TPMM 04 Operations strategy

Lecture 4: Decision category 2 Capacity Decision category 3 Facilities

Operations strategy 4-1

Strategic capacity decisions

Amount
Assumption: capacity increases are lumpy
Related to process choice

More lumpy for continuous processing

Timing
3 strategies for capacity expansion relative demand:
lead capacity in anticipation of demand lag capacity after observed demand track capacity follows demand
Operations strategy 4-2

Three levels of capacity decisions

Level Time-scale Decisions concern provision of
Buildings and facilities
Process technology MonthsWeeks Aggregate number of people Business site

Span of decisions

Starting point of decision

Strategic capacity decisions

Mediumterm capacity decisions

Years-Months

All parts in the process

Probable future markets

Current capacity config. Market forecasts Physical capacity constraints

Degree of subcontracted resources

WeeksHoursMinutes Individual staff within the operation etc. Site department Current demand Current available

Short-term capacity decisions

Operations strategy

4-3

Product-process matrix
Product Mix Type
1 low-volume, non-standard, one-of-a-kind 1 2 low-volume, many products 3 high-volume, few major products 4 high-volume, standard, commodity

Construction work
Skanska

Job shop

Process Type

2 Flow shop 3 Line flow 4 Continuous flow

Industrial robots
ABB Robotics Atlas Copco Tools

Industrial tools, hand tools Ball bearings

SKF

Dairy products
Arla Foods

Operations strategy

4-4

Product delivery strategy and the customer order decoupling point

CUSTOMER ORDER

PLANT Parts mfg Modules Assembly FGI DC Sweden DC Europe

RMI

RMI = Raw Materials Inventory

FGI = Finished Goods Inventory MATERIAL FLOW

Operations strategy

4-5

Lead: Capacity in anticipation of demand

Volume

Capacity Demand

Time

No need for sub-contracting Always room for volume flexibility

Operations strategy

4-6

Capacity strategy - Lead

Typically used in industries with:
Cheap capacity High profit margins Delivery sensitive customers

Operations strategy

4-7

Lag: Capacity after observed demand

Volume

Demand

Capacity

Time

Use subcontracting for capacity shortages No volume flexibility

Operations strategy

4-8

Capacity strategy - Lag

Typically used in industries with:
Expensive capacity that is bought in large increments Low profit margins Low costs for turning down customers

Operations strategy

4-9

Track: Capacity follows demand

Volume

Capacity

Demand

Time

Alternating overcapacity and subcontracting Periodic volume flexibility

Operations strategy

4-10

Capacity strategy - Track

Typically used in industries with:
Very even demand Simple manufacturing processes
Small increments Fast capacity changes

Low cost for turning down customers or keep them waiting

Operations strategy

4-11

Capacity strategies at variable, but stationary demand

Volume

Demand

Lead
Track Lag

Time

Operations strategy

4-12

Summary - Factors affecting the capacity strategy

Market requirements
Lead times Substitutes

Technology
Cost of capacity Size of capacity increments

Probable future scenarios

Medium and long term forecasts
Operations strategy 4-13

Peerless capacity
Strategic capacity decisions Amount: small or large increments Customer order products Standard products

Timing: lead, lag or track

Operations strategy

4-14

Peerless capacity utilization

Operations strategy

4-15

Peerless capacity
Strategic capacity decisions Amount: small or large increments Customer order products Standard products

Timing: lead, lag or track

Operations strategy

4-16

Strategic facility decisions

Size
Per plant One or more plants

Location
Geographic location

Specialization / focus
One product per plant or many? Product or process focus
Operations strategy 4-17

Plant size
Economies of scale
high volume

Optimal plant size

Considered by many to be appr. 1000 people per plant

Diseconomies of scale
large overhead complex control

Operations strategy

4-18

Factors affecting optimal plant size

Process technology Knowledge intensity in manufacturing Economy of transportation

Operations strategy

4-19

Location factors
1. Proximity to customers and markets

2.
3. 4.

Proximity to raw materials

Proximity to transportation hubs Proximity to the right work force
(a) Research and development
(b) Low cost labor

5.

Legal aspects

trade barriers
local content requirements tax incentives
Operations strategy 4-20

Empirical results: 106 Swedish plants 2007

Three main strategic reasons for plant location
Competence
Proximity to high competence Sociopolitical conditions

Market
Proximity to market Proximity to transportation hubs

Low cost
Proximity to low-cost labour Access to cheap energy Proximity to raw materials
Klla: Feldmann & Olhager (2008)
Operations strategy 4-21

Location models
Proximity matrix
With respect to the importance of different location factors Comparison of alternatives

Optimization model
Global networks
Case study HP (DVD)

Operations strategy

4-22

The location decision:

a balance between qualitative and quantitative factors
Location parameters
Factor costs
Labor costs (by skill level) Cost of capital Cost of materials

Process parameters
Input factor volumes
Labor time (by skill level) Nominal capital employed (plant and equipment) Purchased parts/raw materials Parts (made inhouse) Space requirements (land and buildings)

Productivity

Labor productivity Capital productivity

Other quantitative factors

Distance from relevant markets Potential restructuring and closure costs Freight rates

Other quantitative factors

Volume and weight Delivery time requirements Maintenance requirements/costs

Qualitative factors

Availability of land and infrastructure, rights of ownership Legal safeguards, protection of intellectual property

Qualitative factors

Process complexity

Know-how intensity and sensitivity/patents Environmental requirements 4-23

Regulations, work safety, environmental guidelines, etc Operations strategy

Source: Abele et al. (2008)

Current research on location decisions Three layer model

Country Cost levels Proximity to markets Region Access to required skills and knowledge Condition of infrastructure Supplier base Competition Local Proximity to:
Ports Railways Highways Other companies in the same industry Work force

Operations strategy

4-24

Facility focus

Focus around resources

Process Volume Variety Geography

Focus around markets

Product/ Order-winners market and qualifiers

Source (Hill and Hill, 2009)

Operations strategy

4-25

Facility focus
Product focus
Design
Based on one product or a homogenous product group

Process focus
Design
Based on competence in one or a few processes

Operational problem
Process availability

Operational problem
The flow of production through the plant

Operations strategy

4-26

Facility specialization
Dedicated facility
Designed for one product or a homogenous product group
Driver: economies of scale

Multi-purpose facility
Designed and equipped for managing a wide product range
Driver: flexibility and proximity to market

Operations strategy

4-27

Peerless facilities
Strategic capacity decisions Size: size per plant number of plants Location: geographical position Focus/specialization: product/dedicated process/multi-purpose Customer order products Standard products

Operations strategy

4-28