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Strategic Capacity Honda on July 18 announced two new plants. In Argentina, Honda will spend $100 million on a new compact-car plant. The facility will be located in Buenos Aires and initially have a capacity of around 30,000 units. In Thailand, Honda will add a second plant that, from the second half of 2008, will double production to 240,000 units. Meanwhile, in India, Honda will triple auto production, to 150,000 units, by 2009. And in China, where Honda will produce 530,000 cars this year, the company announced it and partner Guangzhou Auto have established a new research and development venture to launch a new vehicle in 2010. Even in Japan, where the auto market is shrinking, Honda has new production facilities in the pipeline. Among them, a new auto plant in Yorii, outside Tokyo, will be Honda's most advanced plant anywhere when it opens in 2010. Honda says the plant will be used as a testing ground for new technologies that will eventually filter through to overseas plants. Source: “Honda Hits the Gas on Capacity” Business Week 19th July 2007
Strategic Capacity • Guangqi Honda Automobile, a Honda automobile production and sales joint venture in China, has announced plans to expand its annual production capacity from the current 360,000 units to 480,000 units in China. • Guangqi Honda's current overall production capacity of 360,000 units includes 240,000 units at the HuangPu plant and 120,000 units at the ZengCheng plant. The company has decided to double the annual capacity of the ZengCheng plant to 240,000 units by the later half of 2011.To expand its production capacity, the ZengCheng plant will add new equipment. In addition, Guangqi Honda aims to enhance the plant's standing as an environmentally-responsible plant through various improvements including further advancement of the complete wastewater recycling system, which was introduced to this plant in 2006.The total investment for this expansion is expected to be approximately RMB930 million. Guangqi Honda's total employment is expected to be increased from the current 6,800 to 8,000 associates.Combining Guangqi Honda's capacity expansion and the addition of Dongfeng Honda's second plant, scheduled to begin operations in the later half of 2012 with annual production capacity of 60,000 units, Honda's overall annual automobile production capacity in China will be expanded from the current 650,000 units to 830,000 units by the later half of 2012. Source: “Honda to expand automobile production capacity in China” Published by Datamonitor on 26 May 2010
Strategic Capacity AUTOS Carmakers are expanding at home, where nimble, high-tech plants offer more flexibility. In the midst of a dramatic earnings slump, Toyota, Nissan, and Honda are ramping up production fast. Not in the U.S., their most profitable market, but back in Japan, where domestic auto sales just hit a 25-year low. Every major Japanese automaker is building plants at home or adding capacity to existing ones. A Toyota subsidiary is constructing a 120,000-car plant in Miyagi, north of Tokyo. It's Toyota's first such plant in Japan since 1993. Nissan, which not so long ago was slashing production in the country, is expanding capacity by 22% at its Kyushu factory. Honda is spending $1.5 billion on a new factory and engine plant in Saitama, just outside Tokyo. "The time has come for our Japan operations to once again take the initiative," Honda President Takeo Fukui told reporters on May 21. Business Week; 9th June 2008 p64
Strategic Capacity (cont) Volkswagen (VOWG.DE) has selected Chattanooga as the site for a new U.S. assembly plant ….. For Volkswagen, the Tennessee plant is the cornerstone of an audacious plan to build up to 1 million in U.S. sales by 2018 [the figure covers both the VW and Audi brands]. The Chattanooga operation will have an initial capacity of 150,000 vehicles and will include body production, a paint shop, and assembly operations, Volkswagen said. Most plants are built to expand to between 200,000 to 300,000. Volkswagen Waltzes Into Tennessee.Business Week 16th July 2008
Strategic Capacity • The global consumer electronics market (including OEM and retail sales) was valued at approximately $681bn in 2009, a decrease of 1.7% over 2008. Growing at a CAGR of 8.4% during 2005–10, Business Insights anticipates that the size of the global consumer electronics market will remain flat at $681bn in 2010. This flat growth owes to the weakness in the global economy. • The fastest-growing products of 2010 will be LED and OLED displays, Ethernet-enabled TVs and receivers, eBook readers, and 3D TVs. Cloud computing and virtualization emerging as the new growth engines. • Against the backdrop of the global recession, cost competitiveness, technological innovations and emerging markets are the key drivers of the industry's transformational growth. The emergence of South Korean giants - Samsung and LG - as market leaders is commoditizing the industry. • The fall-out of this fierce competition is that companies such as Sony are struggling to retain a foothold in the industry, while other Japanese rivals are diversifying into new growth areas such as environment, energy and infrastructure in order to survive. On the other end of the spectrum there is Apple, which is able to earn huge profits by leveraging on its disruptive innovations, reinforcing the necessity of innovation. • Even in the core hardware industry, technology companies are shifting to services and software in response to the declining margins. Several small M&A deals are facilitating this transition to emerging technologies such as smartphones and specialized software such as business analytics. • Furthermore, the onset of the global recession is challenging the traditional business model of selling premium priced products to developed markets. The trend now is to scale down many of the features of standard models and sell no-frills products at affordable prices to the low and middle income segments of emerging markets. Source: “The Top 10 Consumer Electronics Manufacturers” Business Insights 21 September 2010
Strategic Capacity:Global Computer Hardware • The global computer hardware market had total revenue of $193.2 billion in 2009, representing a compound annual growth rate (CAGR) of 5.4% for the period spanning 2005-2009. In comparison, the • European and Asia-Pacific markets grew with CAGRs of 1.8% and 8.7% respectively, over the same period, to reach respective values of $64.3 billion and $44.1 billion in 2009. • Computers sales proved the most lucrative for the global computer hardware market in 2009, with total revenues of $104.9 billion, equivalent to 54.3% of the market's overall value. In comparison, sales of peripherals and devices generated revenues of $59.4 billion in 2009, equating to 30.7% of the market's aggregate revenues. Source: Datamonitor June 2010
Strategic Capacity (cont) What the Chinese want now are more bottles of Mountain Dew. At least that is the hope of PepsiCo, which says it plans to spend $150 million to expand bottling capacity by a third. That will mean 100 million more cases of Pepsi, 7 Up, and the caffeine-charged Mountain Dew. While the company's annual sales in China have grown at around 10 percent in recent years, it still has only about half the penetration of rival Coca-Cola. PepsiCo executives say they are determined to increase their beverage presence in China, despite the threat of severe acute respiratory syndrome (SARS). Business Week, 6th Sept. 2003
Strategic Capacity (cont) The article reports on Boeing, in light of the Paris air show. The popularity of its new 787 twin-aisle airliner has helped Boeing open up a big lead over Airbus in orders this year, with 245 planes sold vs. 145. Less noticed is that Boeing…… has maneuvered Airbus into a strategic cul-de-sac that could handicap the European consortium for years. Boeing's rise represents the latest phase of an epic dispute between the two companies about what airline customers want. Boeing is betting passengers will opt for more frequent trips in smaller planes that fly direct between less-traveled city pairs like Seattle--Seoul. Both Boeing and Airbus forecast sales of some 2,600 planes, with capacity between 300 and 450 passengers, over the next 20 years Fortune 13th June 2005
The Importance of Understanding Capacity – a simple example When we hire somebody, we have to pay them 52 weeks X 40 hours =2080 hours BUT the maximum capacity is vastly different to the actual capacity We need to deduct: 20 X 8 hours (vacation): 160 5 X 8 hours (sick allowance) 40 8 X 8 hours (public holidays) 64 ----- 264 So we have 2080 less 264 = 1816 THEN we must add the International Labor Organization’s estimate of 70% utilisation so 1816 X 70% = 1271
The Importance of Understanding Capacity – a simple example (cont.) Recall: When we hire somebody, we have to pay them 52 weeks X 40 hours =2080 hours BUT we only have 1271 hours to recover this. We need to understand the multiplier here: 2080 (maximum) ------ 1271 (actual) gives us 1.64 If we hire somebody for 150,000 Dollars per annum we are paying them 150,000/2080 = 72.12 Dollars per hour BUT we need to CHARGE OUT at 72.12 X 1.64 = 118.28 per hour as a BASIC charge (NB: there are no overtime, pensions and other costs listed here!)
Output Capacity Measures OrganizationMeasure Of Capacity Automobile Plant Number Of Autos/Hour Law Firm Number Of Cases Handled/Week Oil Refinery Barrels Of Oil/Day Electric Company Megawatts Of Electricity/Hour Paper Producer Tons Of Paper/Week Input Measures OrganizationMeasure Of Capacity Jet Engine Plant Machine Hours/Month; Labour Hours/Month Airline Number Of Seats/Flight Hotel Number Of Rooms, Number Of Beds Grocery Store Number Of Checkout Lines Warehouse Cubic Feet Of Space Tennis Club Number Of Courts Department Store Number Of Square Feet
Service Capacity: “DON'T LET HOTELS 'WALK' ON YOU!” "You're never going to believe this," a top executive from a major hotel chain told me, "but I just got walked from our hotel to this dump near Central Park." It seems even hotel executives aren't immune from the recent surge of travelers showing up at hotels and being told there's no room for them. (Hotel folks call it "getting walked.") It happens because, like airlines, hotels tend to overbook their rooms when demand is high for fear of not achieving full occupancy. Sometimes big-city hotels can overbook by as much as 20% (the average is about 10%). That means even with a confirmed reservation, the front-desk clerk will send you to another hotel at the first one's expense--a headache for a busy traveler. So how do you avoid this? Besides checking in early and being a member of the hotel's loyalty program, ask for a written or e-mailed confirmation when you book and bring it with you. Then call to confirm two or three days before you arrive, get the agent's name, and ask to have your call noted in the reservation. And ask for a better room while you're at it--you have nothing to lose. Source: Fortune 7th August 2006, p102
The Curse of Bottlenecks 2 streams or lanes of operations – not a problem The bottleneck – a BIG PROBLEM 4 streams or lanes of operations – not a problem
The Curse of Bottlenecks Flow of Operations – people, information, inventory etc 6 8 8 12 10 An Operations System like this is almost DESIGNED (!) to be a problem – and is very common in both manufacturing and services!!
Three Capacity Management Strategies • Three strategies that are used across organisations to manage fluctuations in demand and supply are: • Providing the same level of supply, no matter what demand level. This strategy may be called demand smoothing in service operations, or level production in manufacturing operations. • Exactly matching the level of supply to the level of demand. This strategy is usually called chase demand. • Adjusting demand to better match supply. This strategy is called demand management.
Level Capacity Strategies. One strategy that organisations use to match demand and supply is to produce and store outputs in advance of demand. These strategies rely on building inventory. Other types of operations -- such as service operations -- have only limited recourse to inventory-building strategies. In many service organisations, mismatches between supply and demand will result in queues. A level capacity strategy
Chase Strategies. Organisations that use chase strategies adjust their activity levels to reflect the fluctuations in demand A chase capacity strategy
Demand Management Strategies. Organisations that use demand management try to change demand to smooth high and low periods.
Hierarchy Of Company Plans In Operations Business Planning (years) Type of Plans Yearly Sales Forecasts Master Operations Schedule (MPS) - monthly Daily Scheduling LOADING TIME
Scheduling Rules "GOOD IDEAS ...." * Schedule First Those Jobs With The Shortest First Operation Or * Schedule First Those Jobs With The Shortest Last Operation Or * Schedule Jobs According To Their Total Work Content Or * Schedule Jobs According To Their Date Of Receipt Or * Prioritise Jobs By Customer
Shortest First Operation If the RED line is the shortest FIRST operation, what would be the sequence of jobs?? 1 2 Job 3 4 5 Time
Shortest LAST Operation If the BLUE line is the shortest LAST operation, what would be the sequence of jobs?? 1 2 Job 3 4 5 Time
Total Work Content On the basis of the Total Work Content, what would you chosse as the sequence of jobs?? WHY?? 1 2 Job 3 4 5 Time
Scheduling Rules More "GOOD IDEAS ...." • First come, first served (FCFS)- the first job or customer to arrive at a workstation will be the next one processed. This is a fair rule when people or jobs arrive randomly and have similar requirements. All customers are treated equally in the sense that priorities are assigned in order of arrival, but no allowance is made for the fact that some jobs or customers are more important or need to be finished sooner than others • Earliest due date (EDD) - the job or customer with the earliest due date will be processed next. This minimises the total lateness of all jobs or customers being processed. This rule highlights the importance of due dates, and therefore may be more in line with customer needs. On the other hand, where service is unreliable or consistently late customers often learn to "play the system" and submit jobs with artificially early due dates. • Shortest processing time (SPT)- the job or customer that will take the least time to process is the next processed. This minimises the total waiting time, but long jobs or more urgent jobs may not be processed quickly. This rule maximises the throughput measured as number of jobs processed, and is therefore commonly used by operations whose goal is to maximise cash flow, since these flows come earlier in the process and therefore are discounted less.
Scheduling Rules Even More "GOOD IDEAS ...." • Last arrived, first processed (LAFP) - the opposite of first come, first served. This is seldom an efficient rule , because it means that jobs currently in the system will have to wait even longer to be processed. However, overworked administrators often apply this rule since the job that has arrived latest is usually associated with a living, breathing customer! • Least slack time - the job with the least time between the time it will take to process the job and the due date (slack or float time) will be processed next. • Start the job with the shortest first processing time – This is managed by breaking up the total work content into the operations that are required. The operations manager then chooses the job with the shortest first operation. The rationale for this is to ‘get up and running’ with jobs and this ploy may be used where firms have invested recently in new technology. The problem with this approach is that, like others we have discussed, this rule pays no attention to customer requirements. The other problem is that although firms may wish to be ‘busy’ and to utilise technology this may simply encourage work in process and not result in finished goods. This in turn may mean that the firm cannot invoice and so cash may be drained.
Scheduling Rules Even More "GOOD IDEAS ...." • Longest processing time (LPT)- this is the opposite of shortest processing time. This rule may be applied when the operation is not concerned with early cash flows, but can be associated with interim (stage) payments for partly completed work. • Start the job with the longest last operation - This is quite difficult to execute but some companies do this. The reason for this is that the last thing that a firm wants is to progress jobs and then have them held up at the last process. What this rule tries to do is to avoid bottlenecks occurring at the last stage (which is the most expensive stage of the overall job because all other costs have been accrued by this stage). • Critical ratio (CR) - is a more sophisticated version of least slack time, since it computes the ratio of time remaining to the work remaining, so that jobs or customers with varying processing times can be compared more easily.
Scheduling Operations A good idea is to schedule operations based upon dependencies – and try to ‘decouple’ operations as much as possible. An example: Activity Dependency? A - B - C A D B E A, B, C, D
Listing Activities by Dependency G A C F E H B D I TaskDescription A Machine Engine Parts B Machine Transmission Parts C Assemble Engine D Assemble Transmission E Assemble transmission and engine into one unit F Mount unit in car frame G Make front-wheel drive connection to transmission H Connect fuel lines I Make electrical connections
Listing Activities by Dependency G 7 10 8 A C 8 10 F E H 6 B D I 8 4 7 • 2 Questions: • What is the earliest time that Activity E can begin? • What is the shortest overall process time?
Listing Activities by Dependency G 7 10 8 A C 8 10 F E H 6 B D I 8 4 7 The Critical Path
Johnson's Algorithm If The Shortest Time For A Job Is On The First Facility, Schedule The Job As Early As Possible. If It Is On The Second Facility, Schedule It As Late As Possible. Delete That Job And Repeat The Procedure
Key Points • Capacity management is based on understanding the specific characteristics of volume, variety, variation, variability, predictability and perishability.
Key Points • Early operations management approaches to capacity were based on order sequencing, scheduling activities, and process control; whilst materials management was based around economic order quantities, standardised components, and inventory control.
Key Points • There have been major transitions from craft to mass through to the current era of Mass Customization, Agility, Lean and Strategic Manufacturing. Each of these has represented a major, world-wide innovation, with implications for strategy formulation and profoundly changing the way people work. In each case, the new paradigm has made the previous one largely, but not totally, redundant.
Key Points • There are some ‘good rules of scheduling’ that can be used as a guide.
Key Points • It is always vital to remember that there is no such thing as a perfect solution when scheduling and the process has to be based on sound business reasons and not driven purely by software calculations.
