INDIAN INSTITUTE OF MANAGEMENT LUCKNOW Post Graduate Programme (Term II, 2012)

OPERATIONS MANAGEMENT
Assignments Case: Chaparral Steel (Abridged) Weight: 10 % Preliminary remarks: This case serves to look at OM issues in an integrated way, as was faced (during the period from its inception in 1974, and up to September 1979) in a World Class Company. As one of the pioneers in what came to be known as the minimill technology, and from the start, Chaparral targeted business in a broader range of bars and shapes than most other minimills, which pitted them directly against the integrated mills, and was the first to approach their size standards. In order to compete against the integrated steel mills, and particularly against the foreign companies with low labor costs (such as the Korean), the company had to steadily design out the three predominant costs in the steel business, viz., labor, capital and energy. The company sought to do this by enlisting the aid of its employees. (A case in point is how Chaparral in 1990later than the current case datedeveloped the horizontal caster technology that fundamentally overcame the constraints of existing vertical casting method, without significantly affecting the processing cost.) In this, the company had the advantage of being a greenfield site, and so could hire employees with principles and beliefs complementary to the enabling culture in the company that it consciously cultivated. The culture itself developed mainly in the very context of the way that the ten OM decision areas at the company were actually managed. The Assignment: The objective of the assignment is to develop and present your understanding of how the management (and in particular the decision making and their implementation) processes functioned, evolved and developed at the company, in the five interrelated areas listed in the table below. The understanding of the management processes may be presented in the form of the twin-track micro-macro processes and management perspective of actioning and visioning (as was discussed in the class with reference to the case of the faltering factory), in each of the five dimensions below, and in operations management as a whole, at the company (See also the slides of sessions 1, 3 and 4-5, with the blue asterisk marks).
OM Dimensions Interim (progress) reports on the management perspective (as of September 1979, the case date): 1. 2. 3. Product design, Process design, which, as a process in itself, also derived support from the companys Job design and the Work systems design (which happened in the context of the companys people and operating stylesee pp 4 5 of the caseand resulting work culture, and which could contribute effectively to the continual process of the companys operations design) , Scale and capacity planning and management, and Design and management of various incremental and step development projects, which finally enabled the company to enact its excellent operations management performance. 15 Oct 12 22 Oct 12 22 Oct 12 Deadlines

Submission Dates for different stages: As specified.

4. 5.

Post-mid Post-mid Post-mid

Final report, comprising: 1. Consolidated study of the management perspective (as of September 1979) covering the designs of all OM dimensions, and of OM as a whole, and accordingly, 2. Specific strategic decisions and action plans now, and over the years ahead (as of Sep 1979).

The assignment will be completed over the period of the course, simultaneous with sessions covering the different topics above being completed, as per the schedule. Progress submissions of the above five areas will be made as per the deadlines indicated, in addition to the final consolidated report.

Guidelines: 1. After thorough reading of the case, as first step perform SWOT analysis for the company, and accordingly determine the competitiveness strategy the company has pursued so far, and that it will pursue (in its chosen target market segments) in the future. 2. Next, prepare and use as checklists as illustrated below, the lists of some the underlying issues governing the five dimensions (the checklists below 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 (in relation to markets and customers): (Product design affords looking at the companys operations and business strategy from the market and, in particular, from the major customerspoints of view.) 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, less competition in these product ranges, etc. 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, rather than have too high market share in fewer regions. (see para 3, page 6) v. Focus upscale, and aim for part of the Big Steels market (rather than only think of traditional mini-mill products). vi. Competition expected from other mini-mills and the integrated steel mills. vii. The companys low costs and high productivity enabled it to compete against imports, when moving up to larger structural shapes. (see para 4, page 7) b. Issues faced in Process design: (Process design helps develop/use technology towards operations improvement, and development of process capabilities in the organization.) 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. 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. vi. 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. vii. 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 value-added products (See para 3, page 8) viii. 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 developing Job design and the Work systems design (which led to right development of work culture) at the company (Job design and the Work systems design helps develop right culture for maximal employee involvement in work toward maximal customer satisfaction.) 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)

d. Issues faced in determining Scale and Capacity planning and management: (Scale and Capacity planning and management helps decide and execute effective capacity expansions in terms of timing and sizing of the expansions.) 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). e. Issues faced in Design and management of incremental and step development projects (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) Participative management, (ii) Job training, (iii) Lean and flat management structure, (iv) Profit sharing, (v) Promotion of an environment of informal ways, we can do it outlook and pride in doing job well and taking credit, and (vi) Freedom to experiment (and even make mistakes in doing so), etc.) i. The approach of adapting and implementing what you learn, with a minimum of capital investment. (see para 5, page 3) ii. Freedom to experiment (see para 3, page 5) iii. Portfolio of development projects (see Note on Projects and Teams at Chaparral Steel)

3. In carrying out the assignment, 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 mobile-home 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).

4. In carrying out the assignment, you may find taking the following steps useful:
a. Consider the companys initial plant design in 1974 (see para 4 and 5 in page 2), in particular the design (or rated) capacities of the furnace, the continuous caster and the rolling mill. Also consider the improvements made in steel making up to September 1979 (the case date) at Chaparral (see pages 3 4), thus enabling improvement of the effective capacities. Understand the capacity strategy employed, also relating it to the product and process strategy employed, and its impact on the companys performance. b. Ask why may the company be contemplating the major (step) capital investments in capacity expansion (see para 1 2 in page 1, and pages 7 8) during September 1979? c. 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, and similarly of the operation of the caster)

d. 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. e. Explain, using a chart as above or a sketch, how the Japanese procedure of sequence casting (that allowed multiple heats to be cast, without interruptions for cleaning tundish and molds, and for restranding) would have served to provide, for Chaparral, a new alternative for additional further increases in the caster capacity? Considering both the markets and the competition faced by Chaparral, do you think that the proposed capacity expansion is justified? Discuss it in relation to i. The size of the capacity expansion proposed, and ii. The timing of the capacity expansion being proposed. Would you suggest a different strategy with respect to the sizing and/or timing of the capacity expansion? Discuss. g. Discuss in detail how the companys work culture, processes, products, competitiveness and plant capacities have all evolved together, over the four years from 1975 to 1979. h. Discuss what roles the human processes and their inherent human skills of quality management, maintenance management, project management, continuous improvement, etc. i. Would have played, in the past, in the companys strategic management of operations, ii. 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. ~~~~~~~~~~~~~~~

f.