Capacity strategy is a plan of action aimed at providing an organization with the right facilities to produce the needed output at the right time. The output capacity of the organization determines its ability to meet future demands for goods and services. Insufficient capacity results in a loss of sales, which, in turn, affects profits. Excess capacity results in higher production costs. A strategy that aims for optimal capacity, in which quantity and timing are in balance, provides an excellent basis for minimizing operating costs and maximizing profits.

Capacity flexibility enables a company to deliver its goods and services to its customers more quickly than its competitors do. This component of capacity strategy involves having flexible plants and processes, extensively trained employees, and easy and economical access to external capacity, such as suppliers.

Managers use capacity strategy to balance the costs of overcapacity and undercapacity. The difficulty of accurately forecasting long-term demand makes this balancing task risky. Modifying long-range capacity decisions while in production is both hard and costly. In a highly competitive environment, construction of a new high-tech facility might take longer than the life cycle of the product. Correcting overcapacity by closing a plant saddles management with high economic costs and even higher social costs—such as lost jobs, which devastate both employees and the community in which the plant operates—that will have a long-term, adverse effect on the firm.

The traditional concept of economies of scale led management to construct large plants that tried to do everything. The more modern concept of the focused facility has shown management that better performance can be achieved in specialized plants that concentrate on fewer tasks and are therefore smaller.

Managers are more likely to make sound strategic capacity decisions if they adhere to the following five-step process:

1. Measure the capacity of currently available facilities.

2. Estimate future capacity needs on the basis of demand forecasts.

3. Compare future capacity needs and available capacity to determine whether capacity must be increased or decreased.

4. Identify ways to accommodate long-range capacity changes (expansion or reduction).

5. Select the best alternative based on quantitative and qualitative evaluations.

Location strategy is a plan of action that provides an organization with a competitive location for its headquarters, manufacturing, services, and distribution activities.25 A competitive location results in lower transportation and communication costs among the various facilities. These costs—which can run as high as 20 to 30 percent of a product’s selling price—greatly affect the volume of sales and the amount of profit generated by the particular product. Many other quantitative and qualitative factors are important when formulating location strategy.

A successful location strategy requires a company to consider the following major factors in its location study:

• Nearness to market and distribution centers

• Nearness to vendors and resources

• Requirements of federal, state, and local governments

• The character of direct competition

• The degree of interaction with the rest of the corporation

• The quality and quantity of labor pools

• The environmental attractiveness of the area

• Taxes and financing requirements

• Existing and potential transportation

• The quality of utilities and services

The dynamic nature of these factors could make what is a competitive location today an undesirable location in five years.

Product strategy is an operational plan of action outlining which goods and services an organization will produce and market.27 Product strategy is the main component of an organization’s operations strategy—in fact, it is the link between the operations strategy and the other functional strategies, especially marketing and research and development. In essence, product, marketing, and research and development strategies must fit together if management is to be able to build an effective overall operations strategy. A business’s product and operations strategies should take into account the strengths and weaknesses of operations, which are primarily internal, as well as those of functional areas that are concerned more with external opportunities and threats.

Cooperation and coordination among its marketing, operations, and research and development departments from the inception of a new product are strongly beneficial to a company. At the very least, cooperation and coordination ensure a smooth transition from research and development to production because operations people will be able to contribute to the quality of the total product, rather than merely attempting to improve the quality of its components. Even the most sophisticated product can be designed so that it is relatively simple to produce, thus reducing the number of units that must be scrapped or reworked during production as well as the need for highly trained and highly paid employees. All of these strategies lower production costs and, hence, increase a product’s price competitiveness or profits or both.

Process strategy is a plan of action outlining the means and methods an organization will use to transform resources into goods and services. Materials, labor, information, equipment, and managerial skills are the resources that must be transformed. A competitive process strategy will ensure the most efficient and effective use of these organizational resources.

All manufacturing processes may be grouped into three different types. The first type is the continuous process, a product-oriented, high-volume, low-variety process used, for example, in producing chemicals, beer, and petroleum products. The second type is the repetitive process, a product-oriented production process that uses modules to produce items in large lots. This mass-production or assembly-line process is characteristic of the auto and appliance industries.

The third type of manufacturing process is used to produce small lots of custom-designed products such as furniture. This high-variety, low-volume system, commonly known as the job-shop process, includes the production of one-of-a-kind items as well as unit production. Spaceship and weapons systems production are considered job-shop activities.

Organizations commonly employ more than one type of manufacturing process at the same time and in the same facility.

Process strategy is directly linked to product strategy. The decision to select a particular process strategy is often the result of external market opportunities or threats. The corporation decides what it wants to produce and then selects a process strategy to produce it. The product takes center stage, and the process becomes a function of the product.

The function of process strategy is to determine what equipment will be used, what maintenance will be necessary, and what level of automation will be most effective and efficient. The type of employees and the level of employee skills needed depend on the process strategy chosen.

Layout strategy is a plan of action that outlines the location and flow of all organizational resources around, into, and within production and service facilities. A cost-effective and cost-efficient layout strategy minimizes the expenses of processing, transporting, and storing materials throughout the production and service cycles.

Layout strategy—which is usually the last part of operations strategy to be formulated—is closely linked, either directly or indirectly, with all the other components of operations strategy: capacity, location, product, process, and human resources. It must target capacity and process requirements. It must satisfy the organization’s product design, quality, and quantity requirements. It must target facility and location requirements. Finally, to be effective, the layout strategy must be compatible with the organization’s established quality of work life.

A layout is the overall arrangement of equipment, work areas, service areas, and storage areas within a facility that produces goods or provides services.28 Three basic types of layouts are used for manufacturing facilities:

1. A product layout is designed to accommodate high production volumes, highly specialized equipment, and narrow employee skills. It is appropriate for organizations that produce and service a limited number of different products. It is not appropriate for an organization that experiences constant or frequent changes of products.

2. A process (functional) layout is a layout pattern that groups together similar types of equipment. It is appropriate for organizations involved in a large number of different tasks. It best serves companies whose production volumes are low, whose equipment is multipurpose, and whose employees’ skills are broad.

3. The fixed-position layout is one in which the product is stationary while resources flow. It is appropriate for organizations involved in a large number of different tasks that require low volumes, multipurpose equipment, and broad employee skills. A group technology layout is a product layout cell within a larger process layout. It benefits organizations that require both types of layouts.

Figure 18.4 illustrates the three basic layout patterns. Actually, most manufacturing facilities are a combination of two or more different types of layouts. Various techniques are available to assist management in designing an efficient and effective layout that meets the required specifications.

Human resources is the term used for individuals engaged in any of an organization’s activities. Two human resource imperatives are as follows:

1. It is essential to optimize individual, group, and organizational effectiveness.

2. It is essential to enhance the quality of organizational life.

A human resources strategy is an operational plan to use an organization’s human resources effectively and efficiently while maintaining or improving the quality of work life.29 As discussed in Chapter 12, h uman resource management is about employees, who are the best means of enhancing organizational effectiveness. Whereas financial management attempts to increase organizational effectiveness through the allocation and conservation of financial resources, human resource management (personnel management) attempts to increase organizational effectiveness through such factors as the establishment of personnel policies, education and training, and procedures.

Chrysler Corporation recently adapted its human resources strategy after its acquisition by Italian automaker Fiat. Specifically, Chrysler hired 600 engineers—200 of them with a background in quality processes—to help fill the supply pipeline with vehicles. Working from a clean slate, Chrysler identified skilled designers who could adapt the Fiat platforms to cars and trucks to be marketed under brands such as Chrysler, Dodge, Jeep, and Ram.30

Operations management attempts to increase organizational effectiveness by employing the methods used in the manufacturing and service processes. Human resources, one important factor of operations, must be compatible with operations tasks.

Labor force planning is the primary focus of the operations human resources strategy. It is an operational plan for hiring the right employees for a job and training them to be productive, which is a lengthy and costly process. A human resources strategy must be founded on fair treatment and trust, and the employee, not operations, must take center stage. However, the recent economic decline had a significant impact on the workforce, with widespread layoffs and many jobs moved offshore. As the economy continues to recover, the process of strategic workforce planning is more critical than ever and forces employers to revisit some of their conventional assumptions about hiring.31

Job design is an operational plan that determines who will do a specific job and how and where the job will be done. The goal of job design is to facilitate productivity. Successful job design takes efficiency and behavior into account; it also guarantees that working conditions are safe and that the health of employees will not be jeopardized in the short or the long run. When executed effectively, job design sets the stage for a successful recruitment and retention program.32

Work methods analysis is an operational tool used to improve productivity and ensure the safety of workers. It can be performed for new or existing jobs. Motion-study techniques are another set of operational tools used to improve productivity.

Work measurement methods are operational tools used to establish labor standards. These standards are useful for planning, control, productivity improvements, costing and pricing, bidding, compensation, motivation, and financial incentives. In measuring organizational characteristics (e.g., pricing, quality), managers must ensure that their methods are compatible with the organization’s objectives.33