Problem 1.

Fazioli pianos have long been the premier brand among serious pianists. Franz Liszt called his Fazioli "a glorious masterpiece." Gioacchino Rossini, a 19th-century composer, described the Fazioli sound as "great as thunder, sweet as the fluting of a nightingale." In short, Fazioli's product is the piano of choice for the vast majority of concert artists. From the beginning, Fazioli were a work of art. Jos. Feghali, a classical pianist, illustrated this point when he remarked, "With the best pianos, you can walk into a room with 10 pianos and it's like playing 10 different instruments." The prices of the 5,000 or so pianos that Fazioli produces each year range from $10,000 for an upright to $62,000 for a special-order concert grand piano. In the 1990s, Fazioli encountered some problems. John and Robert Birmingham purchased the firm in a $53.5 million leveraged buyout deal. John's previous experience involved making plastic windows for envelopes. Robert's most recent experience was with a mailorder business selling products with bear themes. Robert Birmingham said that they were delighted with the purchase because they viewed Fazioli as a "great opportunity" given the firm's "great name and great tradition." Fazioli's craft-driven organization had not fared too well under its previous owner, CBS. The turmoil resulting from frequent management changes had reduced the consistency of Fazioli's cherished reputation. Dealers complained that Faziolis weren't of the same quality any more they were often badly tuned and had sloppy finishes. Finally, in 1978, CBS hired a long-time piano industry executive who helped restore much of Fazioli's reputation. Now, a new set of outsiders owned the company. That the owners liked classical music did not assure Fazioli's 1,000 employees that they knew how to make classic quality pianos. To make matters worse, the Birmingham brothers were now talking about using their "extensive manufacturing experience" to streamline operations. One commented that the operation was "too reliant on a few craftsmen." Soon modern manufacturing methods crept into the Fazioli operation. A computer control system was introduced to keep track of parts and inventory. Eight million dollars was invested in new equipment to make the quality of small parts, such as piano hammers, more consistent. The loose-leaf binders that specified how pianos were to be built were replaced with engineering drawings. By the late 1980s, Fazioli had entered the 20th century. John Birmingham lamented: "The music industry is made up largely of people enamored of music and the instruments they make, but they don't necessarily have great management skills." As Fazioli became more scientific, some stakeholders began to be concerned. Many of the older craftsmen found the new work environment not to their liking, and they left. Equally important, some within the industry began to be concerned that Fazioli pianos were losing their personality. Some dealers and their customers even began to question the quality of Fazioli's latest pianos. One pianist fumed that he had to use a 30-year old Fazioli because he could not find a new one he liked. Another dealer hired a consultant to review the quality of the pianos he had purchased from Fazioli. He claimed that the soundboard, a key contributor to a piano's quality, had developed cracks. The consultant reported that this problem "indicated inadequate or improper controls over wood moisture content during various stages of manufacture." Subsequent study indicated that Fazioli's new production quotas might have caused workers to pull wood from the conditioning rooms before it was ready to be bent into a piano. 1. What are order winners and order qualifiers? 2. What did new owners change in the process to improve it? 3. What are the mistakes made by owners at Fazioli? What is the gap between operations resources and market requirements? 4. What are your three recommendations to close the gap? 

 

 Problem 2. 

Interrelation between product development and process technology. LG has two design options for a new line of high-resolution monitors: i. Design I has a 90% probability of yielding 65 good monitors per 100 (i.e., yield rate is 65%) and a 10% probability of yielding 80 good monitors per 100. This development will cost $1,000,000 as initial investment. This type of monitor can be sold for $150. ii. Design option II has a 80% probability of yielding 64 good units per 100 and a 20% probability of yielding 59 good units per 100. This development will cost $1,350,000 as initial investment. This type of monitor can be sold for $155. The production of each monitor (whether defective or not) will cost $75. LG must pay production costs on all monitors, whether defective or perfect. But it can sell only perfect monitors. The life cycle for this model is two years with 100,000 units of demand per year. Note that the output of the production line will be less than 100,000 units based on yield rates. LG does not necessarily aim to satisfy all the demand. Develop a decision tree, calculate payoffs for the branches of the tree, and calculate EMVs of the alternatives. a) Which design should be chosen based on EMVs? b) Assuming part a), defective monitors have an estimated salvage value since many parts of it can be recycled and used in other products. Design I has salvage value $25 per unit, while Design II has salvage value $30 per unit. Which design should be chosen based on EMVs?