The Wharton School
University of Pennsylvania
National Bicycle Industrial Co.
At 6 a.m. on November 21, 1986, Makoto Komoto was on his way to work — his first day
on the job as the youngest president in the history of National Bicycle. As his driver wove in and
out of traffic, Komoto reclined in the back seat and tried to compose the speech he would deliver to
National Bicycle’s 450 employees.
“My name is Komoto Makoto, and I’ll be your new president ... Before coming here, I
worked at a joint company in Taiwan for 11 years, and then I was transferred to the Motor Division,
where I worked for the next two years ...”
But Komoto couldn’t concentrate because his thoughts kept returning to the meeting he had
had the previous week with his new boss, Mitsuo Nakai, an executive vice president of the
Matsushita Electric Company. “You must be surprised by this transfer,” Nakai had said to Komoto.
In all honesty, Komoto had been shocked when he learned that he would leave his current position
as director of sales for Matsushita’s Electric Motor Division to lead the Bicycle Division.
“I know nothing about bicycles,” Komoto told Nakai. “In fact, I’ve never thought about
bicycles since I joined Matsushita Electric thirty years ago. When I was told about this, it was
completely out of the blue.”
“That’s exactly why we transferred you to the bicycle division,” Nakai had replied. “We
have so much hope for you precisely because you know nothing about bicycles.”
Nakai had gone on to explain the current situation in the Japanese bicycle industry and the
uphill battle awaiting Komoto at National Bicycle. Bicycles in Japan were bought mainly by
children or by adults as an inexpensive means of transportation, but sales to these customers had
recently plateau-ed. Moreover, exports to the United States were decreasing while inexpensive
bikes from Taiwan and Korea were rushing into the domestic market. Bicycles had become a
commodity sold on the basis of low price. The labor-intensive production process for bicycles
combined with steadily rising labor rates had left the Japanese bicycle industry ill equipped to
compete. The only dimension on which National Bicycle could compete was design of new bikes.
But even if the company came up with a great new design, others could easily copy it. A recent
study by the Ministry of International Trade and Industry had even suggested that the bicycle
industry had become a structural misfit in the highly developed Japanese economy and should be
allowed to move offshore. Thus, the very survival of National Bicycle was being called into
question. Nakai explained that the plan was to leave National Bicycle in the hands of an outsider to
the bicycle industry who could take a fresh look and come up with a way out of their dilemma.
This case was written by Marshall L. Fisher as a basis for class discussion. Preparation of this case was supported in
part by the Wharton U.S—Japan Management Studies Center. Copyright 1993 by Marshall L. Fisher. Written 1993.
Revised 1994 and 1995.
Author’s Note: Information in the case was provided by National Bicycle or obtained from the book Project POS:
The Challenge of a Division, Tokyo, Chuo Koron, 1986 as translated by Kenjiro Matsuda. Quotations are taken from
the book or written by me based on available information and reviewed by National Bicycle. Some of the data have
been disguised.
The History of National Bicycle
After leaving Nakai’s office, Komoto picked up some background information on National
Bicycle. The roots of National Bicycle traced to 1905 when Konosuke Matsushita, the founder of
Matsushita Electric, began working as an apprentice in a bicycle shop at the age of 10. Matsushita
Electric, founded in 1918, introduced an innovative bicycle light in 1923, but it wasn’t until 1952
that National Bicycle Industrial Company (NBI) was born and the first bicycle bearing the National
brand name hit the market. In 1956, National Bicycle began manufacturing and selling racing bikes,
which were adopted by the Japanese National team for the 1972 and 1976 Olympics.
NBI is a wholly owned subsidiary of Matsushita Electric responsible for all bicycle
manufacturing. The Bicycle Division of Matsushita Electric is a separate organization responsible
for all bicycle sales. The two groups are located at the same site, operate essentially as one company
and are referred to collectively as simply National Bicycle. National Bicycle is one of the ‘Big
Three’ of the Japanese bicycle industry that together account for 38% of the market. The remaining
62% is splintered among dozens of small firms.
Makoto Komoto’s First Day on the Job at National Bicycle
Komoto’s reflections were interrupted as his driver turned into the parking lot of National
Bicycle’s gray, two-story facility in Kashiwara, an industrial suburb of Osaka. National Bicycle was
housed in a sprawling main building and two small adjacent buildings used for storage and for new
model design and development (see Exhibit 1).
Komoto was greeted by Managing Director Kootaro Hata, Director of Manufacturing Shooji
Yoshida and a group of office workers. (See Exhibit 2 for a listing of other key managers.) After
making brief remarks to the group, Komoto put on the uniform of National Bicycle and set out to
work.
With Hata and Yoshida as guides, Komoto began a tour of National Bicycle. The three
executives started in the showroom where the three brands they produce and sell were displayed —
transport bikes providing inexpensive transportation for students and others that must travel on a
budget; kids bikes; and the newer sport cycles sold under the Panasonic brand name. (Exhibit 3
reports unit sales by type for the last 4 1/2 years, and Exhibit 4 shows the three types of bikes.)
Komoto was attracted to the sports bikes, but Hata and Yoshida explained the risk these
bicycles carry. Because they use expensive components and exotic materials like titanium for the
frame, sports bikes retail for around 100,000 yen, compared to an average retail price of about
30,000 yen for transport and kids bikes. Moreover, it’s hard to market the same model for a long
time because the company always has to adjust to the latest fashion trend. In this situation, a single
instance of over production of a new model sports bike would be a critical blow to National
Bicycle.
“Let’s go see the factory,” said Komoto. They went outside and walked down a gravel
driveway to the factory entrance. As they walked, Komoto noticed tall racks along the building
filled with long shiny tubes, soon to be cut and welded into bike frames.
The entrance opened onto the portion of the factory devoted to tube cutting, stamping of
forks and welding of the frame (see Exhibit 5 for a factory layout). The building smelled of oil and
reverberated with the rhythmic pounding of stamping presses hammering tubes into bike forks. To
Komoto’s right was the testing room where long-term product evaluations were conducted using
various “torture” machines developed by the company to reproduce the maximum forces at work in
actual riding situations (see Exhibit 6).
“Here’s the factory!” Yoshida proudly proclaimed. “We assemble and produce all the
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bicycles here.”
“Do we make the components here as well?” asked Komoto.
“No,” said Yoshida. “Like everybody in the industry, except for forks and frames, we buy
all our parts from large component manufacturers like Shimano. In fact, all purchased parts and
materials account for 70% of the cost of a bicycle. This makes it hard for our bikes to stand out
among our competitors. So we try to make them unique by their basic design or performance.”
“I see,” observed Komoto. “But this may be something we should think about.”
“But at the volume of components we use, it would never pay to manufacture them on our
own,” objected Yoshida.
“I agree. I’m not saying we should make components on our own. I just thought there might
be some way to make our products more unique.”
Looking at a picture of a bicycle, one can easily visualize the production steps required. The
frame of the bicycle is built from tubes, cut to length and welded together. The front wheel is held
by forks that are stamped from tubes by a large press. The frame and front forks are painted, and
components are attached by hand to complete the bike. Components include the wheels, saddle,
handlebars, pedals and cranks, brakes, gear shifting mechanisms, fenders, chain guard and other
minor accessories.
At the first step, long tubes are fed automatically into a tube-cutting machine and come out
the other side as the short lengths that will comprise a bicycle frame. The frame consists of a front
triangle and a rear triangle that hold the front and rear wheels. The front triangle is built first, from
three large tubes. On many bicycles, small parts called lugs are inserted at the three points where the
frame tubes meet. The lugs help join the tubes and also provide other functions. The head lug in the
front is used to support the forks of the bicycle, the seat lug at the upper rear to hold the seat tube
and the hanger lug at the bottom to hold the cranks. The rear triangle is built separately from smaller
tubes and then attached to the front triangle.
Depending on the type of bike, frames can be welded in either of two alternative processes
—brazing or electric welding. In both processes, the tubes that comprise the frame are clamped in
place and moved between welding stations on a highly automated production line. Brazing
accomplishes a weld through heat generated by flame jets directed at the joint (see Exhibit 7).
As they approached the braze weld line, Komoto remarked that the line had stopped. “Why
isn’t anything happening?”
“They’re shut down for changeover” explained Yoshida.” “It takes almost an hour to change
this line from one model to another. Changeovers in paint and assembly are quicker —25 minutes
for paint and 5 minutes for assembly— but still significant. That’s why we produce bikes in batches
of the same model throughout the factory. We use a batch size of 50, 100, 150, etc., depending on
the popularity of the model. The minimum batch size of 50 is a problem. Since customer needs have
diversified, we really need to produce many kinds of bicycles in small quantities.”
Next they walked to an electric welding station which created a bond between a pair of tubes
by applying an electric current while the tubes were held together. Komoto noticed a computer
terminal next to the electric welding station and asked what it was for.
Yoshida explained: “The electric welder is controlled by a computer that also makes an
immediate check of weld quality. It’s impossible to tell visually whether the weld is good, so we
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have developed a unique computer inspection system to test welds. This system, which is the only
one of its kind in the world, compares the current that was applied over time during the welding
process to a theoretical ideal and rejects the weld if the discrepancy is too great.”
“It looks like we have computers everywhere,” remarked Komoto.
“That’s right,” said Yoshida. “We have some ‘hackers’ who develop their own software.
Over here is a 3-D measurement machine that was developed by our own staff, even its hardware.”
They entered a small room where a worker demonstrated a machine that was used to check
the dimensional accuracy of a single bike frame selected at random from each batch (see Exhibit 8).
He clamped a frame on a measuring table adjacent to a computer terminal displaying a schematic
diagram of the frame. He then took a series of key measurements by moving a sensor sequentially
between points on the bike frame that were indicated by a flashing arrow on the computer terminal.
These measurements were compared against the design standard and any discrepancies noted for
corrective action.
Komoto, Hata and Yoshida left this room and walked to an adjacent area containing the antirust cleaning station that began the painting process. In this process the frame is washed in acid and
water, and then dried to increase rust resistance and adherence of paint. On the second floor, bicycle
frames are provided with colors and a glossy finish using National’s own advanced technologies
(see Exhibit 9). The paint facility is capable of handling multiple colors, although most bicycles are
a single color. In a small room adjacent to the paint operation, workers hand-stencil decorative
designs on bike frames and chain guards.
As they walked through the stenciling area towards the assembly line, Komoto confessed:
“Well, I’m really amazed. To tell you the truth, I thought a bike plant would be kind of low-tech.”
Yoshida laughed. “People are always amazed when they come to see us here. No other plant
in the whole industry can match our use of computers. Of course, with all the equipment and
computer systems, we still rely on human power as a main force to hand-craft quality bikes. You
probably noticed there weren’t many workers in the frame building and painting areas. That’s
because those processes are highly automated. But here in assembly, you’ll see lots of people
because bikes are assembled almost completely by hand.”
They were now looking out over three long parallel assembly lines, each manned by 40
workers at separate stations (see Exhibit 10). Each line comprised really two lines - a bike line
along which the partially assembled bicycles moved, and a parts line running behind the workers
that carried to them, on a conveyer, the parts they would require. As the bikes passed before them,
each worker spent about 30 seconds either removing a part from the belt behind them and attaching
it to the bike or completing an attachment begun by another worker. Assembly accounted for one
third of the labor content and 5% of the cost of a bicycle. After assembly, bikes were automatically
boxed and sent straight to the finished goods warehouse on a conveyer. From the finished goods
warehouse, bikes were shipped to regional warehouses and eventually to retailers.
They went back to the conference room in the factory office and Hata and Yoshida outlined
the distribution system for Komoto. Hata drew a diagram of the supply chain on the blackboard (see
Exhibit 11) and described how it worked. National is provided with the many components used in a
bicycle by suppliers like Shimano (brakes, derailers, and shifting levers), Kusuki Handles
(handlebars), Araya Industries (wheel rims), Asahi Spokes (spokes), and Gojyo National Bicycle
Parts (a subsidiary of National Bicycle operated at a different location supplying wheels). In
addition, numerous Italian firms supply saddles.
Distribution of bicycles from the factory to retailers relies on a type of company called
hansha (for ‘sales company’) that is more-or-less peculiar to Japan. A hansha is a distributor
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that is incorporated as an independent company but which is completely captive to a particular
manufacturer. National Bicycle used ten hansha that had been established by Matsushita Electric
and were run by ex-managers of Matsushita. The hansha carried only National bicycles which they
bought from National Bicycle and resold to retailers in exclusive territories.
When a retailer needs more bicycles, they phone or mail an order to the regional sales office
of their designated hansha. This order is then transmitted via computer network first to the main
office of the hansha, then to National Bicycle’s sales office and eventually to the production
planning department of the factory. Some order processing steps are performed at each stage, so it
can easily take a week from the time a retailer places an order until it reaches the factory. If the
bicycles to fill the order are in inventory (the ten hansha, the factory and retailers each carry about
one month’s worth of finished goods inventory), they are shipped via truck, following the reverse
path, from National Bicycle via the hansha to the retailer. Transportation from the factory to the
retailer requires 7 to 10 days.
The planning for sports cycles had some unique features, Hata explained. Sports bikes had
become something of a fashion item, with annual new model introductions that drove production
planning and inventory management. The retail sales season began in early spring so retailers liked
to have new models on display by March 1. In preparation for this, National Bicycle began planning
its new model assortment the preceding July. Samples were built and exhibited in September and
designs finalized in late November or early December.
National worked hard at predicting which models would be popular that year so that the
right amount of each model could be produced. For example, they based their color assortment on
what colors of automobiles were currently selling well. However, sales were affected by so many
random events that accurate prediction was impossible. Weather was a common source of
unpredictability. The last Friday, Saturday and Sunday in March is always a high volume sales
period because it’s a weekend preceding the start of warm weather. If this period has good weather,
that has a big positive impact on sales.
Because of the unpredictability of sales, the most popular models each year were frequently
out of stock, while excess supplies accumulated of less popular models. When the season ended in
early July, everyone in the supply chain was usually left with unsold bicycles which were marked
down in price, sometimes several times, until they eventually sold.
Yoshida gave Komoto some cost data he had assembled for a typical sports cycle selling for
100,000 yen (See Exhibit 12). National charges a factory price to the hansha that is about 70% of
the suggested retail price for a bicycle. This leaves a margin of 30% to cover the cost and profit of
the retailer and hansha. National’s profit margin (factory price minus total cost) was 5% of factory
price for sport cycles and 2% of factory price for transport and kids bicycles.
After a long but satisfying day, Komoto walked to his car and headed for home. Although he
knew some radical change would be needed to avoid stagnation or extinction, Komoto was
impressed by the many skilled engineers and workers he had met that day and felt sure there was a
way to draw on these skills to gain a competitive advantage. He passed someone riding a bicycle in
the night. His driver told him that more and more people are riding bicycles as a sport these days,
since health and fitness had become a high priority.
Back home Komoto began to review some reports on the bicycle industry he had brought
from the office. One report, “An Overview of the Bicycle Industry,” prepared by the Association of
the Bicycle Industry of Japan showed that sales of bicycles in Japan had been basically flat for some
time (see Exhibit 13). Moreover, the sales of domestic producers were being eroded by an influx of
inexpensive imports. Komoto was also intrigued by some data in this report on the bicycle industry
in the United States. Unlike Japan, the U.S. market had recently enjoyed a healthy sales growth (see
Exhibit 14). This growth was fueled by the popularity of high-tech sport cycles, which now
accounted for more than half of U.S. sales. By comparison, sports cycles comprised only 15% of the
Japanese market.
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The popularity of sports cycles in the U.S. was driven by the fitness boom. This movement
began with jogging and aerobics, but as scientific data and actual experience began to show that
these sports are hard on joints, attention shifted more and more to bicycles. Given that booms like
jogging and aerobics had hit Japan a few years after they had the United States, Komoto thought it
was only a matter of time until sports cycles took off in Japan. Komoto also read of a trend in the
United States for young cyclists to assemble their own bikes from purchased components. This
allowed them to tailor their bicycles to individual size and taste.
Sports Cycles
The next day, at the company’s morning management meeting, Komoto shared what he had
learned. “As I see the data, domestic bike sales have been around six million for several years and
show no promise of increasing. However, even if we can’t increase unit sales, an increase in
average price would increase total monetary sales. From this I conclude we should emphasize sport
cycles.”
“But sports cycles are extremely risky,” objected Hata. “They are expensive and their
popularity is at the mercy of customer taste, which makes it hard to predict their demand. This year
is typical. At the end of the season, 20% of our production was left in inventory. Half had to be
marked down 10-15%, and the other half still hasn’t sold, even with a 50% price cut.
“Yes,” said Komoto. “My predecessor, Mr. Ryuichi Hattori made much the same point to
me when he left office.”
Komoto recalled Hattori telling him: “Mr. Komoto, sports cycles are a double-edged sword.
With their high price, the company can make two or three times as much by selling just one bike.
But on the other hand, their demand is hard to predict and once stock begins to pile up, it can do two
or three times as much damage as other merchandise. What’s more, this problem is only going to
get worse. The way to make money on sports cycles is to emphasize their fashion dimension by
using new colors and the latest technology. But doing that increases unpredictability and the risk of
overproduction.”
The Retailer’s View
Later that week, Komoto decided to better understand the bicycle market. He had his driver
take him around Osaka until he spotted a bicycle shop that carried National brands. Stopping the
car, he went inside and started to introduce himself to the owner.
“Hello. I’m from the National Bike. ..”
But the owner quickly interrupted. “We already have a representative from the company,”
he said. “Not that it matters. Bikes don’t sell well these days and we don’t get any customers. You
may not know it, but we are having a hard time selling a single bike. Hey! Tell your boss to come
up with some big-time bikes quickly or I’m out of business.”
Komoto revealed that he was the new president of National Bicycle and promised that he
was working on a plan to satisfy the retailer’s request for some “big-time bikes.”
As Komoto left the store, he thought about the retailer’s plight. Komoto’s new policy to
emphasize sports cycles could definitely help, but the question remained: what types of sports
cycles to produce, and how? One thing was clear: he had to somehow avoid risky anticipatory
production. Komoto wandered into a department store and was immediately confronted by a large
poster advertising fashion clothes with the words: “I don’t wanna be like others: Special clothes just
for you.” To Komoto, this phrase was a revelation.
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That evening, Komoto reflected on the experiences he had had that day. Fashion clothing
was one way that people expressed themselves. That is why they are willing to pay high prices for
individualized items. Komoto’s thoughts wandered to the golf match he had last Sunday. His
golfing partner had proudly displayed a custom-made driver designed just for him based on his
weight, height, grip and swing. Shouldn’t the same principle hold for sport cycles? After all, sports
cycles are pretty expensive and no one would like to see someone else riding the exact same cycle.
But how can you individualize sport cycles?
Komoto’s Bold Proposal
By the next morning, when he walked into the daily management meeting, Komoto felt he
had found the answer. “I have a new idea,” he announced. “An order system. We’ll make sport
cycles as we get customer orders. We’ll measure their sizes and then make the bike to fit them, just
like tailored suits. This way we can individualize each product. Customers should be willing to pay
a high price, and best of all, there’s absolutely no risk of overproduction.”
Everyone thought this idea was total nonsense. Yoshida was the first to speak. “But we
already make bikes to order. Most of them are for racing competitors who give us detailed
specifications of parts, as well as their weight and height. We assign a special team - two for the
frame and one for painting. Even with this dedicated team of three skilled workers, it still takes two
to three months to complete a customer order. The operation is separate from the main production
line of the plant, and we actually lose money on custom-made cycles.”
Komoto was not persuaded. “I’m thinking of a new custom-made system that makes money.
This one utilizes computers. When I first saw the plant, I was surprised to find such extensive use of
computers here. And I was wondering if there was any way to use them more effectively. This
custom-made system will give us an outlet for our computer skills.”
Yoshida wasn’t buying it. “I don’t know much about computers, but I don’t see how a
computer can make a custom bike. Made-to-order production relies on skilled workers at so many
points that computers will not help.”
Komoto suggested that they were opposing his plan just because it was radically different
and they could not envision how it would work. He also insisted that they launch the new system by
June 1, 1987, in order to catch the triathlon season that peaked in July. Nishida objected that this
would disrupt the factory which was fully occupied making current models. Komoto brushed
Nishida aside with the suggestion that they could build a new plant for custom production using the
small storage building next to the main plant. He was even willing to invest 300 million yen in this
project, twice the company’s usual annual investment.
In essence, Komoto was proposing putting in place a radical new custom production system
and building a new plant, all in the space of six months. By now all of the staff were in total shock
and continued to raise numerous objections to Komoto’s plan. But eventually, Hata and Yoshida
came to Komoto’s defense. They said that, while they had some doubts, they were willing to try his
idea since they clearly needed to do something different to survive the current industry slump.
Moreover, if his plan should succeed, it could be a great thing.
The meeting ended and all headed off to pursue Komoto’ s concept, albeit with considerable
misgivings about what they were being told to do. For his part, Komoto believed that people needed
a vision to inspire them and he hoped, despite the rocky start, that the new order system would
prove to be that vision.
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March 1 – “This Just Might Work”
Over the next three months, National Bicycle became a battleground as everyone worked
feverishly to develop the custom production system. Despite the hectic pace, or perhaps because of
it, a contagious enthusiasm swept through the staff as they pursued Komoto’s plan.
On March 1, Komoto was headed to a meeting of key staff to review progress on the project
when he saw Yoshida coming towards him. The excited expression on Yoshida’s face lifted
Komoto’s spirits and for the first time since the project began, he thought, “This just might work.”
When the meeting began, the first to report was Murakami, who proudly displayed samples
of the colors and designs his group had developed. “These samples were all done by first-class
skilled workers,” Murakami said. “The base coat was applied by a painting robot, but the finishing
coats and more intricate designs were done by skilled painters with decades of experience. Their
work should satisfy the most quality sensitive customers. At first we had aimed at 30 patterns, but
everyone got so involved in the project that we ended up with 70 choices of one, two or three colors
in various designs. It’s very unlikely that a customer will see another bicycle with the same color
design. We recommend that retailers who want to participate in our custom-bike program be
required to buy color samples, consisting of painted cut tubes in each of the 70 available patterns, at
a total cost of 6,000 yen.”
The big news came from Otsuka and Morita, who had been assigned the job of designing a
system for determining the ideal frame dimensions for a given customer. They proudly displayed
their “secret weapon,” a fitting scale (see Exhibit 15) that could be adjusted to create the
dimensional equivalent of every possible frame geometry available under the custom bike program.
The adjustable dimensions included: (1) three choices for width of the handle bars, (2) the length of
the seat tube, adjustable in one centimeter increments from 46 to 60 centimeters, (3) the horizontal
distance from the seat to the handle bars, and (4) the height of the handle bars. The optimal frame
dimensions would be determined by a trial-and-error process guided by the retailer. A customer
would try out a possible frame geometry by getting on the measuring stand as though it were a bike
and assuming the correct riding position for the type of bike they were buying. The quality of fit
would be judged both by how it felt to the customer and how it looked to the expert eye of the
retailer. Once the right dimensions were determined, the retail store would transmit them to
National Bicycle together with the customer’s choice of colors and components. The fitting scale
would be produced by National Bicycle and sold to each retail store participating in the custom bike
program for 14,000 yen.
The discussion then turned to a report by Takeshige on the expected demand for custom
bikes. Takeshige shared with the group some data that had been collected by their Osaka area
hansha from major retailers showing sales at the store level by month for 1984 and 1985 as well as
daily sales for a portion of 1985 (see Exhibits 16 and 17). Not surprisingly, more bikes were sold
during warm weather months and on weekends. The survey of retailers also found that typically
about 15% of the sport cycles that had been ordered by a retailer in a given year were left in
inventory at the end of the season and needed to be marked down in price. Markdowns varied
greatly but averaged about 25%.
Takeshige was uncertain how well custom bikes would sell since this was a completely new
concept. He had talked to some retailers who indicated that about 15% of their customers were hard
to fit and would be attracted to the custom frames offered under the order system. Other customers
might like the wider color selection. Racers and other serious riders who were already buying
custom bikes would be another target market. Takeshige also hoped that the custom capability
would attract some buyers to the Panasonic brand that otherwise would have bought a competitor’s
sports bike. All in all, he felt selling 250 custom cycles per week during the summer peak season
was a reasonable goal.
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Komoto pointed out that it was hard to talk about demand without determining how custom
bikes should be priced. They had been working under the assumption that custom bikes would be
sport bike designs from National Bicycle’s standard line offered in a customized form through
tailored frame dimensions and a wider choice of colors and components. They also felt that
embossing the customer’s name on the bike would add a nice touch. Komoto proposed, somewhat
arbitrarily, to sell custom bikes at the price of the standard bike plus a customization fee equal to
7,000 yen for one color, 10,000 for two colors and 15,000 for three colors. Yoshida thought this was
too low to cover the extra cost of customization and others agreed. However, after much discussion,
it was decided to try Komoto’s price schedule, at least initially.
Takeshige reminded everyone that National sold nearly 100 models of Panasonic sport
cycles ranging in price from 46,000 yen to a carbon road model retailing for 750,000 yen. It would
be unwieldy to offer customization for all models. He felt they should set a price threshold and only
offer customization for bikes priced above the threshold.
Komoto took charge at this point. “Clearly the more models we offer customization on, the
more demand we’ll get. If our goal is to sell 250 custom bikes a week during the peak season, why
don’t we adjust our price threshold dynamically until we hit that goal. Let’s begin by offering
customization on all models selling for more than 100,000 yen. Then we can lower that threshold a
few months later if we’re not selling 250 bikes per week.”
Takeshige was working on a brochure to distribute to bike shops advertising the custom
capability. He needed an official name for the new system and suggested Panasonic Order System
(POS). Komoto liked that option. By choosing the name POS, the company would make it clear that
it’s not offering a new product, but a new system for customers to buy the product.
Now Yoshida and Nishida proudly unrolled a blueprint of the POS factory (see Exhibit 18)
and explained how the process would work. POS production would begin when a customer order
was received at the POS factory. In the order entry section on the second floor, clerks would use
computer terminals to enter the information defining a customer’s order into the main computer
which would develop and print a diagram of the bicycle (see Exhibit 19) and a bar coded label that
would identify the bike during production. The computer would also drive a machine that cut
painting stencils from rolls of thin plastic sheets. The order entry process would take one day; for
example, orders received at the POS factory anytime on Monday would have been entered into the
computer by the start of Tuesday.
Next, parts would be picked from an inventory maintained in the second floor stockroom
(see Exhibit 20 for a list of the main parts and raw materials for a POS bicycle). Suppliers would
replenish parts using the same system that had been developed for mass production. A
replenishment order for each part type would be issued on the 1st and 15th of every month. Ordered
parts would arrive 40 days later, although the order could be revised up to 25 days before delivery.
The amount ordered was based on a forecast of future usage for the part, developed from historical
demand patterns, as well as the desire to maintain a safety stock for each part equal to two weeks of
demand. Suppliers were always coming out with new versions of parts, and it was important in the
high-tech sports cycle segment to employ the latest, most advanced parts. As a result, National
Bicycle tried to keep parts inventories low to avoid the cost of obsolescence when a part design
changed every couple of years. In the event of a parts stock-out, a supplier could usually make an
emergency parts delivery in one to two weeks. While the service level for each individual part was
high (over the last two years, 99.4% of parts requirements had been supplied out of stock), there
were so many different types of parts used in a bicycle that some production orders were delayed
each month because of parts shortages.
Once the required parts were assembled, they were sent with the identifying bar code label
to the first floor of the factory for production. The first stage in the process was frame production
9
involving five steps: (1) tube cutting, (2) front triangle tack and permanent welding, (3) rear triangle
attachment, (4) seat post slitting and reaming and (5) automatic inspection of frame measurements.
Frame building would employ some ingenious equipment that had been designed by Nishida’s
group. They had managed to stay within Komoto’s 300 million yen investment budget by
resurrecting some old frame-building equipment that had been slated to be scraped and connecting
it via cables to the main computer, which could then automatically adjust the equipment for each
type of bike. For example, after a worker had cut tubes to the right length, he would fabricate the
frame by lightly welding the tubes that comprise the frame using a machine that clamps the tubes in
the right position. This machine would be directly connected to the main computer and adjust to the
correct position for a particular frame after the operator had scanned the bar code associated with
that bicycle. (They had developed a working prototype of this machine and found that a mere 20
seconds were required to adjust for a particular frame.) The operator would then remove what was
now a lightly welded bike frame and re-clamp it into another device that automatically performed
the required permanent welds for the frame.
After this, the rear triangle (which would be pre-assembled and delivered by an outside
supplier) would be automatically welded to the frame and the seat post slit and reamed. Finally, the
bicycle frame would be measured using a more fully automated adaptation of the 3-D measurement
device used in the mass production plant. The dimensions would be compared by the computer to
the required specifications and the frame rejected if the bicycle was not within tolerances. If the
frame was accepted, the results of this inspection would be saved on the computer to be available in
the event the customer challenged the correctness of the bike’s dimensions.
At this point the frame would be complete and ready for painting. After washing the frame
in acid and water to remove grease, a base coat would be applied automatically by a robot — the
first fully automated robot to be used in bicycle painting. The rest of the painting, including
stenciling of the owner’s name, would be performed by hand.
Following painting, the bicycle would be assembled on stands with one operator assembling
an entire bike. After this, the operator would put the bicycle into a box. Once a computer generated
shipping label was affixed, the box was ready for shipping.
Yoshida had selected 23 of the best workers from the mass-production factory to work in the
new POS factory. Each of these workers would specialize in one of the three main production steps,
frame building, painting or assembly, although since they were highly skilled, everyone expected
that each worker would quickly learn to do a variety of tasks. They had already experimented by
having some of these workers perform the various production operations under the conditions they
would face in the POS factory. Based on these experiments, they estimated the time to perform each
operation and developed a staffing plan (see Exhibit 21). They expected the labor content to set up
and perform all steps for a POS bicycle to be about three hours, or three times higher than the same
bicycle produced under mass production. Yoshida felt there was a good chance labor content would
eventually decrease to twice the mass production level as workers became more familiar with the
POS environment.
The normal work week was five days and each work day was 480 minutes reduced by 80
minutes for morning and afternoon gatherings, floor cleaning, intermission, rest time, facility
inspection, maintenance and training. The current plan was to work a single shift since second shift
production carried a 60% labor cost surcharge. Working overtime added 50% to labor cost during
the week and 70% during weekends.
10
Lead Time Decision
After Yoshida and Nishida finished their presentation, Komoto thanked them and said,
“Now I want to take us back to the customer. Specifically, what lead time should we promise to the
customer from the time he places an order in a retail shop until we deliver his bicycle?”
Yoshida responded, “Well, it currently takes us two to three months to build a custom
bicycle, but with our new dedicated POS factory, I bet we could cut that time significantly.”
Takeshige observed, “It can take as long as ten days just to get an order from the retail shop
through the hansha and into the factory. And then we still have to produce and deliver the bicycle.
I’ve been looking into the delivery side and I think I can speed up our usual process. We’ll deliver
the bicycle to the hansha, who will transport it to the retail outlet who will deliver it to the
customer. It’s a little bit complicated, but even using trucks I think we can accomplish delivery
from the factory to the customer in two days. We could cut this time to one day if we used air
freight, but it would cost us an extra 5,700 yen. The hansha and the retail outlets are even willing to
deliver on Saturday and Sunday, although, as you know, all of our hansha are closed on
Thursdays.”
Komoto suggested that there must be some way to shorten the ten-day order processing
time. “What about using fax?” asked Komoto. “I know you can buy a decent fax machine for
200,000 yen and I think they lease for about 4,000 yen per month.”
Takeshige argued out that requiring a retailer to buy or lease a fax machine, as well as spend
20,000 yen for the fitting scale and color samples, might make the initial investment so high that no
retailer would be willing to participate in the program. But Komoto felt that surely some retailers
would be willing to make this investment. Moreover, requiring the retailers to make a financial
investment in order to participate was not a bad idea, since then they would be more committed to
the program.
“If we’re going to use a fax, I don’t see why we can’t deliver in one week,” said Hata.
“After all, there is only three hours labor content in a POS cycle. And let’s be frank. We don’t know
whether customers will accept our concept or not. Right now, a customer can walk into a retailer
and get a new bike immediately. To compete with that, we’ve got to deliver absolutely as quickly as
possible.”
The time to end the meeting had arrived so they resolved to reconvene the next day to
finalize the choice of lead time. As Komoto left the meeting, he was gratified by the incredible
progress they had made since his first day at National Bicycle. But clearly, getting the lead time
right was critical. Speed of delivery did seem crucial to customer acceptance, but if they promised a
short lead time and then could not meet it consistently, the negative publicity could kill the entire
project.
11
Exhibit 1 Facility Plan of National Bicycle
Finished
Goods
Warehouse
Factory
Sales
Office
Factory
Office
Storage
New Product
Design and Development
Exhibit 2 Management of National Bicycle
Makoto Komoto
—
President
Kootaro Hata
—
Managing Director
Shooji Yoshida
—
Director of Manufacturing
Noboru Takeshige
—
Director of Sales
Shigeru Morita
—
Section Manager, Merchandise Planning
Ken’ichi Murakami
—
Section Manager, Design
Shotaro Nishida
—
Section Manager, Production Technology
Takao Ono
—
Section Manager, Manufacturing
Hiroshi Iwamoto
—
Section Manager, Quality Control
Hideki Otsuka
—
Quality Control
Exhibit 3 National Bicycle Unit Sales by Year and Type of Bicycle
82
83
84
85
86*
Transport
368,445
401,173
391,781
293,123
208,449
Kids
102,721
110,919
115,137
115,864
57,018
Sports
81,077
90,787
81,919
64,546
15,128
Total
552,243
602,879
588,837
473,533
280,595
Note: The fiscal year runs from April 1 to March 30. For example, the 1982 fiscal year is
April 1, 1982 - March 30, 1983.
*First half of 1986 fiscal year only (April 1, 1986 - September 30, 1986)
Exhibit 4 The Products of National Bicycle
Transport
Sport
Kids
Exhibit S Factory Layout
First Floor
Component Inventory
Surface
3—D
Measuring
Cleaning
Electric
Frame
Welding
Braze
Frame
Welding
Plant
Engi—
neering
Offices
Tube Cutting
Fork and
Rear
Triangle
Production
Testing
Entrance
Second Floor
3 Assembly Lines
Stenciling
Painting
To Finished
Goods
Warehouse
Exhibit 6 Bicycle Testing
Exhibit 7 Braze Welding Frame Line
Exhibit 8 3-D Automatic Measurement System
Exhibit 9 The Painting Process
Exhibit 10 A Bicycle Assembly Line
Exhibit 11 National Bicycle Supply Chain
50 suppliers of
components and tubing
(inventory of components and tubing)
National Bicycle Factory
W
0
W
W
0
W
0
0
W
W
O
W
O
W
O
(1 month finished goods
inventory)
W
o
W
10 Hansha
operating 32
regional warehouses
(1 month inventory)
9000 retailers
(1 month inventory)
Exhibit 12 Cost Structure for a Typical Sports Cycle
(all financials are in yen)
National Bicycle Costs
Purchased Parts and Materials
46550
Labor
9975
Factory Overhead
2500
Transportation
1995
Inventory carrying for Finished Goods,
Parts and Materials*
1160
Selling and Administrative Expense**
4320
Total Cost
Factory Price
Retail Price
66500
70000
100000
*
National estimated annual inventory carrying cost at 18% of value.
**
Selling and Administrative Expense includes an allowance, allocated across all sports
cycles, of the average amount lost each year from unsold bikes that must be disposed of at
a loss.
Exhibit 13 Trends in Japanese Bicycle Demand (1965 —86)
(1000s of bicycles)
10000
total production
9000
8000
7000
6000
5000
domestic demand
4000
3000
exports
2000
1000
65 66 67 68 69 70 71 72 73
74 75 76 77 78 79 80 81 82 83 84 85 86
Year
Source:
M Overview of the Bicycle Industry , Association of the Bicycle Industry
of Japan, November 1986.
Note: Total production = domestic demand + exports — imports. Imports not
shown. Data for 1986 based on projections.
Exhibit 14 Trends in U.S. Bicycle Demand (1965 —86)
(1000s of bicycles)
15000
14000
total demand
13000
12000
11000
10000
9000
8000
7000
us. made
6000
5000
4000
3000
imports
2000
1000
65 66
67 68 69 70 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86
Year
Source: An Overview of the Bicycle Industry , Association of the Bicycle Industry
of Japan, November 1986.
Note: Total demand = U.S. Made + Imports. Data for 1986 based on projections.
Exhibit 15 Measuring Stand for Custom Bicycle
Exhibit 16 Monthly Sport Cycle Sales for a Group of Osaka Retailers
January
February
March
April
May
June
July
August
September
October
November
December
1984
1985
456
528
1311
1488
1400
1517
1697
1173
1318
959
515
609
523
555
1317
1736
1708
1514
1669
1133
1153
573
548
524
Exhibit 17 Daily Sales of Sport Cycles for a Group of Osaka Retailers
Week of
April1,1985
8
15
22
29
May 6
13
20
27
June3
10
17
24
July 1
8
15
22
Totals
Mon Tues Wed Thur
Fri
Sat
41
44
47
47
56
50
38
50
36
57
56
45
55
57
51
42
42
68
48
52
57
63
44
72
67
55
46
57
56
59
69
66
43
47
45
44
43
49
38
26
51
45
34
48
43
26
31
38
14
41
58
26
45
14
16
30
37
35
34
40
22
23
41
26
39
35
33
40
16
39
43
36
19
19
22
12
36
32
27
44
27
36
31
17
22
108
90
111
103
116
101
97
118
111
115
120
107
127
118
113
113
112
814
969
672
536
478
1880
Sun
Totals
60 364
77
387
49
359
60
368
51
371
51
328
53
368
66
392
61
373
76
396
69
395
67
386
74
399
76
433
67
377
66
355
88
409
1111
6460
Exhibit 18 Panasonic Order System (POS) Factory
First Floor
Exit
Entrance
front
triangle
tube
cutting
Acid
Wash
Robot
Painting
Hand
Painting
and
Stenciling
Package for Shipment
tacy
and
permanent
weld
Assembly
rear
triangle
attachment
seat
]3OSt
slit/ream
automatic
frame
measurement
Second Floor
Order
Entry
Computer
Driven
Stencil
Maker
Parts
Inventory
Stocyroom
EXl llblt 19 Blue Print for
a Custom Bicycle
Exhibit 20 Parts Variety for POS Bicycles
Number of part types
Parts Description Road
Bikes
Frame
Tubing
All Terrain Total
Bikes
4
2
6
5
4
5
4
i
3
2
2
6
7
7
6
Brake levers
Front brake
Rear brake
Chain
Crank set
Pedals
Handle bar stem
Handle post
Front derailleur
Rear derailleur
Shift levers
Saddle
Seat post
3
4
4
7
14
5
16
25
4
4
5
5
5
6
5
5
4
12
6
3
11
6
6
6
5
5
9
9
9
11
26
11
19
36
10
10
11
io
io
Wheel
Rim
Tire
Spoke
Hub
10
6
16
Headlug
Hangerlug
Seatlug
Rear triangle
Major differences between parts
tensile strength, hardness, material,
manufacturer
shape, size, angle
shape, size, angle
shape, size, angle
tensile strength, hardness, material
shape, grade, mechanism
shape, grade, application
cantilever or calliper brake, grade
shape, grade, surface finish
shape, grade, crank length
shape, grade, application
shape, grade, bar width
shape, grade, stem size, width
shape, grade
shape, grade, 7 or 8 gears
shape, grade
shape, grade, application
shape, grade
pattern, application
size
shape, grade, application
Exhibit 21 Estimated Operation Times and Staffing Plan
Operation
Number of
Workers Assigned
Operation Time
in Minutes
Frame production
1.
Cut tubes and weld small
frame parts to the tubes
1
8
Tack weld front triangle,
then permanently weld
1
8
Attach rear triangle to front
triangle
1
8
4.
Slit and ream seat tube
1
6
5.
Check frame measurements
1
7
2.
3.
Painting
1.
Acid wash
1
32*
2.
Apply base paint coat by robot
1
7 + 40 mins
dry time. No
workers are
required for
drying.
3.
Apply 1-3 finish coats
4**
16 mins/coat
+ 40 mins/coat
dry time. No
workers are
required for
drying
4.
Stencil name
1
8
11**
88
Assembly and boxing
*
Frames are acid-washed in a tank in batches of 4. Total time for a batch of 4 is 32 minutes.
**
There are 4 paint booths for hand finish coat painting and 11 assembly stands so 4 finish
coat painters and 11 assemblers can all work in parallel on different bikes.