Strategic Capacity Management

Strategic Capacity Planning

• Capacity can be defined as the ability to hold, receive, store, or accommodate
• Strategic capacity planning is an approach for determining the overall capacity level of capital intensive resources, including facilities, equipment, and overall labor force size

Capacity Utilization

Where

Capacity used

rate of output actually achieved 

Best operating level

capacity for which the process was designed

Best Operating Level

Example: Engineers design engines and assembly lines to operate at an ideal or “best operating level” to maximize output and minimize ware.

Example of Capacity Utilization

During one week of production, a plant produced 83 units of a product.  Its historic highest or best utilization recorded was 120 units per week.  What is this plant’s capacity utilization rate?

Answer: 

Capacity utilization rate =      Capacity used    .    = 83/120

                        Best operating level      =0.69 or 69%

Economies & Diseconomies of Scale

     

  

The Learning Curve

Capacity Focus

• The concept of the focused factory holds that production facilities work best when they focus on a fairly limited set of production objectives
• Plants Within Plants (PWP) 

       -Extend focus concept to operating level   

Capacity Flexibility

• Flexible plants 
• Flexible processes
• Flexible workers  

Capacity Planning: Balance

Capacity Planning

• Frequency of Capacity Additions
• External Sources of Capacity 

Determining Capacity Requirements

1. Forecast sales within each individual product line

2. Calculate equipment and labor requirements to meet the forecasts

3. Project equipment and labor availability over the planning horizon 

Example of Capacity Requirements

     

A manufacturer produces two lines of mustard, FancyFine and Generic line.  Each is sold in small and family-size plastic bottles. 

The following table shows forecast demand for the next four years.

Example of Capacity Requirements (Continued): Product from a Capacity Viewpoint

Question: Are we really producing two different types of mustards from the standpoint of capacity requirements?

Answer: No, it’s the same product just packaged differently.  

Example of Capacity Requirements (Continued) : Equipment and Labor Requirements

• Three 100,000 units-per-year machines are available for small-bottle production.  Two operators required per machine.
• Two 120,000 units-per-year machines are available for family-sized-bottle production.  Three operators required per machine.

Question: What are the Year 1 values for capacity, machine, and labor?

Question: What are the values for columns 2, 3 and 4 in the table below?

Example of a Decision Tree Problem

A glass factory specializing in crystal is experiencing a substantial backlog, and the firm's management is considering three courses of action:

A)  Arrange for subcontracting

B)  Construct new facilities

C)  Do nothing (no change)

The correct choice depends largely upon demand, which may be low, medium, or high.   By consensus, management estimates the respective demand probabilities as 0.1, 0.5, and 0.4.    

The management also estimates the profits when choosing from the three alternatives (A, B, and C) under the differing probable levels of demand.  These profits, in thousands of dollars are presented in the table below: 

Step 1. We start by drawing the three decisions

Step 2. Add our possible states of nature, probabilities, and payoffs

Step 3. Determine the expected value of each decision

Step 4. Make decision

Alternative B generates the greatest expected profit, so our choice is B or to construct a new facility.

Planning Service Capacity vs. Manufacturing Capacity

• Time: Goods can not be stored for later use and capacity must be available to provide a service when it is needed 
• Location: Service goods must be at the customer demand point and capacity must be located near the customer
• Volatility of Demand: Much greater than in manufacturing . 

Product Design

Typical Phases of Product Development

• Planning
• Concept Development
• System-Level design
• Design Detail
• Testing and Refinement
• Production Ramp-up

Economic Analysis of Project Development Costs

• Using measurable factors to help determine:

           -Operational design and development decisions

           -Go/no-go milestones

• Building a Base-Case Financial Model

          -A financial model consisting of major cash flows

          -Sensitivity Analysis for “what if” questions

Designing for the Customer 

Designing for the Customer: Quality Function Deployment

• Interfunctional teams from marketing, design engineering, and manufacturing
• Voice of the customer
• House of Quality 

Designing for the Customer: Value Analysis/Value Engineering 

• Achieve equivalent or better performance at a lower cost while maintaining all functional requirements defined by the customer

1. Does the item have any design features that are not necessary?
2. Can two or more parts be combined into one?
3. How can we cut down the weight?
4. Are there nonstandard parts that can be eliminated?

Design for Manufacturability

• Traditional Approach

      -“We design it, you build it” or “Over the wall”

• Concurrent Engineering

     -“Let’s work together simultaneously”

Design for Manufacturing and Assembly

• Greatest improvements related to DFMA arise from simplification of the product by reducing the number of separate parts:

1. During the operation of the product, does the part move relative to all other parts already assembled?
2. Must the part be of a different material or be isolated from other parts already assembled?
3. Must the part be separate from all other parts to allow the disassembly of the product for adjustment or maintenance?

Measuring Product Development Performance

Project Management

Project Management definition:
A Project is a series of related jobs usually directed toward some major output and requiring a significant period of time to perform.
Project Management is the management activities of planning, directing, and controlling resources (people, equipment, material) to meet the technical, cost, and time constraints of a project.

Pure Project definition:
A pure project is where a self-contained team works full-time on the project.

Pure Project: Advantages

• The project manager has full authority over the project
• Team members report to one boss
• Shortened communication lines
• Team pride, motivation, and commitment are high 

Pure Project: Disadvantages

• Duplication of resources
• Organizational goals and policies are ignored
• Lack of technology transfer
• Team members have no functional area "home"    

Functional Project definition:

A functional project is housed within a functional division.

Functional Project: Advantages

• A team member can work on several projects
• Technical expertise is maintained within the functional area
• The functional area is a “home” after the project is completed
• Critical mass of specialized knowledge 

Functional Project: Disadvantages

• Aspects of the project that are not directly related to the functional area get short-changed
• Motivation of team members is often weak
• Needs of the client are secondary and are responded to slowly 

Matrix Project Organization Structure

Matrix: Advantages

• Enhanced communications between functional areas
• Pinpointed responsibility
• Duplication of resources is minimized
• Functional “home” for team members
• Policies of the parent organization are followed  

Matrix: Disadvantages

• Too many bosses
• Depends on project manager’s negotiating skills
• Potential for sub-optimization 

Work Breakdown Structure definition:

A work breakdown structure defines the hierarchy of project tasks, subtasks, and work packages.

Network-Planning Models

• A project is made up of a sequence of activities that form a network representing a project 
• The path taking longest time through this network of activities is called the “critical path” 
• The critical path provides a wide range of scheduling information useful in managing a project
• Critical Path Method (CPM) helps to identify the critical path(s) in the project networks

Prerequisites for Critical Path Methodology

A project must have:

•    well-defined jobs or tasks whose completion marks the end of the project;
•    independent jobs or tasks;
•    and tasks that follow a given sequence.

Types of Critical Path Methods

• CPM with a Single Time Estimate

     -Used when activity times are known with certainty

     -Used to determine timing estimates for the project, each activity in the project, and slack time for activities  

• CPM with Three Activity Time Estimates

     -Used when activity times are uncertain 

     -Used to obtain the same information as the Single Time Estimate model and probability information

• Time-Cost Models

     -Used when cost trade-off information is a major consideration in planning

     -Used to determine the least cost in reducing total project time 

Steps in the CPM with Single Time Estimate 

1. Activity Identification

2. Activity Sequencing and Network Construction

3. Determine the critical path

-From the critical path all of the project and activity timing information can be obtained

CPM with Single Time Estimate

Consider the following consulting project:

First draw the network

Determine early starts and early finish times.

Critical Path & Slack

Operations and Supply Strategy

What is Operations and Supply Strategy?

Operations and supply strategy is concerned with setting broad policies and plan for using the resources of a firm to best support its long-term competitive strategy.

Competitive Dimensions

•Cost or Price

–Make the Product or Deliver the Service Cheap

•Quality

–Make a Great Product or Deliver a Great Service

•Delivery Speed

–Make the Product or Deliver the Service Quickly

•Delivery Reliability

–Deliver It When Promised

•Coping with Changes in Demand

–Change Its Volume

•Flexibility and New Product Introduction Speed

            --Change it

•Other Product-Specific Criteria

            --Support it.

Dealing with Trade-offs

For example, if we reduce costs by reducing product quality inspections, we might 

         reduce product quality.

If we improve customer service problem solving by cross-training personnel to deal  with a wider-range of problems, they may become less efficient at dealing with  commonly occurring problems. 

                                      

                       

Order Qualifiers and Winners Defined

Order qualifiers are the basic criteria that permit the firms products to be considered as candidates for purchase by customers

Order winners are the criteria that differentiates the products and services of one firm from another 

What is Productivity? Defined

Productivity is a common measure on how well resources are being used. In  the broadest sense, it can be defined as the following ratio: 

Outputs

  Inputs

Total Measure Productivity

Total Measure Productivity = Goods and services produced

                                                              All resources used

Partial measures of productivity =

Output or   Output or Output    or    Output

Labor         Capital      Materials        Energy   

  

Operation Management

1. Introduction to the Field
2. Operations and Supply Strategy
3. Project Management
4. Product Design
5. Strategic Capacity Management
6. Quality Management
7. Supply Chain Strategy

Introduction to the Field

OBJECTIVES 

•What is Operations and Supply Management?

•Why Study Operations Management?

•Transformation Processes Defined

•Differences between Services and Goods

•The Importance of Operations Management

•Historical Development of OM

•Current Issues in OM

Operations and Supply Management (OM) is defined as the design, operation, and improvement of the systems that create and deliver the firm’s primary products and  services.

A transformation process is defined as a user of resources to transform inputs into some desired outputs.

Transformations

•Physical--manufacturing

•Locational--transportation

•Exchange--retailing

•Storage--warehousing

•Physiological--health care

•Informational--telecommunications

•“If you drop it on your foot, it won’t hurt you.” (Good or service?)

•“Services never include goods and goods never include services.”  (True or false?)

•Historical Development of OM

•JIT and TQC

•Manufacturing Strategy Paradigm

•Service Quality and Productivity

•Total Quality Management and Quality Certification

Historical Development of OM (cont’d)

•Business Process Reengineering

•Six-Sigma Quality

•Supply Chain Management

•Electronic Commerce

•Service Science

Current Issues in OM

•Coordinate the relationships between mutually supportive but separate organizations.

•Optimizing global supplier, production, and distribution networks.

•Increased co-production of goods and services

Current Issues in OM (cont’d)

•Managing the customers experience during the service encounter

•Raising the awareness of operations as a significant competitive weapon

MARKET-DRIVEN STRATEGY

Objectives 

• Market-Driven Strategy 
• Becoming Market Oriented 
• Distinctive Capabilities 
• Creating Value for Customers 
• Becoming Market Driven 
• Challenges of a New Era for Strategic Marketing

Market-Driven Strategy

• All business strategy decisions should start with a clear understanding of markets, customers, and competitors.
• The market and the customers that form the market should be the starting pint in shaping business strategy.

Why Pursue a Market-Driven Strategy?

• Strong supporting logic
• Achievements of companies displaying market-driven characteristics are impressive

Examples include:

• Dell Inc.
• Louis Vuitton
• Southwest Airlines
• Tesco
• Tiffany & Co.
• Wal-Mart
• Zara

BECOMING MARKET ORIENTED

• Customer is the focal point of the organization
• Commitment to continuous creation of superior customer value
• Superior skills in understanding and satisfying customers
• Requires involvement and support of the entire workforce
• Monitor rapidly changing customer needs and wants
• Determine the impact of changes on customer satisfaction
• Increase the rate of product innovation
• Pursue strategies to create competitive advantage

Characteristics of Market Orientation

Customer Focus
What are the customer’s value requirements? 
Competition Intelligence
Importance of understanding the  competition as well as the customer.
Cross-Functional Coordination
Remove the walls between business functions.
Performance Consequences
Market orientation leads to superior organizational  performances.


Market Orientation

Information Acquisition

• Gather relevant information on customers, competition, and markets
• Involve all business functions
• Intuit’s Quicken

Inter-functional Assessment

§  Share information and develop   innovative products with people from different functions.

§

§Shared diagnosis and action

§ Deliver superior customer value

DISTINCTIVE CAPABILITIES


“Capabilities are complex bundles of skills and accumulated knowledge, exercised through organizational processes, that enable firms to coordinate activities and make use of their assets.”

Southwest Airline’s Distinctive Capabilities Organizational Processes

Southwest uses a point-to-point route system rather than the hub-and-spoke design used by many airlines.  The airline offers services to 57 cities in 29 states, with an average trip about 500 miles.  The carrier’s value proposition consists of low fares and limited services (no meals).  Nonetheless, major emphasis throughout the organization is placed on building a loyal customer base.  Operating costs are kept low by using only Boeing 737 aircraft, minimizing the time span from landing to departure, and developing strong customer loyalty.  The company continues to grow by expanding its point-to-point route network.

Skills and Accumulated Knowledge

The airline has developed impressive skills in operating its business model at very low cost levels.  Accumulated knowledge has guided management in improving the business design over time.

Coordination of Activities

Coordination of activities across business functions is facilitated by the point-to-point business model.  The high aircraft utilization, simplification of functions, and limited passenger services enable the airline to manage the activities very efficiently and to provide on-time point-to-point services offered on a frequent basis.

Assets

Southwest’s key assets are very low operating costs, loyal customer base, and high employee esprit de corps.

CREATING VALUE  FOR CUSTOMERS

Customer Value:

§Value for buyers consists of the benefits less the costs resulting from the purchase of products.

§Superior value:  positive net benefits

Creating Value:

§“Customer value is the  outcome of a process that   begins with a business  strategy anchored in a deep   understanding of customer  needs.” 

Market Driven Initiatives

Market Sensing Capabilities

–Effective processes for learning about markets

–Sensing:

•Collected information needs to be shared across functions and interpreted to determine proper actions.

Customer Linking Capabilities

–Create and maintain close customer relationships

CHALLENGES OF A NEW ERA FOR STRATEGIC MARKETING

§Strategic marketing faces unprecedented challenges and opportunities:

• Turbulent markets 
• Intense competition 
• Disruptive innovations 
• Escalating customer demands 

§Ethical Challenges

§Societal and Global Change

§Social Responsiveness of Organizations

Escalating Globalization

It is important to understand the differences (and similarities) between the developed economies and the new world beyond.

Market opportunities  

Competitive threats 

Partnering opportunities

Outsourcing initiatives

The world’s poor

Ethical Behavior and Social Responsiveness

Increasingly demanding ethical challenges

Corporate responsibility

Responsibilities to stakeholders