Page 83 - DMGT501_OPERATIONS_MANAGEMENT

Unit 3: Capacity Planning

The designation is relative. Core and non-core activities can change depending on the perception Notes
of management.

Example: When TELCO put up its Jamshedpur plant, it decided to have its own foundry
and forge divisions. These were considered core activities that would reflect upon the quality of
the TATA vehicle. However, when TELCO expanded its operations to Pune, the management
decided that the investment in a forge plant was not warranted, but a foundry was. Gradually, as
the capacity of TELCO increased, the management realized that it would be better off by investing
in expansion of its automobile assembly capacity and engine manufacture rather than in forgings
or castings. Today, most of the forgings and casting required by TELCO are outsourced.
How many activities – related to the product – that the organization performs depend on its
Operations Management strategy and the investments required for backward or forward
integration. Not all the components need necessarily be produced or activities be performed by
the organization. The manufacture of automobiles, once the most vertically integrated of all
businesses, is now among the most disaggregated.
Companies are focusing on the functions they can best perform, and outsource the rest to their
partners. Designated non-core activities or secondary activities are often outsourced to a specialist
to realize not only higher performance levels but also significant savings.

The Operations Management manager must assess the current performance of a process or asset
and also it's potential for improvement so as to take a correct decision regarding outsourcing.
He must judge whether suppliers are meeting standards and are abreast with changes in the
field. When managed well, assets will follow the operators – inside or outside an
organization – that can create the most value.
By shedding assets, some organizations boost their return on invested capital in the short term.
They take on the roles as product designers, solutions providers, industry innovators, or supply
chain integrators.
But in handing over capital-intensive manufacturing assets to outside suppliers, companies may
be losing the very skills and processes that have distinguished them in the marketplace.
Organizations need to critically assess the pros and cons of limiting its manufacturing
investments, and ensure the decision implemented improves its company's performance by
maximizing the products value.

Example: Nokia has been working towards improving the productivity of its existing
assets and integrating its sourcing, sales, and manufacturing efforts.

The company has designed its new Beijing complex, for example, to assemble phones with zero
inventories for the supply base that it manages. All components come from their suppliers.
The basis for decisions on outsourcing or vertical integration is knowledge of the true cost of
manufacturing goods internally against the cost of acquiring these goods from suppliers.
A good decision is based on the assessment by the senior management in the light of the
following three dimensions of performance:
1. Strategic: Does owning or enjoying preferential access to the asset have any strategic
importance? How does the company's manufacturing strategy meet the needs of its overall
business strategy?

Example: TELCO took a decision on building a forge division at Jamshedpur, when the
forging industry in the country was not developed. It gave TELCO the advantage that it was
certain of the quality of the TATA vehicle, especially as the steering components were forgings.

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