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Table of Contents
Introduction .................................................................................................................................................. 1 Type chapter title (level 2) ........................................................................................................................ 2 Type chapter title (level 3) .................................................................................................................... 3 Product strategy ........................................................................................................................................... 4 Manufacturability ..................................................................................................................................... 5 New product opportunities .................................................................................................................. 6 Product Mix ........................................................................................................................................ 6 Competition ................................................................................................................................... 6 Strategic move ........................................................................................................................... 6 Continuous improvements .................................................................................................... 6 New product opportunities ............................................................................................... 6 Human Process ....................................................................................................................................................... 1 Quality management ................................................................................................................................ 2 Project management ............................................................................................................................ 3 Process design .............................................................................................................................................. 4 Technological development ...................................................................................................................... 5 Process streamlining ............................................................................................................................. 6 Continuous Evolution ........................................................................................................................ 6 Process characteristics ................................................................................................................... 6 People participation ................................................................................................................... 6 Competitor's effect ................................................................................................................. 6 Constraints ........................................................................................................................... 6 Expansion constraints ..................................................................................................... 6 Multi activity chart ................................................................................................................................................ 1 Job design and work process design............................................................................................................ 4 Management philosophy .......................................................................................................................... 5 Management decisions ......................................................................................................................... 6
Resulting behavior and cultural traits ............................................................................................... Concluding perspectives .............................................................................................................. 6 Design and management of incremental and step development projects ....................................... 1
Introduction:
Chaparral Steel Company, located in Texas, owns and operates a technologically advanced steel mill that produces bar and structural steel products by recycling scrap steel. Chaparral's facilities and its operating philosophy reflect the latest advances in electric arc steelmaking. We have analysed the case from product design dimension of operations management. Product design itself has multiple dimensions associated with it like 1. 1. 2. 3. 4. Product lifecycle related decisions Product value by analysis New Product development/enhancement opportunities Manufacturability Design Aspects: robust and modular
We have discussed few of these points based on the information available in the case, over and above these points we have discussed some additional issues which are specific to this case. Also we will see implications of macro as well as micro level goals on product design. Chaparral Steel has proposed heavy capital expenditure in its production capacity growth. Despite the high costs and the risks involved, such a major step is justified considering the below mentioned points The company, Chaparral has been making heavy capital expenditure in its capacities from the last four years. And this expenditure has been translating into the higher returns in form of the incremental product sales. Sales have leapt from 203,000 tons to 383,000 in the span of 4 years. The proposed investment in electric furnace, continuous caster and rolling mill will increase the capacity by more than 200 %. Apart from these, in the areas where chaparral is contemplating to venture out, there is a little competition from the domestic steel makers of US in terms of capacities and capabilities. Also, they will almost be better than the foreign steel players from Korea in America in terms of price competitiveness and offerings. Chaparral steel plans to follow the old model of having light, modular construction with machinery that could be quickly changed over and upgraded. So this capital expenditure will be worthwhile keeping in mind the future investments in capacities to tap economies of scale. The potential market is estimated to increase by 600,000 tons in next 10 years by 1987 and the company has presence in 20 states currently which it plans to expand to more number of states. Company is also looking towards product augmentation by introducing beams of 3 categories for home segment where there lies an opportunity to tap upto 50 % of the market.
Products Strategy:
In the initial years of operation Chaparral steel produced products like reinforcing bars and special quality billets. Over the span of next four years company started producing other small merchant shapes like angles channels etc. because of higher profitability associated with them But they were providing these products in small shape and size category. Main reason they have not entered in bigger size and shape market because of high cost associated with raw material production. As the market for smaller size products was very competitive they differentiated their product by focusing on quality and customer commitment. To survive in the competitive market they worked effortlessly on operational efficiency to cut costs. More on operational aspects and process will be dealt in later section of report. The proposed expansion of capacity would add a second electric furnace, continuous caster and rolling mill that would more than double the capacity of existing operations. The proposed layout of the expanded plan put both furnaces and their continuous casters in a single melt shop, but put the rolling mills in separate buildings. Also for the proposed expansion, to accommodate also the junior beams for the mobile-home segment, it would take additional million to up the power and roughly same amount for the heavier equipment. This 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. When it started, Chaparral steel was only into producing Reinforcing bars but slowly it went for producing more profitable items like merchant shapes and special bars. The company tried to go for as broad a product mix as possible without compromising on productivity. The company also rejected orders where there were short runs involved because it didnt want to compromise on its productivity. While going for expansion another key factor was the trade-off between flexibility, quality and productivity and all the three could not be incorporated at the same time. Thus, Chaparral was contemplating on entering upscale product range for which the competitors were located in either primary or the secondary regions giving them a strategic advantage. While other mini mills were adding capacity for traditional mini mill products (niche), Chaparrals thinking was to go upscale and aim part of big steel markets. The rationale behind this was that making heavier billets would not lead to higher costs, provided you have the required horsepower. More so, steel is bought by pound.
Manufacturability:
Since steel manufacturing is a continuous process, for any product switch it takes considerable amount of time. As a result, even though specialised products had higher margin, Chaparral had certain cut-offs to ensure efficiency is not lost with regards to certain minimum number of tons of orders. For example, it used to only accept those orders which exceeded 300-500 tons. In case, customer used to request for lower quantity, Chaparral used to keep them in waiting, so that similar orders of multiple customers can be combined together. If not found, they used to decline the order. By1979, Chaparral was producing following steel products Rebar, Small Rounds, Medium Rounds, Angles, Channels, Flats and Billets. Dynamic product means how
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much customization can be provided into specific designs and dimensions of these products. In Rolling Mill unit, technology is less standardized. For Chaparral, till 1979, they made above products of only certain dimension. This is due to machines support only certain range and large dimension producing ones can't be used for producing smaller dimensions and vice versa. Products not in these standard dimensions are supplied by integrated domestic companies or offshore companies from Korea.
Product Mix
The production type and capacity of a mill is dependent on the rolling mill machinery and its horsepower. Chaparrals goal was to have a broad mix of products. Therefore, unlike typical mini-mills that had limited range of merchant shapes and no beams Chaparrals targeted the share of Big Steels market. In Big Steels, because of inefficient rolling mills and hot-meal operation the production cost of domestic mills was very high. Since Chaparrals had the required rolling mill machinery and horsepower to run it they focused on going upscale, aiming for the part of big Steels market instead of introducing smaller products or going niche like the mini mills.
Competition
The wide range of product mix that Chaparrals offered made both the manufacturers of light structural products- the minimills as well as the manufacturer of the upscale product rangeintegrated steel mills its competitor. There were four very small mini mills operating before Chaparral was built but it was Nucor that was Chaparrals main competitor in local minimill market. In the upscale product range Chaparral had few competitors as integrated steel mills were reducing their capacity in lower ranges of product line due to high production cost. Nucor, which opened a 2, 50,000 tonnes per year mini mill in Texas was chaparrals principal competitor in local market. They had a competitive advantage over their rivals that they could make a seamless product while their rivals made welded product. They would easily capture one third of the market, maybe even one half. The cost of goods sold which is around $207 per ton now, was expected to rise very little, as productivity improvements offset increases in wage rates and other input costs. The estimated comparable cost per ton for Nucor, its direct
competitor, was about the same; and for a domestic integrated mill, the cost was 50-70% higher than this. Theirs was the most unique kind of equipment that they were about to make. Because of high cost especially for raw steel production, the domestic integrated mills could not compete and had significant reduced the capacity in the lower ranges of the product line. Their production costs were $400 per ton for beams that importers would sell for $400 per ton. While other mini mills were adding capacity for traditional mini mill products (niche), Chaparrals thinking was to go upscale and aim part of big steel markets. Chaparrals sales had reached $112 million, a net income of over $13 million with fewer than 500 employees or about 2.7 hours of labour per ton. They were looking forward to continued growth similar margins and expected their labour quotients to fall below 2 labour hours per ton. Their closest competitor Nucor was also close at 2.7 hour of labour per ton. Also, Chaparral was contemplating on entering upscale product range for which the competitors were located in either primary or the secondary regions giving them a strategic advantage. For example, about 70% of larger bars and wide flange beams 20-30% of other structural and flats were provided by manufacturers outside their area. Their closest competitor Armco in Houston had eliminated all but is products above 14. Two more distant plants CF&I and U.S. steel were eliminating products at the bottom of their lines which would have overlapped with Chaparrals proposed mill. So, this was an added advantage to them. Also the competitors were planning to expand but only across a limited range at or slightly above their current capabilities. Nucor was planning a 300,000 ton expansion with a 6 product as maximum. Bayou Steel was planning new 350,000 tpy plant with angles to 6 and channels and flats to 8. Ohio Steel bought an existing with no furnace but intended to roll 250,000 tons of structural up to 6 from imported billets until its own shop was built. Florida Steel was also contemplating a plant with products to 6. As we can observe most of the products are in around the same portfolio thereby increasing competition. Chaparrals expansion would increase its portfolio of products. They have little competition in the domestic market in terms of capacities and capabilities. Instead addition of one or more caster or minimill as a whole can only add to the benefit of planning. Also sometimes the incremental addition would lag behind the demand of the steel. In such cases the opportunity lost is the opportunities given out to the competitors. Hence by proposing a larger capacity addition, Chaparral is following leading strategy which will also act as a barrier for any new players from entering the market in future.
Strategic Move
Apart from these, in the areas where chaparral is contemplating to venture out, there is a little competition from the domestic steel makers of US in terms of capacities and capabilities. It considered Korea and other offshore producers as their competitors moving up to large structural shapes would lead to greater competition with inputs. They were looking for trigger price mechanism in order to make metal at a relatively lesser cost. The currency situation also supported Chaparrals keeping imports relatively constant. Also, they will almost be better than the foreign steel players from Korea in America in terms of price competitiveness and offerings. The domestic integrated mills were unable to compete with the importers. Their costs of production were in line with the importers selling price. In contrast to that Chaparral steel due to streamlined operational procedures and keeping abreast with the
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latest technological developments (Chaparrals electric arc furnace , originally rated at 250,000(tpy) was producing hot metal at the rate of 370,000(tpy)) was able to demonstrate high productivity with low cost. As a result in the larger structural shape sector they were considering offshore producers as their main competitors. Their goal was to make steel for less than the imported steel. Chaparral Steel Company has kept up with the latest technological development and incorporated the techniques of best steel plants. The following human processes and their inherent skills have played an important role in companys strategic management of operations.
Continuous improvements:
The companys emphasis on matching up with the latest technology in their operations by concentrating on technological advancements has helped the company in increasing their melt capacity by one-half. Chapparal utilized about 2.7 labor hours for producing per ton of steel. The management tracked the performance of its competitors which were at par with itself and looked forward to lower its labor quotient to 2 labor hours per ton.After implementing creative changes in operating procedures the caster was matching the furnace capacity in production.
Human processes:
Chaparral had a non-union operation based on participatory management and profit-sharing. The company believed that work must be fun and satisfying. Decision making was taken to the lowest competent level and thereby the lowest level was made competent.Its management philosophy precluded formal meetings and paperwork. The management structure was lean and flat with only four levels from top to bottom. This participatory management excluded formalities and everyone was on a first-name basis. Chaparral people were confident of implementing their target with the firm belief on we can do it.The management gave responsibility and rewarded the employees along with the paycheck. The employees had the freedom to experiment, mistakes being tolerated. Job training was always a top priority.
Quality management:
The company had quickly earned reputation for quality and competitiveness in price. Its operating philosophy was commitment to the customers. When Chaparral faced problems with the transformer of the furnace, in order to serve the customers, it afforded to buy billets from outside. The billets were costly and yielded less steel which was again a loss to the company. So, the company demonstrated its non-financial commitment to serve its customers.
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Project management:
In Chaparral, the work was defined with a specific goal and deadline. Here, the work contained complex interrelated tasks requiring specialized skills. The defined goal was to make steel as fast as possible. The plant was scheduled to run for 3 shifts per day, 7 days per week, 50 weeks per year. The company encouraged people assigned to the project receive the motivation, direction and information needed to do their jobs. Proper management of the workforce, resources and meeting the deadlines, rather finishing before deadline was practiced in Chaparral. a. 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. The managers of Chaparral were confident of tackling future competition as trigger price mechanism was introduced. They aimed at producing steel at a cost lesser than the price at which importers will shift. The expansion would more than double the capacity of the existing operations. This will lead to expansion of employee base. They would able to cater the growing needs of the future market. The new furnace would be the worlds largest electric furnace. Usage of technology will support their goal of producing steel faster and will add to enrichment of their productivity and survive in the competitive world. Though there were no producers of the machines that Chaparral wanted as a part of expansion they did not give up the plan. They found a German manufacturer who built most modern structural mills in the world and got their required machinery built. This shows their dedication to quality and innovation. The company was planning to take care of its supplies during volatile times with steady purchases. They also planned to backhaul scrap from distant markets. This would help them in maintaining good relationships with their suppliers. The expansion will create new opportunities for growth for individual workers and managers.
Process design
The current management structure was lean and flat (only 4 levels), thereby supporting their philosophy of participatory management. Also they precluded formal meetings, paperwork, memos etc. to increase the efficiency of people without any extra non useful work. Over the last few years the furnace was completely rebuilt with new technology. Due to improvements along with streamlining operating procedures, a significant increase in the melt capacity was seen. The current size of rolling mill stands and horsepower of motor were suited for the products of group 1 and 2, but for expanding the size for group 3 and 4(21 28 mill range) an additional cost will be incurred which is about 40 percent of the total hard cost. If some technique can be devised to reduce this cost, a great amount of expansion cost will be reduced.
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Also for the proposed expansion, to accommodate also the junior beams for the mobile-home segment, it would take additional million to up the power and roughly same amount for the heavier equipment. This 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. Process design describes how the product will be made. The process design decision has two major components: a technical (or engineering) component and a scale economy (or business) component. The technical component includes selecting equipment and selecting a sequence for various phases of operational production. The scale economy or business component involves applying the proper amount of mechanization (tools and equipment) to make the organization's work force more productive. This includes determining: 1) If the demand for a product is large enough to justify mass production; 2) If there is sufficient variety in customer demand so that flexible production systems are required; 3) If demand for a product is so small or seasonal that it cannot support a dedicated production facility.
Process Streamlining:
The streamlining of the process in Chaparral was very critical. Their 1 hour 40 minutes of processing to produce 70 40-foot billets. It required 3 helpers, one stocker and one scrap crane operator to run the process to create sufficient amount of heat. Another set of 3 people were required to tap the molten liquid into a ladle. The issue with this layout was that told the caster and the furnace was not always synchronized. The caster had four strands, and three operators were always ready to take action should something happen to any of the strands. In case of anything wrong, the production rate was poised to be slow because then strands were required to be plugged off, cleaned and restarted.
were planning to expand their production capacity. However, Chaparral had kept a close look on their competitors movement and has planned accordingly. As in 1979, Chaparral came to know that Nucors productivity was 2.7 labor hours per ton, and its closest domestic rival was at 5 labor hour per ton. In regards with this company looked to continue revenue growth with similar margin and tried to reduce its own productivity to less than 2 labor hour per ton. With its continuous innovative strategies Chaparral has earned a reputation of quality as well as competitiveness in the price. Apart from these domestic competitors, its other concerns were US minimills (Including Nucor). Chaparrals goal is to make metal at a cost which is lower than the cost at which they (foreign competitors) can ship metals here. However, the currency situation has been in favour of Chaparral and it has kept imports constant since last three years Management always tried to systematically track the performance of its major mini mill competitors especially of Nucor Steel and used to evaluate its performance with respect to Nucor Steel. It also used to track its closest mill rivals to see its performance.
(vii) Constraints:
Size of rolling mill stands as suited to product groups 1 and 2 correspond to continuous equipment type with average estimated costing of $60,000,000 and produces 65% of the total demand of the products. But this capacity and horse power constraints make it unsuitable for high valued product which requires reversing equipment (entails fewer but much larger stands) and requires an investment of close to 125,000,000.
Issues faced in Process design: The current management structure was lean and flat( only 4 levels) , thereby supporting their philosophy of participatory management. Also they precluded formal meetings, paperwork, memos etc. to increase the efficiency of people without any extra non useful work. Over the last few years the furnace was completely rebuilt with new technology. Due to improvements along with streamlining operating procedures, a significant increase in the melt capacity was seen. The current size of rolling mill stands and horsepower of motor were suited for the products of group 1 and 2, but for expanding the size for group 3 and 4(21 28 mill range) an additional cost will be incurred which is about 40 percent of the total hard cost. If some technique can be devised to reduce this cost, a great amount of expansion cost will be reduced.
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Also for the proposed expansion, to accommodate also the junior beams for the mobile-home segment, it would take additional million to up the power and roughly same amount for the heavier equipment. This 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. b. Expected to be experienced reactively (i.e., through the resulting actual organizational processes) as emergent. Issues faced in determining Capacity strategies: 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. Initially the furnace and the caster both were rated at 250,000 tpy . The sequence assumed that caster was synchronised with the furnace without any interruptions. However due to the strands in the caster, many a times clogging or a breakout happened, due to which a slower rate of production than expected. On the other hand, Japanese steel mill had a much efficient procedure that allowed the cleaning and maintenance of the tundish only after 12 cycles (compared to 3-4 in Chappral). But to upgrade to such a method will require an extra capital expenditure of $2.5 million and would shut down caster for round 6 weeks. Also they continually evolved through continuing investments, albeit modest, and sending operating people to visit best steel plants and equipment manufacturers worldwide. Also the plan of expanding by adding a second electric furnace, continuous caster, and rolling mill would more than double the capacity. The rated capacity was 516,000 tonnes per year but according to Werner and by their past experience we can conclude that they can get much more out of it. It would be the worlds largest electric furnace
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Lowering of electrodes
Melting
Simultaneous process
Tundish and moulds cleaned lifting empty ladle and lowered it to ground
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Management Philosophy
Chaparrals management pursues the hologram philosophy where each employee is a replica of the whole and understands managements visions and the companys full business situation. That allows each employee to make independent decisions that become part of implementing corporate strategy while taking into account broad business implications. The management believes that their employees must be better educated and have a better understanding of the technical and business aspects of operations than competitors. That is the basis for distributing decision making and encouraging individuals to act on their own.
Management Decisions
Chaparrals employees are salaried and divided into teams. Team leaders are rotated every few months. There are no individual department bonuses. Twice yearly profit sharing is distributed to all based on the total companys performance. There are no production quotas only a stated desire to produce as much as possible at the highest quality required by the present market. Operations are closely integrated to break down barriers between departments Continuous casting and mill operations report to the same general manager to strengthen integration.
Concluding Perspectives
Chaparral has implemented these practices and has reaped significant benefits from these endeavours. They have learned adopting greater people-centric perspectives. To be viable, they need constant learning led by constant innovation. Technology by itself only goes so far and can only provide them with rudimentary reasoning devoid of innovation. People are the intelligent agents that make organizations function. People create new opportunities and act on them. However, they need to provide the same people with opportunities, permission, motivation, and knowledge.
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1) The incremental capacity growth happening in the company for the past four years has achieved its significant results by operating a 250000 tpy furnace at 383000 tpy. But the continuously running at over capacity would only post some additional constraints in the resources used. The caster would become a constraint at higher operating efficiency. The process should be fine-tuned in order to maintain the output at such desired levels. Instead addition of one or more caster or minimill as a whole can only add to the benefit of planning. Also sometimes the incremental addition would lag behind the demand of the steel. In such cases the opportunity lost is the opportunities given out to the competitors. Hence by proposing a larger capacity addition, Chapparal is following a leading strategy which will also act as a barrier for any new players from entering the market in future. One bottleneck which can be found in the process is the amount of molten metal carried by the ladle. Immediately after the electric furnace which has a higher capacity, one single ladle to transfer the molten metal from furnace to Tundish would be time consuming. Hence addition of another ladle, tundish and caster can increase its output, yet which makes this operation to be more efficient than the capacity of the furnace. This too signifies the importance of adding up the additional capacity. Considering the market situation, the growth of the industry is estimated to be at 5.1 million in 1986. Chapparal steel, enjoying a 10% market share currently(1979), if expected to have the same share in 1987, it would require a plant capacity of atleast 510000 tpy. Hence the proposed plan by 1979, when everything goes right, would end within 2 years which would result in the plant operating at 500000 tpy from 1983 onwards! Hence the proposed expansion plan looks good with a futuristic view. 4 years of continuous technological changes has absorbed 11 million dollar in terms of cost. But the proposed investment of $166 million, the investment would start fetching the returns from 8th year (Assumption: the net sales growth is same over the rest of the period and plant will fetch the complete use of capacity and demand would be matched) of operation, which is not very high comparing the industry in which the plant is operating.
2) The general capacity of minimills used to be around 50,000-2,50,000 tons around the years 1960-1970s. Chaparral steel was founded in the year 1973. At starting the capacity of Chaparral steel at finish end was twice that of melt shop. Thus equipment ordered for rolling mill and the furnace&caster were rated 0.5million tons and 0.25 million tons respectively [Per year+. By the year 1979 Chaparral steels electric furnace, originally rated at around 0.25 million tons per year (tpy). But it was producing at the rate of 0.37 million tpy and was soon expected to reach capacity of 0.45 million tpy.
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Thus in 1979 there was pressure of continuous operation [3shifts a day, 7days a week and 50 weeks per year which makes 350 days year] on caster. Still due to creative changes in the design model the capacity of caster was matched according to the furnace. But with the anticipated capacity reaching upto 0.45million tpy, unless and until the caster capacity is raised upto 20% it is not possible to meet the capacity. Hence a new caster should be added. In these circumstances Chaparral discovered another alternative in the form of a Japanese method called Sequence Casting Following is the table showing the differences between the two methods Adding New Caster 1)No Significant increase in yields 2)No shut down of process required Japanese Sequence Casting Technique 1)Yields may increase upto 2% points 2)Shut down of process for at least 6 weeks is needed 3)Needs an investment of $20million for 3)No significant capacity is increased apart increase of capacity by 0.25million tpy from yield, and needs an investment of $2.5 million With the present orders and the running capacity Chaparral Steel cannot risk stopping its procedure for six weeks. It is given in the case that due to problem in transformer the production was stopped for two weeks at one point which made them buy the orders from its competitors. As an expanding company it cant take any risk by losing its good will and also cant pay extra price due to lack of additional capacity Now clearly Chaparral can take risk of increasing its capacity in 1979 Moreover clearly from the given case most of the minimills cannot make any sizes beyond 4inches *angles+ and 6inches for channels and flats. Hence mostly minimills dont increase capacity. But Chaparral steel is trying to build upon its initial success and trying to go upscale and aiming for the part of Big steel market Clearly from the market research of Chaparral steel the total steel consumption would be increased to around 5.1 million tpy within 10 years[By 1987]. Similarly the expected price in this product line is expected to be stable for the coming 5 years [By Japanese Sequence Casting Method, only 2% yield is increased which is way below the forecasted demand] Also coming to competition in the lighter markets there was only one major competitor in the form of Nucor which has a capacity of around 0.25 million. Looking at the competitors in the upscale market it can be identified that Chaparral had very less competition. Almost 70% of large bars and wide flange beams. Hence expanding capacity
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and upgrading to Big Steel Company would give Chaparral a first mover advantage in their local area and also would give an advantage of being the best in the Small Scale segment Also in the small steel sector companies like Nucor, Bayou, Ohio River, Florida are trying to increase their capacity as well as product range. Hence 1979 November was definitely ideal time to increase capacity of Chaparral. MULTI ACTIVITY CHART TIME OPERATION FURNACE
MELT SHOP
1 hr 40 mins
FURNACE
20 mins CASTER
ACTIVITY Picking up scrap and lime charge Release to furnace 3 Helpers and 1 Lower electrodes Stocker Melting Continue for 3 or 4 charges Crane operator Lifting caster above tundish Slide gate operator Opening the slide gate Crane operator Pouring of molten metal Utility person Cleaning tundish and molds Insert Dummy bars to mold Prepare mold for heat Scrap crane operator Move empty ladle to ground Pickup charge, raise to caster 3 operators Ready the upper level and feed the metal
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Management Philosophy
Chaparrals management pursues the hologram philosophy where each employee is a replica of the whole and understands managements visions and the companys full business situation. That allows each employee to make independent decisions that become part of implementing corporate strategy while taking into account broad business implications. The management believes that their employees must be better educated and have a better understanding of the technical and business aspects of operations than competitors. That is the basis for distributing decision-making and encouraging individuals to act on their own.
Management Decisions
Chaparrals employees are salaried and divided into teams. Team leaders are rotated every few months. There are no individual department bonuses. Twice yearly profit sharing is distributed to all based on the total companys performance. There are no production quotas only a stated desires to produce as much as possible at the highest quality required by the present market. Operations are closely integrated to break down barriers between departments. Continuous casting and mill operations report to the same general manager to strengthen integration.
Concluding Perspectives
Chaparral has implemented these practices and has reaped significant benefits from these endeavors. They have learned adopting greater people-centric perspectives. To be viable, they need constant learning led by constant innovation. Technology by itself only goes so far and can only provide them with rudimentary reasoning devoid of innovation. People are the
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intelligent agents that make organizations function. People create new opportunities and act on them. However, they need to provide the same people with opportunities, permission, motivation, and knowledge.
Scale and Capacity Planning Macro level issues: Big step capacity expansions
Chaparral Steel was planning a large capacity expansion in 1979 by adding a new 500,000 tons per year (tpy) capacity furnace, continuous caster and rolling mill which combined with the upgradation of the existing plant capacity would lead to a production of over 1 million tons per year by 1986. This would more than double the capacity of the existing operations. The new furnace included in the proposal would be the worlds largest electric furnace and was capable of producing at 516,000 tpy. Due to the constant innovations to the existing furnace by observing the best practices, this new furnace would come installed with these additions. The medium section rolling mill was rated at 160 tons per hour. The rolling mill would be capable of producing the largest sizes of their current product line as well as larger structural shapes hitherto made only by the integrated steel companies. Thus, adopting a specific strategy of occasional, big step capacity expansions would allow Chaparral to realise economy of scale benefits.
Japanese steel mill, which used sequence casting. To convert the existing caster to sequence casting, however would require additional capital expenditure of $2.5 million (and caster shutdown for six weeks), whereas a new 250,000 tpy caster represented a $20 million investment.
Following is the table showing the differences between the two methods: Adding New Caster 1)No Significant increase in yields 2)No shut down of process required 3)Needs an investment of $20million for increase of capacity by 0.25million tpy Japanese Sequence Casting 1)Yields may increase upto 2% points 2)Shut down of process for at least 6 weeks is needed 3)No significant increase in capacity & needs an investment of $2.5 million
It is given in the case that due to a problem in the transformer in 1976, the production was stopped for two weeks at one point which made them buy the orders from their competitors. As an expanding company it cant take any risk by losing its good will and also cant pay extra price due to lack of additional capacity. Hence, it is more advisable to go for a new caster.
Size& timing:
With the present orders and the running capacity Chaparral Steel cannot risk stopping its procedure for six weeks. In 1976, due to a problem in the transformer the production was stopped for two week, which made them buy the orders from their competitors. As an expanding company it cant take any risk by losing its good will and also cant pay extra price due to lack of additional capacity. Now, Chaparral can take the step of increasing its capacity in 1979. Moreover, most of the mini-mills cannot make any sizes beyond 4inches [angles] and 6inches for channels and flats. Hence mostly mini-mills dont increase capacity. But Chaparral steel is trying to build upon its initial success and trying to go upscale and aiming for the part of Big steel market. Clearly from the market research of Chaparral steel the total steel consumption would be increased to around 5.1 million tpy within 10 years (by 1987). Similarly the expected
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price in this product line is expected to be stable for the coming 5 years (by Japanese Sequence Casting Method, only 2% yield is increased which is way below the forecasted demand) In terms of competition in the lighter markets there was only one major competitor in the form of Nucor which has a capacity of around 0.25 million. Chaparral also had very less competitionin the upscale market. Hence expanding capacity and upgrading to Big Steel Company would give Chaparral a first mover advantage in their local area and also would give an advantage of being the best in the small scale segment. Also in the small steel sector companies like Nucor, Bayou, Ohio River, Florida are trying to increase their capacity as well as product range. Hence 1979 November was definitely ideal time to increase capacity of Chaparral.
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