ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.
-
Upload
rylie-huntington -
Category
Documents
-
view
218 -
download
0
Transcript of ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.
![Page 1: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/1.jpg)
ISEN 315Spring 2011
Dr. Gary Gaukler
![Page 2: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/2.jpg)
Operations
Finance
Marketing
Functional Areas of the Firm
![Page 3: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/3.jpg)
Time Horizons for Decisions1. Long Term Decisions
2. Intermediate Term Decisions
3. Short Term Decisions
![Page 4: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/4.jpg)
The Elements of Production and Operations Strategy
![Page 5: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/5.jpg)
History of POM
Early years of the Industrial Revolution 1780-1890– Shift from low-volume production to large scale
operationsMass Production 1890-1920
– Concept of the assembly line– Frederick Taylor champions the idea of “scientific
management”– “The first IE”
“Golden Age” of IE 1920-1960– Operations Research and IE influence industry– Inventory control, quality control, scheduling
![Page 6: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/6.jpg)
History of POM
1960-1990– Sophisticated concepts: Quality Circles, JIT– US companies lose competitive edge
1990-today– Supply chain management– New technologies: internet, wireless, RFID
![Page 7: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/7.jpg)
How Do Firms Differentiate Themselves from Competitors?
• Low Cost Leaders: Some examples include
• High Quality (and price) Leaders. Ex:
![Page 8: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/8.jpg)
Along What Other Dimensions Do Firms Compete?
![Page 9: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/9.jpg)
The Product Life-Cycle Curve
![Page 10: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/10.jpg)
![Page 11: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/11.jpg)
A First Operations Model: Capacity Strategy
Fundamental issues:
– Amount. When adding capacity, what is the optimal amount to add? • Too little
• Too much
– Timing. What is the optimal time between adding new capacity?
– Type. Level of flexibility, automation, layout, process, level of customization, outsourcing, etc.
![Page 12: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/12.jpg)
Three Approaches to Capacity Strategy
• Policy A: Try not to run short. Here capacity must lead demand, so on average there will be excess capacity.
• Policy B: Build to forecast. Capacity additions should be timed so that the firm has excess capacity half the time and is short half the time.
• Policy C: Maximize capacity utilization. Capacity additions lag demand, so that average demand is never met.
![Page 13: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/13.jpg)
Capacity Leading and Lagging Demand
![Page 14: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/14.jpg)
Determinants of Capacity Strategy
• Highly competitive industries (commodities, large number of suppliers, limited functional difference in products, time sensitive customers) – here shortages are very costly.
• Monopolistic environment where manufacturer has power over the industry: (Intel, Lockheed/Martin).
• Products that obsolete quickly, such as computer products. Want type C policy, but in competitive industry, such as computers, you will be gone if you cannot meet customer demand. Need best of both worlds: Dell Computer.
![Page 15: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/15.jpg)
Mathematical Model for Timing of Capacity Additions (Capacity leads demand)
Let D = Annual Increase in Demand
x = Time interval between adding capacity
r = annual discount rate (compounded continuously)
f(y) = Cost of expanding by capacity y
![Page 16: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/16.jpg)
Mathematical Model (continued)
• A typical form for the cost function f(y) is:
Where k is a constant of proportionality, and a measures the ratio of incremental to average cost of a unit of plant capacity.
( ) af y ky
![Page 17: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/17.jpg)
Capacity Expansion Cost
![Page 18: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/18.jpg)
Dynamic Capacity ExpansionSuppose demand exhibits a linear trend:
y: current demand (= current capacity)D: rate of increase per unit time
![Page 19: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/19.jpg)
Dynamic Capacity ExpansionCapacity leads demand
![Page 20: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/20.jpg)
Dynamic Capacity Expansion
Question: What value of x minimizes the net present value of capacity expansion costs?
x = time interval between capacity expansions
![Page 21: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/21.jpg)
Model Assumptions
• Infinite planning horizon• Demand grows linearly• Capacity expansion allowed at any time point• Any size capacity expansion allowed• No shortages allowed• Continuous discounting at rate r• Capacity expansion is instantaneous• Expansion cost for expanding by size x is f(x)=kxa
(0<a<1)
![Page 22: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/22.jpg)
Continuous Discounting
• The present value of $1 incurred in t years, assuming continuous compounding at a rate r, is e-rt
• Let’s derive this!
![Page 23: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/23.jpg)
![Page 24: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/24.jpg)
![Page 25: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/25.jpg)
Optimal Expansion Size
• Need to satisfy all demands• x is the time interval between expansions• Hence, at the time of expansion, the expansion size
should be:
• Cash flows:
![Page 26: ISEN 315 Spring 2011 Dr. Gary Gaukler. Operations Finance Marketing Functional Areas of the Firm.](https://reader036.fdocuments.us/reader036/viewer/2022062312/5519ffa0550346634a8b47dc/html5/thumbnails/26.jpg)
Sum of Discounted Costs
• Cost = C(x) = f(xD) + f(xD)e-rx + f(xD)e-2rx + ...
• After some algebra:– Cost = C(x) = f(xD)/(1-e-rx)
• Want to find: min C(x) s.t. x>=0
• Result: rx / (erx-1) – a = 0• Numerical solution only!