Capacity Management and Manufacturing Flexibility - Term Paper Example

Table of Contents Table of Contents 1.0.Introduction 2 2.0.Supply chain management 3 2 Supply management 4 2 1.Supplier base reduction 4 2 2.Supplier selection 5 2.1.3.Supplier involvement 6 2.1.4.Supplier performance 7 2.1.5.Supplier certification 8 2.1.6.Communication 8 2.1.7.Long-term relations 9 2.1.8.Cross-functional teams 9 2.1.9.Trust and commitment 10 2.2.Sourcing and Purchasing 11 2.3.Capacity management & manufacturing flexibility 12 2.3.1.Capacity management 12 2.3.2.Manufacturing flexibility 12 2.4.Knowledge management 14 3.0.Analysis 15 4.0.Conclusion 17 5.0.References 18 1.0. Introduction Operations management is defined as the design, operation, and improvement of the systems that create and deliver the organization’s primary products and services. In reality, all functions of the organization, not just operations, must design and operate processes and deal with quality, technology and staffing issues. The major challenges facing operations managers in manufacturing industries today are: the global focus of business, need to accommodate rapid product development and changing demand, mass customization, employee empowerment, just-in-time production and supply chain partnering (Heizer & Render 2001). How an operations manager handles these challenges is manifested through a combination of the following four competitive priorities: cost, quality, time and flexibility. The optimal goal of any operations manager is to achieve low-cost operations in terms of cost. With regards to quality the objective is to develop high-performance designs and to manufacture quality products consistently. The operations manager’s time priority seeks rapid new product development, and on-time and reliable delivery of products. Finally, the priority of flexibility is to achieve mass customization albeit with flexible production volume capacity to profitably meet the changing consumer demands. In meeting the challenges facing operations management today, we find that the two key drivers are the role of information and of information technology within the firm and externally to it with the organizations that it has relationships with. Vonderembse and Tracey (1999) argue that more communication and interactions with suppliers, customers, and other functional areas within the firm are needed to ensure that capabilities, both internal and external, are employed in ways that enhance overall performance. In this report we shall address the issue of how an operations manager should go about optimizing the operations and production of a manufacturing plant in the situation where the plant has too many suppliers which is causing major problems in terms of delivery levels; quality of products and raw materials; production scheduling and eventually to customer satisfaction. This problem is best resolved using the supply chain management concept found in operations management. 2.0. Supply chain management With the advent of modern technology, manufacturing processes have become so sophisticated that a single quality characteristic cannot reflect the true product quality (Pana, Panb & Lee 2009). Management is responsible for developing, organizing, and utilizing internal and external capabilities in ways that meet customer needs. To satisfy the final customer’s needs therefore would be a cumulative result of efficiency and effectiveness along the entire supply chain rather than the capabilities of a single firm (Vonderembse & Tracey 1999). This double demand that today’s manufacturing enterprises face, to be both efficient as organization and to contribute to customer satisfaction has meant that a good balance has to be sought. Heikkilä (2002) states that too much in customization ruins efficiency, while too rigid an approach to supply chain management risks customer satisfaction. This leads to the question: what is the supply chain management concept? Supply chain management (SCM) is a set of practices aimed at managing and coordinating the supply chain from raw material suppliers to the ultimate customer. According to Tseng and Lin (2005) the objective of SCM is to improve the entire process from sourcing of raw materials to the delivery of finished products to the consumer rather than focusing on local optimization of particular business units. In this case we observe that the operations manager quandary begins at the root of the supply chain where he is faced with too many suppliers. Since SCM emphasizes all aspects of delivering products and services to customers (Leenders, Fearson, Flynn & Johnson 2002), in this discussion we shall subdivide it into four categories to help us elucidate the possible approach that the operations manager could take to optimize the manufacturing plant’s operations and production. These categories are: supply management; sourcing and purchasing; capacity management and manufacturing flexibility and knowledge management. 2.1. Supply management Supply management emphasizes primarily the buyer–supplier relationship (Leenders et al. 2002) and therefore it differs from the broader definition of SCM which looks at more constituents other than these two. According to Chen and Paulraj (2004) supply management involves: supplier base reduction, supplier selection, supplier certification, supplier involvement, communication, long-term relations, cross-functional teams, and trust and commitment. Vonderembse and Tracey (1999) focus on supplier selection, supplier involvement and supplier performance. 2.1.1. Supplier base reduction In the past, manufacturing firms made it a practice to contract several suppliers on the assertion that (1) competition is the basis of the economic system, (2) purchasing must not become source dependent and (3) multiple sourcing is a risk-reducing technique (Shin, Collier & Wilson 2000). However, in contemporary buyer-supplier relationships the administrative or transaction costs associated with managing a large number of vendors have been found to often outweigh the benefits of having multiple suppliers (Chen & Paulraj 2004). In our case where the organization has too many suppliers, one of the strategies that the operations manager needs to undertake is to divide the firm’s supplier relationships into classes along a continuum from ‘arms-length’ relationships to true partnerships (Heikkilä 2002). This will aid him in identifying which relationships require greater commitment due to their vital importance to the manufacturing plant and which relationships require little investment of effort, time and resources. In support of supplier base reduction, Chen and Paulraj (2004) aggregate the following benefits from various authors: ‘(1) supply base consolidation sets the stage for future development of the chosen suppliers, (2) fewer suppliers to contact in the case of orders given on short notice, (3) reduced inventory management costs (4) volume consolidation and quantity discounts, (5) increased economies of scale based on order volume and the learning curve effect, (6) reduced lead times due to dedicated capacity and work-in-process inventory from the suppliers, (7) reduced logistical costs, (8) coordinated replenishment, (9) improved buyer-supplier product design relationship, (10) improved trust due to communication, (11) improved performance and (12) better customer service and market penetration’ (p.138). 2.1.2. Supplier selection According to Tseng and Lin (2005) there are four major issues that the operations manager will need to look at in relation to choosing suppliers, namely: technology, flexibility, quality and communication channel. Technology looks at whether the supplier to be selected will enable the value of technology to be realized in terms of maintaining or improving the firm’s existing products. This includes the proprietary techniques and professional know-how. Flexibility looks at whether the supplier has the flexibility to aid the manufacturing plant respond better to fluctuations in level of demand, product price change, product mix change, and action of competitors (Tseng & Lin 2005). Quality is about ascertaining whether the supplier can sustain provision of quality raw materials, on-time delivery, and uninterrupted supply (Chen & Paulraj 2004). Finally communication looks at willingness to share information (Chen & Paulraj 2004) and how rapidly is the communication channel (Tseng & Lin 2005). A critical evaluation of these four issues should provide the operations manager with a clearer picture on which suppliers to retain as he embarks upon supplier base reduction. For a better selection process, the operations manager’s firm will need to carefully define and communicate a multi-dimensional criteria to evaluate and select suppliers, so that potential vendors have a clear understanding of the firm’s and its customers’ expectations. Also, with well-defined criteria suppliers will heighten their attention to detail and their level of effort are likely to increase substantially, leading to enhanced performance (Vonderembse & Tracey 1999). 2.1.3. Supplier involvement Supplier involvement is critical because from research suppliers accounted for approximately 30% of the quality problems and 80% of product lead-time problems (Chen & Paulraj 2004). Moreover, research shows that effective integration of suppliers into new product development can reduce cost and improve quality of purchased materials, reduce product development time, and improve access to and application of technology (Primo and Amundson 2002). After the selection of suppliers assign appropriate production tasks to the partners according to each partner’s production capacity in order to create an effective and competitive industry value chain (Tseng & Lin 2005). Supplier involvement in product development activities and continuous improvement efforts, educates suppliers about customer needs, culture, and decision making patterns (Vonderembse & Tracey 1999). This enables suppliers to be more beneficial to the firm because they can now adjust and apply their resources in ways that shall improve the entire supply chain. 2.1.4. Supplier performance The fundamental purpose for supplier relationship management is to enhance the organizations performance through continuously improving operations and product design efforts. In today’s competitive environment it is therefore critical that suppliers participate in this improvement. According to Vonderembse and Tracey (1999) supplier performance is gauged through: raw material availability, timeliness, in-transit damage, and incoming quality. Assessing the level of performance may involve looking at the supplier’s change in performance over the past five or so years. Similar to supplier selection, the criteria for evaluating supplier performance needs to be clearly defined and effectively communicated for optimal effect (Vonderembse & Tracey 1999). 2.1.5. Supplier certification Supplier certification supports greater collaboration between buyer and supplier by providing a mechanism for screening a supplier’s motivation and capabilities (Chen & Paulraj 2004). The operations manager should consider certification of the organization’s supplier’s product as well as its processes. This involves the thorough examination of all aspects of a vendor’s performance for the purpose of improving supplier product quality, reduction of communication errors, and reduction of inspection and inventory costs for the buyer. According to Chen and Paulraj (2004) supplier certification enhances buyer-supplier trust and communication. It also lessens the process of supplier selection and supplier base reduction. 2.1.6. Communication Effective two-way communication is demonstrated throughout SCM literature as essential to successful supplier relationship management. Buyers and suppliers have to commit a greater amount of information and be willing to share sensitive design information (Chen & Paulraj 2004) if there is to be an increased level of the supply chain’s performance. For example information flows in terms of orders have a direct impact on the production scheduling, inventory control and delivery plans of individual members in the supply chain (Heikkilä 2002). In communication what the organization seeks is to ensure effective information sharing in terms of quantity, quality and participation. Information sharing refers to the extent to which critical and proprietary information is communicated to one’s supply chain partner (Mohr & Spekman 1994). Information quality includes traits such as: accuracy, timeliness, adequacy, and credibility. Information participation refers to the extent to which partners engage jointly in planning and goal setting (Mohr & Spekman 1994). These information attributes are closely related and critical in enabling members of the buyer-supplier relationship to co-ordinate their activities (Heikkilä 2002). 2.1.7. Long-term relations According to Chen and Paulraj (2004) long-term relationships does not refer to duration, but rather, to the intention that the proposed arrangement is not going to be temporary. Through a long-term relationship, buyer and supplier increase the intensity of their relationship coordination, as the supplier becomes part of a well-managed chain that will have a lasting effect on the competitiveness of the entire supply chain (Chen & Paulraj 2004) Moreover research shows that when you compare the potential costs associated with different sourcing strategies companies gain greater benefits by placing a larger volume of business with fewer suppliers using long-term contracts. And also that strategically managed long-term relationships with key suppliers have a positive impact on a firm’s supplier performance (Chen & Paulraj 2004). 2.1.8. Cross-functional teams Considering that buyer-supplier relationships are essentially between two organizations, the need for cross-functional teams comes almost naturally. The breadth of corporate objectives pursued through teamwork indicates that it is central to many attempts at wide-ranging organizational transformation. This implies that organizations within the supply chain should likewise anticipate major contributions through team effort especially where the firm interacts with outsiders such as: customers, suppliers and international partners (Chen & Paulraj 2004). In their work Chen and Paulraj (2004) cite several authors who identified cross-functional teams as important contributors to the success of supplier selection, product design, just-in-time manufacturing, cost reduction, total quality initiatives and improved communication. 2.1.9. Trust and commitment SCM is built on a foundation of trust and commitment (Chen & Paulraj 2004). Trust is the belief that the firm’s supply chain partners will do what they promise with consistency. This essentially means that the organization will operate without the fear of self-serving behavior on the part of the other members of the supply chain (Chen & Paulraj 2004). Trust is manifested in a supply chain partnership through faith, reliance and confidence between the partners. It contributes significantly to long-term beneficial relationships. On the other hand, commitment refers to the willingness of both partners to devote their energy and resources with the aim of sustaining and furthering the goals of the supply chain. With commitment, supply chain partners become integrated into their major customers’ processes and more tied to their goals (Chen & Paulraj 2004). High levels of trust and commitment lower transaction costs by minimizing search, contracting, monitoring and enforcement costs over the long term while enhancing supplier performance through reduced negotiation costs and reduced conflict (Chen & Paulraj 2004). 2.2. Sourcing and Purchasing According to Wright (2009), ‘Operational excellence stems most directly from a companys ability to react quickly – but not impulsively – to global market changes and macroeconomic shifts. Blending on-shore, near-shore, and far-shore operations often serves companies better than acquiring materials solely from distant, low-cost countries’ (p. 34). Narrow-minded far-shore sourcing strategies not only make it difficult to respond quickly to rapid shifts in customer demand but also expose the firm to effects of unpredictable currency swings and fluctuating oil prices. As the operations manager tackles the issue of too many suppliers he should also establish frameworks that shall reduce sourcing costs and limit sourcing cycle times especially if the manufacturing plant is has to source some raw materials globally. The aim here is to reduce the cost of globally-acquired goods. The firm would therefore have to constantly assess and revise its global sourcing approaches by: enhancing planning and forecasting mechanisms to maximize responsiveness; segmenting the supplier base such that the firm uses third parties to source the more predictable items as it focuses its in-house experts on sourcing more complex categories such as capital equipment; and by performing comprehensive performance metrics to identify and measure the business behaviors that contribute most directly to total cost of ownership (Wright 2009). The ability of purchasing to influence strategic planning has increased due to the rapidly changing competitive environment because purchasing selects the right type of relationship with its suppliers and supplier relationships ought to be strategically managed (Chen & Paulraj 2004). 2.3. Capacity management & manufacturing flexibility 2.3.1. Capacity management Capacity is the total productive capability of all the utilized productive resources, which can be either permanent or contingent. Permanent capacity is the maximum amount of production possible in regular work time using the internal resources of the company such as existing workforce level on the steady payroll while contingent capacity refers to the additional temporarily acquired capacity for example through subcontracting, overtime production, renting work stations, and so on (Alp & Tan 2008). The issue of capacity management is of vital importance in most production systems, especially under demand volatility. According to Alp and Tan (2008) in a make-to-stock system with fixed capacity and volatile demand, elevated levels of inventory and/or significant underutilization of capacity is unavoidable in order to be able to meet demand in a timely fashion. However, in many production systems a certain level of flexibility in the production capacity is either inherent or can be acquired (Alp & Tan 2008). This implies that system costs could be decreased through managing the capacity and inventory in tandem. The operations manager has to deal with capacity decisions such as determining how many production facilities to operate at any given time, determining the permanent capacity of a facility and making contingent capacity adjustments. 2.3.2. Manufacturing flexibility According to D’Souza (2002) ‘manufacturing flexibility is the ability of manufacturing function to make adjustments needed to react to environmental changes without significant sacrifices to firm performance’ (p.471). In today’s competitive environment it is not about the surfeit of assets that an organization can flaunt rather it is about the flexibility of those assets. Manufacturing flexibility can be defined and measured using four dimensions: volume flexibility and variety flexibility address the need to manage uncertainty in the external environment (externally oriented) while process flexibility and materials-handling flexibility address flexibility at the value-adding core activities of the business (internally oriented) (D’Souza 2002). In our case, the operations manager needs to take a critical look at how environmental uncertainty, management preferences and time dependency affect the manufacturing plant’s flexibility options. For example under environmental uncertainties he may look at resource and supplier-based uncertainties, fluctuations in output quality and demand-based uncertainties as drivers to help him resolve the issue of too many suppliers, quality of products and customer satisfaction. Under management preferences he may address issues such as the organizational goals and strategies, and what are the expectations of his bosses, peers and subordinates. Time dependency simply refers to whether he needs to seek a short-term or long-term flexibility option. Increasing manufacturing flexibility is a key strategy for improving responsiveness in the face of an uncertain future for example process flexibility, enables the firm to produce different types of products in the same plant or production facility at the same time (Chambers, Snir, & Ata 2009). Also, a key research finding corroborates that a limited amount of flexibility, carefully allocated, provides the great majority of the potential benefits achievable with total flexibility, i.e. the optimal use of a relatively small amount of flexible capacity may constitute an optimal policy (Chambers, Snir, & Ata 2009). 2.4. Knowledge management With globalization, manufacturing organizations have increasingly taken advantage of advanced information technologies to achieve their global supply chain. This has led to development of advanced manufacturing enterprises characterized by: a physically distributed enterprise environment, outsourcing and IT-enabled supply chain management (SCM) (Gunasekaran & Ngai 2007). It is believed that the ability to manage and exploit knowledge will be the main source of competitive advantage for the manufacturing industry of the future. Traditional manufacturing had a focus on managing physical assets, but current manufacturing environments focus on managing knowledge assets (Gunasekaran & Ngai 2007). Knowledge management is a function by which decision-making can be automated, in particular for managing enterprise operations (Gunasekaran & Ngai 2007). Civi (2000) provides us with a list of five steps that are needed to be successful in the knowledge management processes: (1) identify the business problems and develop a clear set of goals and objectives for knowledge activities, (2) create a knowledge crew, (3) adapt all level managers to the process, (4) help the companies to change their organizational culture to implement knowledge activities, and (5) provide access to knowledge using various networks and technologies. Knowledge is not just confined internally to the manufacturing organization; it has to be extended to the network of partnering firms and customers (Gunasekaran & Ngai 2007). This calls for the development of knowledge networks to encourage open communication and diffusion of innovation for improving manufacturing competitiveness. However, the organization must be wary of the great challenge in protecting commercial interests over such networks. 3.0. Analysis First step to supplier base reduction involves dividing the firm’s supplier relationships into classes along a continuum from ‘arms-length’ relationships to true partnerships (Heikkilä 2002). This supply base consolidation reduces inventory management and logistical costs, improves buyer-supplier intimacy and betters customer service. However before that is done the organization must carefully define and communicate a multi-dimensional criteria to evaluate and select suppliers, so that potential vendors have a clear understanding of the firm’s and its customers’ expectations (Vonderembse & Tracey 1999). These criteria would make it simpler for both the firm and its suppliers to gauge whether they are suited to match each other’s needs. Chen and Paulraj (2004) cite research that backs up the purpose of this report, i.e. suppliers accounted for approximately 30% of the quality problems and 80% of product lead-time problems in manufacturing plants. After the selection of suppliers, their involvement in product development activities and continuous improvement efforts is vital in creating what Tseng and Lin (2005) refer to as a competitive industry value chain. Having already selected a reduced supplier base does not imply that the organization cannot change its relationship with any of its suppliers. Vonderembse and Tracey (1999) emphasize creation and communication of clear criteria for evaluating supplier performance over a couple to see whether your organization is benefiting from the relationship or not. Mohr and Spekman (1994) remind us that buyer-supplier relationships, akin to humans, are cemented through information sharing where the focus is on quality, quantity and participation in the process. The operations manager therefore will need to ensure that channels of communication with his selected supplier base are as open and valuable as possible. One of the best approaches to do this is through the formation of cross-functional teams made up of personnel from the supplier and the buyer. Cross-functional teams provide a good platform for all parties to build trust and also manifest the commitment from both parties. Global sourcing especially the current preference for far-shore sourcing in the name of “cheaper cost” will also demand the immediate attention of the operations manager. Wright (2009) advices organizations to develop performance metrics to evaluate the true total cost of ownership for far-shore sourcing, look at the responsiveness to fluctuating demand and save on internal resources by focusing in-house experts on sourcing more complex categories and leaving the sourcing of predictable items to third parties. We are informed that in a make-to-stock system with fixed capacity and volatile demand, elevated levels of inventory and/or significant underutilization of capacity is unavoidable in order to be able to meet demand in a timely fashion (Alp & Tan 2008). This essentially means that capacity planning and management is an unavoidable task that the operations manager has to think about. This can be done through in-building of manufacturing flexibility within the organization as well as in its supply chain. Chambers, Snir and Ata (2009) provide the operations manager with hope when they postulate that optimal use of a relatively small amount of flexible capacity may constitute an optimal policy. Finally, being in a digital world where manufacturing enterprises are characterized by: a physically distributed enterprise environment, outsourcing and IT-enabled supply chain management (Gunasekaran & Ngai 2007) the operations manager is encouraged to develop an operational environment that will take advantage of knowledge management. 4.0. Conclusion Research has shown that suppliers are a critical entity to manufacturing firms with regards to meeting variable demand, reduction of inventory and logistics costs, increasing organizational efficiency and enabling customer satisfaction. Therefore it is critical for manufacturing firms’ to nurture and maintain intimate relationships with suppliers if they seek to develop a competitive supply chain. However, maintaining these buyer-supplier relationships requires huge investments in time, effort and capital. This means that manufacturing organizations can only afford to develop a few of such relationships with critical suppliers thus the need for supplier base reduction. To carry out this supplier base reduction the organization must have clearly defined criteria for supplier selection, involvement and supplier performance evaluation. Long-term relationships which research has found to be more beneficial to manufacturing organizations require trust, commitment and open communication. Manufacturing firms are also needed to be flexible to accommodate for the varying consumer demand. Most of all, manufacturing organizations must find ways of harnessing their knowledge and learning curve experience so as to continuously improve their products, processes and people. 5.0. References Alp, O & Tan, T 2008, ‘Tactical capacity management under capacity flexibility’, IIE Transactions, vol. 40, pp. 221 – 237 Chambers, C. G., Snir, E. M & Ata, A 2009, ‘The Use of Flexible Manufacturing Capacity in Pharmaceutical Product Introductions’, Decision Sciences, vol. 40, no. 2, pp. 243 – 268 Chen, I. J. & Paulraj, A 2004, ‘Understanding supply chain management: critical research and a theoretical framework’, International Journal of Production Research, vol. 42, no. 1, pp. 131 – 163 Civi, E. 2000, ‘Knowledge management as a competitive asset: a review’, Marketing Intelligence & Planning, vol. 18, no. 4, pp. 166 – 174 D’Souza, D. E 2002, ‘Toward an understanding of how organizations create manufacturing flexibility’, Journal of Managerial Issues, vol. XIV, no. 4, pp. 470 – 485 Gunasekaran, A & Ngai, E. W. 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