The Electronic Relay Company (ERC) came into being five years ago based on a new product innovation that involved micro-circuitry. The new “smart” relays could react much faster and time their action to coordination with many special needs in complex equipment. Like many new products involving silicon chips, electronic relays had swept the industry and were in great demand because of their versatility and moderate cost.
The relays were used in many types of equipment and the service requirements were quite variable, depending on the particular application. Although ERC’s output included 500 different models each year, they had developed a substantial demand for 10 popular models that seemed to find application in many different end products. ERC was one of several firms in the field that had an excellent engineering staff that could design smart relays to individual customer needs. Sales had increased extremely rapidly, especially in the last two years when they had increased 40 percent each year. Long term sales forecasts indicated that a 30 percent annual increase was the best estimate for the next five years.
The relays were produced in a flexible process focused plant only on the basis of special order. The process departments were metal stamping a small machine shop, electronics assembly, paint, final assembly, and an inspection and test. ERC had a minimum size order of ten, though some recent orders had been as large as 1000. Each order was first routed to engineering for design requirements and then to a cost estimating department for the construction of a bid price and estimated delivery commitment. If the customer accepted the terms, the materials required were ordered and a production order (PO) was issued. The processes required were listed on the PO. The order was routed to the required departments in sequence was tested and was finally shipped to the customer. The typical time for production once the customer had accepted the terms, was six weeks.
Because of the long term forecasts, the president, Frank Moore, made strategic planning the subject of the next executive committee meeting. The views of the committee members were divergent but were summarized by the VP of manufacturing and VP of marketing. The VP of manufacturing Tom Hendrick, was strongly for standardizing on relatively few high demand models and gearing up to produce them in quantity for a mass market.
There are really only about ten different designs and models when you come right down to it. All the others are just minor variations of these ten. Right now, ten models account fro 75 percent of orders. It we could just standardize on these, I could knock 50 percent of the cost out of them. In a couple of years the demand for just those ten would be such that we could automate a line and become the dominant producer in the industry. Let’s take the stream of the business and let someone else wrestle with those small special orders.
Dick Lutz, the marketing VP, strongly disagreed:
We will miss out on a lot of business if we don’t give them what they need. They do not all have the same needs in their products. Our people are in touch with the markets all the time, and we see some common needs as Tom says, but there are a lot of different situations out there. Sure an order for ten must drive Tom’s people nuts, but we charge accordingly. We are making a lot of money from those small orders. Naturally we like the big orders too, and it’s true that there is a natural tendency toward standardization because the customer can get a better price on one of our standard models. But let’s not shove the market around, let’s go with the market.
Vassily Rostopovich, the engineering VP, agreed with Dick Lutz, though not with great vigor. He said:
We are really good at designing the smart relay to meet individual needs. We have it down to a computer aided design process so we can produce a special design within a couple of days if we have to
Frank said that he would think over what had been said and draft a position paper on ERC’s strategic plan for the next five years for discussion at the next executive committee meeting. What should Frank do? Outline a position paper that you would recommend to Frank.
Frank can advise for standardization of their 10 models which now account for 75 percent of their market. A proper forecasting of demand of these models for the next 3 to 5 years must be assessed by marketing department. Out of the 10 models if they even find 5 to 8 models demand is sustaining then they can be standardized where by selling costs can be made more competitive. Regarding the rest high value products must be tailor made as per customers’ choice and for the rest an attempt must be made to standardize initially some low value and high quantum products and offer them to the market as the company’s standard product with value addition. If successful the same logic can be applied to rest of the products at a later date. To retain or increase market tailor made products must not be discontinued.