OS-Lec4-CapacityFacilities

8/2/2019 OS-Lec4-CapacityFacilities

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Operations strategy 4-1

TPMM 04

Operations strategy

Lecture 4:

Decision category 2 Capacity

Decision category 3 Facilities


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Strategic capacity decisions

Amount

Assumption: capacity increases are lumpy

Related to process choice

More lumpy for continuous processing

Timing

3 strategies for capacity expansionrelative demand:

lead capacity in anticipation of demand

lag capacity after observed demand

track capacity follows demand


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Three levels of capacity decisions

Level Time-scale Decisionsconcernprovision of

Span ofdecisions

Starting pointof decision

Strategic

capacitydecisions

Years-Months Buildings and

facilitiesProcesstechnology

All parts in the

process

Probable future

marketsCurrent capacityconfig.

Medium-termcapacity

decisions

Months-Weeks

Aggregatenumber ofpeople

Degree ofsubcontractedresources

Business site Market forecasts

Physical capacityconstraints

Short-termcapacitydecisions

Weeks-Hours-Minutes

Individual staffwithin theoperation etc.

Site department Current demand

Current available



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Operations strategy

Product Mix Type

Proc

essType

1

low-volume,non-standard,one-of-a-kind

2

low-volume,many

products

3

high-volume,few majorproducts

4

high-volume,standard,

commodity

1

Job shop

2

Flow shop

3

Line flow

4

Continuousflow

Atlas CopcoTools

SKF

Arla Foods

ABBRobotics

Skanska

Product-process matrix

Construction work

Industrial robots

Industrial tools, hand tools

Ball bearings

Dairy products

4-4


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Operations strategy

Product delivery strategy and thecustomer order decoupling point

DC

Sweden

DC

EuropeFGIModules AssemblyRMI

Parts

mfg

PLANT

CUSTOMER ORDER

MATERIAL FLOW

RMI = Raw Materials Inventory

FGI = Finished Goods Inventory

4-5


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Lead:

Capacity in anticipation of demand

No need for sub-contracting Always room for volume flexibility

Volume

Demand

Time

Capacity


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Capacity strategy - Lead

Typically used inindustries with:

Cheap capacity

High profit margins

Delivery sensitivecustomers



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Lag:

Capacity after observed demand

Use subcontracting for capacity shortages No volume flexibility

Volume

Capacity

Time

Demand


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Capacity strategy - Lag

Typically used in industrieswith:

Expensive capacity that is

bought in large increments Low profit margins

Low costs for turning downcustomers



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Track:

Capacity follows demand

Alternating overcapacity and subcontracting Periodic volume flexibility

Volume

Demand

Time

Capacity


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Capacity strategy - Track

Typically used inindustries with:

Very even demand

Simple manufacturingprocesses

Small increments

Fast capacity changes

Low cost for turning down

customers or keep themwaiting



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Capacity strategies at

variable, but stationary demand

Time

Volume

Demand

Lead

Lag

Track


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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



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Peerless capacity

Strategiccapacity decisions

Customer orderproducts

Standardproducts

Amount:

small or large increments

Timing:lead, lag or track


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Peerless capacity utilization



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Peerless capacity



Standardproducts

Amount:

small or large increments

Timing:lead, lag or track


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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


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Plant size

Economies of scale

high volume

Diseconomies ofscale

large overhead

complex control

Optimal plant size

Considered bymany to be appr.1000 people perplant


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Factors affecting optimal plant

size

Process technology

Knowledge intensity in manufacturing

Economy of transportation



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Location factors

1. Proximity to customers and markets

2. Proximity to raw materials

3. Proximity to transportation hubs

4. Proximity to the right work force

(a) Research and development

(b) Low cost labor

5. Legal aspects trade barriers

local content requirements

tax incentives


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Empirical results:106 Swedish plants 2007

Three main strategic reasons for plantlocation 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)


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Location models

Proximity matrix

With respect to the importance of different

location factors Comparison of alternatives

Optimization model

Global networks Case study HP (DVD)


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The location decision:a balance between qualitative and quantitative factors

Location parameters Process parameters

Factor costs Labor costs (by skill level) Input factorvolumes

Labor time (by skill level)

Cost of capital Nominal capital employed (plantand equipment)

Cost of materials Purchased parts/raw materials

Productivity Labor productivity Parts (made inhouse)

Capital productivity Space requirements (land andbuildings)

Otherquantitativefactors

Distance from relevant markets Otherquantitativefactors

Volume and weight

Potential restructuring andclosure costs

Delivery time requirements

Freight rates Maintenance requirements/costs

Qualitativefactors

Availability of land andinfrastructure, rights ofownership

Qualitativefactors

Process complexity

Legal safeguards, protection ofintellectual property

Know-how intensity andsensitivity/patents

Regulations, work safety,

environmental guidelines, etc

Environmental requirements

Source: Abele et al. (2008)Operations strategy 4-23


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Current research on locationdecisions Three layer model

Country

Cost levels

Proximity to

markets

Local

Proximity to:

Ports

Railways

Highways

Othercompanies inthe same

industry Work force


Region

Access torequired skills and

knowledgeCondition ofinfrastructure

Supplier base

Competition


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Facility focus


Focus aroundresources Focus aroundmarkets

Process Volume Variety Geography Product/market

Order-winnersand qualifiers

Source (Hill and Hill, 2009)


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Facility focus

Product focus

Design

Based on one

productor ahomogenousproduct group

Operational problem

Process availability

Process focus

Design

Based on

competence in oneor a few processes

Operational problem

The flow ofproduction throughthe plant


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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


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Peerless facilities



Standardproducts

Size:

size per plantnumber of plants

Location:geographical position

Focus/specialization:

product/dedicatedprocess/multi-purpose

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