Network Flexibility & Consolidation
Flexibility is about the ability to adapt or change. Scope flexibility measures the degree of flexibility in terms of the breadth or scope of activities performed. Agility refers to the speed at which an asset, network, or an organisation can change. Flexibility is a strategic capability to maximize NVP and limit risk when faced with uncertainty. Flexibility questions are pertinent in every operation. For example to what extent should organizations cross-train their human capital?
Flexible versus specialzed asset - The Scottish political economist and moral philosopher Adam Smith proposed the “division and specialisation of labour”, which heralded the industrial age along with a dramatic rise in productivity and welfare.
Scope or mix flexibility measures the breadth of activities that an asset can perform.
Scale or volume flexibility - Scale flexibility is especially important for organisations that face high seasonality
Agility and new product flexibility - new product flexibility measures the ability to introduce new products into the operating system
Robustness - means that performance does not vary much over the range of activities performed.
Automation impacts flexibility
Automation measures the degree to which a process can operate without human supervision. Manual processes typically utilise some capital equipment, but their operation also requires human presence. Internet grocer Webvan started operations using highly automated distributions enters in stark contrast to Pepod’s manual start-up processes. Automation can provide higher consistency (quality), volumes, or lower costs. Increased automation typically comes with increased fidgety leading to a trade-off.
Obstacles to achieving flexibility
flexibility is expensive and difficult to value
flexibility is not used appropriately
Flexibility is not well understood
complexity, competition and customer perception
Risk pooling
Aggregating two volatilities, individual fluctuations partly cancel out, thus reducing total relative volatility. this effect is also known as risk pooling, diversification, statistical economies of scale, or the portfolio effect. Indeed, it is the fundamental reason for preferring financial portfolios.
Allocation flexibility and information updating
Flexibility has a switching option that allows you to switch capacity allocation to the more profitable product. Allocation flexibility allows dynamic profit maximisation, whereas risk pooling is simply the passive aggregation of volatilities.
Network Flexibility
Network flexibility stems from flexible assets or flexible routing.
Resource substitute and hybrid networks
Resource substitution achieves an intermediate degree of flexibility between the ones obtained by dedicated and shared assets. Resource substitution requires that at least one asset is flexible while the other asset can be dedicated.
Transshipment
Transshipment means re-locating assets. This practice is powerful in retail and distribution networks and helps match excess demand in one location with excess capacity in another. For example, if a customer requests an item that is out-of-stock, Nordstrom will transship it from the nearest location that has it in stock. Both transshipment and substitution flexibility introduce additional complexity into network control: dynamic decision making on routes, also known as routing flexibility, which requires real-time network information.
Both transshipment and substitution flexibility introduce additional complexity into network control: dynamic decision making on routes, also known as routing flexibility, which requires real-time network information.
Postponed differentiation and late customisation
Postponed differentiation and late customisation delay customer-specific activities such as product assembly or service completion, so that earlier activities can be common to all customers.
If assembly or completion is executed after the customer order is known, the process is called assembly-to-order (ATO).
Tailored Network Flexibility
The flexibility principle states that the value of flexibility exhibits decreasing returns. In addition, more flexibility typically costs increasingly more. The results is that an intermediate amount of flexibility often provides the highest net present value.
Tailored network flexibility: dedicated and flexible assets
Often, the demands for products and services can be split into a guaranteed “base volume” and an uncertain “upper-tail volumes”.
Using flexibility to serve guaranteed base volumes is not a good strategy: it is more expensive and leads to lower service levels. Similarly, trying to serve volatile tail volumes with dedicated capacity leads to lower firm value and service levels. The optimal amount of flexibility depends on the situation: it typically increases as demand volatility increases, demands are more negatively correlated, product margins are more heterogeneous, or the relative cost of flexibility compared to dedicated capacity decreases.
Tailored network flexibility: resource pooling and chained routing
Chaining allows resource pooling. Chaining gives almost full network flexibility while keeping resources mostly dedicated to their main activities and cross-trained in one other task that is performed only sporadically.
Tailored component commonality: maximize operation and customer value
Commonality must be carefully applied so as not to destroy customer value. The danger of platform sharing applies to commonality that only seeks to save cost. The appropriate amount of sharing recognises the operational value of component commonality, as well as the cost in terms of customer perception (which ultimately drives customer valuations, pricing, and profitability)
The commonality matrix may be a good starting point to tailor a commonality strategy.
Standard or universal design
A standard or universal design is a product design strategy that aims to satisfy different demands and needs with a single product or service. This strategy is illustrated by Henry Ford’s statement that “you can have it in any color as long as it is black”, or any standard (governmental) service. A universal design must decide which needs to cover.
Component commonality and platform sharing
Component commonality is a design strategy whereby different products or services share a common component. It is the product design counterpart of asset sharing. Many restaurants have several dishes that share a common set of vegetables and side dishes. Swatch watches are designed to share a common interior while the exterior parts can differ. Ikea uses component commonality in its furniture.
Platform sharing is similar in concept to component commonality, but typically impacts a broader set of people and actives.
The benefits of platform sharing include:
commonality in component design, manufacturing, sourcing and inventory management.
allowing mixed production on a single process (level loading of the assembly line)
and level loading of new product development by staggering new product launches from the same platform
For example, Volkswagen’s “A platform” now in its sixth generation , is VW’s most prolific platform for its compact cars. It is shared by the Audi A3, Audi TT, VW Golf, VW Jetta, VW Eos, VW Tiguan, VW Touran, VW Scirocco, SEAT Len, SEAT Toledo, SEAT Altea, and Skoda Octavia.
Modular design
Modularity is a design strategy where many different products or series are assembles from a set of modules or building blocks that are loosely coupled to the rest of the system. Modularity also promotes serviceability.
scope flexibility increase exponentially in the number of modules
agility in terms of fast product design and updating
robustness: low cost and high reliability due to re-using modules and scale economies.
Diagnosing complexity
The design structure matrix (DSM) is a practical tool to map the complexity of a design or project. The DSM show which components or tasks are dependent on or interact with other components or tasks. Interaction may take the form of, for example, information (one task requires input from the other), space or sources sharing, material (one task provided material used by the other), or constraints (one task may produce a system parameter that constrains the other according to Loch, DeMayer, and Pich (2006).
Complexity = (sum of all elements) x (sum of all interactions)
In practice, interactions occur in three domains simultaneously: the system domain (where components interact), the task domain (where project activities interact), and the organizational domain (where teams and stakeholders interact). For each of these three domains, a separate DSM may be drawn.
The downside of modular design is the benefit of integral design
Modular design may also suffer from negative customer perception and a lack of competitive protection.
The opposite of a modular design is an integral design which has fewer parts, tends to be couples, a favours “technical performance.” Some examples are high-performance sport motorcycles, light and compact consumer electronics, precision machines and game software.
Adaptable design
Adaptable design can be adjusted to specific needs.
Mass Customization
Mass Customisation is a compromise between mass production and full custom work. It balances the demand benefits of customization with the supply efficiencies of standardisation by limiting customer choice to pre-set range while increasing the flexibility of a flow process. It recognises that many customers are looking to escape mass products, but do not mind mass production.
Technology behind mass customisation
Coordination and information technology are used to allow customers to self-design their product and transmit that information to the fulfilment process.
Product technology uses modularity and platforms along with adaptable designs.
Process technology uses flexibility through postponement; at least the last process step must be able to quickly support a batch size of one.
How to create “industrialized intimacy”?
When these technologies are carefully designed in concert, mass customised services can provide industrialised intimacy. Kolesar, van Ryzin, and Cutler (1998) define industrialised intimacy as a strategy that “exploits information technology capabilities to efficiently create and deliver appropriately familiar and customized higher valued services” and provide some suggestions on how to do achieve that, including:
Build customer knowledge into the service-delivery system.
Promote value-enhancing self-servicing
Let customers design the product and integrate revenue management methods