MGT 563 OPERATIONS STRATEGIES

1. MGT 563OPERATIONS STRATEGIES Dr. Aneel SALMAN Department of Management Sciences COMSATS Institute of Information Technology, Islamabad

2. Recap Lecture 13 • Six Sigma Basics • Application of six sigma • Barriers to implementation • Why six sigma is successful • DMAIC Methodology • Elements of six sigma • Application of all these tools (TQM, Six sigma, Lean, BPR)

3. FACILITY PLANNING Facility planning answers: • What kind of capacity is needed? • How much capacity is needed to match demand? • When more capacity is needed? • Where facilities should be located (location) • How facilities should be arranged (layout)

4. CAPACITY (DEFINITION OF) • The number of units a facility can hold, receive, store or produce in a period of time • It is the upper limit or ceiling on the load that an operating unit can handle. It includes • equipment, • space, • employee skills

5. STRATEGIC CAPACITY PLANNING • Goal • To achieve a match between the long-term supply capabilities of an organization and the predicted level of long-run demand • Overcapacity operating costs that are too high • Undercapacity strained resources and possible loss of customers

6. CAPACITY PLANNING QUESTIONS • Key Questions: • What kind of capacity is needed? • How much capacity is needed to match demand? • When is it needed? • Related Questions: • How much will it cost? • What are the potential benefits and risks? • Are there sustainability issues? • Should capacity be changed all at once, or through several smaller changes • Can the supply chain handle the necessary changes?

7. ISSUES TO BE CONSIDERED IN STRATEGY FORMULATION • Capacity strategy • Demand patterns • Growth rate and variability • Facilities • (Cost of the building and operating) • Technological changes • (Rate and direction of technology changes) • Behavior of competitors • Availability of capital and other inputs.

8. Long Range Planning Add Facilities Add long lead time equipment * Intermediate Range Planning Sub-Contract Add Equipment Add Shifts Add Personnel Build or Use Inventory Schedule Jobs * Schedule Personnel AllocateMachinery * Short Range Planning Modify Capacity Use Capacity *Limited options exist TYPES OF PLANNING OVER A TIME HORIZON

9. IMPORTANCE OF CAPACITY DECISIONS • impact the ability of the organization to meet future demands • affect operating costs • affect lead time responsiveness • are a major determinant of initial costs • involve long-term commitment of resources • affect competitiveness • affect ease of management • are more important and complex due to globalization • need to be planned for in advance due to their consumption of financial and other resources

10. CAPACITY MEASURES • Design capacity Maximum output rate or service capacity an operation, process, or facility is designed for • Effective capacity Capacity a firm can expect to attain given its product mix, methods of scheduling, maintenance and standards of quality. Design capacity minus allowances such as personal time, maintenance and scrap

11. Resource Usage Issues include: Quality • Capacity levels • Number of sites • Size of sites • Location Speed Performance objectives Dependability Market Competitiveness Flexibility Cost Development and Organization Capacity (configuration) Process Technology Supply Networks Decision areas

12. Capacity Strategy Managing Capacity Change Configuring Capacity Magnitude of Change Overall Level of Capacity Location of Capacity Timing of Change Location of changed capacity Type of Capacity Issues in capacity strategy

13. Forecast level of demand Availability of capital Cost structure of capacity increment Changes in future demand Overall level of capacity OPERATIONS RESOURCES MARKET REQUIREMENTS Uncertainty of future demand Economies of scale Flexibility of capacity provisions Consequences of over/under supply Some factors influencing the overall level of capacity

14. Issues include….. NUMBER OF SITES CAPACITY OF EACH SITE LOCATION OF EACH SITE a LONG-TERM CAPACITY CHANGE STRATEGY ALLOCATION OF TASKS TO EACH SITE

15. Many small sites? NUMBER OF SITES and CAPACITY OF SITES Few larger sites? Supply side dominated? LOCATION OF SITES Demand side dominated? All sites make all products/services? ALLOCATION OF TASKS TO SITES Each site focuses on a few products/ services? Capacity leads demand? LONG-TERM CAPACITY CHANGE STRATEGY Capacity lags demand? Questions: “Who should be involved in these decisions?” “How does the company make this type of decision?” Questions Options

16. Why is capacity strategy important? Without an appropriate capacity strategy operations will always be struggling to supply markets in a competitive manner Getting capacity strategy right is the starting point for developing competitive operations

17. How should one judge a capacity strategy ? NUMBER OF SITES What performance measures will all these decisions have a major impact on ? CAPACITY OF EACH SITE LOCATION OF EACH SITE ? LONG-TERM CAPACITY CHANGE STRATEGY ALLOCATION OF TASKS TO SITES

18. 12 10 8 Cost Forecast demand = 9000 units Costs / Revenue ($) 6 4 Revenue 2 0 0 2 4 6 8 10 12 Volume in thousands of units Cost, volume, profit illustration

19. 8 8 6 6 Diseconomies of scale kick in Unit cost (total cost / volume) Unit cost (total cost / volume) Nominal capacity limit 4 4 2 2 0 0 0 1 2 4 5 6 0 1 2 3 4 5 6 3 Volume in thousands of units Volume in thousands of units (a) (b) Unit cost curve

20. Cash flow with extended physical capacity Cash flow with two identical capacity increments Physical capacity of facilities Demand Cumulative cash flow Volume Time Effective Capacity Time Expanding physical capacity in advance of effective capacity can bring greater returns in the longer term

21. Economies of scale Required service level Size and number of sites OPERATIONS RESOURCES MARKET REQUIREMENTS Geographical distribution of demand Supply costs Some factors influencing the number and size of sites

22. Required service level Resource costs Land and facilities investment Suitability of site Location of sites OPERATIONS RESOURCES MARKET REQUIREMENTS Resource availability Image of location Community factors Some factors influencing the location of sites

23. CAPACITY RELATED CONCEPTS • Actual output Rate of output actually achieved—cannotexceedeffective capacity • Utilization Actual output as a percent of design capacity • Efficiency Actual output as a percent of effective capacity

24. EFFICIENCY Measure of how well a facility or machine is performing when used Actual output Efficiency = Effective Capacity (expressed as a percentage)

25. UTILIZATION Measure ofactual capacity usage of a facility, work center, or machine Actual Output = Utilization Design Capacity (expressed as a percentage)

26. EXAMPLE- EFFICIENCY/UTILIZATION Design capacity = 50 trucks/day Effective capacity = 40 trucks/day Actual output = 36 units/day Actual output = 36 units/day Efficiency = = 90% Effective capacity 40 units/ day Utilization = Actual output = 36 units/day = 72% Design capacity 50 units/day

27. DETERMINANTS OF EFFECTIVE CAPACITY • Facilities • Product and Service Factors • Process Factors • Human Factors • Policy Factors • Operational Factors • Supply Chain Factors • External Factors

28. STRATEGY FORMULATION Strategies are typically based on assumptions and predictions about: • Long-term demand patterns • Technological change • Competitor behavior

29. SPECIAL REQUIREMENTS FOR MAKING GOOD CAPACITY DECISIONS • Forecasting the demand accurately • Understanding the technology and capacity increments • Finding the optimal operating level (volume) • Building for change

30. KEY DECISIONS IN CAPACITY PLANNING • Amount of capacity needed • Timing of changes (frequency of capacity additions) • Extent of flexibility of facilities • External sources of capacity • Need to maintain balance

31. AMOUNT OF CAPACITY NEEDED

32. STEPS OF CAPACITY PLANNING • Estimate future capacity requirements • Evaluate existing capacity and facilities and identify gaps • Identify alternatives for meeting requirements • Conduct financial analysis • Assess key qualitative issues • Select the best alternative for the long term • Implement the alternative chosen • Monitor results

33. FORECASTING CAPACITY REQUIREMENTS • Long-term considerations relate to overall levelof capacity requirements • Short-term considerations relate to probable variationsin capacity requirements

34. CALCULATING PROCESSING REQUIREMENTS • Forecast sales within each individual product line • Calculate equipment and labor requirements to meet the forecasts

35. CALCULATING PROCESSING REQUIREMENTS Calculating processing requirements requires reasonably accurate demand forecasts, standard processing times, and available work time

36. CALCULATING PROCESSING REQUIREMENTS

37. CALCULATING PROCESSING REQUIREMENTS If the department works one eight hour shift, 250 days a year, calculate the number of machines that would be needed to handle the required volume. Solution: 5800/(250)(8) = 2.9 (3 machines are needed)

38. CAPACITY CUSHION • Capacity Cushion • Extra capacity used to offset demand uncertainty • Capacity cushion = 100% - Utilization • Capacity cushion strategy • Organizations that have greater demand uncertainty typically have greater capacity cushion • Organizations that have standard products and services generally have greater capacity cushion

39. SERVICE CAPACITY PLANNING • Service capacity planning can present a number of challenges related to: • The inability to store services • The need to be near customer • The degree of demand volatility

40. SERVICE CAPACITY PLANNING • Time: Inability to store services for later consumption. Capacity must be available to provide a service when it is needed (capacity must be matched with the timing of demand) • Location: Need to be near customers for convenience. Capacity and location are closely tied. 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) • Volume and timing of demand • Time required to service individual customers

41. CAPACITY UTILIZATION & SERVICE QUALITY • Best operating point is near 70% of capacity • From 70% to 100% of service capacity, what do you think happens to service quality?

42. TIMING AND SIZE OF CHANGES (FREQUENCY OF CAPACITY ADDITIONS)

43. CAPACITY EXPANSION Factors to be considered: • Volume and certainty of anticipated demand • Strategic objectives for growth • Costs of expansion and operation • Incremental or one-step expansion • Frequency of capacity additions

44. Expected Demand Expected Demand New Capacity New Capacity Demand Demand Time in Years Time in Years Capacity leads demand with a one-step expansion Capacity leads demand with an incremental expansion Expected Demand Expected Demand New Capacity New Capacity Demand Demand Time in Years Time in Years Attempts to have an average capacity, with an incremental expansion Capacity lags demand with an incremental expansion CAPACITY EXPANSION STRATEGIES (1 of 5)

45. Expected Demand New Capacity Demand Time in Years Capacity leads demand with an incremental expansion CAPACITY EXPANSION STRATEGIES (2 of 5)

46. Expected Demand New Capacity Demand Time in Years Capacity leads demand with a one-step expansion CAPACITY EXPANSION STRATEGIES (3 of 5)

47. Expected Demand New Capacity Demand Time in Years Capacity lags demand with an incremental expansion CAPACITY EXPANSION STRATEGIES (4 of 5)

48. Expected Demand New Capacity Demand Time in Years Attempts to have an average capacity, with an incremental expansion CAPACITY EXPANSION STRATEGIES (5 of 5)

49. MAKE OR BUY? • Available capacity • Expertise • Quality considerations • Nature of demand • Cost • Risk

50. OPTIMAL OPERATING LEVEL