Vertical Boundaries of the Firm - Vertical Chain and Vertical Integration - Essay Example

Vertical Chain and Production Management in a Hypothetical Company Introduction to the company Long gone are the days when stakeholders would decide the course of action in the company and govern investments through the management. Today, the management of any company has more autonomous power to take crucial decisions and have everyone including stakeholders follow the rules and ensure smooth workflow in the system. The main focus is on getting maximum possible amount of smoothness in the work and to thereby realize profit targets. In the present study we analyze the production management and vertical chain management challenges of Triond Furnitures, a hypothetical furniture brand that encourages the use of recycled teak in creation of new-age designs and sells them in affordable prices. Triond Furnitures: The Unique Aspects The main operational uniqueness of this brand is that it follows a production after order placement module. In this mode of operation, the customer chooses the product and the design and the workers develop the product according to the choice, delivering the finished furniture in a couple of weeks time. The company has a production unit in Birmingham from where furniture orders placed in its twelve showrooms throughout Britain are produced and shipped. This arrangement gets excellent response from customers who do not mind the waiting time, since they know that the piece going to be delivered is going to be unique and customized for their needs. Expansion Plan: The great rush of orders and the company’s plan to move to new markets brought out different challenges in vertical chain and production management. To begin with, the firm has decided to open new stores or showrooms in five different cities that they have not been in before. And this would bring in orders that the Birmingham production unit cannot handle. In this scenario, the 30 employee production unit will either need to be doubled in capacity, which might affect the quality of the products or the firm has to think of traditional vertical chain management techniques. Economic Models: The Past, Present and Future The company has operated using the Neoclassical Economics model till date since due to its small size and promising performance, a good number of shareholders and venture capitalists are interested and influential in its growth. However, when they move into real vertical chain system, they will have to ensure that they follow the Quasi Marris economic model which is more fit for the 21st Century, and ensure that behavioral factors are taken into consideration every time. The economy of scale here will be determined by the number of households, offices and complexes which use teak wood furniture or are open to using it in a recycled form. The economy of scope is decided by the readiness of the corporate sector to welcome the Triond Furnitures brand. Identifying competitors like local furniture producers, non-teak furniture brands, teak and recycled teak furniture brands and transportation vendors who are already in a relationship with these leading vendors is important since the brand wishes to enter five new cities around the same time of the year. The competitive risks that Triond Furnitures will have, is at the production and transport levels, because the market is always open to new furniture designs and brand and will welcome new advertising with an initial sales turnout. Management indifference is to be kept minimal as non-cooperative game theory will only lead to higher risks in the initial years (Simatupang & Sridharan, 2002, p.19). Relationship Specific Asset Management: The Ideal Way Out However, the company also needs to choose a very dynamic and powerful vertical chain system and by watching current market situation, it would be safe to say that they should go for a mix of buy and make models of vertical chain management and production. In this model, the market firms which provide high quality recycled teak wood furniture can be contacted and products bought from them and delivered in the new markets. There are two main advantages of this approach. Firstly, the cost of production is streamlined and asset specificity is risk free. Secondly, there is high efficiency and innovativeness found in locally procured market firms and production teams that guarantee a better performance than doubling up number of employees at the main production center. Rent and Quasi Rent: The company can rely on the rent of this approach as buyers are solely common people and customers who can be attracted using innovative marketing skills (Brandenburger & Stuart, 1996, p.22). However, the chances of relying on quasi-rent statistics might arise when the company’s verticals fail to garner the annual sales turnout. Since a back-up plan is not in place, the immediate reaction of a change in assets will lead to a hold-up situation wherein relationship specific assets will be changed to break the hold-up. Hold-Up Plan: The company will then have to ensure that during the hold-up it develops local market specific products and furniture models that work in its best way to help the relationship it holds with the market firm. However, all through the renegotiation phase, the production costs may go higher than expected (Simatupang & Sridharan, 2002, p.17). Therefore, it would be worthwhile if Triond Furnitures decided to make its products in localized production centers instead of buying them from a local manufacturer and buy marketing and selling services from market firms. The level of opportunism will be remarkably low for the firm in this scenario and the entire concept will follow bounded rationality, which in turn reduce risks. Game Dimensions: Defining the boundaries of the firm is crucial to the success of the game dimensions that are started once the brand is in the market and is competing with pricing of similar brands operating in that market. Having a co-operative approach would be a great start. However, the more the company is sure of its production levels, the better it will perform in strategy building. Production and workflow will be in the direction of market popularity. Production and Supplies: The most crucial determiner of success in a vertical chain is the production and supplies section. There have been many cases of foolproof economic plans failing only because the production units could not synchronize with the plans owing to last minute difficulties. Therefore, in case of Triond Furnitures expansion plan, determining production centers will be the turning point in designing, determining and delivering a good economic plan. Triond Furnitures can propose an approach wherein they can enter neighboring markets that can be supplied by the same production unit, and have similar furniture market competition to overcome. In this way, out of the five cities that it plans to enter, four cities will have assured production back-up and one will either take in production from the original Birmingham unit or any of the new production units. While this is a viable plan, ensuring that the quality of the good built in the new production units is similar to the original quality sorted by the brand till now is highly important. The production workflow for the vertical chain will therefore be in the following manner. Teak recycling-processing-deigning-manufacture-quality check-transport-delivery: Crucial processes of sales and marketing are not included in the production workflow since that part is taken care of before the production begins, as against other commercial furniture providers who build the end products and then market them. Conclusion Adding value to the brand is the main focus of the expansion plan designed by Triond Furnitures and while we are concerned about the production and vertical chain economics, there is a definite way out once the company decides the venue of its new production units. In short, with beefed up human asset management and relationship specific asset management, Triond Furnitures can easily jump over the transition tide that is to hit them upon this expansion as shown in this study. References: Brandenburger, A. M., & Stuart, H. W. “Value‐based business strategy.” Journal of Economics & Management Strategy, (1996), 5(1), 5-24. Simatupang, T. M., & Sridharan, R. “The collaborative supply chain.” The International Journal of Logistics Management, (2002), 3(1), 15-30. (Simatupang & Sridharan, 2002, 17) Details of the book whose pages I have followed not given. Please insert. Chapter 3 Page 127 Unit 3 Unit 1 Read More