Operations Strategy

Session 5
Dr. Partha P. Datta Operations Management Group E-mail: ppdatta@iimcal.ac.in

Capacity Expansion under Uncertainty: Calculating Safety Capacity

Required capacity = Average Demand + z * Standard Deviation of Demand

For example:

Where z = the number of standard deviations from the mean implied by the chosen service level Average demand = 2,525 units Standard deviation of demand = 680 units Desired service level = 90% Required capacity = 2,525 + (1.28 * 680) = 3,395 units
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Therefore, z = 1.28

Capacity Timing and Adjustment Guidelines for speed and flexibility

1. Streamline project management
Work in parallel + do activities independent of timing and sizing in advance Use design/build partners Eliminate activities and reduce activity times and rework Use standard designs or re-use previous designs

2. Plan for Uncertainty

1. Modularize capacity and construction 2. Increase adjustment flexibility Reduce chunks, investment (commitment) or increase resale 3. Adapt and postpone capacity Keep initial scope simple Include options for adjustment later Use reactive capacity

Example of modular capacity and construction Pharmadule

Who is Pharmadule?
Leading module manufacturer for pharma industry Started in 1986 Swedish company Provide modules to multiple industries

Lilly & Pharmadule

Lillys exclusive provider of modular construction First factory in 1991 Egypt insulin facility world record time (12 months!)
Ireland

CAPACITY TYPES, FLEXIBILITY & CONSOLIDATION

Different types of capacity

Specialist or Generalist? Degree of flexibility
Examples?

Labour or capital? Degree of automation

General Purpose Degree of flexibility Specialized Manual Degree of Automation Fully Automated

Types & Alignment

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A Flexible Asset strategy should strive for cost reduction e.g. limit scope or speed up changeovers
Flexible with Automation
Capital Investment (CapEx $) Scope flexibility Scale flexibility

What about robustness? Tailoring flexibility?

Adaptable Dedicated
0

Days

Months

Quarters

Agility flexibility or product changeover time

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Obstacles in achieving flexibility

Expensive and difficult to value Abuse of flexible capacity
Potential not realised Wrong conception to be correlated with information integration Wrong conception that agility and scope flexibility are correlated with scale People count more than machines

Complexity, competition and perception

Product design strategies for flexibility and mass customization

Standard or universal design Component commonality and platform sharing Modular design Diagnosing complexity using the design structure matrix Components
A B C D

Dependent components

B and D: sequentially dependent on A B and C: independent

C and D: integrated
D
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Diagnosing complexity using the design structure matrix

Components
A . . . A . . . M N . P Q . . . . U V . Z MN . PQ . . . . U V. .Z A . . . M N . P Q . . . . U V . Z A . . . MN . PQ . . . . U V. .Z A . . . M N . P Q . . . . U V . Z A . . . MN . PQ . . . . U V. .Z

Dependent components

Modular Design

Sequential Design

Integral Design

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Process design strategies for flexibility

D1 Flexible KF D2

Flexible Ks Dedicated K2

D1

D2

D1 Transship D2
Common K1 Flexible KF

D1

D2

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Capacity Flexibility Value Drivers

Scale Risk Pooling Allocation Flexibility & Information Updating
( A switching Option)

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AutoCo
Introducing two car models Afour and Bassat sharing a platform Afour commands higher price and unit contribution margin of $2000 versus Bassats $1000 Capacity cost per unit of Afour dedicated line is $800, for Bassat it is $700 A flexible line costs $900/annual capacity

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How to decide the tailored optimised flexible capacity?

Scenario 1 2 3 4 5 6 7 8 9 Demand Forecast Afour Bassat Probability 70 150 5% 70 200 10% 70 250 15% 100 150 10% 100 200 20% 100 250 10% 130 150 15% 130 200 10% 130 250 5%
Financial Data Contribution margin 1 Contribution margin 2 Dedicated Afour capacity cost/unit Dedicated Bassat capacity cost/unit Flexible capacity cost/unit

$2,000 $1,000 $800 $700 $900

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The cost breakdown of a shirt made in various countries and sold in France
France 15.55 14.33 11.43 11.43 11.13 10.82 10.37 9.60 0 2 4 8 6 10 Cost in euros 12 14 16 Labour Transport Fabric Supplies Customs duties

Portugal
Turkey Thailand Morocco Romania China Myanmar

Source: Slack, N., Chambers, S. and Johnston, R. (2007) Operations Management, 5th edn.

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Factors Affecting Location Decisions of Capacity

Proximity to source of supply:
Reduce transportation costs of perishable or bulky raw materials

Proximity to customers:
High population areas, close to JIT partners

Proximity to labor:
Local wage rates, attitude toward unions, availability of special skills (silicon valley)
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More Location Factors

Community considerations:
Local communitys attitude toward the facility (prisons, utility plants, etc.)

Site considerations:
Local zoning & taxes, access to utilities, etc.

Quality-of-life issues:
Climate, cultural attractions, commuting time, etc.

Other considerations:
Options for future expansion, local competition, etc.
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Globalization Should Firm Go Global?

Globalization is the process of locating facilities around the world Potential advantages:
Inside track to foreign markets, avoid trade barriers, gain access to cheaper labor

Potential disadvantages:
Political risks may increase, loss of control of proprietary technology, local infrastructure (roads & utilities) may be inadequate, high inflation

Other issues to consider:

Language barriers, different laws & regulations, different business cultures
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The Center of Gravity Approach

This approach requires that the analyst find the center of gravity of the geographic area being considered
Computing the Center of Gravity for Matrix Manufacturing
Coordinates Load

Location
Cleveland Columbus Cincinnati Dayton Total

(X,Y) (11,22) (10,7) (4,1) (3,6)

(li) 15 10 12 4 41

lixi 165 165 165 165 325

liyi 330 70 12 24 436

Computing the Center of Gravity for Matrix Manufacturing liXi 325 7.9 ; Yc.g. liYi 436 10.6 Xc.g. li 41 li 41
Is there another possible warehouse location closer to the C.G. that should be considered?? 19 Why?

Capacity Location: Spatial analysis US product distribution for a major appliance manufacturer

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Capacity Location: Network analysis Capacity timing and location interact

B A

http://nationalatlas.gov/

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Capacity Location: Strategic analysis Strategic role of a foreign location

Broad & high

Source plant
Produces at low cost but with same ability as best plant in the network Authority over procurement, production planning, logistics, process & product customization

Lead plant
Global hub for product and process knowledge and innovation. Full authority over all activities. Taps into local skills and knowledge to initiate company -wide innovation.

Contributor plant
Serves specific regional market but competes with other plants in network for new processes or products. Authority over product and process development as well as supplier choice.

What is the scope of its current activities and competencies?

Offshore plant
Produces specific items at low cost and exports for further work or for sale. Minimal authority and investment.

Outpost plant
Primary role is to collect information from advanced suppliers, competitors, research labs, or customers. Secondary role as offshore or server.

Server plant
Serves specific regional market to overcome tariffs, taxes, logistics, or foreign -exchange risk. Limited authority to make minor modifications to fit local conditions.

Narrow & low Access to low -cost production Access to skills and knowledge Access to market

What is the primary strategic reason for the location?

22-Apr, 73-88. Adapted from Ferdows (1997) Making the most of foreign factories. HBR, Mar

General Rationale for Offshoring

Pro

Con

Cost reductions Proximity to local or new markets Domestic labor market constraints Operational hedge Foreign trade barriers
Cost reduction Growth strategy Competitive pressure Access to qualified personnel Industry practice Improved levels of service Business process redesign Changing the rules of the game Increased speed to market System redundancy Access to new markets 52% 50% 48% 37% 35% 33% 25% 73% 71% 70% 97%

Transportation costs Lead times Risks Quality, including health, environmental and CSR Currency, IP, political, competitive Domestic trade barriers Global operations complexity and social implications

The percentage of 2006 survey participants that 23 cite the goals listed as a reason for offshoring.