Business, Operations and Supply Chain Strategy (BOSCS) Business and Operations Strategy: Strategic Management of Operations Capacity

Teaching schedule for business and operations strategy TopicCase studies 1Introduction to business strategy 2Key models in business strategy: activity-system view 3Key models in business strategy: resource-based view & capabilities-based view 4Introduction to operations strategyPractice case study 5Strategic management of operations technology 6Strategic management of operations capacityPractice case study 2

Required reading for this lecture Required reading for this lecture on operations strategy: Hayes, Pisano, Upton & Wheelwright (2005), Operations, Strategy, and Technology – Pursuing the Competitive Edge, chapter 3 3

Strategic management of operations capacity Capacity is the rate (in units of output per unit of time) at which an operations process or system can produce. The purpose of capacity management is to determine the level and type of capacity that is needed to meet the (actual or expected) customer demand for products. Capacity management decisions can relate to the short, medium or long term. ‘Strategic’ capacity decisions are particularly concerned with the medium-to-long term. 4

Questions for capacity management The strategic management of operations capacity is typically concerned with investments (resource commitments) in durable tangible resources (assets), such as land, buildings and other operations facilities (factories, offices, stores etc.), and capital equipment. These assets may be more or less specialised. Key questions: Quantity – how much capacity will be needed in the long term? Timing – when should investments be made in additional capacity or existing capacity be scrapped? 5

A very simple diagram of a production process 6 Resources waiting to be trans- formed Resources in the process of being trans- formed Process boundary Inputs (measured in units/period) Inventory of inputs (measured in units) Capacity (measured in units/period) Transformed resources Inventory of outputs (measured in units) Outputs (measured in units/period)

Throughput delay curve 7 Capacity utilisation 0100% Average waiting time in inventory (queue) of inputs Variability increases Low variability of demand High variability of demand

Capacity leads demand 8 Time Units of output Capacity Demand

Capacity matches demand 9 Time Units of output Demand Capacity

Capacity lags demand 10 Time Units of output Demand Capacity

Economies of scale ‘Static’ economies of scale: the long-run average (or unit) cost of producing an item falls in response to a greater volume of output being produced in a given period of time. ‘Dynamic’ economies of scale output: the long-run average cost of producing an item falls in response to a greater volume of output being produced cumulatively as time passes. This is related to the idea of the ‘learning’ (or ‘experience’) curve. 11

‘Static’ economies of scale 12 Rate of production (units/period) Average cost per unit produced (£/unit) ‘Economies of scale’ ‘Minimum efficient scale’ ‘Diseconomies of scale’ 0

Importance of operational scale Mainly because of its impact on the average cost of production, operational scale is a very important choice variable in business system design in general, and production system design in particular. Investing in additional production capacity before the customer demand that is needed to utilise this capacity profitably has materialised, involves a risk. An increase in operational scale tends to lead to a corresponding increase in complexity (causing potential diseconomies of scale’ ). 13

‘Dynamic’ economies of scale 14 Cumulative number of units produced (units) Average cost per unit produced (£/unit) ‘Learning curve’ 0

Focused operations and the learning curve (1) The more complex a production system, the more difficult it is to manage effectively. The idea of ‘focused operations’ is based on the proposition that narrowing the range of demands placed on an operations facility will lead to better performance, because management attention can be concentrated on a few key tasks and priorities. 15

Focused operations and the learning curve (2) Focused operations involve: focusing each facility on a limited and manageable set of products, markets, process technologies, and volumes; structuring operations and support processes so that they focus on one explicit, overall operations task, instead of many inconsistent, conflicting, implicit tasks. The essence of focused operations is the homogeneity of operations tasks, and the experience within the organisation of completing these tasks repetitively. Focused operations are linked to two other key concepts: routines and the learning curve (and thus dynamic economies of scale). 16

Lean production –> the absence of trade-offs?! Factors that appear to have a significant positive impact of the overall productivity of manufacturing systems: 1.Effectively managing investments in capital equipment so that they contribute to organisational learning rather than mainly add to costs. 2.Designing products for manufacturability (based on modularity and simplification). 3.Eliminating waste. 4.Reducing work-in-progress (WIP) inventory. 5.Managing change to reduce confusion. 17

Strategic assessment of technology and capacity decisions Feasibility – for instance, in terms of the availability of the required finance for investment or access to the necessary technology etc. Acceptability – in terms of the financial return that the business expects to earn on its investment. Vulnerability – in terms of the risk that the chosen alternative will not perform as expected. Fit with strategy – how well each alternative fits meets the competitive priorities of the business. 18