Seagate Case
Problem
The price per megabyte of disk storage has gone done 40% per year from 1980-1995. Seagate believes that in order to stay competitive they must aggressively enhance product offerings and reduce prices. They also believe that in addition to that, they need to provide timely introductions and reduce production costs. However, the surging global demand in this industry is causing some facilities to run at full capacity very frequently, so Seagate needs to tailor its manufacturing strategy for these new products they’re trying to introduce to be based on high-volume and low-cost assembly and test. They are committed to lowering manufacturing costs and increasing volume production, and this is especially important given the short product life cycle in this industry. Given the projected future demand of their newest Cheetah and Barracuda models they need to decide how to structure the assembly and test facilities for each, expecting 300,000 units of each in demand in about a year, but that comes with high demand uncertainty.
Recommendations
Given what I have learned about hedging and having plants with flexibility, I was inclined to think that Ron Verdoorn should reject the Capital Appropriation Request for separate assembly plants for both Cheetah and Barracuda for 300,000 each. I know that the core idea behind this chapter is strategic hedging and having plants with at least partial, if not full flexibility such as the graphic below. However, given that we stick to having the mixed test facility with capacity of roughly 600,000 (I even tinkered with that figure between 600,000 and 800,000 when adjusting the assembly plant capacities) I could not yield a higher profit than the one that the current proposal does. I recommend going forward and accepting the proposed CAR.
Alternatives & Analysis
This is a hedging problem, and the statistics are as followed:
Margin: Cheetah: $400, Barracuda: $300
Cost: Cheetah: ($1090 - $400) = $690, Barracuda: (.85*$1090)
The price per megabyte of disk storage has gone done 40% per year from 1980-1995. Seagate believes that in order to stay competitive they must aggressively enhance product offerings and reduce prices. They also believe that in addition to that, they need to provide timely introductions and reduce production costs. However, the surging global demand in this industry is causing some facilities to run at full capacity very frequently, so Seagate needs to tailor its manufacturing strategy for these new products they’re trying to introduce to be based on high-volume and low-cost assembly and test. They are committed to lowering manufacturing costs and increasing volume production, and this is especially important given the short product life cycle in this industry. Given the projected future demand of their newest Cheetah and Barracuda models they need to decide how to structure the assembly and test facilities for each, expecting 300,000 units of each in demand in about a year, but that comes with high demand uncertainty.
Recommendations
Given what I have learned about hedging and having plants with flexibility, I was inclined to think that Ron Verdoorn should reject the Capital Appropriation Request for separate assembly plants for both Cheetah and Barracuda for 300,000 each. I know that the core idea behind this chapter is strategic hedging and having plants with at least partial, if not full flexibility such as the graphic below. However, given that we stick to having the mixed test facility with capacity of roughly 600,000 (I even tinkered with that figure between 600,000 and 800,000 when adjusting the assembly plant capacities) I could not yield a higher profit than the one that the current proposal does. I recommend going forward and accepting the proposed CAR.
Alternatives & Analysis
This is a hedging problem, and the statistics are as followed:
Margin: Cheetah: $400, Barracuda: $300
Cost: Cheetah: ($1090 - $400) = $690, Barracuda: (.85*$1090)