MAKE OR BUYThe make-or-buy decision is the act of making a strategic choice between producing an item internally (in-house) or buying it externally (from an outside supplier). The buy side of the decision also is referred to as outsourcing.

Factors Considered:1. Available Capacity 2. Expertise 3. Quality Considerations 4. Nature of Demand 5. Cost 6. Risks

DEVELOPING CAPACITY ALTERNATIVESAside from the general considerations about the development of alternatives, other things that can enhance capacity management such as:1. Design Flexibility into system 2. Take Stage of life cycle into account Capacity requirements are often closely linked to the stage of the life cycle that a product or service is in.

3. Take a big picture approach to capacity changes consider how parts of the system interrelate4. Prepare to deal with capacity chunks Capacity increases are often acquired in fairly large chunks rather than smooth increments, making it difficult to achieve a match between desired capacity and feasible capacity5. Attempt to smooth out capacity requirements Unevenness in capacity requirements also can create certain problems.6. Identify the optimal operating level Production units have an optimal rate of output for minimal cost.

At the ideal level, cost per unit is the lowest level for that production unit. Outside the ideal, it will result to either economies of scale or diseconomies of scale.

Economies of scale - If the output rate is less than the optimal level, increasing the output rate will result in decreasing average unit cost, i.e., the the cost per unit of output drops as volume of output increases

The reasons for economies of scale include the following:a. Fixed costs are spread over more units, reducing the fixed cost per unit.b. Construction costs increase at a decreasing rate with respect to the size of the facility to be built.c. Processing costs decrease as output rates increase because operations become more standardized, which reduces unit costs.

However, if output is increased beyond the optimal level, average unit costs would become increasingly larger. This is known as the diseconomies of scale. The reasons for diseconomies of scale are as follows:a. Distribution costs increase due to traffic congestion and shipping from one large centralized facility instead of several smaller, decentralized facilities.b. Complexity increases costs; control and communication become more problematic.c. Inflexibility can be an issue.d. Additional levels of bureaucracy exist, slowing decision making and approvals for changes.

7. Choose a strategy if expansion is involved Consider whether incremental expansion or single step is more appropriate. Factors include competitive pressures, market opportunities, costs and availability of finds, disruption of operations, and training requirements, Also, decide whether to lead or follow competitors. Leading is more risky but it may have greater potential for rewards.

CONSTRAINT MANAGEMENTThe Theory of Constraints was developed and popularized by Eliyahu Goldratt. TOC, as it is commonly called, recognizes that organizations exist to achieve a goal. A factor that limits a company's ability to achieve more of its goal is referred to as a "constraint."7 Principles of the Theory of Constraints:1. The focus is on balancing flow, not on balancing capacity.2. Maximizing output and efficiency of every resource will not maximize the throughput of the entire system.3. An hour lost at a bottleneck or constrained resource is an hour lost for the whole system. An hour saved at a non-constrained resource does not necessarily make the whole system more productive. 4. Inventory is needed only in front of the bottlenecks to prevent them from sitting idle, and in front of assembly and shipping points to protect customer schedules. Building inventories elsewhere should be avoided.5. Work should be released into the system only as frequently as the bottlenecks need it. Bottleneck flows should be equal to the market demand. Pacing everything to the slowest resource minimizes inventory and operating expenses. 6. Activation of non-bottleneck resources cannot increase throughput, nor promote better performance on financial measures.7. Every capital investment must be viewed from the perspective of its global impact on overall throughput (T), inventory (I), and operating expense (OE).7 categories of constraints:Market ResourceMaterialFinancialSupplierKnowledge or competencyPolicyHowever, in general, these types of constraints can just be either internal or external to the system. An internal constraint is in evidence when the market demands more from the system than it can deliver. If this is the case, then the focus of the organization should be on discovering that constraint and following the five focusing steps to open it up (and potentially remove it). An external constraint exists when the system can produce more than the market will bear. If this is the case, then the organization should focus on mechanisms to create more demand for its products or services.Five-step process for recognizing and managing limitationsStep 1:Identify the constraintStep 2:Develop a plan for overcoming the constraintsStep 3:Focus resources on accomplishing Step 2Step 4:Reduce the effects of constraints by offloading work or expanding capabilityStep 5:Once overcome, go back to Step 1 and find new constraints

EXAMPLE (Application of the 5-step process) The demand for parts produced by a computer-controlled piece of equipment known as the NCX10 exceeded the machine's capacity. Since the factory could only assemble and sell as many products as they had parts from the machine. The capacity of the factory to make money was tied directly to the output of the NCX10. The NCX10, therefore, was the constraint.

STEP 1 IDENTIFY THE CONSTRAINT In order to manage a constraint, it is first necessary to identify it. In the above example,the NCX10 was identified as the constraint. This knowledge helped the company determine where an increase in "productivity" would lead to increased profits. Concentrating on a non-constraint resource would not increase the throughput because there would not be an increase in the number of products assembled. To increase throughput, flow through the constraint must be increased.

STEP 2 DEVELOP PLAN FOR OVERCOMING CONSTRAINT Once the constraint is identified, the next step is to focus on how to get more production within the existing capacity limitations. when the company and the labor union agreed to stagger lunches, breaks, and shift changes so the machine could produce during times it previously sat idle. This added significantly to the output of the NCX10, and therefore to the output of the entire plant. To manage the output of the plant, a schedule was created for the constraint. The schedule showed the sequence in which orders would be processed and their approximate starting time.

STEP 3 FOCUS RESOURCES ON ACCOMPLISHING STEP 2 or SUBORDINATE Exploiting the constraint does not ensure that thematerials needed next by the constraint will always show up on time. The most important component of subordination is to control the way material is fed to the non-constraint resources. TOC says that non-constraint resources should only be allowed to process enough materials to match the output of the constraint. The release of materials is closely controlled and synchronized to the constraint scheduleSTEP 4 REDUCE THE EFFECTS OF CONSTRAINTS BY OFFLOADING WORK OR EXPANDING CAPABILITY The next step is to determine if the output of the constraint is enough to supply market demand. If not, it is necessary to find more capacity by "elevating" the constraint. In the above example,schedulers were able to remove some of the load from the constraint by rerouting it across two other machines. They also outsourced some work and brought in an older machine that could process some of the parts made by the NCX10. These were all ways of adding capacity, or elevating the constraint.

STEP 5 - GO BACK TO STEP 1 Once the output of the constraint is no longer the factor that limits the rate of fulfilling orders, it is no longer a constraint. Step 5 is to go back to Step 1 and identify a new constraint -because there always is one.

EVALUATING ALTERNATIVESAlternatives should be evaluated from varying perspectives1. ECONOMIC Cost-volume analysis Break-even point Financial analysis Cash flow Present value Decision theory Waiting-line analysis Simulation2. NON-ECONOMIC Public opinion Cost-Volume Analysis focuses on the relationship between cost, revenue and volume of out-put. purpose of cost-volume analysis is to estimate the income of an organisation under different operating conditions. It is particularly useful as a tool for comparing capacity alternatives.

Assumptions of Cost-Volume Analysis One product is involved. Everything produced can be sold. The variable cost per unit is the same regardless of the volume. Fixed costs do not change with volume changes, or they are step changes. The revenue per unit is the same regardless of volume. Revenue per unit exceeds variable cost per unit.

Financial Analysis Important terms in financial analysis: Cash flow The difference between cash received from sales and other sources, and cash outflow for labor, material, overhead, and taxes Present value The sum, in current value, of all future cash flow of an investment proposal3 most commonly used methods of financial analysis:a. Payback - a crude but widely used method that focuses on the length of time it will take for an investment to return its original costs. Payback ignores the time value of money. Its use is easier to rationalize for short-term than for long-term projects.b. Present Value summarizes the initial costs of an investment, its estimated annual cash flows, and any expected salvage value in a single value called equivalent current value, taking into account the time value of money (interest rates)c. Internal Rate of Return (IRR) summarizes the initial cost, expected annual cash flows, and estimated future salvage value of an investment proposal in an equivalent interest rate. In other words, this method identifies the rate of return that equates the estimate future returns and the initial costs.These techniques are appropriate when there is a high degree of certainty associated with estimates of future cash flows. In many instances, however, operations managers and other managers must deal with situations better described as risky or uncertain. Decision Theory a helpful tool for financial comparison of alternatives under conditions of risk or uncertainty. It is suited to capacity decisions and to a wide range of other decisions managers must make such as product and service design, equipment selection and location planning.

Causes of Poor Decision:1. Mistakes in Decision Process2. Bounded Rationality3. Suboptimization

Mistakes in Decision Process It happens because of mistakes on the following decisions steps:

Suboptimization Usually occurs because organizations typically departmentalize decisions. The result of different departments each attempting to reach a solution that is optimum for that department. Unfortunately, what is optimal for one department may not be optimal for the organization as a whole.

Decision-making under CertaintyWhen it is known for certain which of the possible future conditions will actually happen, the decision is usually relatively straightforward simply choose the alternative that has the best payoff under that state of nature.

Decision-making under UncertaintyAt the opposite extreme is complete uncertainty. No information on how likely the various states of nature are. Under those conditions, 4 possible decision criteria are:

Decision-making under RiskBetween the two extremes of certainty and uncertainty lies the case of risk: the probability of occurrence for each state is known. Decisions made under the condition that the probability of occurrence for each state of nature can be estimated. A widely applied criterion is expected monetary value (EMV).In EMV, the manager determines the expected payoff of each alternative, and then chooses the alternative that has the best expected payoff. This approach is most appropriate when the decision maker is neither risk averse nor risk seeking

Decision Tree A schematic representation of the alternatives available to a decision maker and their possible consequences. The term gets its name from the tree-like appearance of the diagram. The decision tree is particularly useful for analyzing situations that involve sequential decisions. A decision tree is composed of a number of nodes that have branches emanating from them.

Other methods under Decision Theory are:Expected Value of Perfect Information (EPVI) - The difference between the expected payoff with perfect information and the expected payoff under riskSensitivity Analysis provides a range of probability for which an alternative has the best expected payoff.

WAITING-LINE ANALYSIS Analysis of lines is often useful for designing or modifying service systems. Waiting lines have a tendency to form in a wide variety of service systems. The lines are symptoms of bottleneck operations. Analysis is useful in helping managers choose a capacity level that will be cost-effective through balancing the cost of having customers wait with the cost of providing additional capacity.

SIMULATION This is useful in evaluating what if scenarios. What ifanalysis is a powerful tool for improvement that evaluates how strategic, tactical or operational changes may impact the business. Through differentscenariosyou will be able to perform a true-to-life analysis of your processes without putting your business operation at risk.One will be able to answer questions like:How would the processing time of a case decrease if the number of available resources is doubled?What would be the cost/benefit rate of reducing the process time in a specified activity?What would be the effect of altering the working shift configuration in the operational cost and service level?

OPERATIONS STRATEGY Capacity planning impacts all areas of the organization It determines the conditions under which operations will have to function Flexibility allows an organization to be agile It reduces the organizations dependence on forecast accuracy and reliability Many organizations utilize capacity cushions to achieve flexibility Bottleneck management is one way by which organizations can enhance their effective capacities Capacity expansion strategies are important organizational considerations Expand-early strategy Wait-and-see strategy Capacity contraction is sometimes necessary Capacity disposal strategies become important under these conditions

21 | MBA - Operations Management