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					Designing and Managing
Operating Networks
Henry C. Co
Technology and Operations Management,
California Polytechnic and State University

Strategic Choices

   Structure (p.142-150)              Infrastructure (p.150-158)
       Number of operating units          Degree of centralization
        (plants)                           Policies
       Location                           Incentives
       Scope of operation (what           Measures and controls
        each plant does)
       Degree of specialization
                                       Ownership and Governance
                                           Who owns which

Rationale for Multifacilities
            Pros                           Cons
   As a given site is           Economies of scale
    assigned responsibility
                                 Centralization enables a
    for more and more
                                  company to make use of
    activities and as it          the unique capabilities and
    expands its geographic        skills developed in the
    coverage, managing the        original site.
    operation becomes
    increasingly complex.        Avoids logistical
                                  complexity associated
                                  with coordinating
                                  production and
                                  information flows across

Single-Facility Manufacturing

   Facilities choices are limited

   Plant managers and their subordinates alone can
    usually resolve operating issues.

   Corporate manufacturing staffs are seldom

Multifacilities Manufacturing

   New set of problems:
     How to match products with plants?
     What relationship to establish among facilities?
     The basis for comparing the performance of
      dissimilar organizations.

   Operating decisions become more complex, and a
    corporate staff is frequently required to coordinate
    activities across plants.

Facilities Choices

   Companies may choose to             Companies may locate plants
    compete with a few large                Close to markets,
    plants or many small ones.
                                            Close to raw materials,
                                            Close to suppliers, or
                                            Close to R&D laboratories.

   Companies may focus                 Individual factories can be
    facilities by product lines or       integrated into a plant
    production processes.                network.

   For example, large single product plants offer
    efficiency and economies of scale, but sacrifice
    responsiveness and flexibility.

   Locating a plant within a market sometimes provides
    a competitive edge; at other times it does not.

   Deciding how a factory should be focused-the range
    of products to include, and the variety of production
    processes-has important links to competitive
Corporate Attitudes That Imply
Strategic Preferences
1.   Dominant Orientation (market or product),

2.   Pattern of Diversification (product, market, or

3.   Attitude Toward Growth (acceptance of low growth

4.   Choice between Competitive Strategies (high profit
     margins versus high output volumes).

1. Dominant Orientation

 Market    Orientation
    Primary expertise is ability to understand and respond
     effectively to needs of particular market or consumer
    Gillette and Head Ski

 Product/Material      Orientation
    Steel companies, rubber companies, oil companies
    Develop new uses for existing products
    Corning Glass, Firestone, Du Pont, Conoco

 Technology      Orientation
    Computer/Electronics companies

2. Pattern of Diversification

   Product diversification within a given market

   Market diversification (geographic or consumer
    group) using a given product line

   Process (vertical integration) increasing the span of
    the process

   Unrelated horizontal (conglomerate)

3. Corporate Attitude Towards
   Growth sought explicitly

   Growth as by-product of successful management of
    “core” business

4. Competitive Priorities

   Margin or volume?

   Dependability

   Price

   Product flexibility

   Quality

   Volume flexibility

Vertical Integration and Sourcing

   Decisions regarding direction toward market
    (downstream/forward) or (upstream/backward).
    Upstream is usually considered defensive and
    downstream is usually considered offensive.

   Decisions regarding extent how far is a major

   Decisions regarding balance: should it capture all the
    supplier's output or just a fraction.

Reasons for Vertical Integration

   Is vertical integration good?

   The two basic reasons for integration: to increase
    profits and to increase control over suppliers.

   However the control reason is specious since the
    parent may not have the expertise or the control

   Reasons to Use Vertical
    Pros
       Lower costs: reduction of overhead, More
        coordination of design , production and marketing,
        better coupling implies lower inventory; Optimization
        of coordination of between systems; faster feedback
        to customer thereby reducing costs of finished good
       Improved control: Protection from being shut off from
        supplies; reduced susceptibility to destructive
        competition for resources; better information; freer
        communication; reduction of new competitors; tighter
        control over designs and a better product; increased
        control over product quality; also it increases value-
How Should You Organize Manufacturing? (Henry C. Co)

Against Vertical Integration

   Cons
     Arguments against lower cost: no more clout with
      outside suppliers; no expertise in design; lower
      economy of scale due to lower production; higher
      material costs because no clout with the suppliers
      of suppliers; lack of managerial skill; the new
      business may be a second class citizen.( There are
      a possibility that transportation costs will out
      weigh the increased cost mentioned above).
     Bowman(1978) and Buzzell(1983) found that either
      a high or a low level of integration will improve
      ROI. Anywhere in-between left the profit margin

   Arguments against control and flexibility: Many in house
    suppliers find that they have less control over the
    whiplash effect of cascading demand; Conflicts on run
    size due to different set-ups and middle strategy
    destroys both efficiency.
   In one case, a middleman was buying from one branch
    and selling to another of the same company because
    "both price and delivery would suffer if it bought from
    itself".; Also loss of process technological developments
    for both industries is bad. Similar results for R&D. Focal
    points for transfer of information may become blurred
    as the case where firms use engineers for sales
    consultants; Size increase may inhibit the managerial
    aspects.; reduced flexibility to respond to market;
Four Basic Process Strategies

   Process focus

   Repetitive focus

   Product focus

   Mass customization

    Within these basic strategies there are many
    ways they may be implemented
Process Focus

   Facilities are organized around specific activities or

   General purpose equipment and skilled personnel

   High degree of product flexibility

   Typically high costs and low equipment utilization

   Product flows may vary considerably making
    planning and scheduling a challenge
Process Focus

Job Shop

                Many departments and
                   many routings
  Many                                 variety
 inputs                                  of
Process Flow Diagram

                                        Customer sales

              Vendors                   PREPRESS DEPT

Accounting   Receiving                  PRINTING DEPT

             Warehous           COLLATING               GLUING, BINDING,
                e                 DEPT                 STAPLING, LABELING

             Information flow           POLYWRAP DEPT
             Material flow

Repetitive Focus

   Facilities often organized as assembly lines

   Characterized by modules with parts and assemblies
    made previously

   Modules may be combined for many output options

   Less flexibility than process-focused facilities but
    more efficient
Repetitive Focus

Automobile Assembly Line

  Raw                       Modules
materials                  combined
   and                     for many
module                      output
 inputs                     options

Process Flow Diagram
Frame tube            Frame-           Frame                  Hot-paint
  bending          building work      machining                 frame
                        cells                                painting
                                   THE ASSEMBLY LINE
     TESTING                                                         Engines and
                                     Incoming parts                 transmissions
     28 tests
                                                                      Milwaukee on a
                           Air cleaners        Oil tank work cell     JIT arrival
                       Fluids and mufflers      Shocks and forks

                         Fuel tank work               Handlebars
                         Wheel work cell        Fender work cell
  Roller testing
Product Focus

   Facilities are organized by product

   High volume but low variety of products

   Long, continuous production runs enable efficient

   Typically high fixed cost but low variable cost

   Generally less skilled labor
Product Focus

Continuous Work Flow

 Few                    in size,
inputs                  shape,
Product Focus
           D                                                               A             Scrap
                                        Nucor Steel Plant                                steel
Continuous caster

                                                      C                                 Electric
                                                                Ladle of molten steel   furnace

                                     Continuous cast steel
                                     sheared into 24-ton slabs
                                            Hot tunnel furnace - 300 ft
                                    E                                          F

                            Hot mill for finishing, cooling, and coiling

                        H                                              G
Mass Customization

   The rapid, low-cost production of goods and service
    to satisfy increasingly unique customer desires

   Combines the
    flexibility of a
    process focus
    with the efficiency
    of a product focus
Mass Customization

                          Number of Choices
 Item                  1970s         21st Century

Vehicle models            140               286
Vehicle types              18             1,212
Bicycle types               8                19
Software titles0      400,000
Web sites                   0        98,116,993
Movie releases            267               458
New book titles        40,530            77,446
Houston TV channels         5               185
Breakfast cereals         160               340
Items (SKUs) in        14,000           150,000
LCD TVs                    0                102
Mass Customization

                       Repetitive Focus
                          Flexible people
                          and equipment
               supply                       Modular techniques

                     Mass Customization
    Effective                                        Rapid
   scheduling                                     throughput
   techniques                                     techniques

    Process-Focused                          Product-Focused
  High variety, low volume              Low variety, high volume
Low utilization (5% to 25%)           High utilization (70% to 90%)
General-purpose equipment                Specialized equipment
Comparison of Processes

   Process          Repetitive     Product Focus         Mass
    Focus            Focus         (High-volume,     Customization
(Low volume,        (Modular)       low-variety)     (High-volume,
 high variety)                                        high-variety)

Small             Long runs,       Large             Large
quantity, large   standardized     quantity, small   quantity, large
variety of        product made     variety of        variety of
products          from modules     products          products

General           Special          Special           Rapid
purpose           equipment        purpose           changeover
equipment         aids in use of   equipment         on flexible
                  assembly line                      equipment
Comparison of Processes …

   Process         Repetitive     Product Focus        Mass
    Focus           Focus         (High-volume,    Customization
(Low volume,       (Modular)       low-variety)    (High-volume,
high variety)/                                      high-variety)

Operators are    Employees        Operators are    Flexible
broadly          are modestly     less broadly     operators are
skilled          trained          skilled          trained for the

Many job         Repetition       Few work         Custom
instructions     reduces          orders and job   orders require
as each job      training and     instructions     many job
changes          changes in job   because jobs     instructions
                 instructions     standardized
Comparison of Processes …

  Process          Repetitive    Product Focus       Mass
   Focus            Focus        (High-volume,   Customization
(Low volume,       (Modular)      low-variety)   (High-volume,
 high variety)                                    high-variety)

Raw material     JIT             Raw material    Raw material
inventories      procurement     inventories     inventories
high             techniques      are low         are low

Work-in-         JIT inventory   Work-in-        Work-in-
process is       techniques      process         process
high             used            inventory is    inventory
                                 low             driven down
                                                 by JIT, lean
Comparison of Processes …

  Process          Repetitive   Product Focus         Mass
   Focus            Focus       (High-volume,     Customization
(Low volume,       (Modular)     low-variety)     (High-volume,
 high variety)                                     high-variety)

Units move       Movement is    Swift             Goods move
slowly           measured in    movement of       swiftly
through the      hours and      unit through      through the
plant            days           the facility is   facility

Finished         Finished       Finished          Finished
goods made       goods made     goods made        goods often
to order         to frequent    to forecast       build-to-order
                 forecast       and stored        (BTO)
Comparison of Processes …

  Process          Repetitive    Product Focus        Mass
   Focus            Focus        (High-volume,    Customization
(Low volume,       (Modular)      low-variety)    (High-volume,
 high variety)                                     high-variety)

Scheduling is    Scheduling      Relatively       Sophisticated
complex,         based on        simple           scheduling
trade-offs       building        scheduling,      required to
between          various         establishing     accommodate
inventory,       models from a   output rate to   custom orders
availability,    variety of      meet forecasts
customer         modules to
service          forecasts
Comparison of Processes …

   Process         Repetitive     Product Focus        Mass
    Focus           Focus         (High-volume,    Customization
(Low volume,       (Modular)       low-variety)    (High-volume,
 high variety)                                      high-variety)

Fixed costs      Fixed costs      Fixed costs      Fixed costs
low, variable    dependent on     high, variable   high, variable
costs high       flexibility of   costs low        costs must be
                 the facility                      low

Costing          Costs usually    High fixed       High fixed
estimated        known due to     costs mean       costs and
before job,      extensive        costs            dynamic
known only       experience       dependent on     variable costs
after the job                     utilization of   make costing
                                  capacity         a challenge

Focus Operations

   Doing a few things very well
     (rather than a lot of things less well)

   Concentrating attention and resources on the things
    that are really important to the business:
       Products
       Process Technologies
       Competitive Priorities

    And Often:
   Breaking up facilities that are trying to do too much
    (and separating into several focused facilities)
     divisions within a plant/office
     separate facilities within a building complex
     separate locations

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