AUT MBA 468911 Operations Management Assessment One_Group Project

Name Vivek Anand Michelle Chung Mahsa Dordahan Rob Marks Jaclyn Philpott Angelina Rodriguez

Student ID: 0792735 9902843 0437571 1140706 1132740 0432359

Summary report of the meeting of the Board of Directors This report presents a brief summary of the issues faced by Galanz in relation to the operations management of the company and recommended operational strategies to ensure Galanzs continued growth and prosperity.

1. Order Winners and Qualifiers

The order winners and order qualifiers for the business in the early stages of was the same price/cost. This competitive characteristic is what caused the customers to choose the companies good and services over those of our competitors along with making Galanz a viable competitor. The factor of price/cost lead to reduced profits for the competition and allowed an increasing hold in the Chinese Domestic Market. 2. Objectives The importance of Galanz operations objectives in terms of its VOC and VOB in the early days was

Flexibility Quality Speed Cost

to deliver a low cost microwave which would be affordable by most Chinese households. We believed that by delivering and attracting the masses with new time saving ways of cooking then this technology would become indispensible within the household. After purchasing the technology blue print from Toshiba, sales have exponentially grew production ever since. High volume production was the key then to keep the cost low for a stock standard, basic low quality microwave. The polar diagram below shows the importance of each performance objective to the Galanz operation in the early days.

Early Years (Then) VOB VOC

Over the years our objectives needed to change as we faced tough situations. Some of our competitors limited supply of parts which pushed the business towards innovation, to build its own components and meet the demand. While our core objective still remained to be cost driven, delivering low price to the customer and keeping its own expenses down to capture the market share. In order to improve quality and keep the cost down, we invested more than 3% of the company revenue in R&D and continued to manufacture 90% of the microwave components in house using technology that we had developed ourselves. The polar diagram below shows the importance of each performance objective to the Galanz operation as this has changed over the years. Over the Years (Now) VOB VOC

Flexibility Quality Speed Cost

In the early years, Galanz was able to use all of its operational efficiencies to create microwave ovens with low complexity and therefore were easy to produce in a mass volume. From Diagram 1 we can see there are no major gaps between the VOC and VOB and Galanz was able to create an excellent synergy between the two which led to increased market share. In recent years we have seen the OBM market grew and with this so has its operational complexity. In recent years the VOC has had a major influence on the operations of the business and has caused internal issues with the expanded product lines. Diagram 2 shows the VOC is demanding greater quality for a lower cost with innovation and dependability. Galanz will need to address these gaps and look to invest in R&D of its production in order to close these gaps. 3. Technology Technology has played a great role in the success of the business. With little to no production edge in early years, a number of technology initiatives including have ensured the business has moved forward. Production and design are two strong areas within the business in which technology has had an influence in the following ways:

The purchase of the blueprint from Toshiba for the original microwave over, The import of assembly technologies has helped reduce costs for the business. The ability to provide more products with differentiated features. The mastering of the magnetron technology has enabled the business to produce onmasse. Technology change over the years has enabled the re-brand from Made in China to Created in China. Localised design of our products. Investment in R&D has proven fruitful along with learning from overseas partners and importing the most advances technologies through these relationships. Costs have been reduced as differentiated features in its products give increased flexibility. Manufacturing around 90% of our own components has ensured greater efficiency.

The business has been able to understand the importance of adjusting products available to market through new offerings as a direct result of investment in research and development. All of the above initiatives have seen greater efficiency, greater exports, brand awareness and a greater use of resources.

1. Competitive and Operation Strategies The competitive strategy of Galanz is cost leadership which has resulted with increased market share by being aggressive in the local market with ongoing price cut cycles leading to a price war in the Chinese Domestic Market. The price wars which started in 1996 and have been ongoing through until 2002 has ensured that competitors have reduced profits in the microwave oven market as shown in the below table. Stages of Galanz Price Wars 1996 40% discount Sales increased 650,000 Units Market Share increased to 35% 1997 29-40% discount Total annual sales reached Domestic market share was 47.6% Market share increased to 60% Domestic market share reached 76% International market

2,000,000 units 1998 30% discount Annual production output reached 4,000,000 units 2000 40% discount Annual sales reached 10,000,000 units 2002 30% discount Annual sales reached 13,000,000

units.

share was 40%

Galanzs cost leadership strategy is transferred to its international OBM markets where it is known for its ability to undercut local competitors. The operational strategies Galanz has undertaken has been the transfer of production through OEM Agreement, a focus on research and development and product innovation, making use of resources by increasing production capacity through running production 24 hours a day, bringing the production of component facilities in house and an overall drive and need for self sufficiency in the ever changing market. As a strategic fit operation, Galanz has been able to reduce manufacturing costs through the operations strategies outlined, ensuring a lean manufacturing business that has the ability to increase production when required.

The operations strategy supports the competitive strategy through being productive translating to low product costs, having a high degree of flexibility being able to change when required by the demands of the market or potential future of the market, dependability ensuring that all products meet specifications and arrive on time, speed being fast at delivery and new innovation and quality being right and having a high degree of non-error. 2. OEM/ODM versus OBM 3. Development OEM/ODM Production Is based in client specifications . Production is mass produced for numerous brand companies. Low labour cost. Production costs driven down through economies of scale. OBM Specifications are based on design from the R&D department. Production numbers are based on forecasting from the Marketing Department.

Design

ODM design comes from their inhouse R&D team. Design becomes ODMs Intellectual property OEM driven by client design specification.

Localised design to suit each target market. New products are designed based on its in-house R&D team and research stations in the OBMs target market. Products are marketed with the Galanz brand. Sales forecasting is completed by Galanzs marketing department. Galanz is responsible of the marketing strategy. OBM builds brand equity and creates brand awareness (strategic stretch) and brand loyalty (incremental innovation)

Marketing

OEM/ODM Clients market their own products with their own branding. They take responsibility for the marketing strategy, forecasting and associated costs. No brand exposure for the ODM/OEM producer.

Distribution

Distributed through Clients own chain or value-added resellers.

Distributed through partnerships or OBMs own distribution channels. Their own unless this is outsourced.

Customer Service

Clients have their own after sales support centres.

OBM the OBM business returns higher profit margins and therefore should be continued and developed in the international market. There are associated risks that have been identified in doing this such as: Potential issues with forecasting A wider range of models with lower volume production runs High overheads Risk of being seen to compete with OEM customers

Being the largest microwave manufacturer in the world, with strong commitment to R&D, expertise in manufacturing, logistics and quality control, and increased brand recognition in the overseas market Galanz has gained the competitive advantages for OBM export business. We need continue to increase investments in innovation and branding in order to sustain the competitive advantage in the global markets and ensure that incremental gains are made to ensure profitability. OEM/ODM The OEM/ODM business should be continued due to its operations strengths of low cost in overheads, the provision of forecasts from customers which enables risk to be managed properly, high volume and low variance and due the Galanz being a current industry leader. In todays viciously competitive world of OEM, major OEM customers might seek lower costs elsewhere if production was to be stopped or may withdraw from microwave oven and focus on other goods. However, it is significant that Galanz combines both OEM/ODM and OBM exports. Electronics is scale-intensive industry, OEM/ODM businesses are crucial to fully utilize Galanzs production capacity. In addition, ODM creates our own intellectual property which we are proactively patenting on an international level. Established relationships with major OEM brands who are seeking the economies of scale and the growing ODM market will enable us to consolidate our OEM/ODM business while pursuing the OBM potential in the emerging international markets. 1. The Future To lead the business to a greater success, Mr. Liang and the board of directors for Galanz, must concentrate on renewed strategic focus towards innovation and increase its investment and resources into to create a leading ODM in the world market. In the current competitive market, the directors should give priority to focussing on developing the ODM and OEM sectors of their business especially since the OEM business has been its core and major revenue generating business so far. The continued production of innovative products while

making incremental gains will ensure profitability and the innovation focus will creative further business opportunities through a varied product offering. Investment should also be made in researching and developing production facilities with the capability to take on more diverse and innovative production lines but still have a lean production strategy and keep inventory to a minimum. Whist focusing on their ODM and OEM sectors, they could continue to look for solutions for some problems they have encountered in their pursuance to be an OBM company i.e. delays in new product development process due to failure to arrange prototype production and testing, the need to provide competitive level of customer service to a wider market with variant needs, desires and expectations and others. It would be advised that Galanz form a co-opetition alliance (in established markets) with local providers of after-sales and customer service support in more sophisticated markets where consumers are looking for low cost with a good service behind it. Galanzs OBM business has potential risk and could impact on other areas of the business if it damages its brand through poor customer service and after-sales support especially if looking to make headway into America. Recommendation to the Board of Directors: In order to grow Galanz market share and future, the board must fight and win its battles on all fronts. It is our recommendation that its future resources must be invested in innovation both in design and production capability. We believe an operational strategy that focuses on innovation and market leadership in OEM and ODM will have a positive flow-on effect to its OBM Business. Benefits include using its resources and production facilities with increased product lines more efficiently and therefore allowing Galanz to deliver a highly innovative product at affordable prices. OBM Domestic Market: In this highly competitive domestic market, Galanz has lost ground to its competitors (losing 10% market share from 2002 to 2003). In order to regain market share, Galanz must focus on meeting its customer demands for innovation coupled with the need to keep prices low. Increased investment into the Production R&D will enable Galanz to deliver cost effective products with innovation. We recommend Galanz continues to keep its cost leadership strategy in the domestic market but this is only possible through heavy investment in Galanzs production facilities to meet the future demands of its customers. OEM/ODM Market: Galanzs OEM Market has become the cornerstone of the business and now makes up 47% of its total sales units compared to 25% three years ago.

We recommend heavy investment in R&D both in design of new components, more efficient production techniques and investing in research institutes both in China and in the United States. We believe that focussing on becoming a world leader in ODM will allow Galanz to retain and grow its OEM market and grow its more profitable OBM market. By continuing to drive OEM Business in with its innovative production capabilities, Galanz will be able to create better efficiencies for its more innovative production lines and therefore reduce overall production cost. The increased focus on ODM will create a situation whereby OBM customers are locked into Galanzs ODM innovations and will require greater dependency and therefore a greater surety of future orders. This could also protect Galanz when fighting these same competitors in the more profitable OBM markets. OBM International Market: Galanz continues to gain market share in the International market (from 35% in 2001to 44.5% in 2003) but this growth has also brought on a greater degree of risk due to the increased complexity created by an increased product line and the need to provide a more complete after-sales service to OBM customers in order to protect its brand. Galanz will need to invest heavily into marketing and creating an effective internal sales forecasting system in order to protect its risk of carrying too much inventory. While we recommend investing in forecasting and market research systems we also recommend outsourcing the after-sales service. We recommend that the board investigate possible alliances (co-opetition) with other OBMs in order to provide the necessary level of customer care.

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