Harvard Case - Process Control at Compaq Computer Corp. (A): Understanding the Build-to-Order Decision
"Process Control at Compaq Computer Corp. (A): Understanding the Build-to-Order Decision" Harvard business case study is written by Michael T. Pich, Ludo Van Der Heyden. It deals with the challenges in the field of Operations Management. The case study is 20 page(s) long and it was first published on : Jan 2, 2006
At Fern Fort University, we recommend that Compaq Computer Corp. adopt a hybrid build-to-order (BTO) and build-to-stock (BTS) strategy, leveraging lean manufacturing principles and advanced information systems to optimize their production and supply chain. This approach will enable Compaq to balance the benefits of customization with the efficiency of mass production, ultimately enhancing customer satisfaction, reducing costs, and improving overall competitiveness.
2. Background
The case study focuses on Compaq Computer Corp. in 1993, facing a rapidly evolving PC market characterized by increasing product complexity, shorter product lifecycles, and intense competition. Compaq, previously known for its efficient build-to-stock strategy, is struggling to maintain profitability due to rising inventory costs, obsolescence, and customer dissatisfaction with limited customization options. The company is considering transitioning to a build-to-order model to address these challenges.
The main protagonists are:
- Eckhard Pfeiffer: CEO of Compaq, grappling with the need to adapt to the changing market dynamics.
- The Compaq Management Team: Responsible for evaluating the potential benefits and drawbacks of a build-to-order strategy.
- Compaq's Customers: Seeking both customization and timely delivery of their PCs.
3. Analysis of the Case Study
Operations Strategy: Compaq's current build-to-stock strategy is no longer sustainable in the dynamic PC market. The increasing product complexity and shorter lifecycles lead to higher inventory carrying costs and increased risk of obsolescence. A build-to-order approach could address these issues by reducing inventory and allowing for greater customization.
Supply Chain Management: Compaq's supply chain is facing challenges in terms of lead times, inventory management, and responsiveness. A BTO model requires a more agile and responsive supply chain, capable of sourcing components quickly and efficiently.
Manufacturing Processes: Compaq's manufacturing processes are designed for mass production, which is not ideal for a BTO model. The company needs to implement lean manufacturing principles to optimize production flow, reduce waste, and improve flexibility. This includes:
- Just-in-Time (JIT) production: To minimize inventory and reduce waste.
- Kanban system: To manage material flow and ensure timely delivery.
- Value stream mapping: To identify and eliminate non-value-adding activities.
- Theory of Constraints: To focus on bottlenecks and improve overall throughput.
Information Systems: Compaq needs to invest in advanced information systems to support a BTO model. This includes:
- Enterprise Resource Planning (ERP) system: To manage production, inventory, and customer orders.
- Demand forecasting tools: To predict customer demand accurately and optimize production planning.
- Materials Requirements Planning (MRP): To ensure timely procurement of components.
- Customer Relationship Management (CRM): To manage customer interactions and track order status.
Financial Analysis: A BTO model can potentially reduce inventory costs and improve profitability. However, it requires significant investment in technology and process improvement. A thorough cost-benefit analysis is necessary to evaluate the financial feasibility of the transition.
4. Recommendations
Compaq should adopt a hybrid BTO and BTS strategy, leveraging the strengths of both models:
- Build-to-order for high-demand, customizable configurations: This allows Compaq to cater to customers seeking specific features and configurations while reducing inventory risk.
- Build-to-stock for popular, standard configurations: This ensures availability of readily available PCs for customers seeking quick delivery.
Implementation:
- Phase 1: Focus on implementing lean manufacturing principles and improving supply chain responsiveness.
- Phase 2: Invest in advanced information systems to support order management, demand forecasting, and production planning.
- Phase 3: Gradually transition to a hybrid BTO/BTS model, starting with high-demand, customizable configurations.
Key Initiatives:
- Process design: Re-engineer manufacturing processes to optimize for both BTO and BTS.
- Inventory management: Implement a robust inventory control system to minimize holding costs and ensure timely delivery.
- Capacity planning: Ensure sufficient capacity to meet demand for both BTO and BTS models.
- Demand forecasting: Utilize advanced forecasting methods to predict customer demand accurately.
- Quality management: Implement a rigorous quality control system to ensure product quality and customer satisfaction.
5. Basis of Recommendations
These recommendations are based on:
- Core competencies: Compaq's core competency lies in its efficient manufacturing and supply chain management capabilities. The hybrid BTO/BTS model leverages these strengths while adapting to the evolving market demands.
- External customers: The hybrid model addresses the needs of both customers seeking customization and those seeking quick delivery.
- Competitors: By adopting a BTO model, Compaq can differentiate itself from competitors offering only standard configurations.
- Attractiveness: The proposed model offers significant potential for cost reduction, improved customer satisfaction, and enhanced competitiveness.
6. Conclusion
By adopting a hybrid BTO/BTS strategy, leveraging lean manufacturing principles and advanced information systems, Compaq can effectively address the challenges of the evolving PC market. This approach will enhance customer satisfaction, reduce costs, and position Compaq for continued success in the competitive PC industry.
7. Discussion
Alternatives:
- Full BTO: This option could lead to longer lead times and potentially lower production efficiency.
- Maintain BTS: This option would continue to face challenges with inventory costs, obsolescence, and limited customization options.
Risks:
- Implementation challenges: Transitioning to a hybrid model requires significant investment, process changes, and employee training.
- Demand forecasting accuracy: Inaccurate demand forecasts can lead to stockouts or excess inventory.
- Supply chain disruptions: Disruptions in the supply chain can impact production and delivery timelines.
Key Assumptions:
- Compaq has the resources and commitment to invest in technology and process improvements.
- Compaq can successfully implement lean manufacturing principles and improve supply chain responsiveness.
- Accurate demand forecasting is achievable.
8. Next Steps
- Develop a detailed implementation plan: Define specific milestones, timelines, and resource allocation for each phase of the transition.
- Pilot test the hybrid model: Implement the BTO model for a limited number of product configurations to assess its effectiveness.
- Continuously monitor and evaluate: Track key performance indicators (KPIs) such as customer satisfaction, inventory levels, and production efficiency to identify areas for improvement.
- Adapt and refine: Continuously adapt the hybrid model based on market feedback, technological advancements, and competitor actions.
By following these steps, Compaq can successfully transition to a hybrid BTO/BTS model, achieving a balance between customization, efficiency, and profitability in the dynamic PC market.
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Case Description
Compaq Computer Corp., like many manufacturers, faces operational choices that strongly influence the cost of capital engaged in inventory, customer response time, and potential product obsolescence. This case describes some key operations strategy choices regarding two types of inventory: operation inventory (e.g., flow) and tactical inventory (e.g., finished goods). Tradeoffs in inventory management and customer response time are explored in the context of a firm that is changing from a push manufacturing to a customer-oriented pull system. Optional computer simulations (B case) visually display the dynamics of push and pull systems, kanban squares, and their effect on inventory requirements and customer response times. The simulations require the ProModel simulation software tool (not included, to be purchased separately) and computer simulation model files (available from the authors' website: http://faculty.insead.edu/stephen-chick/simulations).
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