being considered in 1979.

Submission Date: During middle of Post-mid Term (date to be announced)

Note:
The following is a list of relevant and useful points toward answering the above questions. Credit will be given based on how effectively your answers relate to and make full use of these points: 1) The case (as of the case date, September 1979) is focused directly on making decisions on a proposal for Capacity expansion (to more than double the current capacities) at the present site in southern Texas, as a business decision (not just Operations decision). 2) In general, capacity planning (long term) at any company, involving high risk decisions of investments in fixed assets, also become complex as result of the different interrelationships with a. The macro side visioning for the long term (with long term-orientation), and b. The micro side actions for the short term (but also with long term orientation), for the various managerial issues arising from several other dimensions of an operation, such as shown in Table 1, in a general framework (not all managerial issues listed will be applicable or relevant to every organization or managerial situation): These call for development of appropriate management processes for each of the above dimensions, for each of the macro and the micro sides of the dimension. Also, all these management processes should be mutually complementing across the macro-micro dichotomies within each dimension, and also across the different dimensions. 3) A generalized dichotomous view of an evolutionary process of managing operations for the various dimensions of the Operations is:

Table 1: Macro-Micro Level Issues in Operations Management

Operations Dimensions Macro level issues to be faced Micro issues to be faced

Plant capacity expansion decisions at the company (seen as the main Operations dimension) Scale of capacity expansion, in terms of: Being bold and big vs. being watchful and incremental Timing of capacity expansions, in term of: Leading vs. lagging increases in demand Developing companys internal culture (and supporting operating systems) through teamwork, amongst various functions, in terms of: Having shared objectives vs. individual responsibilities. Process design/development, in terms of plant layout, methods/ work systems design, etc., in terms of: Long term goal of streamlined flow vs. short term process improvement activities Process scope3 in terms of development of capabilities and competencies, in terms of: Development of very long term critical capabilities vs. development of long term core competencies. Product Profile6 defining an overall structure in terms of products offered, in terms of: Overall product definitions for the range of product to be offered vs. periodic launch of end product streams/ end products Product scope7, as designed at the company, in terms of: Broadening product scope vs. narrowing down product scope Competitiveness emphasized, in relation to other competitors in the targeted market segments, etc., in terms of: Differentiation vs. cost leadership Adopting specific strategy of occasional, big step capacity expansions through long term investments, to realize economy of scale benefits. Opting for, bold, proactive capacity expansions leading demand, to always ensure adequate capacity to meet all demands Adopting general strategy of frequent, incremental capacity increases, through medium and short term means to meet immediate increases in market demands, with loss in economy of scale benefits. Opting for watchful, reactive capacity expansions based on capacity lagging demand, risking insufficient capacity in relation to demand.

a.

b.

Other Operations dimensions: Determination of shared purposes, objectives, etc., agreed to between the members of teamwork. Undertaking and fulfilling individual responsibilities carried out autonomously (also meeting the personal goals of the individuals concerned) to meet shared goals.

a.

b.

The Lean ideals of streamlined flow, with zero non-value added costs.

Continual process improvements or kaizens, as journey towards the Lean ideals.

c.

Development of core competencies5 the Development of critical organization has chosen to position itself capabilities4 that the organization on, toward matching with the market/ has chosen to organize, using its customers needs, and the opportunities available resources they present.

d.

Development of simple Overall product definition based on concepts of modular design, product platform and core product

Development and launching of more, newer streams of end products offered, to continually match changing market/ customer needs

e.

Variety augmentation through new product launches

Variety reduction through dropping of old/ obsolete products

f.

Differentiation of the product/ service offerings to the customers, based on quality, delivery, responsiveness of service, etc.

Realization of cost leadership and cost leadership, over the product/ services product life cycle.

Step capacity expansions based on high capital investments in plant and equipment, etc. Incremental capacity expansions with only minimal capital investments, and based mainly on additional manpower, overtime, subcontracting, etc. 3 Process scope refers to the orientation of the process, arising from the process technologies a firm has deployed in its value creation process, ranging from basic technologies/ organizational capabilities orientation to market needs orientation. 4 Critical capabilities are the generalized capabilities directly stemming from various technological strengths and organizational prowess in the organization. 5 Core competencies are the specific market and customer-related capabilities in terms of certain core products, which can then serve as the base for launching a variety of end products that meet the specific market/ customer expectations. 6 Product profile refers to overall-to-detail structure in product offerings, in conjunction with the process scope being developed and managed. 7 Product scope refers to the entire range of products a firm produces, markets, etc.
2

[Macro (long term) View: Finding, Defining, and Facing the Right Business Problem to solve, as the issue of Ends] Vs. [Micro (short term) View: Solving the Business problem by the Right Business Solutions, as the issue of Means] 4) Chaparral has, in building the plant (with light and modular plant design) in 1975, followed an initial capacity strategy of having its capacity at the finishing end (the rolling mills) to be twice that of the melt shop (i.e., the furnace and continuous caster). [See para 4 in page 2.] Subsequently, in the next four years after the start up of production (from 1975 to 1979), the company has made all the possible process improvement effortswith impressive progress achieved till 1979, the case dateto enhance, first, the furnace capacity, and later, the caster capacity as well, toward matching with the rolling mill capacity. That is, the company achieved these additional capacities, with only minimal additional capital investments on plant/ equipment capacities. 5) Such a complex approach to management of plant capacity at Chaparral, adopted and implemented over these four years seem to have been directly an evolutionary outcome of the company facing, continually and squarely, the complexity of its total situation (with the necessary macro-micro perspectives on the various dimensions of operations as enumerated above). 6) You may prepare and use, as checklists as illustrated below, the lists of some the underlying issues governing these dimensions, provided below under each these dimensions (the checklists are only illustrative and not complete; you will need to garner more of the issues faced and in more detail, through detailed analysis of the case). a. Issues faced in Product design: i. Efforts to constantly move product mix to higher value-added products such as merchant shapes and special bars (see para 5, page 5); Product categories, viz., junior beams (in the mobile-home market segment, as proposed by Jeff Werner), etc., to take into account product profitability, etc. Less competition in these product ranges. ii. Bigger products more profitable, for the same capacity (see para 2, page 6) iii. Minimum volumes of customer orders accepted (to take into account possible loss of productivity through short runs, etc.) (see para 5, page 5), iv. Emphasis on developing broader market regions and industries in which the product sales will be pursued. (see para 3, page 6) v. Competition expected from other mini-mills and the integrated steel mills. b. Issues faced in Process design: i. Technological development (also emphasizing light and modular plant designs as the ideals, even though no equipment manufacturers were offering equipment that were close to such ideals) (See page 8, para 1 and 2). ii. Continuing evolution through continuing investments, albeit modest, and sending operating people to visit best steel plants and equipment manufacturers worldwide. Considering sequence casting procedure as in a Japanese steel mill as way to overcome bottleneck in the caster. [See page 4, para 3]. iii. Streamlining of the processes by addressing layout and flow-related issues (arising from needs for balancing of the production lines) through new, unorthodox operating procedures. [See page 3, para 2]. iv. People involvement/ participation in the improvements of the companys value-adding process. v. The process characteristic that all the product varieties for the company are realized at the rolling mills stage, since up to the caster the flow is a single variety resulting in 40 feet long billets, typically in 5x5 cross section. vi. Size of rolling mill stands and horsepower of motor, as suited to product groups 1 and 2, corresponded to Chaparral budget, but these would not meet its wish to move to high valueadded products (See para 3, page 8)

vii. For the proposed expansion, to accommodate also the junior beams for the mobile-home segment, the higher costs for the higher horsepower equipment for rolling mills may not be justifiable only based on the junior beams, but may be justifiable based on the possibilities of making other bigger products the company havent thought of yet [See page 10, para 2]. c. Issues faced in relative emphasis of the Choices in competitiveness pursued: i. Systematic tracking of competitors (such as Nucor) performance (in terms of labor hours per ton of steel), and targeting reduction in its own labor hours per ton. ii. Focus upscale, and aim for part of the Big Steels market (rather than only think of traditional mini-mill products). iii. Develop broader market region, rather than have too high market share in fewer regions. iv. The companys costs and productivity enabled it to compete against imports, when moving up to larger structural shapes. (see para 4, page 7) d. Issues faced in developing Internal work culture at the company i. Managements belief that work should be fun and satisfying (see para 6, page 4) ii. Nonunion operation based on participatory management and profit sharing, and hence high priority for job training (see para 6, page 4) iii. Lean and flat management structure (see para 6, page 4) iv. Unorthodox operating procedures; also continuing changes in procedures v. Emphasis on informality and not formal meetings, etc. (see para 1, page 5) vi. Freedom to experiment (see para 3, page 5) vii. We can do it outlook permeated the company (see para 2, page 5) viii. Commitment to customer (see para 4, page 5) e. Issues faced in determining Capacity strategies: i. A number of incremental increases in furnace capacities, and partially matching increases in caster capacity spread over time during 1975 to 1979 creating pressures for further capacity increases in caster capacity, leading the company to examining the novel casting procedures followed in a Japanese steel mill. ii. Consideration of large capacity expansion in 1979 to more than double the capacity of the existing operations, with a new, second 500,000 tpy capacity furnace, which would be the worlds largest electric furnace (see para 2, page 1 and para 5, page 7). 7) Most of these change management would have necessarily involved executing a lot of crossfunctional projects, through teamwork. Change management of such magnitudes and extensiveness, in order to be effectively pursued, require deep involvement of the organizations human processes (the essential problem solving capabilities resting in the companys human organization) in the companys entire strategic management process. Chaparral seems to have appreciated the crucial role of human processes, and seem to have strived to provide the right environment for such processes to develop, through development in the organization of (see pages 4-5 of case): i. ii. iii. iv. v. vi. Participative management, Job training, Lean and flat management structure, Profit sharing, Promotion of an environment of informal ways, we can do it outlook and pride in doing job well and taking credit, Freedom to experiment (and even make mistakes in doing so), etc.

8) In answering the assignment questions, you may find consideration of the following points useful: a. All product varieties for the company are realized at the rolling mills stage, since up to the caster the flow is a single variety resulting in 40 feet long billets, typically in 5x5 cross section.

b. Steel, as a basic commodity for industrial requirements, offers little scope for differentiation, apart from more responsive delivery (i.e., shorter delivery lead time), more reliable delivery (i.e., delivery within promised delivery date), etc. Thus the main basis for the companys competitiveness is cost leadership, with some enhancements through responsiveness in deliveries, etc. c. As the melt shop capacities were continually increased through various process improvements and as a result, approached, in 1979, the rolling mill capacity toward gaining capacity balance of the production line, and as Chaparral Steel has been operating profitably with 9 to 11 % net earnings on sales since 1977 (see para 1, page 9), the operations managers had begun to think of their next major/ strategic step in terms of capacity expansion. d. In the above discussions you must touch upon all specific facts/ issues of the case, such as: i. The company has not tried such innovative process strategies, which it employed for its furnace and caster, for also increasing its rolling mills capacity.

ii. In determining the customer order acceptance, the company took into account not only the product profitability, but possible loss of productivity through short runs. iii. The company adopted a marketing strategy of also winning orders in newer geographical markets (i.e., in its secondary market areas) rather than only increasing the market shares in the existing geographical markets (in its primary market areas). e. Jeff Werner, marketing vice-president has proposed that, when considering capacity expansion at Chaparral, the company should also target a new opportunity of junior beams in the mobilehome market segment, and accordingly go for higher horse power in the rolling mill planned for the capacity expansion (with corresponding capability/ competency improvement for the company, and the cost implications). 9) In answering the above questions, you may find taking the following steps useful: a. Draw a simple flow diagram showing the three stages of production in Chaparrals mini-mill (inclusive of the inter-stage, simultaneous operation of the two ladlesfor tapping of the molten liquid, lifting it to the caster, and finally lowering the empty ladle to the ground for the next heat). b. Draw a multi-activity chart (or bar chart), showing for a cycle of one whole heat (of about 100 tons), the operation of the furnace, the caster and the rolling mill (along with roles played by the crews attending to the furnace and to the ladle, for the transfer of molten metal), enabling the existing mill (in 1979, before the proposed capacity expansion) to operate at its designed capacity. For ready reference, a write-up on multi-activity charts is attached. c. Explain, using a chart as above or a sketch, how the Japanese procedure of sequence casting would have served to provide, for Chaparral, a new alternative for additional further increases in the caster capacity? d. Discuss in detail, for the purpose of gaining learning from past experience in the company, and using the concepts of generalized dichotomous view of an evolutionary process of managing operations, how the companys work culture, processes, products, competitiveness and plant capacities have all evolved together, over the four years from 1975 to 1979.

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