Unit II

Capacity Strategy &

Supplier Network Strategy
Capacity Strategy

Definition: Capacity strategy refers to the approach an organization takes to determine the
amount, timing, and type of resources needed to meet current and future demand.

Objective: The goal is to balance the available capacity with customer demand while minimizing
costs and maintaining operational efficiency.

Capacity Planning: Deciding the level of capacity required.

Key Components: Capacity Management: Ensuring resources are effectively utilized.

Lead Strategy: Adding capacity in anticipation of future demand.

Types of Capacity Strategies: Lag Strategy: Adding capacity only after demand is confirmed.
Match Strategy: Incremental capacity additions to align with demand.

Importance: Effective capacity strategy helps prevent underutilization (waste) or overutilization

(bottlenecks), ensuring that operations can meet customer requirements consistently.
Levels of capacity strategy
Level of operations • The overall level of operations capacity refers to the total volume of resources or output
capacity that an organization can handle over a specific period.

Determinants: • Market Demand: Capacity is aligned with expected customer needs.

• Resource Availability: Includes workforce, equipment, facilities, and capital.

• Long-term: Deciding the scale and size of facilities (e.g., building a factory).
Capacity Decisions: • Short-term: Adjusting resources to handle immediate fluctuations in demand (e.g.,
overtime, hiring temporary staff).

Strategic Importance: • Ensures the organization can meet demand without incurring excessive costs or delays.
• Supports the firm's competitive positioning by aligning capacity with operational goals.

• Overcapacity: Leads to high operational costs and wasted resources.

Risks of Mismatch: • Undercapacity: Results in unmet customer demand, loss of market share, and damaged
reputation.
Strategic Capacity Decisions

Time Scale: Years to months.

• Decisions: Concerned with long-term physical aspects like buildings,
facilities, and overall process technology.
• Focus: Aligning capacity with the future market demand, determining
the total required capacity, and deciding its location and distribution.
• Example Questions:
• How much capacity is needed in total?
• Where should the capacity be located?
• How should the capacity be distributed?
Medium-Term Capacity Decisions

Time Scale: Months to weeks.

• Decisions: Focused on operational adjustments like staffing
levels, subcontracting resources, and maintaining or fluctuating
capacity levels.
• Focus: Balancing between market forecasts and physical
constraints.
• Example Questions:
• Should staffing levels be adjusted as demand changes?
• Should subcontracting be used to manage fluctuations?
Short-Term Capacity Decisions

Time Scale: Weeks to minutes.

• Decisions: Immediate adjustments such as allocating tasks to
specific resources and scheduling individual facilities.
• Focus: Managing resources to meet current demand
effectively.
• Example Questions:
• Which resources should be assigned to what tasks?
• When should activities be scheduled on specific resources?
 Capacity change refers to adjusting the
Definition scale of operations to align with demand.

Gradual adjustments to capacity, such as

Incremental Change adding small-scale equipment or hiring
part-time staff.

Large-scale investments, such as building a

Step Change
Capacity
new factory or adopting automation.

Change Design Flexibility

Organizations should invest in flexible
systems or modular facilities to allow easier
adjustments in capacity without complete
overhauls.

Capacity decisions depend on accurate

demand forecasts. Errors in forecasting can
Demand Forecasting lead to over-capacity (wasted resources) or
under-capacity (lost opportunities).

The location of new capacity additions can

Geographic Location influence logistics, supply chain costs, and
market responsiveness.
 Forecasting future demand accurately is difficult
Uncertainty in Demand: due to market volatility, seasonal changes, and
economic factors.

Large capital investments in capacity expansion

Cost of Expansion or Reduction: or costs associated with layoffs and facility
closures can strain finances.

Coordination Across the Supply Changes in capacity can disrupt supplier

Challenges
schedules, inventory levels, and delivery
Chain: timelines.

Adopting new technologies to increase capacity

Technological Integration:

in Capacity
requires training, infrastructure adjustments, and
upfront costs.

Misaligned capacity strategies may result in a loss

Competitive Risks: of market share if competitors respond better to

Change
demand shifts.

Capacity changes often require significant lead

Lead Time: time, making it difficult to respond to sudden
demand surges.

Regulatory and Environmental Capacity expansions may need compliance with

zoning laws, environmental regulations, or
Considerations: community agreements.

Sudden capacity reductions can affect employee

Human Resources: morale, while expansions may face hiring and
training challenges.
 Timing decisions depend on forecasted demand
and market conditions.

Companies adopt one of three generic strategies:

Timing of
Capacity Lead Strategy: Adding capacity before demand
increases to prevent shortfalls.

Changes
Lag Strategy: Increasing capacity only after
demand exceeds current levels.

Smoothing with Inventories: Using excess

capacity from one period to meet demand in the
next
Lead Strategy
Definition: Increasing capacity before demand materializes.

Objective: To stay ahead of demand and ensure no customer is turned away due
to shortages.

Ensures availability of products/services during peak periods.

Benefits: Builds customer trust and positions the company as a reliable market
leader.

High initial investment.

Challenges: Risk of overcapacity if demand doesn’t grow as expected.

A renewable energy company building additional solar farms in

Example: anticipation of government subsidies encouraging solar adoption.
Lag Strategy

Definition • Adding capacity after demand consistently exceeds current

capacity.

Objective • To minimize financial risk by only committing resources when

necessary.

Benefits: • Avoids over-investment in unused capacity.

• Efficient use of existing resources until justified by actual demand.

Challenges: • May result in lost sales or delayed service due to insufficient capacity
during peak demand.

Example: • A retail chain waiting until all existing stores in a region are
consistently overcrowded before opening a new outlet.
Smoothing with Inventories

Definition • Excess capacity in one period is used to build up inventory for

later use during high-demand periods.

Objective • To balance production rates and demand fluctuations without

constant changes to capacity.

Benefits: • Efficient use of capacity during slow periods.

• Reduces the need for frequent capacity adjustments.

Challenges: • Requires storage space and increases inventory holding costs.

• Risk of obsolescence for perishable or outdated products.

Example • A toy manufacturer producing in bulk during the off-season to

prepare for holiday demand.
Japanese Manufacturing in Europe
The UK as the Early Building a Supportive Practical and Cultural Toyota's Surprising
Favorite: Ecosystem: Advantages: Decision (1997):
• Inward investments by • Early investments by • English proficiency • Despite a successful
Japanese companies in companies like Nissan among Japanese UK plant, Toyota built
the 1980s and 1990s created a network managers eased its new European
were drawn to the UK effect: operations. facility in France.
due to: • Positive publicity • Cultural familiarity, • Factors influencing the
• Government-funded attracted more such as similar shift:
financial incentives in Japanese firms. climates and leisure • Generous French
industrial areas. • Infrastructure options (e.g., golf government aid for the
• High unemployment development for courses), made the UK Valenciennes region.
regions with a strong expatriates (schools, appealing. • Preference among
manufacturing history. food retailing, social French consumers for
activities). locally manufactured
cars.
• Speculation about the
UK's hesitation to
adopt the EU single
currency.
Lessons Learned
Early investments were driven by attractive government-funded support, but over
Financial Incentives Matter but Aren’t the Only Factor: time, cultural, operational, and market-specific factors played a more significant
role.

Clustering of businesses generates positive publicity, builds support

Critical Mass Creates Momentum: infrastructure, and attracts additional investments, reinforcing a location's appeal.

Cultural and Practical Considerations Influence Factors like language, climate, and lifestyle conveniences (e.g., schools, food,
Decisions: leisure) significantly impact location decisions, beyond financial metrics.

Local consumer attitudes, such as the French preference for domestically

Market Preferences Drive Strategic Choices: produced cars, can outweigh operational efficiencies in global capacity location
strategies.

Speculation about the UK’s reluctance to join the European single currency
Currency and Economic Policies Impact Investments: highlights the influence of national economic policies on business decisions.

Toyota’s choice shows the importance of aligning operational capabilities with

Balancing Efficiency with Market Responsiveness: market demands, even if it means foregoing some existing advantages.
 Supply Network
• An interconnection of organizations which relate to each other through upstream and downstream
linkages between the different processes and activities that produce value in the form of products and
services to the ultimate consumer
• Key Questions
• What we should do ourselves and what to subcontract
• When to use market-based purchasing
• How to develop 'partnership' supply
• Taking a supply network perspective
• How supply networks fluctuate over time
• Reducing supply-chain instability
• Supply-chain restructuring
How it
looks like
• Company A is called the 'focal' company of the network
and together with
• Companies B and C forms the 'focal level' of the
network
• Upstream and downstream here imply that the
dominant flow in the network is
• from left to right. Note, however, that flow occurs in
both directions, products
• and/or services one way and the information that
triggers supply the other way.
• The various processes within Company A form the
internal supply network.
• Outside its boundaries, Company A will have direct
contact with a few suppliers and a number of
customers; this forms the immediate supply network.
The
• linkages of suppliers to Company A's suppliers, and
customers to Company A's customers,
• form its total supply network.
 Supply network strategy
• Supply network strategy is the strategic direction of an organization's
relationships with suppliers, customers, suppliers' suppliers, customers'
customers, etc.
• It includes issues:
• Ensuring that the organization has an understanding of its supply networks,
• Determining appropriate supply network relationships for its various
activities,
• understanding supply network behavior,
• how the dynamics of a supply network will affect the organization
• how networks can be managed (or at least influenced) for the long-term
benefit of the organization.
Why take a supply-network perspective?
• Businesses benefit from viewing themselves within the entire network of customers and suppliers
Understanding the Network to better understand their behaviors and needs.

• Companies can either rely on intermediaries (like immediate customers) to relay end customer
Two Options for Insight needs or take direct responsibility for understanding these needs themselves.

Limitations of Relying on • Depending solely on immediate network partners can be risky, as it places too much trust in their
Intermediaries judgment regarding critical competitive factors.

• Complementors are businesses that provide complementary products or services, which can
Emergence of Complementors significantly ease operations for other companies (e.g., delivery services for online retailers).

• A company is surrounded by four key types of players in its value net: suppliers, customers,
Value Net Concept competitors, and complementors.

• More organizations are choosing to actively engage in understanding customer-supplier

Proactive Approach relationships to enhance their competitive advantage.
What is supply network perspective
• Understands an operation's place within the broader supply network,
Network Positioning: highlighting both its direct activities and those performed by other operations.

• Questions the current boundaries of an operation, considering the potential

Boundary Analysis: benefits of vertical integration or outsourcing to optimize performance.

• Shifts the perspective from traditional customer-supplier relationships to a

Relationship Focus: focus on the flow of goods and services between operations.

• Prioritizes the end customer's experience, recognizing the importance of the

Customer-Centricity: entire supply chain in delivering value.

Collaborative • Encourages collaboration and cooperation among operations within the

Partnerships: network to improve overall effectiveness and efficiency.
Global Sourcing
• Global sourcing can significantly reduce costs by leveraging lower labor and material
Cost Reduction: costs in different regions.

• It provides access to specialized suppliers and unique resources that may not be available
Access to Specialized Suppliers: domestically.

• Sourcing from regions with high-quality standards can improve product quality and
Enhanced Product Quality: reliability.

• Diversifying the supply base across multiple geographies can mitigate risks associated
Increased Supply Chain Resilience: with disruptions, such as natural disasters or political instability.

• Global sourcing can facilitate expansion into new markets by understanding local
Market Expansion: preferences and regulations.

• Collaborating with suppliers from different cultures can foster innovation and knowledge
Innovation and Knowledge Sharing: exchange.

• Global sourcing introduces complexities in terms of logistics, customs, and cultural

Increased Complexity differences.

• Longer supply chains can increase the risk of delays and disruptions, impacting delivery
Risk of Supply Chain Disruptions: times and customer satisfaction.

Currency Fluctuations: • Changes in exchange rates can affect the overall cost of sourcing.

• It's essential to ensure that suppliers adhere to ethical and social standards, including labor
Ethical and Social Responsibility: practices, environmental impact, and human rights.
 Ethical Labor Practices

Global Sourcing Policy

• Child Labor: The company strictly prohibits child labor and only works with
suppliers who comply with minimum age requirements.
Levi Strauss & Co.'s • Forced Labor: Levi's is committed to eliminating forced labor and prison labor
from its supply chain.
• Disciplinary Practices: The company prohibits corporal punishment and other
forms of physical or mental coercion.
• Working Hours: Suppliers must adhere to local labor laws regarding working
hours and overtime compensation, ensuring adequate rest periods.
• Wages and Benefits: Workers should receive fair wages and benefits that meet
local industry standards.
• Freedom of Association: Levi's respects workers' rights to form and join labor
unions and engage in collective bargaining.
• Discrimination: The company prohibits discrimination based on personal
characteristics or beliefs.
• Health and Safety: Suppliers must provide safe and healthy working conditions
for their employees, including those residing in company-provided housing.

Supply Chain Transparency and Monitoring

• Supplier Audits: Levi's conducts regular audits of its suppliers to assess
compliance with its ethical standards.
• Country Assessments: The company evaluates the social, political, and
economic conditions in countries where it operates to identify potential risks
and develop appropriate strategies.
Traditional market-based Supply
Transactional Relationships Emphasis on Price Competitive Bidding
• Suppliers and buyers engage in arms-length • The primary driver in supplier selection is • Buyers rely on competitive tendering or
relationships focused on individual cost minimization, with little consideration bidding processes to ensure favorable terms.
transactions rather than long-term of broader value-added services. • Example: A construction company issuing a
partnerships. • Example: A retailer choosing a supplier tender for cement supply, awarded to the
• Example: A company purchasing raw purely based on who offers the lowest per- cheapest supplier.
materials from the lowest bidder in a unit price for goods.
commodity market.

Limited Collaboration Focus on Short-Term Gains Standardized Offerings

• Interactions are restricted to fulfilling • The relationship prioritizes immediate cost • Suppliers provide generic, undifferentiated
specific contractual obligations, with savings over strategic long-term benefits. products or services to a wide customer
minimal communication or shared strategic • Example: A company switching suppliers base.
goals. frequently to exploit short-term discounts or • Example: Bulk procurement of standardized
• Example: A manufacturer purchasing better offers. steel rods from a large supplier catering to
electronic components without discussing multiple industries.
product design or improvements with the
supplier.
Partnership Supply
Emphasis on building enduring partnerships between buyers and suppliers, fostering trust and mutual commitment.
Long-Term Relationships Example: An automobile manufacturer collaborating with a specific tire company over decades to align production and innovation.

Shared Goals and Both parties align their objectives, focusing on joint problem-solving and achieving mutual benefits.
Strategies Example: A technology firm and its chip supplier co-developing customized solutions to meet market demands.

Collaboration and High levels of information sharing, transparency, and regular interaction to optimize processes and outcomes.
Communication Example: A retail chain sharing sales forecasts with its suppliers to streamline inventory management and reduce lead times.

Partnership supply prioritizes overall value creation rather than just cost minimization, often including quality, innovation, and reliability.
Focus on Value Creation Example: A food company working with farmers to improve crop quality and ensure sustainable supply chains.

Suppliers often tailor products or services to meet the specific needs of their partners, adding a layer of exclusivity and optimization.
Customized Solutions Example: A pharmaceutical firm sourcing unique packaging solutions designed specifically for its products.

Risks and rewards are shared between partners, promoting joint responsibility for outcomes such as cost reduction or new product development.
Risk and Benefit Sharing Example: An energy company and a wind turbine supplier sharing the costs and benefits of developing a new, efficient turbine design.
 Network Management in Supply Chains

Collaboration Balancing Sustainability

Risk Technology
Across the Efficiency and and Ethical
Management Integration
Network Flexibility Practices
Facilitating smooth Striking a balance Identifying, assessing, Leveraging digital
Ensuring the network
communication and between cost and mitigating risks tools like IoT,
aligns with
collaboration among efficiency and the such as supplier blockchain, and
sustainability goals
all members of the ability to respond to disruptions, advanced analytics for
and adheres to ethical
supply chain to ensure market changes and geopolitical issues, or real-time tracking and
standards.
seamless operations. uncertainties. demand fluctuations. decision-making.

Example: A Example: A consumer

Example: A retail giant Example: An Example: A logistics
technology firm goods company
coordinating with automotive firm company using AI-
diversifying its auditing its suppliers
logistics partners and adopting dual sourcing based routing to
supplier base to avoid to ensure compliance
suppliers for just-in- for critical components optimize delivery
dependency on a with environmental
time inventory. to mitigate risks. schedules.
single region. regulations.
Decision Logic of Outsourcing
 Definition
• potential disruptions or challenges that can arise during the procurement of goods and services or within the broader

Purchasing and Supply

supply chain

Supply Disruption
• Caused by natural disasters, geopolitical events, supplier insolvency, or strikes.
• Example: A supplier's factory closure due to a flood, disrupting the delivery of raw materials.

Quality Risk
• Inconsistent or substandard materials or products from suppliers can affect the end product's quality.
• Example: Defective parts in an automotive supply chain leading to vehicle recalls.

Financial Risk
• Volatility in costs due to price fluctuations, exchange rates, or supplier financial instability.
• Example: A spike in commodity prices increasing manufacturing costs.

Demand-Supply Imbalance
Chain Risk

• Forecasting errors or unexpected demand surges can lead to stockouts or overstocking.

• Example: A sudden increase in demand for medical supplies during a pandemic, causing shortages.

Cybersecurity and Data Breaches

• Risks to sensitive supplier or operational data through cyberattacks.
• Example: Hackers targeting logistics systems, disrupting supply chain tracking and management.

Regulatory and Compliance Risk

• Changes in trade regulations, tariffs, or non-compliance with legal requirements.
• Example: A new trade embargo restricting critical imports from a region.

Supplier Dependency Risk

• Over-reliance on a single supplier or region increases vulnerability.
• Example: A tech company heavily reliant on a single microchip supplier facing delays.
How Samsung Came in existence: General Electric (GE)
microwave oven case
GE enjoyed reasonable success in the U.S. microwave oven market in the early 1980s.
Initial Market Position Operated a purpose-designed microwave oven plant in Maryland.

Price Pressure from Faced intense competition from Japanese manufacturers like Matsushita and Sanyo.
Competitors Cost pressures prompted GE to consider subcontracting production of basic models.

GE subcontracted cheaper models to Matsushita despite the risks of working with a competitor.
Outsourcing Decisions GE also placed a trial order of 15,000 units with a small Korean company, Samsung, to assess its capabilities.

Knowledge Transfer to GE engineers helped Samsung set up production to ensure quality standards were met.
Samsung Samsung quickly learned and improved its production capabilities, maintaining low costs and reasonable quality.

Increased Dependence GE outsourced more orders to Samsung due to the higher margins compared to its Maryland plant.
on Samsung The Maryland plant struggled to remain competitive and eventually closed.

GE's Market Exit and GE withdrew from the microwave oven and domestic appliance market altogether.
Samsung's Growth Samsung, using the knowledge and experience gained, became the world's largest manufacturer of microwave ovens within a decade.
Lessons Learned

Loss of Competitive •Subcontracting critical operations to a competitor (Matsushita) and an emerging player (Samsung) gave them
opportunities to improve their capabilities.
Advantage •Over time, Samsung leveraged the knowledge transferred by GE to become a dominant player in the industry.

Erosion of Internal •Outsourcing production reduced the Maryland plant's economies of scale, making it harder to remain cost-competitive.
Capabilities This eventually led to the plant’s closure.

Over-Reliance on •GE became increasingly dependent on Samsung, which provided better margins than its in-house production. This
Subcontractors shifted control of key operations to the subcontractor.

Unintended Knowledge •GE’s efforts to ensure quality by sending its engineers to assist Samsung unintentionally facilitated the growth of a future
Transfer competitor.

Short-Term Cost Focus vs. •While subcontracting initially addressed cost pressures, GE did not anticipate the long-term consequences of enabling
Long-Term Strategy Samsung’s growth or losing its in-house manufacturing capabilities.

Exit from Core Business •The outsourcing strategy ultimately undermined GE's position in the market, forcing it to exit not only the microwave
oven market but the entire domestic appliance industry.