Chapter * Dave Storm, Vico President of Strategy for Harley-Davidson Motor Company, reflected on the struggles and successes that Harley-Davidson has faced over its turbulent history. Harley-Davidson hhad come a long way and overcome many ob- stacles since its inception, but times had changed and so had the challenges. The determination and will to succeed within the organization was, how- ever, stronger than ever. Harley-Davidson had felt a sense of pride at the success of their latest ex- pansion to 100,000 motorcycles per year. Their plans had been successfully executed well ahead of schedule. Ten years ago, no one within the orga- nization would have imagined that so many peo- ple would want to buy Harley-Davidson motarcy- cles. Never in their wildest dreams would they have thought that they would be capable of pro- ducing so many. However, the company had un- derestimated the demand for their product and in the heavyweight motorcycle market as a whole. With demand growing rapidly, Harley-Davidson's fe HARLEY-DAVIDSON MOTOR COMPANY constrained production capacity was insufficient to meet demand, Excess demand, estimated to be ‘more than 10% above capacity, resulted in wait- ing lists of up to 2 years dlepending on the model. Harley-Davidson was practically inviting potential ‘customers to buy from their competitors! Dave asked Jim McCaslin, Vice President of Harley-Davidson’s York Assembly facility, to join him and the rest of the management team at the Head Office in Milwaukee to finalize the com- pany’s response to the latest surge in demand. The management team had devised several alternative strategies to counter their gradually sliding mar- ket share and to continue the phenomenal growth that the company had been enjoying recently. The problem they faced was choosing the best strategy, and time was rapidly running out. On June3, 1996, they would present their recommendations to the Board of Directors on the best way to deal with their constrained production capacity in a rapidly growing market History (1903-1992) AND COMPANY INFORMATION Harley-Davidson Motor Company, the only remaining major American manufacturer of mo- toreycles, has had a long and exciting history William Harley and the Davidson brothers (Wal- ter, Arthur, and William) built the first Harley- Davidson motorcycle in 1903 in a shed in Milwau- kee, Wisconsin. By 1909, Harley-Davidson hat troduced a more powerful motorcycle, ineorporat- ing a new engine that has become the company’s standard to this day: the V-Twin (named after the ‘This case was prepared by Troy Anderson, Mark Bruno, Shaun Usmar, and Professox Van Mieghem a the bass for class dis cussion rather than to illustrate either the effective or neffecive handling ofa managerial situation. The cogperation of Harley Davidson management is gratefull acknowledged. No part ofthis case study may be reproduced without pecmissions tirect al inguires to permissions @vanmieghem.s 39392. Chapter 11» Harley-Davidson Motor Company ag ak ie ee tas acs nde posed) Doubling the power ofits predecessor, it carried riders at a then unbelievable 60 miles per hour. ‘The motorcycle erage caught ony and by 1911 there were over 150 other brands of mo- torcycles competing for space on America’s roads. Soon thereafter, a new use for motorcycles ap- onl. tinct Togo ey Sine Davidson motorcycles began to be used to support the infantry in World War I. Over 20,000 Harley- Davidson motorcycles had been called into action by the end of the war. ‘Although there was initially a strong demand for these bikes, the introduction of the Model T automobile and the subsequent eects of the Great Depression devastated the motorcycle mar- ket. By 1931, only three US. manufacturers had survived: Harley Davidson, Excelsior-Henderson and indian, Even though sarual company sales dropped: sharply to 3700 motorcycles, Haney: Davidson survived thanks mostly to a strong, dealersareons pollen aoa alive tea, soaeret tive business management, and stong exports. In 1941, the US. and Allied forces once again turned to Harley-Davidson for help. Hatley. Bavideon supplied i of 3 prodtactim--eiare than 90,000 units during World War Il. This was te beeing ira. er tena, tamecinely a= Se WATT, pepe Sia sage ta gat hace ta eae pl Mer ences tee Boece Coupled with an improved road system through oat fer UE, fuged st eplntoe demand for ap. torcycles. To help meet this booming demand, Sie Detidina feria a. plans juopeior plant on Capitol Dive in the Milwaukee stub (of Wauwatosa into additional manufacturing facil- ities in 1947. Harley-Davidson's success grew even more when Indian, its oldest and closest competi- toe, went oat OF business Mh oF he reasoe for their demise was their inability to-deal with the ‘volatility of the market demand, Harley-Davidson ras ablovo copeberer ‘thus becoming the sole sur- vivor in the US, motorcycle industry since 1954. But the company did not rest on its laurels, It leapt forward in 1957 by introducing the Sportster ‘motorcycle ushering in a new era of heavyweight motorcycles. The 1950s and 60s also saw the explo- sion of the American “motorcycle culture,” with Dblackeleatherjackets=becoming not only a state- ment of fashion, but also of a lifestyle. The tough “Wild Ones” image, made popular by the Marlon Brando movie of the same name, labeled motorcy- le enthusiasts as “outlaws.” (In fact only a small minority of all motorcyclists ft this image.) Jn 1965, Harley-Davidson ended family own- ership with a public stock offering and was later purchased by the American Machine and Foundry ‘Company (AMF) in 1969. AMF had great plans for Harley-Davidson; indeed, AMP's financial strength and resources helped the motorcycle com- pany meet the demands of the rapidly expand- ing marketplace. In 1974, the company moved its chassis manufacturing and final assembly op- erations to an old AMF plant in York, PA. (The engine and transmission operations remained in Milwaukee, along with the corporate headquar- ters.) When AME purchased Harley-Davidson, they were producing 14,000 motorcycles a year, but by 1975 they increased production to 75,408, in- cluding lightweight motorcycles. This rapid growth in production quantities was, however, a poor indicator of success. Be- ginning in 1969 and continuing into the 1970s, ‘huge numbers of low priced motorcycles were im- ported from Japan, dramatically reducing Harley- Davidson's market share. The ferocious cor- petition coupled with motorcycle quality prob- Jems, which surfaced as a result of the company’s rapidly expanding production, caused major prob- lems for Harley-Davidson. In 1981, AMF wanted to sell Harley-Davidson after 11 years of ownership—but there were no willing buyers. Working against the odds and driven by a love for the product and a belief in the ‘company’s potential, 13 members of the Harley- Davidson management team purchased the com- pany from AMF for $81.5 million in a highly lever- ged buy-out. They could not have-done ata ‘more challenging time. In the face of a worldwide decline in the heavyweight motorcycle market, the Japanese manufacturers decided to ship their ex- cess inventories to the US, thus massively over- loading the market and depressing prices. This, coupled with extraordinary interest rates and in- flation, could have meant the demise of Harley- Davidson, After complaining about inappropri- ate competitive practices to the International Trade ‘Comuission (ITC), President Ronald Reagan im- Reposed a 5-year tariff on imported Japanese heavy- ‘weight bikes. This gave Harley-Davidson just, enough room to move. Through a combination of streamlined operations, improved quality and manufacturing techniques, and by designing new models, Harley-Davidson was able to win back market share from its competitors. By 1986, it was in a position to return to public ownership, and by 1987 it petitioned the ITC to remove the tariffs one year eatly. Harley-Davidson was on its way to be- coming an American success story. Company Structure The parent Harley- Davidson Inc. operates in two segments: mo- toreycles and related products, and financial ser vices, Its motorcycle segment consists primarily of its wholly-owned subsidiary Harley-Davidson Motor Company, which designs, manufactures, and sells heavyweight motorcycles. It also sells a broad range of related products including motor- cycle parts, accessories, and apparel. The Financial Services segment comprises Eaglemark Financial Services. Faglemark provides financial support services such as financing and insurance to Harley- Davidson's participating North American dealers and domestic retail customers. The Heavyweight Motorcycle Industry The heavyweight motoreycle market in which Harley- Davidson operates includes all motorcycles with an engine displacement of 651cc or above. By the early 60s, Japanese manufacturers started to move from producing smaller lightweight motor- cycles to producing Harley-Davidson look-alikes ‘These bikes were faster, less expensive, and more technically advanced in terms of electric systems and engine designs. By the late 70s, the big four Japanese producers—Honda, Yamaha, Kawasaki and Suzuki—were producing so many heavy- weight bikes that they sent their excess production to the US. This, combined with a massive down- ‘turn in the demand for heavyweight bikes, spelled trouble for Harley-Davidson. Between the early 70s and 1984, its market share dropped almost con tinuously. Its domestic market share dropped from 77.5% in 1973 0 30.8% in 1980. It was not until 1988 that Harley-Davidson managed to increase its share to 46.5%, a level it has maintained and even increased until today (Fig. 11.1 and Table 11.1). —_ History (1903-1992) and Company Information 393 Consumers In order to understand Harley- Davidson customers, one must understand the Harley-Davidson. “mystique.” People ride “Harleys” not so much as a means of transport, butrather asa lifestyle. Many owners are affiliated in some way to the Harley Owners Group (HOG) Harley-Davidson motorcycles exude freedom and adventure, To their owners, Harleys are as Amer ican as the Stars and Stripes or the Bald Eagle. Itis, however, more than just national pride that drives these owners. To them, their motorcycle has a personality. It has heart and spirit; it is not just. ‘mechanical marvel, but another member of the family. This “family loyalty” is demonstrated by Harley-Davidson’s 95% customer retention ra- fo, There must be very few companies who play such a large part in their customer's lives that their customers willingly tattoo its brand name logo on their bodies (Figure 11.2). Harley-Davidson is one such company. Despite the renegade image with which Harley-Davidson owners are often associated, not all customers fit this image. In fact, the trend over the last ten years has been towards more ma- ture and better-educated owners. The typical US. Harley-Davidson motorcycle owner is a male in his early forties, with a household income of ap- proximately $66,000, who purchases a motorcycle for recreational purposos and who is an experi- enced motorcycle rider. Product Segments The heavyweight class of motorcycles is comprised of four segments: stan- dard, which emphasizes basic transportation and cost; performance, which emphasizes handling and speed; touring: and custom. The touring segment includes motorcycles equipped for long- distance touring with fairing, windshield, and sad- dlebags. By comparison, the custom segment em- phasizes styling and individual owner customiza- tion. These motorcycles are highly customized through the use of chrome trim and accessories While Harley-Davidson pioneered the touring seg- ‘ment, itis best known for creating the custom mo- torcycle featuring the distinctive styling associated with certain classic Harley-Davidson motorcycles, as shown in Figure 113. Harley-Davidson has concentrated on the touring and custom segments, currently manufac-1873 1980) 1989) 1088 1901 1986, Figure 11.1 North-American heavyweight motorcycle market shares. (Units in Thousands) 1594 North Americ: “Teulregisuations 103 3 5s — Harley Davidson registrations 7 65 es Hrrley-Davidson market share 54.90% 8.70% 57.90% Europe “ia vegans 33 a7 an — Harley-Davidson registrations 323d Harley-Davidson market sare percentage 3090% _1100% 10.10% apan/Awstralia: otal registration? Hlariey Davidson segistrations Davidson market share percents a 7376 2h 22% re 66 21% Table 11.1 Worldwide heavyweight (750cc+) motorcycle registration data, turing and selling 23 different models of heavy- weight motorcycles, with suggested retail prices, ranging from approximately $5,100 to $18,200. ‘These motorcycles are based on variations of four basic chassis designs: the Sportster, Dyna, Softail and Touring bike chassis. They are powered by one of three air cooled, twin cylinder engines of “V” configuration, which have displacements of 883cc, 1200cc, and 1340cc, respectively. With its smaller engine displacement, the Sportster_model represents Harley-Davidson’s, only “entry level” option for potential first-time motorcyclists. It provides the ideal way for con- sumers who lack the ability or the confidence to handle heavier bikes to enjoy the theill of riding a Harley-Davidson, Itis also the greatest selling bike in the history of the company. Market & Competitors Up until the 1960s, Harley-Davidson had a virtual monopoly on the domestic heavyweight motorcycle market. Since then, however, the US. and international heavy- weight motorcycle markets have become highly competitive. Major competitors like Honda, Yamaha, Kawasaki, and Suzuki have financial ‘and marketing resources that are substantially greater than Harley-Davidson’s, and also have much larger corporate revenues. Out of these competitors, Honda has his- torically posed the biggest threat. It enteredHistory (1903-1992) and Company Information 395 Figure 11.2 When was the last time you felt this strongly about anything? the worldwide motorcycle production industry Although Harley-Davidson has led the indus- jn 1963 when its first production facility outside try in domestic sales of heavyweight motorcycles Japan—Honda Benelux N.V. in Belgium—started producing lightweight scooters. Honda has since expanded into all facets of the motorcycle industry, for the last ten years, its market share is shrinking, idson’s contin sbavrate-fast.. ted. inabiltjoto,ramponp production at By looking for high-end extensions to their sport “enough tomeetehe growing market demand. lines, Honda now produces a range that closely fol- lows that of Harley-Davidson (see Table 11.2). It sells the popular Gold Wing line of touring bikes Operations Harley-Davidson operates two main and three successful custom lines: the Valkyrie, facilities. Its Capitol Drive plant in Wisconsin Shadow and Magna. Hondasnowasells.arounded: produces engines and transmissions for both the -smillior-motoreycies.a.ye: Sportster and super heavyweight models. Its facil- | Honda's 1995 mo- ity in York, PA, performs all final assembly. Due torcycle revenues, however, were only $3.7 billion to its strong nationalistic roots, Harley-Davidson (out of a $40 billion total revenue for Honda),com- has chosen to outsource very few of its compo- pared to Harley-Davidson’s $1.35 billion (see Ta- nents and as a result produces many of its parts ble 11.3), inchouse, Even at times when the company’s liveli Yamaha poses the next biggest threat with its hood was threatened, Harley-Davidson refused of- classic American motorcycles: the Royal Stas, V- fers from both Honda and Yamaha to provide theit Star and the Virago. Generally, the custom and advanced V-twin engines. touring motoreycles are the most expensive and But how could Harley-Davidson compete with ‘most profitable vehicles in the market. the Japanese? ‘They used robots and cheap la- Currently, Harley-Davidson dominates the bor to create a lower cost structure. After a few 651+ce market in the U.S, with a 50% marketshare. trips to Japan in the early 80s it became appar. ‘The next highest competitor is Honda with around ent to Vaughn Beals, then Chairman of the Boerd, 20%. ‘The situation overseas is slightly differ- that hidden magic was not the reason for the ent, Although Harley-Davidson has managed to Japanese success. “We were being wiped out by capture a 16% share in the Pacific Rim—mainly the Japanese because they were better managers Japan and Australia—its situation in Europe is It wasn't roboties, or culture, or morning ealisthen. more precarious. In Europe, which has a larger ies and company songs—stwasrprofessional-man. heavyweight market than the U.S. does, Harley- Davidson only holds a 6% share. As a result, the gention.todetaily ” Beals said. The Japanese meth- company has been looking towards both Europe ods seemed to work. In the early 80s, only 5% of and Asia as growth markets for the future. Japanese machines coming off the assembly line | | ee3 396 Chapter11 «Harley-Davidson Motor Company ES [eee iconataenntatad Tr Figure 11.3 Production Output per Model failed to pass inspection, compared with 50-60% of Harleys. Furthermore, the Japanese were able to reduce costs and increase quality by achiev- ing 20—30 inventory turns per year compared to Harley-Davidson’ 4 Don Gogan, a recent graduate of Kellogg's Masters in Manufacturing Management program, is now a Product Plant Manager at the Capitol, Drive facility. He recollected that in order to beat, or at least join the Japanese, Harley-Davidson had to play their game. That game included learning and embracing three practices, known as the “Pro- _ductivity Triad” Employee Involvement (BI Just- In-Time inventory (JIT), and Statistical Operator Control (SOC). EI involved enlisting the full par- ticipation of all employees to solve problems and control quality. In this way, everyone would be re- sponsible for the success of the company. JIT, or MAN (Materials As Needed) as Harley-Davidson named it, involved reducing costly inventory lev- els and supplying the assembly line with small quantities of materials only when needed. Finally, SOC gave all employees sufficient training to help them measure the quality of their own output, and consequently assure quality throughout the pro- cess. Harley-Davidson was one of the first compa- nies in the U.S, to adopt these lean manufactur-a The 1982 Capacity Decision 397 AH porte 1209 s7aio | sris0 ans sae XE tS Sporeter 1200 Sport 859s | Stti0o sine 2x Sane per mn Car ster XH Spenser $5215 | Pactiocoset ne) $6698 LE Sper 9 oggee os Dye su FXDL Dy Lane Rider 13730 | Soe Ae 89 FxDDyna Super Chise Sides | Sodow Ace 50 56393 BXDSCONVDinaCemertble Staite | Sudow VEX Dele Sto EXDNG Oyaa Wide Gide ss st Vey 6 Magne FLSTC Hentage ft Case susazs | valle 5200) sae FASIC Sofa Carem sitias | Magne 98 FISTS Heroge Spang sis Hsirany sus ISTS Springer Se site twee Gold Wing 6 Tes FLIR/FLTR Rood Gide ssc | Gold Wing aspencade sisi FLAT Elec Ga Srdard 12725 | aye toes sisi55 Huitte/muret cra Gide Cisse Saar FuMTeUTUtrsClnscBacrs ide, S186 Fuso su75 PRovalSert LARCH Rood Rng Case Royal Su Tour CsiC1300e) $1459 VRise aon) 510389 iago (10h) 79 Table 11.2 Comparison of Heavyweight Motorcycle Prices, ing practices—and the results were impressive. In- ventory tums increased from 5 to 20, the percent- age of completed motorcycles coming off the line rose from 76% to 99%, and productivity rose by 50%, None of these changes could have been made without the involvement of the employees and their unions. Employee and union involvement is deeply rooted into Harley-Davidson’s corporate culture. Dealers The dealer network was also crucial to Harley-Davidson’s success. Nationally, it com- prised 600 independent, but primarily exclusive, dealets, The symbiotic relationship between the company and its dealers proved critical to Harley-Davidson’s survival during troubled times. Whether it was by buying excess inventory to im- prove Harley-Davidson’s cash flow, or by repair- ing poor quality bikes that they had received in or- det to make them fit for sale, the dealers stayed Joyal during the difficult years THE 1992 Capacity DECISION With the market improving due fo a resurgent economy, Harley-Davidson looked to continue im- proving its operations to keep up with increasing demand. Jeff Pharris, a Strategic Planning Man- ager, recollected the large demand for bikes in 1992, With longer waits for bikes, noticeable also for employees (the staff received no preferential treatment), Harley-Davidson had its finger on the pulse of the market through product ownership and first-hand observance of the entire channel Harley-Davidson knew that wait times and the general backlog, of orders it had from its dealers, Rot to mention some of the opportunistic pricing practices of the dealers, meant ever-growing de- mand, Despite Harley-Davidson’s perception of itself as a niche player, this “niche” was becom ing larger—more and more people wanted to ride a Harley-Davidson. Not wanting to throttle back on customers’ de- ‘mands, Harley-Davidson knew it needed to add supply. At the time, Harley-Davidson was quite averse to adding capacity due to its experience with the volatile and cyclical motorcycle business. geopaet ee WOR Re andl eyelice motieeyeie emi388 Chapter it « Harley-Davidson Motor Company {sco staTEMENT (0 000) sss 193 Fa r TAT RIES Te Cont of gods sold e067) Gonsis)” Giza) Graea7) Gar) Ges pre fue’ ssa! Safe? Egon” nda Tet hom financial ervicor 3 Soling adiin and engineering (34223) @ou77)_cns7s) _i1skasoy (19380) “xen fom opersties Tere — ket — ta aan — Ea Gsm) eis 19% dats Inet incre (erperee- net ther income expense) net Prove tor inome Gasp i, 2s G20) Sip en) 51500 BALAN SHEET CO): 1995 1993 __t992 tom SWaragapel $n $5 BE EE Finance rect ables nt raed Tome aS sets 167 TSE Gtorvtemdebyindudingcuent 2901 NaS) $M Ha Sate Matures ot longterm debt Lamgterm db escurent matures 18207 9am) S145] Saance dost ies 7 ral debt 185298 oar 7308 re 93 Shareholde equliy ise Gea ssa — 300 ‘case Foon (0000 155 Rete provided by operating acivibes 3 171 7— ‘Adjusts tn ele cach uk vcaton an Amortarton oe Nechangein erkng Cap iar oie ist Reha ernst ————taray— Netexpta Bperdtre (ues Specter isos) “Ret eas provi 6 fet maa EEE CT — TRetingese crease in cath an ovens — naa — ute: Miley Davidson Company IIGTOK Table 11.9 Selected Financial Statement Data of Hatley-Davidson Therefore, Harley-Davidson was going to try to expand capacity at existing plants first through process improvement and restructuring, and ex- ternally only as needed. In this way, Harley- Davidson could always stay ready for any ex- pected dip in demand and still be profitable. Concerns Approaching 1992, Harley-Davidson had seen it all: fantastic pre-war demands, post- war booms and recessions, the recessions of the 1970s and 80s, a leveraged buyout, the loss of sig- nificant market share, and finally a resurgence in demand. Indeed, Harley-Davidson’s familial firm ‘memory has been tainted with boom and bust cy- cles throughout its history. This made manage- ment and key decision-makers reluctant to just add supply due to an uptum in the waits and dealer ac- tions, a feature that many newer recruits could not understand at frst. Throughout this boom and bust cycle, debtors and investors alike upset any feeling of comfort within the organization. Indeed, it was just this relationship, coupled with the weight of past debt obligations, that influenced Harley-Davidson’s de- cision to avoid taking on further debt in its 1992 capacity decision. As a result, the option of adding. another plant was considered to be out of the question. Consequently, Harley-Davidson was prompted to fund the 1992 expansion internally. Below are some of the steps Harley-Davidson took and their pertinence to the more recent 1996 capac- ity question.Outsourcing Since Harley-Davidson was not going to expand by adding a new facility, the question of outsourcing work became a much- discussed option. Jeff Pharris knew the signifi- cant returns on investment achieved in the auto industry by outsourcing. Only 55% of Harley- Davidson's cost-of-goods-sold (COGS) was related to purchased goods. Many companies produced parts similar to Harley-Davidson’s and could be approached to supply the company. It was a well- Known fact that aftermarket suppliers make it possible to build a Harley-Davidson from scratch. (at significantly higher expense). Jeff Pharris found himself wishing on a num- ber of occasions that they would begin outsoure- ing; he felt that much of the value that Detroit appreciated could be easily replicated here. But he also knew and understood the concerns of the longer-time employees in the firm that a too exten- sive use of outsider’s parts could perhaps detract, from the value of the Harley-Davidson brand. Rationalization of Operations Once the com- pany decided not to build new facilities, the op- timal use of available space at existing facilities be- came a priority. This required rethinking machin- ing and assembly of parts within these facilities. Fitst, Harley-Davidson decided to integrate some machining and assembly, using a daring new pro- cess architecture where machining cells would be positioned in close proximity to the assembly line, feeding it directly without storage and handling Second, all machining and parts activities were scrutinized to see which activities could be out- sourced. Harley-Davidson categorized part man- ‘ufacturing activities according to their strategic value and whether they were proprietary or also could be purchased externally. Investment and outsourcing decisions were prioritized according to the position of each activity in the core compe tency matrix shown in Figure 11.4 ‘The matrix looks at strategic value (high or low) and internally versus externally sourcing components. Strategic value is attributable to characteristics that distinguish a component from. its mimickers, either quality-wise or cosmetically. When looking at the outsourcing decision, it was important to consider who was supplying the part and perhaps to whom else that company supplied More Growth in Demand 399 Third, and last, the strategic planners pro- posed a project status monitoring system that pro- jected cost-of-goods-sold (COGS) figures for given future volumes. Management committed t0 de- liver the COGS figures on the pro-forma profit and, Joss statement for the future. ‘This approach was well understood and appreciated by the board, which approved the $80 million capital investment required for the plant's restructuring, Harley-Davidson accomplished the expansion from an 75,000 unit to 100,000 unit capacity ahead of schedule and did it without any extemal fund- ing, In a year and a half, Harley-Davidson had ac- complished what was originally estimated to take three years, and the operations group delivered the COGS figures! More GROWTH IN DEMAND Harley-Davidson had increased its output by nearly 10,000 units in 1995 alone (Fig. 11.3 on 396), yet its market share continued to steadily decline (Fig, 11.1 on p. 394). Compared to 199, i dustry registrations of domestic heavyweight mo- torcycles were up 14.5%, The company ended 1994 with a domestic market share of 56.1% com- pared to 584% in 1993. Market share slid further to 55.8% in 1995, despite a significant increase in ‘output over the same period. This decrease was a reflection of Harley-Davidson’s constrained pro- duction capacity in a growing heavyweight mo- torcycle market, The strong growth in the heavy- ‘weight motorcycle segment in recent years was un- derpinned by strong economic indicators, grow- ing demand for leisure goods and greater dis- posable income amongst Harley-Davidson’s target consumers. They needed to act quickly once again to take advantage of this trend or risk further loss of market share to competitors. Abasic look at-the-supply-and-demand-situ- ation for Harley-Daxidson-suggested-theneed't0 -sitherincrease pricesio.increase profits.and.-better. jiatch.supply.and-demand—or fosinctease.capac~ ostmarket share ‘ibjto.meet.clemand-and-regairr (Figure 11.5). On the other hand, the pragmatists within the organization pointed out the dangers of uncontrolled growth as experienced in the early400 Chapter 11 + Harley-Davidson Motor Company Internal/Proprietary Maintain + Must have cost panty Low | Unique H-D part + Minimal ravestment + Simplifies flow Strategic Value 5 Invest in Process (ale Aa (eg, pain + Customer peresived value High | Prodet performance + Product integrity + Unique capability to H-D ExternaVGeneral Buy Well + Commodity + Low risk to H-D + Require eitcal mass: technology, investment, engineering support, volume Invest in Supplier (eg, castings) + Customer perceived value + Product performance + Product integrity + Unigue to others + Regie tcl mass. technology, investment, engineering suppor, volume Figure 11.4 Investment and outsourcing decisions were prioritized accord ng to the position of each activity in the core competency matrix, 70s under AMF ownership, or the risk of alienating the market with excessively high prices. Dave Storm knew that Harley-Davidson also hhad to consider the risks of expanding and hav- ing the market for heavyweight motorcycles dis- appear as it did in the early 80s, when yearly de- ‘mand for light and heavyweight bikes plummeted from 400,000 units down to 100,000 units in only 18months. This sharp drop in demand had caused Harley-Davidson to reduce its yearly output from 50,000 units down to 28,000 units. They did not ‘want to risk returning to the dark days of survival in a soft market with excess capacity and employee layorts. In 1995, the management team took all these factors into account, and then decided on four pri- mary success criteria against which any decision would be evaluated and later measured: 1. The speed of increasing the volume of 1340ce bikes (higher margin and higher demand motorcycles). 2. Maintaining good labor relations 3. Maintaining focus on the company’s core- competencies and customer needs, as well as fostering optimal engineering- manufacturing relationships as a means to achieve this. 4, Controlling costs (capital, operating expen- diture, overheads, etc) and risk: Harley- Davidson should be able to withstand a “dis- aster scenario” such as a 30% drop in de- mand without loosing excessive amounts of cash ‘The Harley-Davidson team realized that they were no longer the niche player that they had once been. They were now a well-respected growth company (Fig. 113 on p. 398), adored by loyal cus- tomers and Wall Street investors alike. If they con- tinued to grow, they needed to take advantage of the booming demand for their product.Average Price per un 3813210] Increase pies io satch supply and demand, keping production sanstant siz4so) Strategic Choices 401 Demend i increasing over the last few yeas Canent 1995 "7 crease our Poston sping 2 pices constant o 1000 “20000 Annual Quantity Figure 11.5 Conceptual representation of strategic choices, STRATEGIC CHOICES Increase prices The simplest action involved maintaining existing output levels, but raising prices to increase profits and to capture a greater portion of consumer spending surplus for the com- pany. This would provide an easy way to match supply and demand without requiring additional capital investment, or significant changes to the production process. Just how much more would consumers be willing to pay? And what would the long-term implications be? What if the economy slows down in the future? Change the product mix Thenext option was to climinate the legendary Sportster from the prod- ‘uct line-up and using the freed-up capacity for the high-margin Softail and Tourer lines. Proponents of this option pointed out that the Sportster was ‘the company’s lowest margin product (Table 11.4) by far, and that the demand for the bigger bikes Was so great that they would easily be able to sell the increased output, thereby capturing the greater margins associated with these products. Further- more, Harley-Davidson was probably best known for its big bikes. The capital expenditure required to change over the current facilities to exclusive Dollar figures have been modified to enaure content. big-bike production was also minimal, estimated? at $20 million, It required only limited equip- ‘ment investment and plant and equipment setup changes that could be depreciated over 5 years. Continuous improvement and outsourcing ‘The last option that did not require any significant investment in new facility construction (“brick and mortar") was to continuously improve and opti- mize existing facilities to maximize output, while ‘outsourcing most non-core activities. By spending around $10 million per year, this approach would allow the company to increase capacity by 10% annually to a maximum of 150,000 bikes per an- num. Bach modest incremental capital investment could be depreciated over 5 years. They had al- ready embarked upon a more conservative ver- sion of this outsourcing strategy in the previous 1992 capacity expansion. Jeff Pharris in particular, ‘was a firm believer in outsourcing as many non- core activities as possible, and felt that it was the most cost effective and time effective way to in- crease output in the short term. A responsible ap- proach to further outsourcing non-core activities and component manufacturing along with some402 Chapter 11 + Harley-Davidson Motor Company $500. 2.000, $5500 $3500] ‘10,700 50 312.500 ‘i500 ‘Table 11.4 Product Information (figures are modified to ensure confiden- tality) rearrangement of equipment, wasa relatively low risk opportunity to increase output to 150,000 bikes per year. “Brownfields” expansion The first of the ex- pansion alternatives that would require an invest- ment in brick and mortar was a “brownfields” expansion. This would involve the extension of the existing manufacturing facilities at Milwaukee and York, thereby allowing Harley-Davidson to in- crease its capacity over the course of 2 years to a ‘maximum of 200,000 units per annum. It was felt that this level of production would allow Harley- Davidson to meet demand in the medium to long, term, and thereby ensure continued growth and increased profitability. The capital investment re- quired with this option was, however, fairly signif- icant: it would require a $100 million investment spread over the next three years, each depreciated over years. , “Greenfields” expansion The final option that ‘was considered involved building a new plant that ‘would allow Harley-Davidson to achieve a total capacity of 210,000 units per annum after incre- mental ramp-up. This option, the most capital in- tensive of al the alternatives, would require a total layout of $180 million during the next three years, each depreciated over 10 years. It involved many issues that the company was not accustomed to dealing with, Harley-Davidson had no experience with building and commissioning new plants. [fit was to choose this option, where would the new plant be located? Should the company build aflex- ible facility, or should it dedicate the plant to a spe- cific type of bike and reconfigure the existing fa- cilities? 1f production was dedicated to a specific product, would it be better to build the higher- margin big bikes in this new facility, or the Sport- sters? Should the new plant be integrated and perform all machining and assembly activities for 4 product line, or should it focus on a particular function such as machining, engine manufactur ing, or final assembly? Choosing an option Neither Dave nor Jim was sure which of these many choices would be the best for Harley-Davidson in the long run. There were so many uncertainties. All that they could be certain about was that if they did not make a decision shortly, they would run the risk of los- ing further ground to their Japanese competitors and to new American custom bike producers, (Ru- ‘mors said that Polaris, a recreational vehicles com- pany, and a new company, registered as Excelsior- Henderson’, were planning to enter the heavy- ‘weight custom motorcycle market) The manage. ‘ment team had only a day left before they would have to make a recommendation which would be aligned with Harley-Davidson’s strategy and fi- nancially attractive to the Board. The original Excelsior Henderson Motorcycle Company folded in 198 anc the trademark fell into disuse afterits parent went bankrupt in 1992,DISCUSSION QUESTIONS 1, Describe and evaluate Harley's operations strategy (using the framework of Chapter 1). 2, Demand uncertainty is a major factor in strategic capacity decisions. How does Harley-Davidson take uncertainty into ac- ‘count in its planning processes? How does HD's history affect its decision-making pro- cess? Discussion Questions 403 3, What factors should HD consider when ana- lyzing the alternatives? 4. What is your recommendation to Harley- Davidson? Assess your plan’s fit with HD's strategy and assess its financial attractive- ness: complement your qualitative analysis with an NPV analysis. (Use a discount factor of 12%; marginal tax rate is 37%.)