Slides for Chapter 10

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

• 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.

Strategic Capacity

Source: “Honda to expand automobile production capacity in

China” Published by Datamonitor on 26 May 2010

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.

Strategic Capacity

Business Week; 9th

June 2008 p64

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.

Strategic Capacity (cont)

Volkswagen Waltzes Into Tennessee. Business Week 16th July 2008

• 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.

Strategic Capacity

Source: “The Top 10 Consumer Electronics Manufacturers”

Business Insights 21 September 2010

• 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.

Strategic Capacity:

Global Computer Hardware

Source: Datamonitor June 2010

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

Strategic Capacity (cont)

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

Organization Measure 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

Organization Measure 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

"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.

Service Capacity:

“DON'T LET HOTELS 'WALK' ON YOU!”

Source: Fortune 7th August 2006, p102

The Curse of Bottlenecks

4 streams or lanes of

operations – not a

problem

2 streams or lanes of

operations – not a

problemThe

bottleneck

– a BIG

PROBLEM

The Curse of Bottlenecks

Flow of Operations – people, information, inventory etc

10 8 12 6 8

An Operations System like this is almost DESIGNED (!) to

be a problem – and is very common in both manufacturing

and services!!

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.

Three Capacity Management Strategies

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.

Demand

Units of outp

ut

Capacity

Capacity

A level capacity strategy

Chase Strategies.

Organisations that use chase strategies adjust their activity

levels to reflect the fluctuations in demand

Demand

Units of outp

ut

Capacity

Time

A chase capacity strategy

Demand Management Strategies. Organisations that use

demand management try to change demand to smooth high

and low periods.

Demand

Unit

s of outp

ut

Adjusteddemand

Hierarchy Of Company Plans In Operations

LOADING

TIME

Daily Scheduling

Master Operations Schedule (MPS) - monthly

Yearly Sales Forecasts

Business Planning (years)

Type

of

Plans

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

Job

Time

If the RED line is the

shortest FIRST

operation, what would

be the sequence of

jobs??

1

2

3

4

5

Shortest LAST Operation

Job

Time

If the BLUE line is

the shortest LAST

operation, what would

be the sequence of

jobs??

1

2

3

4

5

Total Work Content

Job

Time

On the basis of the

Total Work Content,

what would you

chosse as the

sequence of jobs??

WHY??

1

2

3

4

5

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.

• 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 Rules

Even More "GOOD IDEAS ...."

Scheduling Operations

Activity Dependency?

A -

B -

C A

D B

E A, B, C, D

A good idea is to schedule operations based upon dependencies –

and try to ‘decouple’ operations as much as possible.

An example:

A

B

C

D

E F

G

H

I

Listing Activities by

Dependency

Task Description

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

A

B

C

D

E F

G

H

I

Listing Activities by

Dependency10

87

810 8

7

6

4

2 Questions:

1. What is the earliest time that Activity E can begin?

2. What is the shortest overall process time?

A

B

C

D

E F

G

H

I

Listing Activities by

Dependency10

87

810 8

7

6

4

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.