Step 1: Problem Definition
The organization's production technology is designed for manufacturing heavyweight glass bottles, which means the production line cannot handle lightweight glass bottles. In recent years, sales of heavyweight glass bottles have plummeted, resulting in a decline in revenue. At the same time, there has been a steady growth in the sales of lightweight bottles, which suggests that their demand has grown. In the last 3 years, the industry realized $100,505,341, $131,394,611, and $154,367,918 in total sales of lightweight glass bottles this represents a cumulative sales growth of 53.6% over the last three years. On the other hand, industry sales of heavyweight glass bottles over the last three years stood at $112,638,190, $107,346,817, and $86,303,381, representing a cumulative decline of 23.38% (Future Market Insights, 2016). The organization itself has recorded a 19.36% cumulative decline in sales in the last three years.
From the sales figures, it is apparent that the demand for lightweight glass bottles has increased in the recent past, while the demand for heavyweight glass bottles has declined during the same period. It is instructive to note that, four years ago, the holder of the patent for the technology for producing lightweight glass bottles commercialized it for the first time. Lightweight glass bottles seem attractive for customers - especially industrial and business customers - because they are easy to move, which helps keep material handling costs low. In addition, producing lightweight glass bottles does not cost as much as producing heavyweight glass bottles does, which enables a manufacturer to price the lightweight glass bottle lower than they do heavyweight glass bottles. The new technology for producing lightweight glass bottles seems to have changed the factors for competitiveness. My role is to identify a solution to the organizations problem.
Step 2: Objective
Currently, the organization produces heavyweight glass bottles. The firms value proposition to customers is to provide glass bottles that can withstand strong impact during transportation and handling the ability of these bottles to withstand strong impact is important in helping to minimize product breakages during handling. With low product breakages during material handling, the organizations customers can reduce the cost of supplies, which is beneficial to the bottom line. The heavyweight glass bottles cost more to produce compared to lightweight glass bottles; the additional cost is the premium that customers pay for eliminating wastage from breakages when handling supplies.
On the downside, however, the heavyweight glass bottles require more effort to move, which means they increase the material handling cost, which eventually results in a high cost of production. For customers preferring the heavyweight glass bottles - these are the organizations customers, and they are declining, it seems the cost savings from eliminating breakages during material handling far outweigh the higher cost of material handling that is caused by the extra effort required to move heavyweight glass bottles.
Ideally, the organization should change its value proposition in response to the industry shift that has altered the key factors for success. The lightweight glass bottles require less effort to handle in comparison to the heavyweight glass bottles, which means a reduction in the material handling costs. In addition, through continuous improvement and other contemporary approaches to quality management, the industry has developed new ways of eliminating product wastage from breakages that occur during transportation and materials handling. Thus, the allure of the heavyweight glass bottles seems to have dissipated because the benefits that justified spending more on heavyweight glass bottles are not there any longer. To remain competitive, the organizations value proposition will have to be to offer, at a reduced price, glass bottles that will help reduce the material handling costs, and hence the production cost. The goal in resolving the organizations problem is to consider changes to the production technology so the firm can remain competitive.
Step 3: Exploration of Alternatives
The organization needs to redefine its competitive position. One option is to retain the current value proposition and refine the production system so that the company cements its competitive position in the traditional market for glass bottles. The production system can be refined through technological changes that help lower the cost of production, hence lowering the prices for the heavyweight glass bottles. Low prices for the heavyweight glass bottles mean the organization will compete effectively against the firms selling lightweight glass bottles. As it emerged earlier in this paper, advances in quality management mean that the organization cannot use the beneficial attribute of heavyweight glass bottles - elimination of product wastage through breakages during materials handling and transportation - as the selling point that justifies the price premium it charges.
Lower-priced heavyweight glass bottles will eliminate a competitive disadvantage the organization currently suffers relative to the firms manufacturing lightweight glass bottles. In addition, with a reduction in price, the organization will gain another selling point. Using the lightweight bottles requires industrial customers to invest in advanced quality management systems that can help them minimize the wastage that product breakages occasion in the process of handling and transportation. However, when the organizations industrial customers use the heavyweight glass bottles there will be no need to invest in the advanced quality management systems because there will be no breakage during handling and transportation. Thus, refining the production system to lower the production cost will enable the organization to position the heavyweight glass bottles on saving industrial customers the cost of investing in advanced quality management systems.
The second option for enhancing the organizations competitiveness is to start producing lightweight glass bottles alongside the traditional, heavyweight glass bottles. Producing the two types of bottles will enable the company to serve both segments of the market for glass bottles. However, the organizations production plants are operating at maximum capacity, and the company will have to cut back on the production of heavyweight glass bottles for it to produce lightweight glass bottles.
Adding lightweight glass bottles to the current product line means the organization will not be able to develop distinct and dynamic capabilities for serving the market for glass bottles; it will split its resources into serving two sets of markets, which will make it difficult to attain specialization. The advantage of the second option is it helps the organization to diversify its product line in light of the declining market for heavyweight glass bottles and the growing market for lightweight glass bottles. The capacity constraints in the organizations production plants suggest that the company will use the extra capacity resulting from the declining industry sales of heavyweight glass bottles; declining sales mean the firm may not sell some of its output, which implies inefficient use of some of its productive capacity.
The third option for the organization is to undertake a complete overhaul of the production line by investing in new technology that would see the firm shift from producing heavyweight glass bottles to producing lightweight glass bottles. The change from a producer of heavyweight glass bottles will enable the organization to align its competitive positioning to the new success factors that the industry change has necessitated. As a manufacturer of lightweight glass bottles, the organization will be able to position its product offering on helping industrial customers enhance their bottom line by cutting down on product wastage during materials handling and transportation; reduction in product wastage, in turn, will help reduce the cost of supplies the industrial customers use in production. However, the organization could be a late entrant into the market segment for lightweight glass bottles, which may put it at a competitive disadvantage relative to its competitors because, for instance, the first movers and fast followers in this market segment could be enjoying high brand awareness and recognition.
Step 4: Predicting Consequences
The organizations sales turnover in the last three years has averaged $11,752,092. Retaining the current value proposition and refining the production system is likely to increase sales when we consider the recent pattern of lightweight glass bottles sales in relation to that of heavyweight glass bottles. The average price of the lightweight glass bottle is $10, whereas the average price of the heavyweight glass bottle is $17. In the last three years, the average change in the industry sales of lightweight glass bottles is 24.1%. In addition, the average price of the heavyweight glass bottle has been 70% higher than the average price of the lightweight glass bottle. Dividing the difference in the price of the lightweight glass bottle and the price of the heavyweight glass bottle by the average annual change in sales can give a rough estimate of how the price difference drove the changes in turnover.
From a rough estimate, for every percentage increase in sales, there was a percentage price difference of 0.344. The first option will help lower the cost of producing the heavyweight glass bottles, which will see the average price drop from $17 to $12; this represents a percentage price reduction of 41.66%. Therefore, reducing the price of the heavyweight glass bottles will result in the growth of sales by an estimated 41.66*0.344 = 14.33%. The organizations sales stood at $10,667,097 in the last financial year, which means a 14.33% increase in sales will result in a turnover of $12,195,693 in the next financial year this is a $1,582,595 increase. The cost of the technology upgrade is $550,000, which means the net sales increase, and hence the expected payoff from the upgrade, is $978,595.
Considering the organizations sales of $10,667,097 in the last financial year, and the average price of $17 for a heavyweight glass bottle, the organization produced 627,476 bottles last year. If the company is to produce lightweight glass bottles alongside the heavyweight ones, it will have to reduce the output of heavyweight glass bottles because of capacity constraints in its production plants. One plausible way of reducing the output of heavyweight glass bottles is to cut it by the percentage of the reduction in the sales of the heavyweight glass bottles over the past three years. The average decline in industry sales of heavyweight glass bottles in the last three years is 12.15%; using this rate, the organization will cut its output of heavyweight glass bottles by 627476*0.8785 = 76,238 bottles.
The company will then use the extra capacity to produce the lightweight glass bottles. Industry averages can provide a useful basis for estimating the cost of investing in new production technology (Reilly & Schweihs, 2012; Ceccagnoli & Jiang, 2013). Looking at the investment in production technology and the output of the firms that have been producing lightweight glass bottles, it is apparent that the investment in production technology works out to $3.5 per unit of output. Therefore, if the organization will produce 76,238 lightweight glass bottles next year, we can estimate that it will spend 76238*3.5 = $266,833 in the technology for producing lightweight glass bottles. With a lightweight glass bottle selling for an average of $10, the organization will earn $762,380 (762...
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