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“Blessed are the flexible, for they will never be bent out of shape”

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  1. “Blessed are the flexible, for they will never be bent out of shape”

  2. Managing Operational Flexibility Under Demand Uncertainty Dissertation Defense: Manu Goyal

  3. Chapter 2: Strategic Technology Choice and Capacity Investment under Demand Uncertainty. Analytically studies the impact of competition on the adoption of product flexibility in an environment characterized by uncertain demand. Chapter 3:Deployment of Manufacturing Flexibility: an Empirical Analysis of the Automotive Industry. Empirically tests the findings of the second chapter. Evidence suggests that product and volume flexibility may be linked. Chapter 4:Capacity Investment and the Interplay between Volume Flexibility and Product Flexibility. Analytically explores the intertwined nature of volume flexibility and product flexibility.

  4. Chapter 2 Strategic Technology Choice and Capacity Investment under Demand Uncertainty.

  5. Town & Country Chrysler PT Cruiser Odyssey CR-V Ford Freestar Ford Escape Honda Ford

  6. Research Questions … • Does the technology investment decision (flexible vs dedicated) depend on what competition is doing? • Is the impact of problem parameters different with and without competition? • Will every firm adopt flexible technology in the equilibrium? ..and answers • It does • It is • No

  7. The Model Uncertain Demand Curve Two markets One flexible or two dedicatedplants One flexible or two dedicated plants Uncertain Demand Curve

  8. Choose capacity : Cost of flexible capacity per unit : Cost of dedicated capacity per unit Decide production qty for both markets q1i, q2i Decide choice of technology, Dedicated (D)or Flexible (F) Prices determined as per Cournot competition. Profits gleaned Flexible Firm: one decision Ded. Firm: two decisions Decision timeline for each of two firmscompeting in two markets Demand Curve realized Capacity Game Technology Game Production Game time

  9. The Technology Game Firm j D F D Firm i F

  10. The Technology Game Profits Firm profit in (D,D) market Dedicated Firm profit in (D,F) market Flexible Firm profit in (F,D) market Firm profit in (F,F) market

  11. The Stochastic EffectProfits (symmetric costs and distribution) Stochastic Deterministic

  12. Dedicated Dedicated Monopolist Flexible Flexible Infeasible Region The Best Response Functions - When Competitor invests in dedicated technology

  13. Dedicated Dedicated Monopolist Flexible Flexible Infeasible Region The Best Response Functions - When Competitor invests in flexible technology

  14. The Nash Equilibrium

  15. The Nash Equilibrium (D,D) (D,F) and (F,D) (F,F) Infeasible Region Pure Flexible Market Mixed Market

  16. Other Effects • Market size effect • Pulls threshold curves down. • Additional (F,F) and (D,D) equilibrium is simultaneously possible. • Product Substitutability Effect. • Amplifies both the stochastic and market size effects • The Cost Effect. • Induced by asymmetries in the costs of firms.

  17. Equilibrium with market size effect (D,F) and (F,D) (D,D) (F,F) (D,D) and (F,F)

  18. Other Effects • Market size effect • Pulls threshold curves down. • Additional (F,F) and (D,D) equilibrium is simultaneously possible. • Product Substitutability Effect. • Amplifies both the stochastic and market size effects • The Cost Effect. • Induced by asymmetries in the costs of firms.

  19. The cost effect cost (F,D) (D,F) and (F,D) I V III (D,D) (F,D) VII VI (F,D) IV (F,F)

  20. cost

  21. Summary and Conclusions • The paper covers three levels of firm decisions: strategic (technology investment), tactical (capacity investment) and operational (production decisions). • Distilled the impact of competition on the technology choice of firms • Flexibility is more valuable if competitor uses dedicated technology, less valuable if competitor uses flexible technology • Technology choice decision cannot be made in isolation. • Flexible and dedicated technologies can co-exist in equilibrium. • The differential Impact (under competition) of: • Product substitution • Market Size • Costs

  22. Chapter 3 Deployment of Manufacturing Flexibility: an Empirical Analysis of the Automotive Industry.

  23. The Hypotheses • H1: The use of flexibility is associated with higher uncertainty in demand for individual products. • H2: The use of flexibility is associated with lower demand correlation for individual products. • H3a: The use of flexibility is associated with a larger number of flexible competitors. • H3b: Under moderate demand uncertainty, the use of flexibility is associated with fewer flexible competitors.

  24. Hypotheses (cont).. • H4: The use of flexibility is associated with lower mean demand for products. • H5: Flexibility is associated with lower difference in mean demand (demand differential) for products. • H6a: Under high demand uncertainty, the use of flexibility is associated with higher product substitutability in the marketplace • H6b: Under a low demand differential, the use of flexibility is associated with lower product substitutability in the market place.

  25. The Data • Primary Sources • Harbour Reports • Ward’s Automotive. • The “Big Three” US Manufacturers. • Years 1996-2003. • Over 70 manufacturing facilities in North America. • Unit of analysis is a given plant in a given year (plant-year combinations, 483 in numbers).

  26. Measures • Flexibility: “Demonstrated” vs. “Potential” Assembly Line Flexibility (ALF): 1 if the number of platforms manufactured in a plant is greater than the number of assembly lines, and 0 otherwise. • Other Ways?

  27. Observed Flexibility Over Time

  28. Measures (cont).. • Demand Uncertainty: Coefficient of Variation of de-seasoned monthly sales. • Correlation. • Mean demand. • Demand Differential. • Competition: number of flexible competitors. • Substitutability. Price difference.

  29. Control Variables • Plant Capacity • Plant Utilization. • Manufacturer dummies.

  30. The Analysis:Descriptive Statistics

  31. Correlations

  32. Univariate Test Univariate Test of Differences in Means (dependent variable: ALF)

  33. Logit Regression (N=483)

  34. Logit Regression • Evidence suggests that plants that are observed to be flexible have: • Higher demand uncertainty (H1). • Lower correlation (H2). • Higher (flexible) competition (H3a). • Control Variables: • Flexible plants have lower utilization. • No significant differences between the “big three”.

  35. Productivity Analysis • Study the implications of deploying flexibility, measured against extant theories. • Hours per Vehicle (HPV) as a measure of productivity.

  36. HPV over the years

  37. Mismatches.. • Measure mismatch benchmarked against six environmental variables: • Demand Uncertainty (H1) • Demand Correlation (H2) • Flexible Competition (H3a) • Competition with moderate uncertainty (H3b). • Mean Demand (H4). • Demand differential (H5).

  38. Regression • Regress HPV against these six mismatches (OLS). • Control Variables: • Flexibility • Utilization • Plant Capacity • Companies • Years • Number of Chassis Configurations.

  39. Results • In the absence of the environmental variables, flexible plants have significantly higher HPV than inflexible plants. • Adjusting for deviations from the benchmarks determined by the six environmental variables, flexibility is no longer significant. • Flexibility by itself does not cause lower productivity

  40. The six benchmarks • Uncertainty: not matching flexibility deployment to environmental uncertainty decreases productivity. • Competition: Responding to flexible competition with flexibility decreases productivity. • Demand Differential: Contrary to theory.

  41. The Control Variables • Plants with higher capacity and utilization have higher productivity. • Productivity has been increasing over the past years. • GM and Ford have higher productivity than DCX.

  42. Summary • One of the first studies to formalize the deployment of manufacturing flexibility. • Demand uncertainty • Correlation. • Though flexibility is used as a competitive weapon (flexible plants have higher flexible competition), evidence also suggests that this could be a cause of lower productivity. • Flexible plants have lower utilization, a possible reason is the presence of volume flexibility in conjunction with product flexibility.

  43. Chapter 4 Capacity Investment and the Interplay between Volume Flexibility and Product Flexibility.

  44. K-ε K+ε Product Flexible Technologywith volume flexibility(VP) Demand for product1 product1 Demand for product2 product2 K

  45. Product Flexible (P) Technology Demand for product1 product1 Demand for product2 product2

  46. Product Flexibility Capacity Allocated to Product 1 Capacity Allocated to Product 2 Total Capacity fixed

  47. Demand for product1 -ε product1 +ε Demand for product2 -ε product2 Volume Flexible Technology (V)

  48. The Dedicated (D) Technology Demand for product1 product1 product2 Demand for product2

  49. Volume and Product Flexibility • Both types of flexibility help cope with demand uncertainty. • Ample literature on capacity investment into product flexibility. • Virtually non-existent literature on volume flexibility. • When would a firm prefer one flexibility to another? • A plant may possess (to some extent) both flexibility types. • No analytical models combining two flexibility types. • When would a firm add one flexibility over another?