CAPACITY, PURCHASING AND SUPPLY STRATEGY ISSUES IN INTERNATIONAL PRODUCTION NETWORKS Flashcards
What is capacity strategy? I
Capacity strategy includes a number of interrelated decisions that include defining the overall scale of the operation, the number and size of the sites between which capacity is distributed, the specific activities allocated to each site, when capacity levels should be changed, how big each step change should be and the location of each site. Capacity-related decisions are conventionally divided into three-time horizons – long-term, medium-term and short-term strategic decisions. Strategic decisions are those concerned with the provision of buildings, facilities and process technology, in all parts of the business, for at least months and probably years into the future.
Capacity decision can be divded into 3 levels, explain them
How much capacity should an operation have?
The starting point in determining overall capacity level will be the demand forecast. However, actual capacity may not be the same as forecast demand. It may be modified to account for the relative certainty, or uncertainty, of demand, long-term changes in expected demand level, the availability of capital needed, the ratio of fixed to variable costs and general economies of scale. Also, a company may choose to provide more of one kind of resource (e.g. the size of the physical building) before demand warrants it, in order to save capital costs in the long run.
How many separate sites should an operation have?
The decision here concerns the choice between many small sites on the one hand, or fewer larger sites on the other. The geographical distribution of demand, together with customers’ required service level, will influence this decision, as will the economies of scale of the operation and the costs associated with supply. If demand is widely distributed between customers demanding high levels of service, and if there are no significant economies of scale or costs of supply, then the business is more likely to operate with many small sites.
What issues are important when changing capacity levels?
Capacity can be introduced to either lead or lag demand. Lead-demand strategies involve early capital expenditure and underutilization of capacity but ensure that the operation is likely to be able to meet demand. Lagging-capacity strategies involve later capital expenditure and full utilization of the capacity but fail to fulfil forecast demand. If inventories are carried over so as to smooth the effects of introducing capacity increments, it may be possible to achieve both high sales and high utilization of resources, and therefore low costs. However, working capital requirements will be higher because the inventory needs to be funded. Changing capacity in large increments can minimize the costs of changing capacity (closure costs if demand is decreasing and capital expenditure if demand is increasing) but can also mean a significant mismatch between capacity and demand at many points in time. Conversely, changing by using small increments of capacity will match demand and capacity more exactly but require more frequent changes. Especially when increasing capacity, these changes can be expensive in capital cost and disruption terms. Often it is the risks of making too large a change in capacity that weigh heavily with operations, especially when forecasts of future demand are uncertain. Generally, the more uncertain is future demand, the more likely operations are to choose relatively small increments of capacity change. Notwithstanding this, there is a general pressure in many industries towards building new capacity, even when over-capacity exists in the industry.
Where should capacity be located?
Required service levels from customers will influence this decision. Fast and regular supply implies location close to customer locations. Other market-related factors include the suitability of the site and the general image of its location. As far as operations resources are concerned, significant factors include the resource costs associated with the site, such as land and energy costs, the investment needed in land and facilities, the availability of any specialist resources required and general community factors.
What are some factors influencing overall capacity?
On the operations resources side:
- Availability of capital
- Cost structure of capacity increment
- Economies of scale
- Flexibility of capacity
On the market requirements side:
- Forecast level of demand
- Changes in future demand
- Uncertainty in future demand
- Consequences of over/undersupply
What are some basic strategies for internationalizing operations?
What is purchasing and supply strategy?
A supply network is an interconnection of organisations that relate to each other through upstream and downstream linkages between the different processes and activities that produce value in the form of products and services to the ultimate consumer. Purchasing and supply strategy is the strategic direction of an organisation’s relationships with suppliers, customers, suppliers’ suppliers, customers’ customers, and so on. It includes understanding the supply network context, determining supply network relationships and understanding the dynamics of the supply network.
What should we ‘do’ and what should we ‘buy’?
Deciding on the extent of outsourcing (or lack of vertical integration) involves an operation in drawing the boundaries of its organisation in terms of the direction of integration, the extent, or span, of integration, and the balance between its vertically integrated stages. In doing so, an organisation is primarily trying to leverage the advantages of coordination, and cost reduction, as well as trying to secure product and process learning. However, the disadvantages of vertical integration can be significant. The internal monopoly effect is often held to inhibit improvement. In addition, vertical integration is said to limit economies of scale, reduce flexibility, insulate a firm from innovation and be distracting from what should be the core activities of the firm. In determining what is effective, the firm must pay full attention to the possibility of opportunistic supplier behavior. Insights from transaction cost economics can be used to help make these types of decision.
What decision logic can one use regarding outsourcing and what are some generic sourcing strategies?
How may in-house and outsource supply affect operations performance objectives?
How do we buy; what is the role of contracts and/or relationships?
Contracts are those explicit (usually written, often detailed) and formal documents that specify the legally binding obligations and roles of both parties in a relationship. Contracts and relationships are the basic ingredients of any supply arrangement. Market- based supply depends on contracts, while ‘partnerships’ are built on relationships. The issue of trust is important in partnerships; strong trusting relationships can facilitate outsourcing even critical activities. Long-term partnerships with a relatively small number of strategic partners have been put forward as a way of maintaining the coordination and low transaction-cost effects of vertical integration, while at the same time avoiding the internal monopoly effect on operations improvement. The major problem with partnerships, however, is the difficulty of maintaining the attitudes and activities that bolster the high degree of trust that is necessary for them to work effectively.
How do we manage supply dynamics?
Because supply networks are interrelationships of independent operations, the way in which each operation relates to the others in the network provides an opportunity for supply network distortions. These distortions can be considered in both a quantitative and a qualitative sense. Quantitative distortions are caused by the necessity to manage the inventories between operations in the supply network. This can lead to short-term imbalance between supply and demand, the overall effect of which is to amplify the level of activity fluctuations back up the supply chain. So, relatively small changes in ultimate demand can cause very large changes in the output levels of operations upstream in the supply chain. Qualitative distortions can occur through misperceptions in the way market requirements are transmitted up a supply chain and the way in which operations performance is viewed down the supply chain. It can also be caused by mismatches between what is perceived as required by customers and suppliers and the performance that is perceived as being given to customers.
How do we manage suppliers over time?
Operations attempt to overcome the worst effects of distortions in the supply chain, usually by one of three methods:
- Coordination: Coordination attempts to line up the activities of operations in a supply chain through information sharing, channel alignment and changes in operational efficiency. .
- Differentiation: Differentiation involves adopting different supply chain management strategies for different types of market
- Reconfiguration: Reconfiguration involves changing the scope and shape of a supply chain. This may mean attempting to merge or reorder the activities in a supply chain, so as to reduce complexity or response times in the network. Increasingly, technology is having the effect of disintermediating operations in supply chains.
