OpsStrat5

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Operations StrategySession 5

Dr. Partha P. Datta

Operations Management Group

E-mail: [email protected]

mailto:[email protected]

mailto:[email protected]

7/27/2019 OpsStrat5


Capacity Expansion under Uncertainty:Calculating “Safety” Capacity

Required capacity = Average Demand + z *

Standard Deviation of Demand Where z = the number of standard deviations from the

mean implied by the chosen service level

For example: Average demand = 2,525 units Standard deviation of demand = 680 units Desired service level = 90%

Therefore, z = 1.28

Required capacity = 2,525 + (1.28 * 680) = 3,395 units

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Capacity Timing and AdjustmentGuidelines 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 designs2. 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

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Example of modular capacity and constructionPharmadule

Leading module manufacturer for

pharma industry

Started in 1986

Swedish company

Provide modules to multiple industries

Lilly’s exclusive provider of modular construction

First factory in 1991

Egypt insulin facility world record

time (12 months!)

Who is Pharmadule?

Lilly & Pharmadule

Ireland4

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CAPACITY TYPES, FLEXIBILITY &CONSOLIDATION

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Specialist or Generalist? Degree of flexibility

Examples?

Labour or capital? Degree of automation

Types & Alignment6

Different types of capacity

D e g r e e o f

f l e x i b i l i t y

Degree of

Automation Manual

Specialized

General

Purpose

Fully Automated

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A Flexible Asset strategy should strive for costreduction

e.g. limit scope or speed up changeovers

Capital

Investment

(CapEx $)

Agility flexibility or product changeover time

Dedicated

Flexible

with Automation

Adaptable

Days Months Quarters00

Scope flexibility

Scale flexibility

What aboutrobustness?

Tailoringflexibility?

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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 correlatedwith scale

“People count more than machines” Complexity, competition and perception

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Obstacles in achieving flexibility

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Product design strategies for flexibility and masscustomization

Standard or universal design

Component commonality and platform sharing

Modular design

Diagnosing complexity using the design structure matrix

A

B

C

D

A B C D

Components

D e p e n d e n t c o m p

o n e n t s

B and D: sequentially dependent on A

B and C: independent

C and D: integrated

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Diagnosing complexity using thedesign structure matrix

A

.

.

.

M

N

.

PQ

.

.

.

.

U

V

.

Z

A . . . M N . P Q . . . . U V . . Z

A

.

.

.

M

N

.

PQ

.

.

.

.

U

V

.

Z

Components

D e p e n d e n t c o m p o n e n t s

Modular Design Sequential Design

A

.

.

.

M

N

.

PQ

.

.

.

.

U

V

.

Z

Integral Design

A . . . M N . P Q . . . . U V . . Z A . . . M N . P Q . . . . U V . . Z

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Process design strategies for flexibility

Flexible D1

Ks

Dedicated D2

K2

D1

Flexible

KF

D2

D1

Transship

D2

D1

Common Flexible

K1 KF

D2

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Capacity Flexibility Value Drivers

Scale

Risk Pooling

Allocation Flexibility & Information Updating

( A switching Option)

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Introducing two car models Afour and Bassat sharing

a platform Afour commands higher price and unit contribution

margin of $2000 versus Bassat’s $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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AutoCo

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Demand Forecast Scenario Afour Bassat Probability

1 70 150 5%

2 70 200 10%

3 70 250 15%

4 100 150 10%

5 100 200 20%

6 100 250 10%

7 130 150 15%

8 130 200 10%

9 130 250 5%

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How to decide the tailored optimisedflexible capacity?

Financial Data

Contribution margin 1 $2,000

Contribution margin 2 $1,000

Dedicated Afour capacitycost/unit $800

Dedicated Bassat capacitycost/unit $700

Flexible capacity cost/unit $900

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Labour

Transport

Fabric

Supplies

Customsduties

15.55 € France

14.33 € Portugal

11.43 € Turkey

11.43 € Thailand

11.13 € Morocco

10.82 € Romania

10.37 € China

9.60 € Myanmar

Cost in euros

2 4 6 8 10 12 14 160

The cost breakdown of a shirt made in

various countries and sold in France

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

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Factors Affecting Location Decisionsof 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 community’s 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 theworld

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 businesscultures

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The Center of Gravity Approach

This approach requires that the analyst find the center of gravity of thegeographic area being considered

Computing the Center of Gravity for Matrix Manufacturing

Is there another possible warehouse location closer to the C.G. that should be considered??

Why?

10.641

436

l

YlY ; 7.9

41

325

l

XlX

i

ii

c.g.

i

ii

c.g.

Computing the Center of Gravity for Matrix ManufacturingCoordinates Load

Location (X,Y) (li) lixi liyi

Cleveland (11,22) 15 165 330

Columbus (10,7) 10 165 70

Cincinnati (4,1) 12 165 12

Dayton (3,6) 4 165 24

Total 41 325 436

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Capacity Location: Spatial analysisUS product distribution for a major appliance

manufacturer

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AC

B

http://nationalatlas.gov/

Capacity Location: Network analysisCapacity timing and location interact

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Capacity Location: Strategic analysisStrategic role of a foreign location

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

Source plant

• Produces at low cost but with sameability as best plant in the network

• Authority over procurement, production planning, logistics, process & productcustomization

Offshore plant

• Produces specific items at low costand exports for further work or for sale.

• Minimal authority and investment.

Lead plant

• Global hub for product and processknowledge and innovation.

• Full authority over all activities. Tapsinto local skills and knowledge toinitiate company -wide innovation.

Outpost plant

• Primary role is to collect informationfrom advanced suppliers, competitors,research labs, or customers.

• Secondary role as offshore or server.

Server plant

• Serves specific regional market toovercome tariffs, taxes, logistics, or foreign - exchange risk.

• Limited authority to make minor modifications to fit local conditions.

Contributor plant

• Serves specific regional market butcompetes with other plants in network for new processes or products.

• Authority over product and processdevelopment as well as supplier choice.

What is the primary strategic reason for the location?

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

Narrow & low

Broad & high

W

h a t i s t h e s c o p e o f i t s c u r r e n t

a

c t i v i t i e s a n d c o m p e t e

n c i e s ?

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General Rationale for Offshoring

Pro Con

• Cost reductions

• Proximity to local or new markets

• Domestic labor market

constraints

• Operational hedge

• Foreign trade barriers

• Transportation costs

• Lead times

• Risks

• Quality, including health,

environmental and CSR

• Currency, IP, political,

competitive

• Domestic trade barriers

• Global operations’ complexity

and social implications

25%

33%

35%

37%

48%

50%

52%

70%

71%

73%

97%

Access to new markets

System redundancy

Increased speed to market

Changing the rules of the game

Business process redesign

Improved levels of service

Industry practice

Access to qualified personnel

Competitive pressure

Growth strategy

Cost reduction

The percentage of 2006

survey participants that

cite the goals listed as areason for offshoring

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