Johannsen Steel CompanyIn-Depth Case Analysis

Researchers SanjogNimishaGajendraSubodh

Acronyms

• JSC- Johannsen Steel Company.

• WVS- West Virginia Steel.

• R&D- Research and development

Brief historySurface analysis

• 1928- Get establish by Johannsen brothers in Pittsfield, Rhodes Island.

Concentrates on high quality, high carbon steel wire.

• Products-Music wire for instruments such as piano and violin.

Copper, teen and other coated wires. High tensile-wire for the newly emerging aircraft industry.• Pioneeres new types of wire.

Started prospering

• 1930-1940

Maintains reputation for high quality.

Maintaines reputation for In house design/construction of it’s own equipment.

Downfall of Johannsen Brothers

The last remaning Johannsen brother sells the company to WVS for $4 million.

JSC is now wholly own subsidiary of West Virginia Steels.

WVS ggets 3 steels mills located in Pittsfield, Rhode Island (500 employees), Akron, Ohio (100 employees), and Los Angeles (16 employees)–and two steel-wire warehouses–one in Chicago (8 employees) and one in Los Angeles (4 employees).

Increasing sales and profit

• 1940-1950

JSC sales to the U.S. military and to U.S. automakers and tire makers is in increasing rate.

Sold wild varieties of wire for different use susch as use in staples, nails, cables, cookie cutters, steel brushes/wire wheels, and electrical products.

• Continued to climb in sales and profit.

Turning point of Us steel industry

• 1960 Customers throughout the United States turns to the

Japanese.• Reason behind turning to Japanese 14-week strike makes steel customers to suffer. The US steel customers quality, price, and even delivery of

Japanese steel was acceptable.

• Competition from offshore steel makers is now going to be high.

Lowering steel prices

• 1960-1970• Increasing Offshore competition and a productivity-

minded economy results steel prices to go down down to very competitive levels.

• Reaction from JSC To strengthen sales expansion for maintaning profit

levels, JSC focuses on cost cutting strategy.

Main strategy-Sales expansion

• 1978 Formal sales manager Joe Thomas becomes president. Emphasizes as well on sales expansion.• 1970-1980 Sales nearly grows by 2 million pounds per year. Growth in sale revenue corresponds the tonnage sold. Throughout late 1980s, after tax profit on sales never goes up 2%. But still JSC maintains its reputation for high quality .It wins

prestigious NASA and computer-industry contracts and still produced "music wire" and other high-carbon grades. The percentage of these high-quality/high-margin sales to total sales continues to decrease however.

Low profit rate

• Mid 1970s• Both JSC and it mother company profit rate is

low.JSC spends less on it’s capital investment.• WVS restrictions WVS won’t spend much unless a 40% return on investment

(ROI) before taxes could be demonstrated. Sixty percent of JSC's total purchase of steel rod (the raw

material for steel wire) is to be purchased from WVS .

Result of WVS restriction

Little spending on capital investment. JSC total purchase of steel rod comprises of lowest

quality WVS steel rods. The number of machine setups and production cost of

JSC increases due to the smaller size of WVS rod coils (300 lb.), compared to the newest industry sizes from Bethlehem Steel (1500 and 3000 lb.).

Joe Thomas orders his sales people to increase sales at least 100 percent per year to use quota of WVS steel rods and to spread overhead cost per tonnage.

Success in increasing sales JSC gets success in increasing sales.

Order and revenue from the more common grade steel wire products such as staple wire, stitching wire, tire bead wire, and brush wire continued to increases.

Japanese competition

Price of steel wires continues to fall as Japanese manufactures steel wires with greater eefficiencey reducing costs,

Change of plan

• 1980Wire-drawing machinery get sophisticated.No longer designs or produced its own

machines. By the 1980s purchases used equipment.

Bulk of problems

Several JSC product innovations appearing is not significant.

No cost control measure- Constant R&D staff size and no increase in funding for cost control.

Good working order machines but old.(much of it’s orignal equipment, some over 50 years old).

Low sales salaries, with 6% commission paid on all sales generated.

Sales staff travel get reduces to cut costs.

Profit at zero

• JSC operational manager says

In conversation with John Green, JSC's operations manager, Joe Thomas was overheard to say; "I can't understad why our profits are now at zero. Sales are up again. Scrap rates are reasonable (5%). Even our raw material costs per ton shipped are lower. John, if we can just lower our labor cost and maintenance costs per shipped ton and spread our fixed overhead costs over more tonnage, I am sure we can pull ourselves out of this."

Bankrupted

• 1982Faces Bankrupcy.

In depth analysis

• Wholly owned subsidiaryA company whose common stock is 100%

owned by another company.Allows allow the parent company to retain the

greatest amount of control leaving the parent company with all the cost and risk of full ownership.

Parent company can involve a associate company.

In house design/construction

• ProsControl of Quality and ReputationContaining Intellectual Property

• ConsIncreased Product CostsTraining/Equipment Costs

Maintaining high quality reputation

• Best raw materials• High quality steel wire reputation in this case was due to

best or standerd raw materials(steel and steel rods).• After WVS took over JSC, JSC still tried to maintain its

high quality reputation and got prestigious Nasa and other contacts inspite of restriction of WVS to use 60 percent of low quality rod of WVS of it’s total purchase and inspite number of machine setups and production cost of JSC increased due to the smaller size of WVS rod coils (300 lb.), compared to the newest industry .

How they did it?

Their strategy always focused increasing sales and cutting down cost to maintain the profit after the competition form Japanese firm arised. So they still maintained high quality reputation by increasing sales. They thought by increasing sales they could use up 60 percent quotas of WVS low quality steel rods and still use 40 percent for high grades contracts like NASA. So they decided by increasing sales, they could increase in quantity of raw materials they purchased for producing different varieties of goods and again

keep on increasing in sales which would maintain their profits level.However, the profits as well as high level contracts was bound to decrease to less to zero at last.

Maintaining high quality reputation

• Link with suppliers

Case study

• Question 1What would be a good mission statement

for (a) JSC and (b) for the production function of JSC?

Question 1 a analysis

• Good mission statement for JSC will be or could have remained

To identify and sell to those markets for which JSC’s engineering and processing provide a competitive advantage.

To be a high quality finished wire small batch producer firm selling high quality high margin products to the US customers.

Investment in reach and development and to those area of the frim for which JSC’s engineering and processing provide a competitive advantage

Question no 1 b analysis

• Production function mission could have been

To provide unique processes and system to maximize that maximize the traditional capability of JSC to manufacture high-quality, custom wire in job lots and small batches, and to maintain advantages in engineering, cost, and delivery that will keep JSC a leader in its industry segment.

Question 2

• What does an analysis of external threats, opportunities, and internal strengths and weaknesses suggest?

Question 2 analysis

• Internal Strengths High-quality products. In-house expertise in design/construction of own

equipment. New product innovations from time to time. Good maintenance of equipment.

Low costs of raw materials per ton shipped.

………………

Internal Weaknesses Very little spending on capital investment. Sixty percent of JSC's total purchase of steel rod (the

raw material for steel wire) had to be purchased from WVS, even though it was well acknowledged throughout the industry that WVS's steel rod was the lowest in quality.

The smaller size of WVS rod coils (300 lb.), compared to the newest industry sizes from Bethlehem Steel (1500 and 3000 lb.)

…………….

No increase in size of R&D staff or funding for R&D department for many years.

Rise in equipment and building maintenance costs. Low sales salaries. Considerable reduction in sales staff travel in order to

curb costs.

……………………..

• External Opportunities Enter into joint venture with some Japanese companies

to utilize their more efficient technologies, and quality control and delivery techniques.

Adopt new technologies to gain competitive advantage. Outsource non-core activities to lower costs.

…………………

• External Threats Offshore competition, especially from the Japanese. Productivity-minded economy. Continuous fall in prices of steel-wire products because

of the Japanese (in particular) manufacturing these products with greater efficiency.

Improvement in technology, such as that of wire-drawing machinery.

•

All of these suggests

• The management of JSC made the error of not aligning its mission with the OM capabilities. They failed to operate with quality, equipment, processes, capacity, product development, layout, scheduling, personnel, inventory, maintenance, pricing, and margins all properly aligned.

Question no 3

• Review the ten OM decisions discussed in this chapter and determine the reasons (both strategic and tactical) behind JSC's problems. What are JSC's options, and what strategic or tactical decisions should it make?

Question no 3 analysis

• The management of JSC made the error of not aligning its mission with the OM capabilities. They failed to operate with quality, equipment, processes, capacity, product development, layout, scheduling, personnel, inventory, maintenance, pricing, and margins all properly aligned.

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Looking at the low-volume,high variety (job shop/ process focused) facility that was the traditional JSC operation. The failure was that management and some of the market moved to the high volume, low variety (product focused) without making the investment in the facilities and new systems required to make such a system work.

Product strategy

• They continued to try to compete in markets that formerly had held high margins (e.g., music wire), but now were medium priced at best due to competition.. They should have adequately responded to these downward margin shifts by aggressively soliciting high-margin orders (experimental wire, hard-to-produce wire, small jobs, etc.) that JSC was best suited to produce. With little or no profits and with little or no capital expenditures allowed, JSC focused on productivity improvements and cost cutting for solutions—Instead they should have focused on analysis of the kinds of orders that were profitable and on which they could successfully compete.

Process strategy

• To fill its excess capacity, spread its overhead costs, and attempt to raise profit levels, JSC sought orders of standard, commodity type wires (e.g., stitching wire, tire bead wire), despite the fact that most of JSC’s process equipment was flexible, but slow running. These were the easiest orders to get .Because of its reputation for high quality and flexibility, JSC was able to obtain these orders. In fact these types of orders increasingly represented the majority of orders taken and tonnage produced. However, because of their commodity pricing and JSC’s competitively inefficient production process, there was little or no profit in them.They should have focus on what they were based at high quality wires specilization.

Quality and supply chain strategy

• Another reason for the moves in the commodity direction was that JSC’s president was under pressure to buy WVS’s steel rod—it was ok for commodity quality wire, but unsuited for higher quality products. This mandate also prevented JSC from benefiting from the larger Bethlehem Steel rod coils.It was WVS investement on JSC. So west Virginia should have been smart enough to understand that and save there investment.

Question no 4

• What tools and techniques would help you in your analysis of JSC and in explaining your recommendations to top management?

Question no 4 analysis

• What I understand about JSC is it has always tried to maintain quality. I got many high level contracts. It had many potentials. My final recommendation to JBS would be Total Quality management.

• Total Quality management It’s not a tool but a philosophy. Seeks organization-wide improvement by involving every

individual in the organization. Unlike traditional quality control methods

Total quality management

• Ensuring quality is the responsibility of everyone in the organization.

• Quality is not restricted to only manufacturing department or set of specifications.

• Understands importance of service provided by other departments to manufacturing department.

Philosophies behind TQM

• A number of tools and techniques are used to give shape to TQM philosophy. The main focus of these tools is on team building and empowering employees. Some of these tools are:

Continuous improvement in process, skill sets, systems and operations.

Development of grass root employees through initiatives like Quality Circles.

Improvement in inter-department coordination and functioning by initiatives like QITs (Quality Improvement Teams).

Preventive maintenance of machinery and other capital equipment by initiatives like Total Productivity Management.

Reducing maintenance cost

• Very costly and sophisticated machinery are being used at JSC. Also, a steel company works 24 hours a day, in different shifts, So a machine breakdown is totally unwarranted in a steel company. Moreover, as per Joe Thomas, president of JSC, maintenance costs per shipped ton are to be lowered.

• I would undertake Predictive Maintenance, in addition to Periodic Maintenance. Predictive Maintenance is the set of irregular preventive maintenance activities, which detect problems while the equipment is still performing at satisfactory levels and rectify the problems when the equipment is not scheduled to be used.

•

Predictive maintenence

• Predictive Maintenance helps in reducing the overtime costs for maintenance labour. The concept of Predictive Maintenance is gaining significance as it is easy to monitor the condition of a machine by using newly developed sophisticated technologies. Operations managers can use sensors to measure the temperature or vibration of an equipment and feed the data into a computer. This data can be analyzed to determine the problem areas by comparing the trends of the recorded vibrations with those recorded when the machine was working under normal conditions. Managers can also use infrared imaging to examine the problem areas identified without dismantling the machine, so that the extent of damage can be determined before stopping the machine. Thus, Predictive Maintenance reduces the service time as much of the diagnostic work has already been done.

Questions???

• We demand to ask questions to us!!!!!