Asset & Network Flexibility
asset type
Assets (capacity portfolio)
Capacity type:
Flexbility
Automation (usually limits flexibility)
anything that takes irreversible investment to acquire/build and that is needed in some quantity to produce/deliver a certain number of goods/services
Land/ Facilities/ Buildings
Equipment/ Machinery
Employee relationships
Supplier, Distributor relationships (contracts + trust)
Technology/ IT
Routines/ Procedures/ Organisation
Lower Ck/C0
[marginal capacity cost/ fixed capacity cost]
↓
the amount of these assets and when & where you have them matter
as they are needed for production (with the right capabilities) to meet the demand (for a specific value proposition)
we consider the flexibility of the assets & the network
(capacity/location of a set of assets, with network flexibility resulting from the flexibility of assets and the way they are connected through transportation).
Specialised assets can be used only for a limited no. of activities
and often deliver high quality & speed at a low cost
Flexible assets can be used for a wider range of activities
and facilitate the production of a wide range of products/ sercives & adaptation to change
~ 2 Possible Benefits
1) Deliver flexibility as a capacity
2) Provide economies of scale & mitigate the challenges of uncertainty
(pooling, contingent allocation, information updating)
which matters to customers, because they care about variety/fit
Asset Flexibility
one asset can perform multiple tasks
e.g., 3D printer can print a wide variety of forms with different materials & limited changeover time.
but they are currently still expensive & slow
Value of flexibility in the Auto Industry
inflexible plant - only produce one car model
flexible plant - produces >1 model
avg. sales incentive $2691 in 2007
avg. sales incentive $3411 in 2007
Firms use pricing & production flexibility to adjust to changes in demand
costs of production flexibility are clear
but the benefits are harder to quantify
Moreno & Terwiesch empirical study
with
vehicles marketed in the US
period 2002 to 2009
348 models, 20,052 model-month observations
findings
deployment of flexibility is associated to:
increase in list prices
demand volatility associated to higher incentives
increase in utilisation
reduction of incentives
$200 to $700 per car
flexibility to produce what is in demand
less forecast error for sum
less excess capacity needed
flexibility more important when demand volatility is high
Common Categories
Scale or Volume Flexibility
Flexibility measures the ability to adapt or change. Upton
Scope, Mix or Range Flexibility
New Product Flexibility
The ability to increase or decrease the production rate of a particular product
(without a significant increase in cost or decrease in performance)
The ability to produce multiple products. This may refer to “simultaneous” production
e.g., different models produced at the same time on the same assembly line, or to the ability to easily switch production from one product to another.
The ability to introduce new products into the operating system
Agility (or response flexibility)
how fast can you change/switch
Robustness
is performance high across the range?
(sourcing, production and distribution)
Alignment with capabilities
agility needed when competing on timeliness & responsiveness
robustness needed when competing on quality and/or cost for a relatively high amount of variety
scope or mix flexibility needed for variety/fit strategies
scale or volume flexibility useful to produce at low cost with volatile demands
for more than one product
e.g., window installation business
Assets with high degree of automation (ability to produce with limited or no human supervision)
tend to be less flexible but could be higher-quality, faster and lower-cost
Obstacles
often unclear which features of a process must be changed to enhance its flexibility
flexibility is driven more by people & management (policies/ procedures/ culture) than by process structure
competition & customer perception may preclude using flexibility
flexibility costs more (investment, marginal production costs) but its benefits are difficult to measure, value (requires models with economies of scale & uncertainty) and convey
e.g., technology
e.g., using same assets to produce luxury & low-cost goods
How is it flexible?
Economies of scale EoS
(aggregating volumes)
even at higher investment costs & higher marginal production costs, one flexible facility can be less expensive than separate dedicated facilities (each with their own investment cost)
for a set of low volume products if there are some EoS (fixed cost, power function Capex with alpha < 1)
the sticking costs of one "flexible" plant could be lower than those of multiple dedicated ones
Risk Pooling
(aggregating volatilities, σ pool ≤ σ1 + σ2)
reduction in safety capacity (if it was positive to start with), proportional to risk pooling effectiveness
(1- 1/sqrt(N); decreasing returns)
increased revenues & fewer lost sales
reduced variance in profits
pooling effect in service queues is well known too
Allocation Flexibility
more than risk pooling
contingent decision-making
Information Updating
e.g., by first producing a product in a flexible facility, forecasts can be updated & decisions made later about whether to build a dedicated facility
flexibility allows the delay of key decisions & the collection of more information
asset flexibility makes variety and innovation more profitable (less costly for the same or better revenues
When is it most valuable?
When the product portfolio, volumes, and EoS favour a flexible asset
When it can help in managing uncertainty
Risk pooling
when demand uncertainties are high & comparable
i.e., when σ1 ≈ σ2
when the correlation between the various demands is small/ negative
Contingent allocation
when margins are different
allocation flexibility allows allocating more capacity to the higher margin product
Information Updating
when forecasts improve significantly with time & flexibility allows the postponement of production decisions
note: flexibility has to be less expensive than capacity as a solution!
use excess capacity if its cheap
otherwise, use flexibility
but remember, you need enough capacity to take advantage of flexibility
When flexibility offers alignment with your competitive positioning
When flexibility brings you closer to targeted spot on the efficient frontier
wide variety, high levels of customisation
speed to market
innovative products with short life cycles
same level of variety & innovation at lower cost
higher level of variety & innovation at lower cost
Network Flexibility
How much?
Flexibility is most effective if it creates long chains (a chain is a group of assets and products connected via links).
How to achieve flexibility with the network
Dedicated capacities
Resource sharing
Resource substitution
or hybrid network
Postponement
(delayed differentiation)
= asset flexibility
a common flexibility capacity for 2 products
requires less (but more expensive) safety capacity because of pooling
one flexible asset & one or two dedicated assets (typically for the lower-end product if only one)
this mix of flexible & dedicated assets can combine the pooling power of flexibility capacity with the lower investment cost of dedicated capacity
a little flexibility goes a long way
Delayed differentiation combines the advantages of product designs that have common components (demand pooling) and differentiator modules with a process
in which the differentiating elements are added at the end of the process in order to reduce the time between product specification and delivery (used in mass customization)
to decide how much of each types of capacities to install
first, find out the demand then allocate the flexible capacity to maximise profit
if demand exceeds capacity, sales are lost
Capacity can be moved along a chain to respond to demand fluctuations.
Products with negatively correlated demands need not be produced in the same plant.
e.g., for 10 plants, a configuration with 20 links can be nearly as effective as total flexibility if it constructs one large chain
A little bit of flexibility goes a long way if it creates a full chain and includes some excess capacity
Flexibility (capability) through product design (product technology)
Component commonality & platform sharing
e.g., one component now can be used in 5 different models
this allows the production of variety (5 models) at lower cost, higher conformance quality, faster response time, etc.
watch perceived quality!
Modular design
(as opposed to integral design)
e.g., instead of one component, we now create 5 different versions of this component
but all of them fit in all 5 original models, thereby creating 25 varieties
supports "mass customisation"
we can thus increase product variety without taking large hits in other capabilities
(cost, conformance quality, responsiveness)
Adaptable design
product can be changed easily (reversible/ irreversible) by designer/ manufacturer (for semi-custom designs), dealer, or customer to fit a variety of customer demands
e.g., software