Terror Tubes - Reasons Why Growth in Market May Not Lead to Significant Increase in Profits - Case Study Example

Reasons why Growth in Market may not Lead to Significant Increase in Profits: A Case Study of Terror Tubes Students Name Course, Semester, Class Tutor Month Date, Year Reasons why Growth in Market May Not Lead to Significant Increase in Profits: A Case Study of Terror Tubes Expansion of business through access to new markets and new products is generally expected to result to increased profits. In the case study of Terror Tubes, an expansion of its market through introduction of standardized tubes as an addition to its existing portfolio of customized exhausts supplies to motor racing and ‘hot rod’ and ‘rev head’ market segments failed to lead to significant increase in profits. In the case study, the organization faced various challenges resulting to reduced profits margins outcome despite growth in sales. These challenges brought to the fore various salient issues in production management such as the issue of perceived quality difference affecting the prices customers are willing to pay for customized products over standardized products, reduced competitiveness resulting from poor strategies or lack of strategies tying organizations production processes to organizations strategic objectives, inability to manage and forecast demand, and organizations capability to manage capacity and meet demand in its operations (Gardner, 2006). Accordingly, growth of new markets, introduction of new products and a growth in sales may not be necessarily accompanied by increased profits. Terror Tubes Company is involved in providing custom-made exhaust pipes to the motor racing industry, “hot rods,” and “rev heads” street cars. In addition, the organization has embarked on producing standardized exhaust systems and has entered into a contract to supply Super Car with specialized exhaust systems. The new contract and increasing demand for standardized products has resulted to challenges in the process of planning, production among other challenges. Consequently, the organization is forced to make ad hoc decisions on the daily operations of the organization such as the time to start producing, the quantity to stock, the employees to carry out production, the amount of time to invest in producing particular product among other decisions. Terror Tubes management has realized that even with increased production, the organization is not making higher returns on investments. Although 40% of the organizations demand is from the standardized products, which are of similar quality to the customized products, consumers are willing to buy at a cheaper price thus the returns from standardized products account for only 25% of the total income. Furthermore, the increased demand is straining the organizations capabilities and facilities creating need to increase space, facilities, and its production capabilities. Consequently, the organization must determine the best way to produce standardized products while at the same time increasing the profits generated from them through use of various principles of process and production management in the organizations operations. The organizations operations are the tools and activities that an organization undertakes to create value for customers and to achieve the objectives of the organization (Mehra & Inman 2004). The process of managing the operations of an organization has spawned an entire field of study in the form of operations and production management. Operations management focuses on management of an organizations internal process to produce and distribute goods and services (Heizer & Render 2006). Most authors describe operational management as the management of key processes aimed at transformation of resources into goods and services (Stevenson 2005). Operations management is further defined by Gardner as the “set of activities of creating, implementing, improving, and creating processes that transform resource input such as raw materials, technologies and labor, into output goods and services that meet the needs of customers” (Gardner 2006). Since it permeates the entire framework of an organization, process management is an important element of an organization and consequently, it should be included in an organizations business strategy. The organizations process in aiming to satisfy customers’ needs seeks to create value to customers and to increase organizations competitiveness (Kenneth, R. 2004). Competitiveness of an organization is measured by how well an organization is able to meet the challenges and demands of customers in an increasing liberalized, global and demanding market (Gardner 2006). Organizations have the duty of envisaging the future demand and determining how to best direct the organization to fit into the future in a process referred to as strategy (Chryssolouris 1996). Since the organizations forecast include expected future demand and plans on how best the organizations process and operations may best fit with this demand, organizations process and operations are an essential part of an organizations strategy. Use of strategies in operation and process management is significantly important when determining the market to enter and the products to offer in those markets (Nahmias 2005). Some of the strategies that an organization may use include the Michael Porters Five forces analysis that measures various forces that may influence the profitability of a particular industry, Mintzbergs Five perspective analysis, and Wiersemans and Treacey strategies (Hill 2005). In the Terror Tubes case study, the decision to enter into production of standardized products along with the customized products and the likely effects on the financial structure of the organization must be considered before proceeding with the decision to expand. The organization may use five porter analysis where in such an analysis forces to be considered include barriers to entry, power of suppliers, and power of buyers, substitutes, and industry rivalry (Kenneth 2004). Applying such an analysis on the terror Tube case study would highlight the power of the buyers in the case of dealing with one dominant buyer such in the case of expansion into producing exhaust pipes for Super Cars and the power of buyer’s in determining price for standardized products. Organization can also make use of the Mintzbergs five perspectives of strategy determining which of the five principles are represented within an organization. In this regard, an organization may regard strategy as a plan, as a ploy as a pattern, as a position or as a perspective (Gardner 2006). In addition, Wiersemas and Treacy articulated operational excellence, product leadership and customer intimacy as another strategy for developing strategic advantage (Gardner 2006). Since Terror Tubes has attained product leadership through its customized products, it should turn its focus on attaining operational excellence by using functional strategies and organizational strategies such as operations strategy. Such strategy may involve an organization competing on cost, flexibility, quality, and service (Bullinger H.J & Schweitzer W., 2006). In order to attain operational excellence factors such as wastage of resources through use of expert human resource for routine non-expert operations in producing standardized products should be addressed if the organization is to reduce its cost of producing standardized products. In addition, the organization may further increase its operational excellence by planning, designing and strategically determining how operational procedures in production are to be carried (Gardner 2006). An analysis of an organizations strategy gives an insight on how an organization fulfils its customers expectations and needs and the methods it uses to achieve this end, elements that are vital for the success of an organization. In strategy, one of the most important aspects in operations management is the issue of strategic capability. These are the core competencies that an organization enjoys. Scholes and Johnson strategic capability model is a resource based view of an organization describing how resources interact with competencies to create competitive advantage. Terror Tubes has strategic capabilities in its level of expertise for production of exhaust pipes and this is important in enhancing its position. Another major issue that is likely to have an effect on the performance of the organization and especially on realization of significant competitive pricing and profits is the management of capacity. After developing strategies that describe organizations, the organization must meet the demands imposed by the environment both economically and within a given timeframe. In determining the financial viability of various processes, capacity denotes a description of the amount outputs possible within a given timeframe (Kenneth 2004). Since realizing the critical capacity involves capital expenditure, the cost of providing capacity is an important element in determining the financial viability of various projects and processes (Nahmias 2005). In the case study, the issue of capacity is evident where increased production of standardized products leads to the consequent effect of inability of the organization to timely meet its other obligations such as the timely production of customized products. In order to attain the required capacity for optimum production and to achieve the organizations strategic objectives various issues related to capacity including planning, designing and implementation of capacity should therefore be taken into consideration (Wittenberg 2004). Capacity planning refers to the set of long term decisions that facilitate an organization to establish the need for either expanding or downsizing capacity to respond to demand (Heizer & Render 2006). Where there exists certainty in anticipated demand, costs, and strategic objectives of expansion of operation, capacity increases. Capacity planning is largely related to forecasting. In demand forecasting, management is informed of capacity decisions in medium, long term and short term range. There are various capacity expansion strategies that an organization may chose from which include leading demand with incremental expansion, leading demand with one step expansion, capacity lagging behind incremental expansion and an average capacity with incremental expansion (Heizer &Render 2006). Such decisions impact on the firms’ strategic direction in regard to fulfillment of its vision, mission, goals and strategic objectives. Another dimension of planning for capacity is aggregate planning, which involves an attempt to balance demand with capacity in the most economical way possible. At this level of planning, organization avails all resources needed for an aggregate of services or products; such as a line of products or services. Aggregate resources may include requirements such as machine time, human resource, raw materials required among others. Through use of aggregate planning an organization is in a better position to forecast the estimate requirements for capacity needs in medium term and more efficient production through use of such tools as a master schedule. An organization must also make long term strategic planning and short term planning besides the aggregate planning. In the case study use of aggregate planning and use of master schedule is significantly crucial to avoid wastage of space occasioned by the r Facilities are an important capacity in influencing the ability of an organization to meet its strategic, aggregate and short term planning decisions. Facilities include equipment, fittings, buildings and such that are used in production. An important component of facility is the design. The design of the facility is especially important as it is determined by the organizations strategy. The layout of a store or organizations facility should reflect its strategies depending on what an organization aims to achieve such as convenience, reduced costs among others. Terror tubes design must be taken into consideration to avoid wastage of space as most of the standardized products are left at various stages of production to allow time for production of customized products. Whenever an organization is involved in different activities it is required to plan and schedule, allocate resources and avoid bottlenecks. Project management concepts are vital in order to manage, design and built production processes. Project management takes into consideration the fact that in each project there are various activities, use of resources and similar situation where decisions are made even though each project is unique. Project elements include the objective of project, scope, contract requirements, resources required, schedules, besides personnel, problem and risk analysis and control. The process of project management entails project planning, project control, scheduling, and use of project team, which is usually made of individuals from various specialty areas. In addition, the project management process may be made up of a matrix organization, which is a team structure having members from functional areas working on a project within their level of skills. In the case study use of matrix organization would especially be important in ensuring that expert staff is not used for routine functions such as in standardized production. After determining the scope of project as captured in scope statement, a document providing justification for production and expected project results, a work statement, which is a description of the projects objectives broken down into its component structures is made. Thereafter, scheduling of project activities is undertaken. Project scheduling involves various steps including defining activities, sequencing activities, estimation of time required, and developing of a schedule. In the case study, such concepts are vital in avoiding the ad hoc decisions that result to significant wastage of time and resources. The steps may be carried out by use of Gantt chart, PERT, CPM or Microsoft Project. A Gantt chart is a bar chart or graph that uses a bar to indicate passage of time for each activity by providing visual display of the schedule of project. It may factor in slack, which is the period that the projects activities may be delayed without resulting to delay in the project. Various project control elements includes time management, performance management, cost management, performance management such as by use of earned value analysis, a numerical procedure for determining the progress of a project by forecasting its completion, cost, variation in budget among other elements. Communication is also used as a tool for control. Critical Path Method (CPM) involves elements such as the deterministic task times, and activity on-node network construction (Gardner 2006). Project Evaluation and Review Technique (PERT) makes use of multiple task time estimates and activity on-arrow network construction (Gardner 2006). In activity on nodes, nodes are activities where arrows indicate precedence relationship whereas in activity on arrow, arrow represents activities while nodes represent events for points in time (Gardner, 2006). An event is either beginning or completion of a projects activity. Another important element that an organization must be aware of is the critical path, which is described as the longest path through a network or the minimum time for completion of a project (Hart 1995). The project time may be reduced by crashing the project. This entails use of additional resources to reduce the time taken to complete a project. Crash time describes the time gained in reduction of activity time, the cost of reducing the time for activity is crash cost (Barnes 2008). An organizations goal during crashing is to reduce the duration that a project takes while at the same time maintaining the costs to the minimum level. In the case study, this would be vital in reducing the amount of space used by items in work in progress while increasing the ability to meet the demands on time and at the least cost possible. In determining time-cost relationships, as project time decreases crashing cost rises In addition, an increase in duration of project leads to increase in indirect costs (Barnes 2008). An organization should thus aim to attain an optimum level where the project length is reduced to the extent that the cost of crashing is less compared to indirect costs. It is evident from the papers analysis that various salient issues contribute to an organization reporting reduced profits despite increased sales and organization growth. Such issues may include consumer’s perceptions of the value of standardized goods as inferior in comparison to the customized products leading to expectations of reduced prices. Furthermore reduced competitiveness resulting from poor strategies or lack of strategies tying the organizations processes to organizations strategic objectives, inability to manage and forecast demand, and organizations capability to manage capacity and meet demand may also affect the potential profits. Accordingly, growth of new markets, introduction of new products, and a growth in sales may necessarily result to increased profits. Necessary efforts are thus required in meeting such challenges if an organization is to achieve meaningful growth in profits in tandem with increased growth of market. The organization may thus be forced to adopt to such a challenges through saving on cost by reducing the cost of production such as through use of less expensive labor force in production of standardized products, saving costs through planning and avoiding wastage of time and resources, following up on strategies among other measures that are outlined above. Reference Barnes, D., 2008. Operations management: an international perspective, Thomson Learning. London. Bullinger H.J & Schweitzer W. 2006. Intelligent production-competition strategies for Producing enterprises, International Journal of Production Research, Vol. 44, Nos. 18-19, 15 .3575-3584. Chryssolouris, G 1996, Flexibility and its measurement, CIRP Annals—Manufacturing Technology, vol. 45, no. 2, pp. 581–587. Gardiner, D 2006, Operations management for business excellence, Pearson Education, New Zealand. 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