Business Administration

Lecture No. 19: Production Strategy
1.What Is Production Strategy?
2. Constituent of Production Strategy
3. Thoughts on Production Strategy

Takahiro Fujimoto
Department of Economics, University of Tokyo
The figures, photos and moving images with ‡marks attached belong to their copyright holders. Reusing
or reproducing them is prohibited unless permission is obtained directly from such copyright holders.

1.What Is Production Strategy?
Business strategy
Corporate strategy (company-wide strategy)
Business strategy (competitive strategy)
Functional strategy (production, marketing, technology, etc.)

Manufacturing strategy--- pattern of decision making with certain consistency
regarding to production(consistencyonmaintenance/enhancement
ofcompetitiveness)

Hierarchy Structure of Management Strategy

company level

corporate strategy

business division levelbusiness strategy

department level by function

functional strategy( diversification strategy)(product --- market strategy)

competition strategy

production strategy
research anddevelopment strategy
marketing strategy
other2.Constituent of Production Strategy（１）Structural item (hard)
Requiring large investment
determination by top management

decision,

involving（２）Substructural item (soft)
Steady buildup of small decisions
Gradually formed as action pattern of all employees
Investment in corporate knowledge/information asset(intangible)

Constituent of Production Strategy
decision of production capacity
factory net work/design
Structural (hard)
selection of production technology
vertical integration

personnel/labor management
purchase/supplier management
production plan/control
Substructural (soft)

quality control
costing, IE, improvement
management organization

Concept of "Strategy": Plan and Pattern
Strategy as plan (vision)'---- strategy as "what top management says"

Strategy as pattern (action pattern)'---- including "quiet man of action"
total production system with consistency on competition--- which by itself is a "strategy as pattern".

Steps of Establishing Production Strategy‡
Author making (reference: 'Skinner,W.,Manufacturing : The Formidable Competitive Weapon, John Wiky & Sons')
Reference: Takahiro Fujimoto 'Introduction to Production Mmanagement' Nihon Keizai Shimbun, Inc. 2001 (Ⅰp347)

Structural Production Strategy (1):
Decision of Production Capacity
Expansion of production capacity: 2 functions（１）to fill product customer's demand for product（２）signal effect(superiority for first-come; believability inintimidation; sunk cost)
Lumpiness of capital investment→

priority investment typelagging investment typein-balancefracture)

type(applicationofcriticalTypes of Production Capacity Expansion Strategy(demand growth period )Production capacity

1. Priority investment type○ low out-of-stock cost
○ quick delivery○ easy share increase● low capacity-operating rate

2. In-balance type
mid point between 1 and 3

3. Lagging investment type●●●○high out-of-stock costprone to late delivery
risk of share decreasehigh capacity-operating rate

Our expectation demandStructural Production Strategy (2):Factory Network Strategy(1)Factory scale and number of factories
Optimum scale of factory
economics of scale (short term, medium term,long term, dynamic)
vs.
diseconomics of scaletransportation cost
recruitment costorganizational regidification
confusion in production
risk of concentrated production

Economics of Scale (scale economy)
1 short-term scale economy

2 medium-term scale economy

3 long-term scale economy

4 learning effect

fixed
cost
total
cost

total
costvariablecost

running cost

fixed cost

aver
age
variable
cost(investmentamount)cost of set-up switch

production volume per period

production lot size

aver
age
cost

aver
age
cost

cost of setup switch

fixed costvariablecost

running costproduction volume per period

production lot size

production capability

aver
age
cost

fixed costvariable
cost
production capability

cumulative production volume

aver
age
cost

fixed cost
cumulative production volume‡
Takahiro Fujimoto 'Introduction to Production Management' Nihon Keizai Shimbun, Inc. 2001 (Ⅰp354 figure.9.6)

Concept of Optimum Factory Size (Sherer)
average

optimum factory size

total cost per unit
cost per unit
in long term０

product-transportation
cost per unit
factory size

Factory Network of Press-to-Assembly Systemlhelsybod

Detroit
press

USA Ｉ

asse
mbly

asse
mbly

weldingasse
mbly(1 module) (1 module)(1 line)pa nDetroit

USA ⅡJapan

el

weld
ing

asse
mbly

weld
ing

asse
mblyweld
ing

asse
mbly

press

presswelding

asse
mblyweld
ing

asse
mbly

‡

Takahiro Fujimoto 'Introduction to Production Management' Nihon Keizai Shimbun, Inc. 2001 (Ⅰp355 figure.9.8)

(2)Factory Location
Factory location research --- in parallel to new factoryplan/business plan
Check points:
distribution of consumption market/material maker,
local labor market
transportation method, community, utility
environment, preferential measure of local
government, and others
Country → area → local → property
Location strategy of new factory (refer to the diagram)
Case: Local North American Factory of Japanese
Automobile Maker

Location Strategy of New Factory
Consumer market

Research anddevelopment base.

Existing factory.

Newfactory

Raw material home.
Supplier accumulation.

Takahiro Fujimoto'Introduction to Production Management‘
Nihon Keizai Shimbun, Inc. 2001 (Ⅰp357 figure.9.9)

Low wage region.
Abundant skilledworker regions.
‡Production Base of Japanese-Affiliated Auto Maker in North America (1999)‡'Automobile engineering of 1999 Japan' Japan Automobile Manufacturers Association, Inc.
Reference: Takahiro Fujimoto 'Introduction to Production Mmanagement' Nihon Keizai Shimbun, Inc. 2001 (Ⅰp358)

Candidate Site of Factory and Estimationof Transportation Cost per Car (example)

Midwest: close
to center ofmarket andparts industry
pool in Detroit

West Cost:
cost up due topassing over
RockyMountains

(3) Specialization of Factory (focus)

Factory specialized by process (process focus)
vs.
Factory specialized by product (product focus)
Factory for whole country (national plant)vs.
Plural factories by local region (regional plants)
Development factory (close to R&D sector, trial and initialproductions)vs.
Volume production factory (satellite factory; local expansion)

Focus (Specialized) Strategy of Factorya. Product focus.
(specialization according to product)b. Process focus.
(specialization according to process)‡Takahiro Fujimoto 'Introduction to Production Management' Nihon Keizai Shimbun, Inc. 2001 (Ⅰp359 figure.9.11)

National Factory and Group of Regional Factories

Hayes/Wheelwright
Ch. 4

Locations of plural-factory-network are influenced by the difference in policies on thenetwork building
Network

Strategy

Location

Advantage.

①
It surpasses it by enhancing
the factory until setting up afactory in the heartland, andreaching critical limit.
Afterwards, the second factoryis built for the first time.
(center factory)

The first factory is built in"Center of gravity" of themarket. This is enlarged.

②
It sets up a factory one after
another in other emphasized
regions instead of enhancing
the first factory.
(making to network)

It thinks about the effectwhen the factory network
is completed, and thefactory is distributed tovarious places.

○
●
○

●

●

●
●

●

○
●
●
●
●

Disadvantage.

Scale economy.
It is possible to reel it to a local
small factory in the remote place.
It is pre-emp as for the rival.
(If the other party is a carpenter
place. )Even power is demonstrated invarious places.
The factory network is complex
and time-consuming tocoordination.
(There is no scale advantage. )Is the first move taken away by
the other party?

(4)Management of Factory Network
Flow of money(local procurement/ transfer-in?
out? borrowing local currency/dollar/Yen)

reinvestment/transfer-

Flow of Mono (parts/material/finished product)(by-product/by-part; for local regions, for Japan, forglobe)
Flow of human(temporary transfer, dispatch --- from Japan)
Flow of information/technology/knowledge(application/adaptation; reverse transfer back to Japan?)
Example: home country's factory and local factory --- age ofmutual learningMutual Complementarity of Parts in Toyota Motor and Mitsubishi Motors (1990)

Figure removed
due to copyright restrictions'Nikkan Jidosha Shinbun'
NIKKAN JIDOSHA SHIMBUN 1990.10.18

Does "Trade Off" Exist?

Cost vs. quality
Cost vs. lead-time
Cost vs. flexibility
Among various cost factors (EOQ, etc.)
Among various functional factors (controllability vs. ridequality, etc.)
Position of static balance → emphasis on tradeoff
vs.
Position of dynamic improvement → without premiseof tradeoffTrade Offdesign quality
low (capability) highdesignquality

lead-time
longshortlowcostlowhighcost(capability)
low

high

high
flexibility
smalllarge

lead-time
longshortcost of set-up switchhighlow
lowlow

cost

invent rideoryquality
cost

highhighhighlow
low controllability high ‡Takahiro Fujimoto 'Introduction to Production Management' Nihon Keizai Shimbun, Inc. 2001 (Ⅰp367 figure.9.14)

3. Thoughts on Production Strategy
Two points of view (One's superiority to another is up to anindustry and times.)(1) "Loud" view of production strategy
high-powered, active top management, significant decision
making(2) "Steady" view of production strategy
at a glance, non-strategic action in operation level
Meticulous buildup in long term → hardly detectable to rival
Was this a strength of Japanese companies ?
(Abernathy)
A balance between these two is important.