4.4.1. Production Strategy Content

• Emphasis on cost savings in all stages of production
• Production in the most economical and relatively stable volumes, minimization of tied-up short-term assets
• Wide-scale usage of the "Make or Buy" philosophy (loosely translated: do not make what you can buy for less elsewhere) and production management concepts aimed at minimizing costs (e.g. just-in-time or MRP – re: Chapter 4)
• Tendency toward long-term cooperation with suppliers
• Very low volumes of safety stock
• The role of management information systems is crucial in terms of monitoring and minimizing costs
• Tendency towards centralized management, efficient production employees are required to carry out their tasks precisely
• Qualified management, ordinary workers are not held to the same qualification standards
• Production using high-performance machinery with an emphasis on automation
• Greater focus on the stability of the production program, limiting its range and wide-scale standardization

• Emphasis on performance and flexibility of production systems (primarily the ability to quickly implement innovations and new products)
• Production management concepts that favour flexibility and performance (e.g. OPT)
• Increased ability of production systems to overcome instability with relatively high levels of safety stock
• Production costs are not of the utmost importance (the company can demand higher prices for its differentiated products)
• The role of management information systems is significant, primarily in terms of planning and monitoring plan implementation, and less significant in monitoring costs
• Tendency towards the decentralization of management
• Higher tendencies towards self-sufficiency and less dependence on suppliers
• Highly qualified management and other employees
• Emphasis on teamwork (primarily when launching new products and addressing instabilities) – maximum utilization of the intellectual potential of all employees
• Production carried out using universal machinery with an emphasis on flexibility
• Pro-innovation nature of the production program that is widely accommodating to customer needs

• From a strategic point of view, this involves deciding on whether production will be centred on the maximum compliance with individual demands or on the contrary, influencing these demands
  (Keřkovský, Valsa, 2012). In the first case, production must be capable of producing the given product based on the specific needs of the customer, which in turn corresponds with the production system (produce to order). In the second case, products are more standardized and production is based on the produce to stock system. Assemble to order is also a commonly used strategy.
• Produce-to-order strategies are implemented based on customers’ individual orders, allowing for the maximum customization of features and product delivery times based on the customers’ demands. The downside is that customers must accept that such a production system is more time-consuming and is generally more expensive than a produce–to-stock strategy. In terms of production and strategy, producing to order resembles the conditions for piece and small batch production and differentiation strategies. It also requires a steady flow of orders, which is dependent on effective and reliable marketing and sales strategies.
• The produce-to-stock strategy involves shipping finished goods to the warehouse from where they are later distributed to customers. The produce-to-stock approach is suitable for sectors with generally predictable demand. This approach caters to customers who require speedy delivery of generic products, that is to say, it is not suitable for customers who require customized products, due to the high cost of storing such a wide range of products. In terms of production and strategy, this approach resembles conditions for serial and mass production, monitoring cost strategy, allowing for better planning conditions, smooth large-scale production, leading to economies of scale, which should outweigh storage costs  (Žufan, 2011a).
• Assemble to order involves the production of products that address customer demands, albeit to a limited degree, due to the standard parts that are used. Assemble to order can then be seen as a combination of the two aforementioned methods. It is a modern concept, applied primarily in the automotive industry, construction and other industry sectors.

• Requires deciding on how production will be arranged. Examples of this include the technological arrangement of production, cellular arrangement or material arrangement of production, amongst others.

• Deciding on the geographic location of production – determining factors are primarily distance to customers and suppliers, distance to input resources (raw materials, production materials), the risk of resource depletion, impact on operating costs, transportation availability, price and quality of workforce, as well as developments in supply and demand, government subsidies, tax exemptions etc.
• When deciding on the geographic location of production within certain countries or regions, it is advisable to consider a wide range of potential factors, such as (adapted from Keřkovský, Valsa, 2012):

• Price of Workforce
• Cost of Materials and Utilities
• Standard Overhead Costs
• Transportation Costs
• Packaging Costs for Transport
• Insurance
• Taxes
• Customs
• Stockholding Costs
• Payment Conditions and Exchange Rate Fluctuations
• Inflation
• Government Support of Investments
• Option to Move Profits
• Political Stability
• Economic Climate
• Legislation and Economic Regulation Levels
• Extent of Grey Economy and Crime
• Power of Unions
• International Aspects (e.g. embargos, war)
• Cultural Differences
• Language Barriers
• Investment Conditions
• Trade Barriers
• Market Size and Saturation
• Qualifications of Workforce
• Climate
• Others

• Deciding on the production concept and whether it will be based on a push or pull strategy (adapted from Keřkovský, Valsa, 2012):

• Push Strategy – usually based on Material Requirements Planning, or MRP. The point of departure for such a strategy is forecasting inventory demand, on the basis of which inputs are ordered and prepared and thereby pushed onto the consumer. One of the basic tools employed for push strategies is a Bill of Materials, or BOM, which covers all of the parts required to manufacture an end product. The predicted amount is then, on the basis of the BOM,   projected onto purchase volumes, input preparation and subsequent production plan (Žufan, 2011b). Alternatively, an MRP II (Manufacturing resource planning) strategy can be employed, which involves other aspects of production management, such as workshop planning, monitoring cash flow, planning business activities, CRP, or Capacity Requirements Planning, and others. Apart from the capacity planning of the entire production capacity, requirements for machinery capacity, human resources and others, this strategy can also enable the monitoring of production time flow and individual activities, allowing for the planning and scheduling of production (Košturiak, J., Gregor, M., 1993). A disadvantage of this strategy is its rigidity and inability to quickly react to developments in customer demands.
• Pull Strategy – is based on “waiting for the customer’s order to be made.” This strategy stems from inventory demand forecasts, which are only projected onto the capacity requirements planning process. It is not until a customer makes an order that system activity is triggered. Only then does gradual “counter” communication come into play, so that individual manufacturing or processing measures can be taken in direct response to individual orders, allowing the order to be successfully finalized as quickly as possible. Among the “pull” production strategies are Just-in-time, KANBAN, Optimized Production Technology, or OPT and the Theory of Constraints, or TOC (Žufan, 2011b,  Košturiak, Gregor, 1993). An advantage of the pull strategy is the generally lower cost of production as a result of lower safety stock volumes and production time. The pull strategy concept is subject to the interest of buyers, as well as the production of appealing, quality products. The company’s success is then dependent on continuous innovation and developments of new products (Keřkovský, Valsa, 2012).

Just-in-time (JIT)

The aim of the Just-in-time strategy, developed by the Japanese company, Toyota, is to manufacture the required volume of products in the required quality and time-frame without producing excess waste, by reducing machinery change-over times, reducing inventory, reducing shopping and handling times, and eliminating wasted time (Košturiak, Gregor, 1993). The concept of JIT is geared towards reducing all activities that do not actively contribute to creating product value. A disadvantage of this strategy is difficulty communicating with suppliers as well as internal communication and transport difficulties, amongst others. Disadvantages can be efficiently eliminated by implementing an adequate information system.

KANBAN

The basis of the KANBAN method (“signboard” or “billboard” in Japanese), is dividing the workplace into “suppliers” and “buyers,” where the supplier is also the buyer and neither is allowed to stockpile, requiring them to deliver precise quantities on time, which automatically leads to the reduction of time wasted by mutual checking. Communication in the workplace is carried out via cards (Kanban), where the buyer places an order with the supplier by sending him an “order” card, and the supplier, who is also the manufacturer of the required parts, delivers the required quantity of goods within the necessary time-frame with the delivery notice, that is, with a “delivery notice” card (Košturiak, Gregor, 1993).  The KANBAN method, by way of monitoring and regulating the number of cards in the operational system, enables the control and management of the entire production process.

Theory of Constraints

Management strategies using the theory of constraints, or theory of bottlenecks, are based on balancing production flow, not capacities, and employing a system that is limited by at least one constraint. This is a rather unconventional approach (Basl, Šmíra, 2003), that stems from the notion that an attempt to utilize workplace capacities to their full potential does not always lead to the maximum utilization of the entire system. It requires realizing that hours wasted in a bottleneck workplace are hours wasted for the entire system, and vice versa – time saved with non-bottleneck machinery is merely an illusion and does not have any effect on the entire system. In this manner, bottleneck, or “low profile workplaces,” impact not only production times but also quantities. There is a distinction to be made between local insight (insight into the capacity of a given workplace) and global insight (insight into capacity options of the system-wide chain of workplaces). Implementing a theory of constraints philosophy is carried out in five steps   (Stevenson, 2005): identifying the system constraints, maximum exploitation of the system constraints, subordinating all activities to the system of constraints, eliminating the constraint and returning to the first step, i.e. re-identifying system constraints, as expanding one system constraint may lead to the development of another constraint.

• An important aspect which should be included in the production strategy is ensuring production stability (ability to recover from, for example, machinery and equipment outages, human error, delivery failures, unforeseen fluctuations in demand, natural disasters.) Possible corrective measures can be, for example, sufficient quantities of raw material reserves, strategic alliances in the event of a crisis, diversification, insurance and others
  (adapted from Keřkovský, Valsa, 2012).

• In terms of the production strategy, aspects that should be addressed include: ethical, ecological, hygienic, or other aspects (text below adapted from Keřkovský, Valsa, 2012)

• product (health and safety of the customer, recyclability of used products, energy consumption),
• deployment of production (employment, impact on the environment and business environment),
• arrangement of workplaces (safety and hygiene regulations and aspects, employment of impaired workers),
• environment impact of production plant (safety and hygiene regulations, safe handling of hazardous materials and waste, not disturbing the surroundings with noise or emissions),

• production organization and planning (extensity and intensity of work in terms of hygienic regulations and standards, employees must be given sufficient rest time between shifts etc.).

• How should my inventory management system be set up with regard to production efficiency and the company’s generic competitive strategy (Keřkovský, Valsa, 2012)?
• Companies with differentiation strategies usually opt for supply systems that ensure overall flexibility, the ability to effectively react to predictable situations and cater to specific customer demands etc.
• On the other hand, companies with low cost strategies opt for supply systems that minimize costs.
• Should the production supply be, in terms of the above requirements, centralized (low cost strategy) or decentralized (differentiation strategy)?
• In addition, this area involves deciding on setting the extent and type of cooperation with suppliers or customers, primarily whether the company would benefit from certain forms of so-called production integration – e.g. forward vertical integration, which involves taking on some of the activities and functions of the company’s clients (e.g. distribution of products), or if it would benefit from backward vertical integration,  where the company takes on certain functions of its suppliers (e.g. suppliers of certain inputs etc.) (Keřkovský, Valsa, 2012).

• How important is the role of quality and assuring quality in the production process in terms of the company’s competitive strategy?
• What system will the company use in order to ensure the quality of production?

• Providing qualified workers
• Remuneration and motivation of the workforce (hourly pay, task-wage)
• How to monitor and manage work?
• What is a suitable management style (participatory vs. autocratic)
• Production scheduling and task delegation
• Method of specifying tasks (general outline, more detailed and structured) etc. (Keřkovský, Valsa, 2012)