Summary lecture on facilities and capacity strategy Conclusions

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Summary lecture on facilities and capacity strategy • Conclusions from American Connector, ITT, Eli

Summary lecture on facilities and capacity strategy • Conclusions from American Connector, ITT, Eli Lilly, Applichem, Australian Paper etc. • An integrated approach • New paradigms for the global environment

Conclusions from American Connector, ITT, Eli Lilly, Applichem, Australian Paper, etc • • Fit

Conclusions from American Connector, ITT, Eli Lilly, Applichem, Australian Paper, etc • • Fit with strategy Focus of plants Scale and cost Means of evaluation and plant roles Technology transfer Implications of change Capacity imvestments

Traditional approaches to facilities emphasize a number of issues Scale Logistics Focus Global flexibility

Traditional approaches to facilities emphasize a number of issues Scale Logistics Focus Global flexibility and access Access to R&D

Product/Market-Process Focus Mean of Focus Volume Product Market Process Off On Example Low Vol.

Product/Market-Process Focus Mean of Focus Volume Product Market Process Off On Example Low Vol. High Vol. Job Batch Line Detroit Saginaw Lima Job Batch Line Detroit Fremont Lancaster Mayesville

Geographic Network Focus on customer demand zones Include production economics Look at flows from

Geographic Network Focus on customer demand zones Include production economics Look at flows from raw materials to customers Suppliers Plants Distribution Centers Customers

Scale Analysis Subcontract Technology 1 Technology 2 COST VOLUME

Scale Analysis Subcontract Technology 1 Technology 2 COST VOLUME

Logistics drivers • Raw material access (e. g. wood products) • Distributed production for

Logistics drivers • Raw material access (e. g. wood products) • Distributed production for heavy products • Warehouses for commodities because of transportation scale • Customer service requirements

Some Examples of Strategies 1. Different process steps and scale, significant logistics Central stage

Some Examples of Strategies 1. Different process steps and scale, significant logistics Central stage 1, decentralized stage 2 2. Significant central R&D Central plant for at least early life cycle 3. Significant product flexibility Decentralized satellite plants for some stages The examples underscore the need to develop a strategically consistent focus approach and then appropriately analyze scale and logistics

A suggested approach • Develop a strategy and appropriate means of focus • Using

A suggested approach • Develop a strategy and appropriate means of focus • Using data, benchmarking and analysis of technology, develop scale curves • Identify major decision choices and service requirements covering plant and process options • Do the analysis

Case Study Worldwide Consumer Goods Manufacturer 25 Product Groups About 10 Production Locations Variety

Case Study Worldwide Consumer Goods Manufacturer 25 Product Groups About 10 Production Locations Variety of Product Values and Weights Over Capacity Lack of Focus Significant Tax Issues

fixed costs variable costs taxes Stage 1 Stage 2 Why Separate? Scale Customer Approach

fixed costs variable costs taxes Stage 1 Stage 2 Why Separate? Scale Customer Approach Cross sectional analysis Capacity Tax analysis Tax Laws Model of variable costs Focus Detailed analysis of actual fixed Relative Technological costs Complexity Solution: Move "light" products to tax havens Better focus facilities by product group

Traditional strategies are subject to question given a number of important trends Increase in

Traditional strategies are subject to question given a number of important trends Increase in worldwide exports Business level trends • lower scale, higher-skill level manufacturing systems such as FMS • JIT systems that also underscore the need for sophisticated vendor infrastructure • TQM and organizational learning • Faster product development • Customization needs • Products such as wafers and chips

Traditional strategies and trends (continued) Macro level trends • Large, sophisticated overseas markets with

Traditional strategies and trends (continued) Macro level trends • Large, sophisticated overseas markets with local needs • Non-tariff barriers • Regionalized trading economies Variable factor costs

New strategies emphasize several key factors Global product volumes Decentralized network based on regional

New strategies emphasize several key factors Global product volumes Decentralized network based on regional presence Infrastructure versus cost • Changing product cost structure • Skill requirements • Vendors Flexibility in several ways Multiple stages, players and movements The new role of supply chain in design Development in several countries

Don Lessard, in his Survey on Corporate Responses to Volatile Exchange Rates, has shown

Don Lessard, in his Survey on Corporate Responses to Volatile Exchange Rates, has shown that companies may value this flexibility. Out of 37 foreign exchange managers, 7 cited "siting new plants with a view to flexibility in shifting production capacity" as a method of managing exposure. Out of 19 responses in international siting, 12 cited locations to "increase flexibility by shifting plant loadings when exchange rates changed. "

The flexibility strategy can actually decrease expected costs with increased risk range cost single

The flexibility strategy can actually decrease expected costs with increased risk range cost single plant extra flexibility risk factors

Exchange rate model

Exchange rate model

Strengths Four-stage approach to strategy development Business and Operations Strategy Global Market Production Technologies

Strengths Four-stage approach to strategy development Business and Operations Strategy Global Market Production Technologies Crosssectional Data Supply Chain Strategy and Plant Scale Location Strategy Supply Chain Modeling Infrastructural Requirements Logistics Costs Factor Costs Capacity Factors Competitive Environment Internal Constraints Supplier Industries Political and Market Issues

The validity of these strategies are confirmed by the cases at Polaroid and Motorola,

The validity of these strategies are confirmed by the cases at Polaroid and Motorola, but are subject to some Caveats Early life cycle products Products of high unskilled labor content Products with high minimum scale

Background Polaroid’s Camera Manufacturing Network Russia Norwood MA Vale of Leven Scotland Shanghai China

Background Polaroid’s Camera Manufacturing Network Russia Norwood MA Vale of Leven Scotland Shanghai China India (planned) Manufacturing Design & Devel. (Size Capacity) Materials Mfg. Eng.

Product development at Polaroid in cameras further illustrates complexities Why is this now important?

Product development at Polaroid in cameras further illustrates complexities Why is this now important? Current Environment • Flat market • Labor intensive assembly Strategic Market Considerations • Opening of new markets • Anticipated growth area • Trade & investment policies favor locating plant in mkt. US Mfg Activity Effective New Product Introduction • Collocation of Design, Development, and Manufacturing in US • Development’s relationship with US vendor base Cost Pressures • high factor costs in US

Summary While traditional methods of analyzing scale, logistics and focus are still crucial, a

Summary While traditional methods of analyzing scale, logistics and focus are still crucial, a new paradigm must emphasize some additional issues. Decentralized and more sophisticated markets Lower-scale, but more advanced technologies Global product design and flow patterns Flexibility