Operation Management of Viktor Lenac Shipyard - Case Study Example

OPERATION MANAGEMENT Introduction A shipyard is a unique kind of Industry where the work can be both high end like building Ocean going Vessels and Oil Rig Platforms, or low end jobs like Dry Docking and Hull Painting. It is also a highly specialized Industry in as much that it requires special raw materials like ship grade Steel Plates for the Hull, very large capacity turbo-charged Generators and about 25000 different kinds of components and parts which finally go into making of a ship. A ship is like a floating community, it can be as small as a family in a boat or as large as a hotel in a Passenger vessel. When a ship is at sea, it is a completely self sufficient unit capable of looking after itself as well as its crew and or passengers. A shipyard is also a very labour intensive industry and it can take more that 2 years to build one ship employing hundreds of skilled labour. At the same time it is also very capital intensive as requires heavy machinery and costly equipment for both building of ships and carrying out repairs. It also requires a very large area or layout for its activities and needs to be next to a sea port or at least on the coast with very good rail and road facilities for transporting goods and materials. Its consumption of electrical power is also very great. Management of such a complex organization also requires special skills and there is great capital required to mange the finances. It is for these reasons that this industry is not as widespread as some other industries like apparel manufacturing or food processing which may be bigger in size or turnover but far easier to manage and organize. Similarly it has a comparatively small clientele who are called ship-owners. Such individuals or companies are also fewer than most other consuming industries. For such an industry to survive and to prosper it must have certain traits and special skills. Such industries are also located in a few select areas of the world and have developed their knowledge base and their especially skilled workers over long periods of struggles and have become respected the world over for the excellence of their work. Case Study One such place in Europe is Rijeka, a city of 200,000 people, located on the north coast of Kvarna Bay between the Istrian Peninsula and the eastern Adriatic coast of Croatia. This small town boast of two shipyards and one of them is the famous Viktor Lenac Shipyard (formerly known as Lazarus). For forty years it was the pride of Yugoslavia, until Croatia seceded from it mother country and became independent in 1991. Because of political turbulence during the next ten years foreign buyer hesitated to give business to Croatian shipyards. But Viktor Lenac survived well as it concentrated on ship repairs and remained profitable all along. During the Yugoslavian days all shipyards were owned by the government but Croatia decided to opt for the open market economy and privatized the shipyards. Attracted by its profitability a group of Italian and American investors stepped in and took over the control and management of Viktor Lenac with intention to upgrade its facilities to make it a shipbuilding yard. Loans were taken from banks for the expansion of the shipyard and in the first phase a second dry dock was made to double the capacity. But the gestation period of such a capital intensive project does not bring in quick results. On top of that there were delays and cost overruns. As a result while some facilities were erected and available for use but was not enough to undertake the shipbuilding plans that were the real objective of the management. A further problem was that there was a cash crunch and it was necessary in the interim period to generate internal accruals to sustain the company. The danger was that if the ship yard went into loss then it would find it impossible to obtain the balance of the loans required to complete the expansion plans. It was a typical situation where it was important both to survive as well as to cover all expenses to remain eligible for further finances. The Problem This critical situation was squarely placed on the shoulders of Ivana Boric by the production manager. She was expected to find a product mix that could raise $ 30 million to cover labour costs, debt servicing and marketing services. Failure to raise this amount through work would result in losses and could well lead to bankruptcy proceeding and could well mean the end of the road for Viktor Lenac. The Opportunities There were plentiful opportunities available for Ivana Boric to explore to get the right product mix of production to meet the requirement of $30 million to meet expenses. Among the top was New Buildings which was the prime desire of the management. In fact this was the reason for their investment in the company. But the fact remained that in the first phase of development not enough was done to make this possible. For example the cranes and the steel workshops that were necessary for such massive work were not yet erected. Another factor was that until the second phase of expansion was completed Viktor Lenac could produce only small tugboats and not larger ocean going vessels. Such new building would fetch a comparatively lower profit of $ 1.5 million only. Moreover the time taken would be too much and the dry dock would be occupied for a longer period for a much smaller return. A much better option was to go for conversions. This work involved converting the present use of a vessel to a different use. In this case the time required in comparison to a new building would be halved and better returns were assured. The constraint here too was the relative unavailability of heavy cranes, the absence of the steel workshop. However some smaller conversions which were not heavy could be carried out. The next and exciting opportunity was that of building Offshore Jackets. These are platforms that are erected on seabed for extracting oil from the sea. These were comparatively simpler jobs as they did not involve the use of dry docks and the lighter equipment could do the job nicely. They also paid well and could be finished in rather small period of time. The mainstay of the ship yard was repairs and that was the bread-earner all along. It could well generate $ 17 million by itself and Viktor Lenac was well equipped both in terms of equipment and labour for this work and could really take all the work it was offered. The constraint was that if only this work was undertaken the company would fall short of requirements and face a financial crisis it so badly needed to avoid. Also it meant that both the dry docks will be fully occupied for this kind of work. The last and the least contributing part of all work was anti-corrosive painting of components. No dry dock was needed in this case but this had to be done in an enclosed building so that vapours did not escape into atmosphere causing pollution. But enclosed space constraint was the consideration and the maximum quantity was limited to 500,000 square meters and could not be expanded further due to financial and time constraints. Critical Resources Crunch There was another element for consideration. One of the most important resources, apart from finance was steel plates and there orders were place on an annual basis. For the current year the producers had put a limit of 5500 metric tons of supplies. This meant that all activities had to be planned around this maximum limit of availability. Secondly the limit of anti-corrosive paint application was to be kept in mind when planning for components for any of the above activity. Labour was a continuous problem. It was not possible to train labour for a different skill set in short period of time. Moreover shipyard labour tends to be local and hiring labour from other centres was difficult as they too preferred to stay on local jobs. Keeping the local working population in view and even with the already enhanced labour force the maximum labour hours that could be factored in were limited to 4 million labour hours that would be available during the year. Although the dry dock capacity had doubled, which was a redeeming factor, the total number of working days in the year would be 350 for each dry dock and 700 for both. Therefore work had to be distributed in a manner where this capacity was optimally utilized between jobs. The Solution Based on information available from marketing department Ivana Boric was able to prepare the following chart.1 The chart laid out in details the entire possible output and the resources required to carry out the jobs. It also detailed the constraints by displaying the available resources. From this table she was able to chart a Linear Production Plan to obtain the best product mix for the year so that the result would be acceptable for the Viktor Lenac shipyard.2 Conclusion The result is the ideal or optimum Product Mix for one year. The main constraint was availability of Resources. Since Steel was the least available resource it was the constraint that was used for maximum utilization. Although Contributions fall short of approximately $30 million expenditure that is expected, there will be a likelihood of savings in Expenditure due to lesser need of resources like Labour Man Hours and Corrosive Paint requirement. Lesser usage of Dry Dock will also reduce maintenance and other costs. Administration costs should also get reduced. As figures of expenditure are not available the actual effect of Contributions cannot be shown or compared. It is however assumed that with reduced requirement of Labour and Paints the Contributions will match the expenditure or will reduce the gap between them to nominal figures and it will not have any adverse bearing on the financial loans that the management is seeking from banks, Chart 1. Viktor Lenac Shipyard Production Opportunities and Resource Position Job Maximum Jobs Contribution Contribution Per Job Total Repairs 40 $ 520171 $ 20,806,840 Conversions 4 $ 5,014,710 $ 20,058,840 Offshore Jackets 2 $ 3098710 $ 6,197,420 Newbuildings 2 $1,600,150 $ 3,200,300 Resources Req Value Repairs Conversions Offshore Jackets Newbuilding Total Available Steel Tons 6,800 4,400 836 600 12.636 5,500 Corrosive paint Square Meters 228,000 192,000 8,400 20,000 448,400 500,000 Dry Dock Days 360 332 0 40 732 700 Labour Hours 1,905,800 2,924,000 341,218 200,850 5.371,868 4,000,000 Viktor Lenac Production Plan Job Description Number of Jobs Steel Required Corrosive Paint S/Mtr Dry Dock Days Labour Man Hours Contribution Repairs 4 680 28,000 36 190,580 2,080,684 Conversions 4 4,400 192,000 332 2,924,000 20,058,840 Offshore Jackets 1 418 4.2 0 120,609 3,086,710 Newbuilding - Tugboats 0 0 0 0 0 0 5,498 224,200 368 3,235,189 25,226,234 Source: Data is from Company files. Read More