DEPARTMENT OF TECHNOLOGY MANAGEMENT AND ECONOMICS DIVISION OF SUPPLY AND OPERATIONS MANAGEMENT CHALMERS UNIVERSITY OF TECHNOLOGY Gothenburg, Sweden 2024 www.chalmers.se Strategic Direction to Manage Increased Production Volumes Exploring Challenges and a Possible Strategic Direction for PowerCell’s Production System Master’s thesis in Quality and Operations Management SARA PETERSSON SOFIA NORRBY Strategic Direction to Manage Increased Production Volumes Exploring Challenges and a Possible Strategic Direction for PowerCell’s Production System SARA PETERSSON SOFIA NORRBY Department of Technology Management and Economics Division of Supply and Operations Management CHALMERS UNIVERSITY OF TECHNOLOGY Gothenburg, Sweden 2024 Strategic Direction to Manage Increased Production Volumes Exploring Challenges and a Possible Strategic Direction for PowerCell’s Production System SARA PETERSSON SOFIA NORRBY © SARA PETERSSON, 2024 © SOFIA NORRBY, 2024. Department of Technology Management and Economics Chalmers University of Technology SE-412 96 Gothenburg Sweden Telephone + 46 (0)31-772 1000 Gothenburg, Sweden 2024 Strategic Direction to Manage Increased Production Volumes Exploring Challenges and a Possible Strategic Direction for PowerCell’s Production System SARA PETERSSON SOFIA NORRBY Department of Technology Management and Economics Chalmers University of Technology SUMMARY A prominent challenge in today’s society is to decarbonize industries that rely heavily on fossil fuels, such as the transport sector. One way of doing this is by utilizing hydrogen, for example with hydrogen fuel cells that generate electricity with no other emissions than heat and water. PowerCell is a cleantech company with a long history of research and development within hydrogen fuel cells that has experienced a large organizational growth during the past years. Recently, PowerCell started to commercialize their fuel cell solutions, and they are today offering highly customized fuel cell solutions to their customers. With the anticipated growth of the fuel cell market, organizational preparedness for higher production volumes is required. To achieve this, there is a need to evaluate PowerCell’s current production strategy and decide on a strategic direction related to the production system. Therefore, this thesis aimed at identifying challenges related to PowerCell’s current production system and based on these provide guidance to PowerCell in developing a strategic direction for their production system. The study began with a pre-study consisting of a literature review, observations, and interviews with employees at PowerCell. Based on the results from the pre-study, a framework was developed to provide a basis for creating a comprehensive production strategy. Furthermore, in the main study, the framework was used to evaluate PowerCell’s current production strategy which led to an identification of 65 strategic decisions made related to the production system. Each decision was evaluated, and challenges and initial solutions were proposed. Then, the identified challenges were clustered into six prominent challenging areas: insufficient cross-functional communication, a lack of clear production strategy obstructs development of the production system, low degree of manufacturability of products, the high degree of customization obstructs managing increased production volumes, inadequate quality management efforts, and non-value-adding work in the production system. Each of these prominent challenging areas were addressed with a proposed strategic direction, enabling creating a comprehensive production strategy. Keywords: production strategy, production process, mass customization, do-or-buy decisions, supplier relationships, quality management, Lean Production, product and process innovation, DFMA, production planning and control Acknowledgements We would like to express our gratitude to all helpful employees at PowerCell, who have made our thesis work very enjoyable. Furthermore, we want to thank all respondents for participating in the study, as it would not have been possible to do it without you. A special thanks to Ingela Andersson for your useful guidance and insightful feedback throughout the project. Additionally, we are truly grateful for all the support and dedicated time from our supervisor at Chalmers, Per Medbo. Your assistance and and encouragement have been invaluable. Sara Petersson & Sofia Norrby, Gothenburg, May 2024 Glossary CODP: Customer order decoupling point. Fuel cell stack: Multiple hydrogen fuel cells combined in series to generate electricity from chemical reactions in the fuel cells. Fuel cell system: Consists of a fuel cell stack and components that ensure that the desired output for the application is obtained. The PS100 system: One of PowerCell’s fuel cell systems, which is built by one person from beginning to end. The power output is 100 kilowatt. The PS200 system: One of PowerCell’s fuel cell systems, consisting of three modules. The power output is 200 kilowatt. Engineering department: PowerCell’s product development department, who delivers new products and product revisions. Applications department: The Applications department conducts customer projects, either constructing and building wholly customized products from scratch or modifying existing products. Operations department: The department responsible for running operations at PowerCell, by managing for example production, purchasing, and quality. JIT: Just-in-time. FAT: Factory Acceptance Test. This is the last test performed on PowerCell’s fuel cell systems, testing the whole product to ensure the highest quality. LIM wagon: Lab Interface Module wagon. Fuel cell systems are mounted on these wagons upon entering the lab area, to enable FAT testing of them. Table of Contents Glossary .................................................................................................................................................... 4 Table of Contents ..................................................................................................................................... 6 List of Figures ........................................................................................................................................ 10 List of Tables .......................................................................................................................................... 11 1 Introduction ........................................................................................................................................... 1 1.1 The Clean Hydrogen Market .......................................................................................................... 1 1.2 PowerCell ....................................................................................................................................... 2 1.2.1 PowerCell’s Production System ............................................................................................. 3 1.3 Aim ................................................................................................................................................ 5 1.4 Problem Description....................................................................................................................... 5 1.5 Research Questions ........................................................................................................................ 8 1.6 Scope & Delimitations ................................................................................................................... 9 2 Frame of Reference ............................................................................................................................. 10 2.1 Performance Objectives ............................................................................................................... 10 2.2 Framework for Production Strategy ............................................................................................. 10 2.2.1 Skinner’s Model of Trade-offs in Production ....................................................................... 11 2.2.2 Bellgran & Säfsten’s Manufacturing Strategy Model ........................................................... 12 2.2.3 Slack & Lewis’ Operations Strategy Matrix ......................................................................... 13 2.2.4 Proposed Integrated Framework ........................................................................................... 14 2.3 Strategic Decision Areas .............................................................................................................. 16 2.3.1 Strategic Production Process Decisions ................................................................................ 16 Production Process Type ........................................................................................................... 16 Production Process Layout ........................................................................................................ 18 Technical Level of the Production Process ............................................................................... 19 2.3.2 Strategic Capacity Decisions ................................................................................................ 20 Total Capacity Level ................................................................................................................. 20 Number of Production Sites ...................................................................................................... 21 Long-Term Capacity Change Strategy ...................................................................................... 21 Task Allocation to Each Site ..................................................................................................... 21 Location of Each Site ................................................................................................................ 22 2.3.3 Strategic Supply Network Decisions .................................................................................... 22 Type of Supply Network ........................................................................................................... 22 Do-or-Buy Decisions ................................................................................................................. 23 Supplier Selection...................................................................................................................... 24 Managing Relationships in the Supply Network ....................................................................... 25 2.3.4 Strategic Quality Management Decisions ............................................................................. 25 Defining the Desired Level of Quality ...................................................................................... 26 Proactive & Reactive Quality Approach ................................................................................... 26 The Three Principles of Quality Management........................................................................... 27 2.3.5 Strategic Development & Organization Decisions ............................................................... 29 Product & Process Innovation ................................................................................................... 29 Cross-Functional Interaction ..................................................................................................... 32 Sequential & Concurrent Engineering ....................................................................................... 32 Design for Manufacturability .................................................................................................... 32 Job Design ................................................................................................................................. 33 2.3.6 Strategic Production Planning & Control Decisions ............................................................. 34 Levels of Production Planning & Control ................................................................................. 35 Choice of Customer Order Decoupling Point ............................................................................ 36 Handling Uncertainties .............................................................................................................. 37 Push & Pull Production Systems ............................................................................................... 38 Material Handovers Between Parts of the Production System .................................................. 39 2.4 Synthesizing Theory into the Proposed Integrated Framework ................................................... 40 3 Methodology ....................................................................................................................................... 42 3.1 Research Strategy & Research Design ......................................................................................... 42 3.2 Data Collection ............................................................................................................................ 42 3.2.1 Pre-study ................................................................................................................................... 43 3.2.2 Interviews ............................................................................................................................. 45 3.2.3 Observations ......................................................................................................................... 46 3.2.4 Literature Review ................................................................................................................. 46 3.3 Data Analysis ............................................................................................................................... 47 3.4 Research Ethics ............................................................................................................................ 48 3.5 Methodology Discussion .............................................................................................................. 48 4 Results & Analysis .............................................................................................................................. 50 4.1 Identified Prioritization of Performance Objectives ..................................................................... 50 4.2 Strategic Decisions, Associated Challenges & Initial Solutions Related to PowerCell’s Current Production System ............................................................................................................................. 53 4.2.1 Strategic Production Process Decisions, Associated Challenges & Initial Solutions ........... 54 4.2.2 Strategic Capacity Decisions & Associated Challenges & Initial Solutions ......................... 59 4.2.3 Strategic Supply Network Decisions, Associated Challenges & Initial Solutions ................ 63 4.2.4 Strategic Quality Management Decisions, Associated Challenges & Initial Solutions ........ 67 4.2.5 Strategic Development & Organization Decisions & Associated Challenges ...................... 78 4.2.6 Strategic Production Planning & Control Decisions, Associated Challenges & Initial Solutions ........................................................................................................................................ 83 4.2.7 Mapping Strategic Decisions in the Proposed Integrated Framework .................................. 88 4.3 The Most Prominent Challenging Areas Related to PowerCell’s Production System ................. 88 4.3.1 Insufficient Cross-Functional Communication ..................................................................... 88 4.3.2 A Lack of Clear Production Strategy Obstructs Development of the Production System .... 89 4.3.3 Low Degree of Manufacturability of Products ..................................................................... 90 4.3.4 The High Degree of Customization Obstructs Managing Increased Production Volumes ... 91 4.3.5 Inadequate Quality Management Efforts .............................................................................. 91 4.3.6 Non-Value-Adding Work in the Production System ............................................................ 92 4.4 Proposed Strategic Direction for PowerCell ................................................................................ 93 4.4.1 Proposed Strategic Direction to Address the Insufficient Cross-Functional Communication ....................................................................................................................................................... 93 4.4.2 Proposed Strategic Direction to Address the Lack of Clear Production Strategy Obstructing Development of the Production System ........................................................................................ 94 4.4.3 Proposed Strategic Direction to Address the Low Degree of Manufacturability of Products ....................................................................................................................................................... 96 4.4.4 Proposed Strategic Direction to Address the High Degree of Customization that Obstructs Managing Development of the Production System ....................................................................... 97 4.4.5 Proposed Strategic Direction to Address the Inadequate Quality Management Efforts ....... 99 4.4.6 Proposed Strategic Direction to Address the Non-Value-Adding Work in the Production System ......................................................................................................................................... 100 5 Discussion & Conclusions ................................................................................................................. 103 6 Further Research ................................................................................................................................ 107 References ................................................................................................................................................ 1 List of Figures 2.1 Manufacturing strategy content. 2.2 Operations strategy matrix. 2.3 Proposed Integrated Framework of synthesized literature. 2.4 Volume-variety characteristics for different process types. 2.5 The product-process matrix. 2.6 Innovation and stage of development. 2.7 The four types of production planning and control and their associated CODP. 3.1 An overview of the phases of data collection. 4.1 Respondents’ opinions on PowerCell’s current prioritization of performance objectives. 4.2 Respondents’ opinions on how PowerCell should prioritize in the future, to achieve higher production volumes. 4.3 Mapped strategic decisions in the Proposed Integrated Framework. 5.1 Interrelations between the six prominent challenging areas. List of Tables 2.1 Some important trade-off decisions in manufacturing. 2.2 Proposed classification of innovation stage. 2.3 Summary of content in the strategic decision areas. 3.1 Description of pre- and main study interviews. 5.1 Overarching themes of the proposed strategic directions 1 1 Introduction This Master’s thesis examines the production system and related strategic decisions at PowerCell, a company developing and producing hydrogen fuel cells. This introductory section provides a background to the study in terms of the industry being studied and a description of the case company. This is followed by a problem description, leading to the aim of the report and research questions. After that, the scope and delimitations to the study are presented. The introductory section is partly based on results from a pre- study consisting of interviews with employees at the case company and partly based on observations in the production area. 1.1 The Clean Hydrogen Market To manage decarbonizing industries that rely heavily on fossil fuels today, hydrogen will constitute a crucial part (Fonseca et al., 2023). However, a precondition for using hydrogen to reduce carbon emissions is that the hydrogen is generated in a renewable or low-carbon way, which is referred to as clean hydrogen (Hydrogen science coalition, 2023). Heid et al. (2022) argue that hydrogen has potential to account for more than 20% of global emissions reduction annually in 2050, thus, it can play a big role in achieving net-zero emissions. The clean hydrogen market is expected to grow over the upcoming years, with an increased announced industrial consumption from 0.11 million tons hydrogen per year in 2023 to 7.13 million tons in 2030 (Fonseca et al., 2023). One type of hydrogen consumption is through hydrogen fuel cells, which can be used for electricity production in a broad range of applications in multiple sectors (Hydrogen and Fuel Cell Technologies Office, n.d.). The clean hydrogen market is characterized by regulations and economic incentives (Fonseca et al., 2023). EU has, among other things, established decarbonization policies aiming to foster a clean hydrogen market, set obligations for using hydrogen in the mobility sector, and developed funding programs with the aim of supporting hydrogen usage and related technologies. Similarly, the US has introduced federal spendings toward reducing carbon emissions (McKinsey & Company, 2022). Thus, the demand for hydrogen solutions, for example hydrogen fuel cells, is currently highly characterized by different types of regulations and economic incentives. Several segments comprise the clean hydrogen market, some of which are: conventional industry, steel, and mobility (Fonseca et al., 2023). In the mobility sector, which has been growing year by year, hydrogen fuel cells can be used to generate electricity from hydrogen stored in tanks on the vessel (Fonseca et al., 2023). Due to strict regulations regarding replacement of fossil fuels in the marine sector and the aviation sector, these are sectors with a high demand for hydrogen fuel cells.1 It should, 1 P. Brouzell, personal communication, January 22 & March 19, 2024 2 however, be noted that using hydrogen to fuel aircrafts is still in an early development phase (Fonseca et al., 2023). To meet the increasing demand for clean hydrogen, there are several challenges to overcome, where two of the most prominent ones are the hydrogen infrastructure and scaling up production of clean hydrogen (Heid et al., 2022). If these challenges are overcome, the demand for hydrogen fuel cells is expected to grow. However, for this demand growth to be realized, there is a need for simultaneous development of regulations and economic incentives along with the previously mentioned infrastructure and clean hydrogen supply. If all these aspects are collectively considered, it should lead to an increased demand for hydrogen fuel cells. 1.2 PowerCell One actor on the clean hydrogen market is PowerCell Group, henceforth referred to as PowerCell, which is a cleantech company that develops and produces hydrogen fuel cell solutions for mobile and stationary customer segments (PowerCell Sweden AB, 2023). PowerCell was established in 2008 as an industrial spin-out from Volvo Group and is since December 2023 listed on Nasdaq Stockholm. The headquarter is located in Gothenburg, Sweden, with approximately 150 employees, of whom 70 have joined within the past three years (PowerCell Sweden AB, 2020; PowerCell Sweden AB, 2022; PowerCell Sweden AB, 2023). Besides the organizational expansion, the company has experienced significant financial growth during the past years, with increased revenues of 27% between 2022 and 2023 (PowerCell Sweden AB, 2023). This reflects the global shift towards an increasing usage of hydrogen for fossil-free energy generation. With a history of over 25 years of research and development, PowerCell has developed competence to meet the growing demand for low emission solutions in their target customer segments: marine, aviation, off-road, and power generation (PowerCell Sweden AB, 2022; PowerCell Sweden AB, 2023). In the automotive segment, Robert Bosch GmbH, henceforth referred to as Bosch, has since 2019, licensed PowerCell’s hydrogen fuel cell technology. PowerCell's product portfolio comprises hydrogen fuel cell stacks and systems. The hydrogen fuel cells operate on hydrogen, generating electricity and heat with no emissions other than water (PowerCell Sweden AB, 2022). The fuel cell stacks, composed of multiple layers of hydrogen fuel cells, form the core of PowerCell's technology, while the fuel cell systems offer a plug-and-play solution that incorporates the fuel cell stacks as a key component among others. PowerCell’s main offering currently consists of two fuel cell systems, differentiated by the power generated by the system, the PS100 system and the PS200 system. Additionally, across all product segments, PowerCell places a strong focus on providing highly customized applications to meet individual customer needs.2 2 L. Kylhammar, personal communication, January 30 & March 19, 2024. 3 Historically, technology exploration as well as research and development projects have constituted a large part of PowerCell’s revenues, with universities and research institutes serving as primary end customers, with most orders regarding single units (PowerCell Sweden AB, 2022).1 However, with the globally growing clean hydrogen market, there is a notable increase in commercial customers seeking the hydrogen fuel cell solutions offered by PowerCell. Particularly promising is the growing focus on the marine and aviation sectors, both of which are highly regulated in terms of CO2 emissions (PowerCell Sweden AB, 2022). However, demand is fluctuating, as it is a new product in a relatively new market.3 Additional aspects affecting the demand are the challenges regarding infrastructure and clean hydrogen supply characterizing the clean hydrogen market, and the regulatory environment. Thus, the customer base is not yet stabilized, and most customers are not yet recurring. With the anticipated heightened demand for commercial applications and serial deliveries, organizational preparedness for higher production volumes is required (PowerCell Sweden AB, 2022). The previously mentioned history of PowerCell being a development-oriented organization still highly affects how the company operates. This can, for example, be seen by the absence of a comprehensive production strategy. Decisions are often made in response to an existing customer order, and this can lead to strategic decisions being made in an ad-hoc manner. The lack of production strategy has not affected PowerCell significantly as production volumes have previously been low. However, increasing production volumes entails a need to incorporate production considerations into the organization, by reviewing the production system and the accompanying strategic decisions. 1.2.1 PowerCell’s Production System Bellgran and Säfsten (2010) define a production system as a collection of components, such as labor or machines, which are interrelated in an organized way to transform input to output. The large focus on customized solutions divides the production process into two parts: production of standard products, in this study defined as products produced in in the main production area, managed by the Operations department, and production of customized products, which are produced in a separate area and managed by the Applications department.3 Customized products can either be produced entirely in this separate area or be derived from standard products. It is, however, important to note that products produced in the main production area, so-called standard products, can differ notably between customer orders. Thus, both the production of standard products and customized products have a high degree of variety. The main production area at PowerCell is located in the main facility, next to the office, the warehouse and goods arrival. When goods arrive, they are inspected by warehouse employees, three in total, in various ways depending on the type of goods, before being transferred to the warehouse’s shelves.4 When the parts are needed in the production, 3 C. Magass, personal communication, January 22 & March 19, 2024. 4 V. Oscarson, personal communication, January 24 & March 13, 2024. 4 initiated by a manufacturing order, warehouse employees receive a message in their handheld device and collect the correct parts in a kit. The kit is placed on a wagon adjacent to the production area. Then, the operator picks up the parts and starts the production process. There are ten operators in total, both production technicians and production assemblers, working with production.5 Fuel cell stacks are produced in a secluded area, as this process is delicate in several aspects.6 The manufacturing process of fuel cell systems consists of mainly assembly work for the two standard fuel cell systems, the PS100 system and the PS200 system. The production time in terms of total throughput time is several weeks for both the PS100 system and the PS200 system, however, for the PS100 system, it is slightly longer than for the PS200 system. The production time is partly a consequence of currently having production employees only working office hours during weekdays, thus, on day shift. Another difference between the systems is that the same operator must manufacture the PS100 system all the way from start to finish, while the PS200 system is modular and can hence be worked on by several people simultaneously.3 A large part of the production system is the testing process for fuel cell stacks and systems, which is done both at the production site and in a separate lab area.6 The testing constitutes a substantial part of the total production time and is conducted during several phases of the production process, as well as when the product is finished, with a factory acceptance test (FAT). When deviations are identified during testing or upon arrival of goods, these are reported to the quality team, who are responsible for informing the product development department, denoted as the Engineering department. The deviating parts or material are placed in a quarantine area next to the production site and is handled in an appropriate way depending on the situation.7 If the deviation concerns defective material, the material is returned to the supplier, and if it is a testing issue, rework is typically done. As part of its growth journey, PowerCell has established production objectives of increased volumes (PowerCell Sweden AB, 2023). As part of achieving this, they have formed a strategic partnership with Bosch for the manufacturing of one type of fuel cell stack. This is done to achieve lower production costs and faster production time, as Bosch produces hydrogen fuel cells on a larger scale. The collaboration allows PowerCell to focus on the development of new fuel cell stacks, as well as development, assembly, and delivery of fuel cell systems (PowerCell Sweden AB, 2023). The pre-study showed that there are several challenges related to the production system, which might be amplified if production volumes are increased. These challenges must be addressed to be able to adopt a comprehensive production strategy. 5 P. Wallin, personal communication, January 30 & March 18, 2024. 6 M. Holmberg, personal communication, January 22 & March 13, 2024. 7 I. Andersson, personal communication, January 16 March 13, 2024. 5 1.3 Aim The aim of this study is to identify challenges related to PowerCell’s current production system and based on these, provide guidance to PowerCell in developing a strategic direction for their production system. The suggestions should support the organizational objective of increasing production volumes and align with the organization’s rapid product development. 1.4 Problem Description As the clean hydrogen market expands, it is, as discussed, anticipated that the hydrogen fuel cell sector will grow too, attracting more actors into the market. Currently, PowerCell is one of few hydrogen fuel cell developers and producers, thus being a pioneer facing evolving uncertainties. By examining PowerCell’s unique challenges and providing strategic guidance on their production strategy, other development- oriented companies facing similar challenges could benefit. PowerCell has previously been development-oriented and only recently started to focus on the efficient and effective functioning of operational processes by establishing an Operations department.5 This, along with the previously relatively low production volumes, has resulted in a production system that is not yet fully developed, and there are several challenges related to the production system that need to be addressed to manage increased production volumes. Six areas were, based on the conducted pre- study, identified as critical: the need for a flexible production process, capacity expansion, aligning product development and production, planning production, externally sourcing parts of production, and the testing activities. These areas are further discussed below. The first critical area concerns that the production system at PowerCell is characterized by its need for high flexibility.5 Flexibility is a performance objective that refers to the ability to rapidly and efficiently adapt production to necessary changes (Bellgran & Säfsten, 2010). Slack and Lewis (2020) argue that an operation is flexible when it can exhibit a wide range of activities, and move between these quickly, smoothly and cheaply. With a highly flexible production system, one can respond more easily to changing market requirements, such as new customer needs and fluctuating volume demands. A highly flexible production system is of importance to PowerCell for two main reasons: because there are frequent product updates from the research and development department, henceforth referred to as the Engineering department, and because of the high degree of customization offered to customers.2 These two reasons are consequences of the organization being highly development-oriented. Firstly, updates from the Engineering department range from annual updates, called annual releases, that are planned, yearly updates to the products, to smaller responses to quality issues or new customer demands. Considering the relatively long production 6 time, product updates can be released in the middle of producing an order.8 This can lead to either the scrapping of products, or misunderstandings between affected departments. An example of where misunderstandings can arise is between the Engineering department and the Sales department, where the latter must coordinate with the customers regarding the different product versions, sometimes without having all the information. Secondly, the flexibility needed due to the high level of customization affects the production of standard products because, as previously noted, the standard production process must accommodate many different product variants.6 Producing a high variety of products requires high flexibility, which in turn typically implies high costs (Slack & Lewis, 2020). Furthermore, Slack and Lewis (2020) emphasize a trade-off between flexibility and cost, a critical consideration when PowerCell plans to increase their production volumes. While PowerCell currently maintains flexibility at low production volumes, scaling up could amplify the significance of this trade-off, increasing costs, which is why this area must be taken into consideration. The strong emphasis on product development and customization has resulted in a high variation in production, indicating that the organization is in the early phases of development and potentially utilizing what Utterback and Abernathy (1975) describe as a performance-maximizing product strategy. This phase is characterized by unique products and varying customer requirements. At the same time, the process development seems to be uncoordinated, due to the high degree of manual and non- standardized work (Utterback & Abernathy, 1975). The second critical area concerns how capacity expansion will be handled. If PowerCell increases their production volumes, at some point a decision must be made regarding how to expand capacity. Such decisions can, according to Slack and Lewis (2020), include considerations as where to locate the new facility and how to allocate tasks to different sites. For example, as the majority of PowerCell’s customers are in Europe and USA, and due to the regulatorily favorable conditions in USA, a potential new site for PowerCell could be placed in USA.1 Furthermore, a potential decision could be whether to have what Slack and Lewis (2020) refer to as dedicated sites, by having one site producing fuel cell stacks and one producing fuel cell systems, or if all sites should be able to produce all types of products. The third critical area regards the alignment between product development and production. As customer requirements are highly prioritized when developing products manufacturability is sometimes compromised, leading to products that are not fully adapted to production.3 Additionally, this requires a high skillset from operators in production, due to the yet not standardized production. Products are, thus, sometimes developed more according to customer requirements than production capabilities, which, according to Slack and Lewis (2020) causes a risk for misalignment in the 8 N. Euler-Renstedt, personal communication, January 23, 2024. 7 organization. The authors emphasize the importance of reconciling the market, or customer, requirements with the operational capabilities, and to develop these in parallel. Furthermore, Wheelwright and Clark (1992) argue that it is important to consider manufacturing issues early in the design process to achieve a better interface between design choices and the production system. The anticipated increase in PowerCell’s production volumes will require a stronger focus on developing production capabilities in alignment with the customer requirements, and designing products that are more adapted to the production. The fourth critical area concerns production planning and control. PowerCell has until recently only produced according to customer orders but has during 2023 introduced aspects of production to stock, by producing certain products even if there is no order, to ensure a more even production rate.5 This was decided partially to reduce lead times and partially to ensure that the operators learn how to produce the products in a standardized manner, with consistent quality. Bellgran and Säfsten (2010) describe these two commonly used types of production planning and control, which are Make To Order (MTO) and Make To Stock (MTS). Both have several consequences for the production system, for example, MTO facilitates small production volumes and high production variation, resulting in a medium-long time to customer. Contrastingly, MTS entails a very short time to customer and is suitable for large production volumes and low product variation. Thus, transitioning from low production volumes to high production volumes implies moving from MTO to MTS, a transition that PowerCell has begun to do. However, while MTS might be the best choice when production volumes have increased, there will, during the period of growth, be a need to find a balance between MTO and MTS that aligns with increased production volumes. At PowerCell, the transition towards MTS has, as their current production system is characterized by frequent updates from the Engineering department, induced a risk of obsolete products and costs of scrapping.4 The fifth critical area regards externally sourcing parts of their production. The partnership with Bosch for production of fuel cell stacks was established with an aim for a faster production time and lower production costs (PowerCell Sweden AB, 2023). According to Bellgran and Säfsten (2010), a common reason for externally sourcing production is cost reduction. Typically, activities that distract an organization from focusing on their core competence are externally sourced, which is not fully correspondent to PowerCell’s situation, as the fuel cell stacks are considered part of their core competencies. Bellgran and Säfsten (2010) argue that a company that externally sources production but does the product development itself is exposed to the risk of issues occurring in the interface between these two activities – that is, product development might not get sufficient feedback from production, leading to an inferior product. Additionally, it is of high importance that the supplier's production is of sufficiently high quality. As the fuel cell stacks are considered by many employees to be the core of PowerCell’s technology, the outsourcing decision has led to a risk of insufficient feedback to product development and insufficient quality. These are two aspects that should be considered alongside the benefits of reduced cost and production 8 time. If production volumes are increased, there is a need to decide how to move forward with this partnership in the future; if all fuel cell stacks should eventually be externally sourced from Bosch or if they should be produced in-house. The sixth critical area concerns the testing activities in the production process, which constitute one bottleneck in the production.3 This is due to several reasons: the testing activities are time-consuming, tests are being conducted during various phases of the production process, and fuel cell systems must be mounted on lab interface module wagons (LIM wagons) before entering the lab area, which also takes time. Additionally, production, the Engineering department, and the Applications department share resources in the lab area, meaning that testing activities must be coordinated. The shared lab area indicates a focus on resource efficiency, maximizing the utilization of resources, rather than flow efficiency, the focus on consistent flows and reduction of non-value adding activities (Wernicke et al., 2017). The focus on resource efficiency is, according to Modig and Åhlström (2011), common in organizations due to a perception that maximizing resource efficiency reduces costs. However, the high resource efficiency can result in increased inventory and queues (Slack et al., 2013). When PowerCell plans for increased production volumes, a strateg decision must be made regarding the balance between resource efficiency and flow efficiency related to the structure of the testing activities. To summarize, certain strategic decisions have been made regarding PowerCell’s production system, however, these decisions lack comprehensiveness and there is no clear production strategy. Moving forwards, there is a need to establish a clear production strategy and align it with the anticipated growth in demand. Furthermore, it is apparent that the newness of the product and the market along with the constantly evolving organization result in a complex situation that must be addressed to achieve the set goals of increasing production volumes. 1.5 Research Questions The conducted pre-study unveiled six challenging areas related to the production system, each of which will need to be further explored to enable the development of a strategic direction for PowerCell’s production system. PowerCell currently lacks a comprehensive production strategy, however, certain strategic decisions have been made, and these need to be identified. There is also a need to examine the strategic decisions further, as these might induce challenges in the production system and could have consequences if production volumes are increased. Furthermore, these challenges should be assessed to identify initial solutions and the most prominent challenging areas. Considering all these aspects, certain strategic decisions can be proposed regarding the production system to address the identified prominent challenging areas and support increasing production volumes. To fulfill the aim of this study, four research questions have been formulated. 9 RQ1: Which strategic decisions have been made regarding PowerCell’s current production system? RQ2: Which challenges associated with the strategic decisions can be identified, and what initial solutions can be proposed to address these challenges? RQ3: Which challenging areas related to PowerCell’s current production system are the most prominent? RQ4: Which strategic decisions regarding the production system should PowerCell make to overcome the identified prominent challenging areas and support increasing production volumes? 1.6 Scope & Delimitations This study focuses on PowerCell’s production system and interfaces between the production system and other parts of the organization, for example, information and material handovers between the Operations department and other departments. Furthermore, this study examines the production process for products manufactured in the production system rather than products manufactured in other locations, such as Applications projects. A delimitation to this study is that it is assumed that production volumes will increase to a certain extent, however, no exact growth rate is assumed. Another delimitation is that the aftermarket is not considered in this study, hence, the activities in the warehouse are limited to those related to production of new products rather than services related to existing products. 10 2 Frame of Reference The following section presents a frame of reference for the report, introducing the most relevant terms and concepts for the study. The topics covered in this section are performance objectives, a framework for production strategy, and a detailed description of the six strategic decision areas of the framework. 2.1 Performance Objectives Slack et al. (2013) describe that there are five basic objectives, referred to as performance objectives, that any operation benefits from acknowledging: quality, speed, dependability, flexibility, and cost. Bellgran and Säfsten (2010) describe the same objectives but refer to them as competitive factors and merge speed and dependability into one single factor called deliverability. Quality refers to how consistently the output of the operation conforms to customers’ expectations and specifications. A high quality means fewer errors and increased customer satisfaction (Slack et al., 2013). Speed is defined as the time between a customer places an order and that the customer receives the product. High speed means that customers get the products earlier. Dependability is the objective of delivering the right things to customers at the right time, thus, high dependability means that customers can trust that they will receive the correct things at the expected time. Flexibility means that the operation can change in response to customer demand, for example in terms of introducing new products, offering a wide range of products, scaling up or down output quantities, or changing the time of delivery. Lastly, the performance objective of cost refers to how cost-efficiently the operations run. Slack et al. (2013) argue that cost is always important for operations, even if the company does not compete directly on price on the market. Typically, there are trade-offs between different performance objectives, thus, organizations must prioritize between the different objectives (Slack et al., 2013). One common trade-off that organizations are faced with is the one between cost and flexibility, in terms of the variety of products offered to customers. Slack et al. (2013) argue that there is a so-called efficient frontier characterizing each operation that organizations position themselves along, where each level of cost efficiency corresponds to a certain, maximum, level of variety. If the organization seeks to improve their cost-efficiency without compromising the variety offered to customers, it must improve operations in some way to extend the efficient frontier. 2.2 Framework for Production Strategy In the following section literature on production strategy is presented. The theory on the subject is synthesized into a Proposed Integrated Framework used throughout the project to fulfill the study's aim. 11 2.2.1 Skinner’s Model of Trade-offs in Production According to Bellgran and Säfsten (2010), Wickham Skinner was a pioneer in bringing production to a corporate strategic level, referring to it as manufacturing strategy. The essence of his recognized article from 1969 is that manufacturing functions often represent a substantial investment for organizations and should therefore be supported by management to reach targets. Skinner (1969) argues that a manufacturing strategy clarifies that production can contribute to company competitiveness. Furthermore, the author describes that very few executives are aware of the trade-offs when designing and operating a production system, wherefor the importance of reflecting top management decisions in the production perspective is stressed. Skinner (1969) suggests five different decision areas within which a company must make strategic decisions regarding manufacturing strategy: facilities and equipment, production planning and control, labor, product design and development, and organization and leadership. In each of these areas, decisions about certain standpoints will be taken, thus, a trade-off between alternatives arises. For example, decisions regarding facilities and equipment comprise decisions about plant size, and whether the company should have one big plant or several small plants. Further examples of decisions in each decision area with corresponding trade-offs are listed in Table 2.1 below. Table 2.1: Some important trade-off decisions in manufacturing (Skinner, 1969). Decision area Decision Trade-offs Facilities and equipment Plant size Span of process Plant location One large or several small Make or buy Near customers or near materials Production planning and control Inventory size Quality control Use of standards High or low High reliability and quality or low costs Formal, informal, or none Labour Job specialization Wage system Supervision Highly- or not highly specialized Many or few job grades Close or loose 12 Product design and development Size of production line Design stability Technological risk Many customer specials or few or none Many changes or frozen design Unproved processes or follow-the-leader policy Organization and leadership Organization type Executive use of time Degree of risk assumed Functional or product focus Involvement in production planning or cost control or other Decisions based on much or little information 2.2.2 Bellgran & Säfsten’s Manufacturing Strategy Model Bellgran and Säfsten (2010) propose a manufacturing strategy that is partly based on Skinner’s (1969) model of trade-offs in production, however, they add certain elements. The authors argue that Skinner (1969) emphasizes what they refer to as structural decision categories. Structural categories are, according to Bellgran and Säfsten (2010), characterized by their long impact, large capital requirements, and resistance to change. In their proposed model, the authors also incorporate infra-structural decision categories, which are referred to as more tactical decision areas, where decisions are made at a higher frequency, and capital requirements are typically lower than with structural decisions. Bellgran and Säfsten’s (2010) model of manufacturing strategy content is presented below in Figure 2.1. Manufacturing Strategy Content Competitive Factors Decision Categories Structural Infrastructural Cost, quality, deliverability, and flexibility Production process, capacity, facilities, and vertical integration Quality, organization, and production planning and control Figure 2.1: Manufacturing strategy content (Bellgran and Säfsten, 2010). The content of Bellgran and Säfsten’s (2010) manufacturing strategy model is based on two dimensions: competitive factors and decision categories. The competitive factors are how the organization aims to compete in a certain market, and these are: cost, quality, deliverability, and flexibility. These correspond to the five performance 13 objectives described in section 2.1 of this report, however, Bellgran and Säfsten (2010) combine speed and dependability into the competitive factor of deliverability. The other dimension, the decision categories, are the company capabilities used to achieve the objectives, and these are: production process, capacity, facility, vertical integration, quality, organization, and production planning and control (Bellgran & Säfsten, 2010). Decisions regarding the production process are split into process type, layout, and technical level, and this decision category relates to how resources are transformed into products. A suitable process type and process layout can be chosen based on the relationship between the volume and variety of the process, visualized by a product-process matrix, as presented in section 2.3.1 of this report. The technical level regards how automized the process ought to be (Bellgran & Säfsten, 2010). The decision category capacity regards which capacity the organization has at a certain point of time to conduct a certain activity, and the capacity can be adjusted according to product demand in one of three ways: personnel, technology, and buying or selling capacity. An organization can choose whether to have a so-called leading strategy or a lagging strategy, choosing whether to adjust capacity proactively, before demand changes, or reactively, after demand changes. The decision category facility refers to the building where the production process occurs, for example where it should be in relation to the market and suppliers, or how many factories are needed (Bellgran & Säfsten, 2010). The next decision category, vertical integration, relates to the degree to which the organization acquires different parts of the supply chain, for example component producers or distributors, to achieve better control over the entire process. The decision category quality refers to how quality issues are handled, for example, if a proactive or reactive approach is chosen, and who is responsible for what. Organization and human resources is a decision category related to organizational structure and sharing of responsibility and work tasks. The last decision category, production planning and control, comprises decisions regarding the customer order decoupling point (CODP), which decides where the planning point should be, material planning, and order sequences. 2.2.3 Slack & Lewis’ Operations Strategy Matrix According to Slack and Lewis (2020), operations strategy relates to the reconciliation of market requirements and operations resources. The content of the operations strategy is presented in a matrix according to Figure 2.2, and comprises two dimensions: required performance, based on an understanding of the market, and strategic decisions, based on an understanding of operations resources and processes. The required performance is represented by the five performance objectives, as described in section 2.1 of this report. There are four strategic decision areas, namely: capacity, supply network, process technology, and development and organization. 14 Figure 2.2: Operations strategy matrix (Slack & Lewis, 2020). Capacity is a decision area that regards how the capacity and facilities should be utilized, for example, how capacity should be adjusted according to demand, how many sites the organization should have, and where the sites should be located (Slack & Lewis, 2020). The supply network decisions regard how the operation is positioned in relation to its customers and suppliers, for example, the degree of vertical integration and the relationships the organization should have to its suppliers. The process technology decisions are concerned with how technology, such as systems or machines to be used for the transformation of resources into products, is chosen. The last decision area, development and organization, comprises decisions regarding how the operation should be run more long-term, for example how processes can be enhanced and how product development is organized. 2.2.4 Proposed Integrated Framework To map and create a production strategy suitable for PowerCell’s specific situation, the three different frameworks described in sections 2.2.1, 2.2.2, and 2.2.3, have been combined into one integrated framework presented in Figure 2.3. The purpose of the proposed framework is to provide a basis for identifying which strategic decisions have been made regarding PowerCell’s production system and for mapping challenges in PowerCell’s current production system. Furthermore, the framework can be used to emphasize areas where strategic decisions should be made, to formulate a strategic direction regarding the production system in a structured way. The frameworks decision areas will further serve as a foundation for areas of relevance in the literature review and when conducting interviews. The performance objectives will be used to cluster decisions based on their intended result. 15 Figure 2.3: Proposed Integrated Framework of synthesized literature. Like the operations strategy matrix by Slack and Lewis (2020), the integrated framework is visualized through a matrix comprising the two dimensions required performance and decision areas forming 30 individual cells. The required performance consists of the five performance objectives quality, speed, dependability, flexibility, and cost, which, according to Slack et al. (2013), are required to be competitive on the market. The decision areas are based on resources and processes considered crucial for PowerCell production strategy and comprise production process, capacity, supply network, quality management, development and organization, and production planning and control. First, production process decisions regard process type, layout, and technical level as described by Bellgran and Säfsten (2010). These are decisions of importance to PowerCell when planning for scaling up production volumes, as they would need to consider the changes in the relationship between the volume and variety and based on that find a suitable process type and process layout. Second, capacity decisions regard facilities and capacity, for example number of sites an organization should have, where these should be located, and how production capacity should be adjusted to demand (Bellgran & Säfsten, 2010; Skinner, 1969; Slack & Lewis, 2020). In accordance with PowerCell’s plans for expansion, decisions about how to allocate and plan capacity strategically will be crucial. Third, supply network decisions concern how an operation positions themselves in relation to suppliers and customers, as described by Slack and Lewis (2020). Similarly, this is described as vertical integration by Bellgran and Säfsten (2010) but is considered more comprehensive and suitable to PowerCell’s situation when treated as supply network decisions. If PowerCell increases output volumes, decisions that concern supplier relationships and the degree of vertical integration will need to be considered in accordance with the performance objectives. This can, for example, refer to the partnership with Bosch and the appropriate degree of outsourcing. Fourth, quality management in terms of being a decision area is not equivalent to quality as a performance objective. As argued by Bellgran and Säfsten (2010), this 16 decision area refers to how quality issues are handled. Making strategic decisions about the process of handling quality issues will be of high importance for PowerCell when scaling up production volumes, to ensure consistency in production. Fifth, the decision area development and organization concerns how operations should be run in the long-term perspective, and how product development is organized (Slack & Lewis, 2020). Decisions in this area must be stressed by PowerCell, as scaling up production volumes will imply organizational changes and strategic decisions to be made about the currently highly development-oriented organization. Sixth, and last, the production planning and control decision area described by Bellgran and Säfsten (2010) will be of high importance to PowerCell when scaling up production volumes, as it comprises strategic decisions about for example material planning and order sequences. For example, the decisions regarding the CODP need to be reviewed to ensure that the correct balance between MTO and MTS is selected. 2.3 Strategic Decision Areas The following section provides and discusses theory on the strategic decision areas used in the Proposed Integrated Framework. The strategic decision areas are production process, capacity, supply networks, quality, development and organization, and production planning and control. 2.3.1 Strategic Production Process Decisions A production process is defined as a process transforming resources into products (Bellgran & Säfsten, 2010). According to Bellgran and Säfsten (2010), strategic decisions related to production processes comprise three types of decisions: process type, layout, and technical level. Production Process Type The process type associated with a production process is, according to Bellgran and Säfsten (2010), the way that activities are organized to perform the transformation of resources. The process type is typically closely related to the output volume and variety of the production process, where different relationships between volume and variety imply selection of different process types. Slack et al. (2013) argue that when designing a process, the volume and variety requirements on the output should be the main guidance for decisions. There is a spectrum ranging from low volume and high variety to high volume and low variety, where processes are positioned, as visualized in Figure 2.4 below (Slack et al., 2013). This leads to five main types of manufacturing processes: project processes, jobbing processes, batch processes, mass processes, and continuous processes. Project processes have a low volume and high variety and manage products that are typically highly customized and that require a long time to complete, with resources exclusively devoted to them. In the project processes, the product flow is almost non-existent (Jonsson & Mattsson, 2009). Jobbing processes also have low volume and high variety; however, process resources are shared between products in 17 this type of process (Slack et al., 2013). Jobbing processes produce a higher volume than project processes, but each product might still require specific attention and have different needs. The jobbing process is appropriate for production of different types of products (Jonsson & Mattsson, 2009). Further, this type of process can require a certain amount of skill and knowledge (Slack et al., 2013). The third type of process, the batch process, produces batches of products that are similar. This process type typically has a lower variety than jobbing processes, as products within batches are similar, however, products can differ between batches. The characteristics of the batches determine the process’s volume and variety levels. Mass processes produce high volume and low variety output and are repetitive with low uncertainty. The last process type, the continuous process, is characterized by an even higher volume and lower variety. This type of process is commonly conducted in an endless flow. Figure 2.4: Volume-variety characteristics for different process types (Slack et al., 2013). A common way of visualizing the process’s volume-variety characteristics is by the so- called product-process matrix, shown in Figure 2.5 (Slack et al., 2013). The authors argue that layout and technology decisions also are related to the volume-variety characteristics of the process. The spectrum of volume-variety characteristics constitutes a so-called natural diagonal across the matrix, where processes should be positioned. Deviation from the natural diagonal will typically entail higher operating costs; moving to the right side of the natural diagonal means that the process has a higher flexibility than required and that opportunities for standardization are missed, and being on the left side of the natural diagonal implies an over-standardization, with too low flexibility and thus high costs of changing between activities. 18 Figure 2.5: The product-process matrix (Slack et al., 2013). Achieving a high flexibility typically comes at the expense of having a low volume. However, there are also ways to reach a high flexibility and offer a high degree of customization while still producing high volumes in a relatively cost-efficient way, and this is called mass customization (Slack et al., 2013). The aim of mass customization is, thus, to overcome the trade-off between variety and cost (Slack and Lewis, 2020). The concept of mass customization is built on the assumption that markets are increasingly fragmented, while new technologies can facilitate enhanced flexibility. An example of mass customization is where product families are developed with basic features that can be modified according to individual customer needs. Other examples are standardization of components, modular designs, or products built on platforms. This topic is further explored in section 2.3.5 of this report. Production Process Layout Layout decisions regard the physical location of the transforming resources and how tasks are allocated to them (Slack et al., 2013). The process layout determines how products will flow through the production system. There are four basic types of layouts that can be altered and combined according to the requirements of the production system: fixed-position layout, functional layout, cell layout, and product layout. Firstly, a fixed-position layout implies that the transforming resources are arranged so that the product is stationary, thus, resources and equipment are moved in a way that is necessary to build the product (Slack et al., 2013). This layout is appropriate when the product is too large or delicate to move. However, as volume increases and variety decreases, the fixed-position layout entails issues with product flows. Secondly, a functional layout means that similar resources or equipment are clustered, so that products flow between activities in the production system as needed. Thus, different products take different routes, which can be appropriate when there is still a certain 19 degree of variety. This layout typically increases resource efficiency but also increases product flow complexity. Thirdly, a cell layout is a layout where products upon entering the operation are guided to one part of the operation, referred to as a cell. In the cell, required resources and equipment are available and arranged in either a functional or product layout. One cell can be succeeded by another cell, where other processes take place. A cell layout is, according to Slack et al. (2013), a solution to the complex flows of the functional layout and can be appropriate when there is a degree of variety, but certain categories of products can be distinguished. Fourthly, and lastly, a product layout implies that every product moves according to a specific path of activities, and the resources and equipment are arranged according to this path. In the product layout, product flows are clear and predictable, making it suitable for products with a high degree of standardization. When choosing a layout, Slack et al. (2013) argue that the importance of product flow is essential. The lower the volume and the higher the variety, the lower the importance of product flow. This is because products flow very infrequently through the operation. However, as volume increases and variety decreases, the product flow becomes more important. The five different process types based on different volume-variety characteristics, explained previously, are typically related to the four layouts in the following way: project processes have fixed-position layouts, jobbing processes have fixed-position or functional layouts, batch processes have functional or cell layouts, mass processes have cell or product layouts, and continuous processes have product layouts. The layout choice should also consider the cost element, where fixed and variable costs differ among the four layouts (Slack et al., 2013). The fixed-position layout entails low fixed costs, but high variable costs associated with each product. The functional- and cell layouts have higher fixed costs but lower variable costs, and the product layout commonly has the highest fixed costs, but the lowest variable costs associated with each product. Technical Level of the Production Process The last decision regards the technical level of the production process. This implies choosing a suitable level of technology to be used in the production system (Bellgran & Säfsten, 2010). Slack and Lewis (2020) describe the need to consider the volume- variety characteristics to find a suitable technical level for the production process. Three characteristics of the process technology differ according to the volume-variety characteristics: the scale, the degree of automation, and the degree of coupling. Scale refers to the technology’s capacity to process work in terms of the size of the units of technology. This can, for example, mean the decision to have one large machine or several smaller machines. Each choice has certain consequences for the production system; large units of process technology typically lead to lower operating costs but imply risks in terms of increased vulnerability and lower flexibility of the operation and reduced opportunity to exploit new technology, while smaller units of process technology might entail higher operating costs but a more robust production system (Slack and Lewis, 2020). The degree of automation refers to the amount of work each unit of technology does and how much human intervention there is. A high degree of 20 automation typically means lower direct costs and higher speed in the process. However, Slack and Lewis (2020) point out that in many cases, automation does not reduce the total costs, due to regular maintenance and the increased labor cost that comes with the change in competence required. Furthermore, the authors argue that automation can reduce the flexibility and dependability of the process, and the implementation is often time-consuming. Coupling refers to how integrated different process technologies are. A high degree of coupling can lead to lower work-in-progress and costs due to a higher degree of synchronization, however, it reduces the robustness of the process in the event of failure at any part of the process. A reduced robustness might, on the other hand, act like a catalyst of change as it exposes weaknesses in the production system, which is a perspective emphasized in Lean Production (Slack et al., 2013). Choosing a technical level can, as previously mentioned, be done by reviewing the volume-variety characteristics and the product-process matrix. The scale, degree of automation, and coupling are related in the sense that a large-scale technology enables high coupling and a higher degree of automation, and the other way around. For a process prioritizing cost efficiency over variety, a large scale, high coupling, and high degree of automation is usually suitable, while a process with high requirements for flexibility and variety typically can benefit from a smaller scale, low coupling, and low degree of automation. A production process should, as previously noted, be positioned on the natural diagonal of the product-process matrix, and the process technology should be chosen in accordance with the volume-variety characteristics of the specific position in terms of scale, coupling, and degree of automation. Slack and Lewis (2020) further argue that information processing technology can overcome the trade-off between volume and variety. This can lead to opportunities for increasing volume while maintaining a relatively high variety, thus utilizing a mass customization approach. 2.3.2 Strategic Capacity Decisions An organization’s capacity strategy within operations defines scale of the capacity, site distribution, allocated activities, and site locations (Slack & Lewis, 2020). The capacity strategy may require adjustments as the competitive landscape changes. The process of changing capacity usually involves deciding when capacity levels should be increased or decreased, how large each step of change should be, and how fast capacity levels should change. Slack and Lewis (2020) highlight five crucial areas to consider regarding capacity decisions. Total Capacity Level The first capacity decision is how much capacity an operation should have, which is influenced both by market requirements and operations resources. Forecasting future demand carries uncertainty that can hinder investment decisions. Excess capacity can offer flexibility to meet short-term demand increases, especially crucial during product launches or in competitive markets where satisfying immediate demand is vital, but is 21 costly (Slack & Lewis, 2020). Undersupplying a market might increase customers’ willingness to pay, depending on how well the product or service is positioned in the market and how much competition there is. However, Slack and Lewis (2020) argue that undersupplying the market could reduce demand, benefiting competitors. Organizations could manage this by adjusting prices and promotions, which highlights the importance of aligning capacity decisions with market strategy. Expanding capacity is a common strategy among firms aiming to broaden their business reach and boost profits, particularly in anticipation of market expansion (Kamoto, 2015). Evaluating the worth of such expansions and making investment choices becomes crucial for firms to optimize their investment value. Slack and Lewis (2020) claim that expanding physical capacity in advance of effective capacity can generate greater returns in the long run, meaning that it can be favorable to invest in larger facilities directly despite the higher initial costs. Number of Production Sites The second decision concerns how many separate sites an operation should have. Slack and Lewis (2020) mean that an organization in general should establish multiple smaller sites if customer demand is widely distributed or if customers demand high absolute levels. Multiple smaller sites located closer to the customer are also preferable if an operation provides few larger units, to lower the transportation costs of goods (Slack & Lewis, 2020). A small number of larger units may also be less costly to supply with input resources. On the other hand, it can be difficult to exploit economies of scale with many small sites, wherefore fewer larger sites could be beneficial. Long-Term Capacity Change Strategy The third capacity decision treated by Slack and Lewis (2020) regards long-term capacity change strategy. Slack and Lewis (2020) describe three main strategies for timing capacity changes: capacity leads demand, capacity lags demand, and smoothing with inventories. The capacity leads demand strategy increases production capacity before forecasted demand increases, potentially yielding higher revenues but at increased costs. The capacity lags demand strategy adjusts capacity introduction to closely match or slightly lag actual demand, potentially leading to missed selling opportunities but useful when capital access is limited. Smoothing with inventories aligns capacity introduction with current capacity levels supplemented by inventory buffers, providing consistent supply to meet demand but implies additional costs and inventory risks. Regardless of timing strategy, Slack and Lewis (2020) stress that the lowest capacity, or bottleneck, in a supply chain will limit the capacity of a whole chain of operations and planning for capacity change must therefore be balanced. Task Allocation to Each Site The fourth capacity decision regards task allocations to an operation’s sites. The main issue with this decision is whether to have focused operations or not, hence, whether sites should be specialized on certain specific tasks or not (Slack & Lewis, 2020). Focused operations entail the benefit of specializing in a narrow range of tasks with clear performance objectives, however, they might be vulnerable to market shifts and 22 lack economies of scale. Bellgran and Säfsten (2010) call this process or product focus. A process-focused site is a general, not dedicated operation, flexible and capable of handling various products. Contrastingly, a product-focused site has focused operations and specializes in producing one or a few products in high volumes, often emphasizing cost efficiency. Location of Each Site The fifth capacity decision involves determining the location of each site, thus, where an organization places its operational capacity (Slack & Lewis, 2020). Effective location decisions require a comprehensive understanding of how costs, revenues, and investments vary across different geographical areas. For instance, locating a manufacturing plant in an area with a shortage of skilled labor can impact product quality and costs due to challenges in attracting the right talents. Additionally, Slack and Lewis (2020) mean that customer service expectations heavily influence location decisions, as closeness to customers ensures prompt and consistent supply, meeting their needs efficiently. Market factors, such as the suitability and perception of the site's location, also influence this decision-making process. Furthermore, operational considerations like land and energy costs, required investments, availability of specialized resources, and community dynamics are pivotal in determining the optimal location. Similar to the location considerations highlighted by Slack and Lewis (2020), Bellgran and Säfsten (2010) discuss that when planning the establishment of a facility or factory, several crucial decisions come into play. These include determining the ideal location of the facility, considering factors such as proximity to markets, raw material suppliers, and logistics centers. 2.3.3 Strategic Supply Network Decisions A supply network is a system comprising interconnected organizations whose various processes and activities collectively produce value (Slack & Lewis, 2020). Each organization will have linkages to both suppliers and customers, and competitors, and the importance of the supply network, according to Slack and Lewis (2020), is that operations managers must understand the capabilities of the resources that form the network, and how effectively these are linked together. Adopting a supply network perspective can also include broader aspects than buyer-seller relationships or competition, such as the collaboration or complementation between different elements of the network. Slack and Lewis’ (2020) main reasoning is that any organization should ask themselves two things: how their suppliers’ operations can help their operation become more effective and how they can help their customers’ operations become more effective. The strategic supply network decisions hence revolve around deciding the organization’s desired position in the supply network. Type of Supply Network One objective when managing the supply network is to achieve a strategic fit between the organization and its suppliers, which can be done by first understanding the level of uncertainty and the supply chain capabilities (Chopra & Meindl, 2013). For organizations facing uncertain demand from their customers, for example due to a new 23 product, forecasting is difficult. Thus, it can be challenging to match the supply to the demand. If this is the case, Chopra and Meindl (2013) argue that a responsive, rather than an efficient, supply network is to be preferred. This implies a supply network that can respond quickly to wide ranges of quantities, offer short lead times, and offer many product variants, and suppliers should be chosen based on their speed, flexibility, dependability, and quality. This type of supply network typically entails higher costs, while the opposite, an efficient supply network, focuses mainly on predictability and lowering costs. In an efficient supply network, suppliers should be chosen based on cost and quality. To achieve a strategic fit, according to Chopra and Meindl (2013), the supply network responsiveness should be matched with the level of demand and supply uncertainty. Do-or-Buy Decisions One type of strategic decision regarding the supply network is about choosing which processes to perform in-house and which to outsource (Chopra & Meindl, 2013). This type of decision is referred to as a do-or-buy decision (Slack and Lewis, 2020). Do-or- buy decisions involve both strategic importance and operational considerations, however, the authors argue that it is relatively common that the focus is on short-term cost savings, rather than efficiency maximization. The do-or-buy decision affects the organization’s performance in various ways, which can be categorized into the five performance objectives. In terms of quality, errors are typically easier to trace and correct when producing something in-house, however, a supplier might be specialized or have a more standardized production process due to higher volumes (Slack & Lewis, 2020). For speed, producing something in-house might facilitate synchronization of flows, however, internal customer-supplier relationships might not always be prioritized in the same way as external customer-supplier relationships. When buying from a supplier, lead times might be contractually defined but there is also a risk of transport delays. Dependability might increase when producing in-house due to easier communication, however, there is still the issue of internal customers receiving a lower prioritization. On the other hand, when buying from a supplier, late delivery penalties can be included in the contract, possibly reducing the risk of delays. In terms of flexibility, in-house production will be limited by the scale and scope of the organization, while suppliers might have broader capabilities. It can be easier to scale up and down volumes when buying than to adjust capacity according to demand fluctuations. Lastly, when producing in-house, the organization can eliminate the profit margin otherwise paid to the supplier, however, low production volumes make it difficult to reach economies of scale. Buying from a supplier might be less costly as suppliers can reach economies of scale, however, administrative and coordinative costs will be induced. Do-or-buy decisions are, according to Dabhilkar (2011), rooted in transaction cost economics and the resource-based view. Transaction cost economics recommends using outsourcing when it is possible to reduce overall production costs (Dabhilkar, 2011). The resource-based view describes firms as collections of resources that, when utilized 24 effectively, lead to competitive advantage. Core business capabilities should be kept internal, while non-core functions can be outsourced. Kroes and Gosh (2009) also describe how do-or-buy decisions enhance a firm's competitive advantage, adding two perspectives: agency theory and the knowledge-based view. Agency theory emphasizes the delegation of authority and the need for alignment between different organizations, explaining outsourcing as the delegation of responsibility to a more efficient provider (Kroes & Gosh, 2009). The knowledge-based view focuses on leveraging specific knowledge sets for competitive advantage, whether from internal or external sources. Overall, these theories suggest that organizations should exploit activities, such as productions processes, that offer additional competitive advantages. Conversely, activities that do not offer such advantages should be externally sourced (Kroes & Gosh, 2009). Supplier Selection Luthra et al. (2020) emphasize the criticality of supplier selection for manufacturing industries due to the substantial costs associated with raw materials and services. Typically, organizations allocate around 60% of product costs towards acquiring raw materials. The quality of these raw materials significantly impacts the production of high-quality end products at optimal costs, underscoring the importance of the customer-supplier relationship. This relationship encompasses various aspects such as material quality, reworking services, handling of customer complaints, and delivery performance (Luthra et al., 2020). One important step in fostering the customer-supplier relationship is selecting the right supplier (Luthra et al., 2020). Reliable suppliers can help lower inventory costs, enhance quality, and contribute to overall supply chain efficiency (Luthra et al., 2020). Therefore, effective supplier selection is critical for long-term business success and competitiveness in the marketplace. Luthra et al. (2020) further outline selection criteria for suppliers, which can include assessing previous performance, quality system adherence, capacity, technical support, cost optimization, and business track record. Methods for evaluating potential suppliers include financial analysis, performance history review, on-site visits, quality system confirmation, and customer feedback analysis. Another decision to be made when selecting suppliers is the number of suppliers for each component, and there are two main approaches: single sourcing and multiple sourcing (Jonsson & Mattsson, 2017). Single sourcing is when a single supplier is used for a certain component, while multiple sourcing implies using several suppliers for a certain component. Using a single sourcing approach can be suitable when sourcing low volumes, as administrative costs from using multiple suppliers might be too high, or when there are only a few options available in the market. Additionally, if aiming for partnerships with suppliers, single sourcing is more suitable, as it facilitates communication and information sharing between the company and the supplier. The main reasons for choosing multiple sourcing are the possibility of decreasing prices by putting suppliers against each other and the reduced risk of delivery disruptions from a single supplier. Further, it can increase flexibility to scale volumes according to demand compared to a single sourcing approach. A multiple sourcing approach has, according 25 to Jonsson and Mattsson (2017) traditionally been the most common, however, the authors argue that the price paid is only a fraction of the total cost associated with the purchasing activity, and that the lack of partnership with suppliers can reduce opportunities of ongoing improvement work. Managing Relationships in the Supply Network In managing the supply network, it is important to review suppliers and to determine the suitable level of relationship to have with each supplier (Uygun et al., 2023). Firstly, securing reliable suppliers that meet quality requirements is crucial for long-term cost savings, especially for complex parts. Secondly, collaboration with suppliers fosters trust and minimizes the risk of receiving parts that do not meet the quality requirements. Furthermore, as complexities in outsourced parts can induce a risk of intellectual property leakage, better collaboration with suppliers and understanding of technology can mitigate this risk, reduce cultural distance and improve knowledge exchange (Uygun et al., 2023). Supplier relationships can be conceptualized along a continuum ranging from transactional to partnership relationships (Slack & Lewis, 2020). Transactional relationships in outsourcing production involve short-term, transaction- focused interactions governed by formal contracts. Communication is limited, and the focus is on immediate exchanges of goods or services. In contrast, partnership relationships entail deeper, long-term collaborations between the buyer and supplier. These involve open communication, joint problem-solving, and a focus on mutual success beyond formal contracts (Slack & Lewis 2020). The emphasis is on building trust, sharing knowledge, multiple points of contact, joint learning, and problem-solving initiatives, and achieving common goals for sustained competitive advantage. If managed in a suitable way, partners in the supply network can help an organization improve (Liker, 2005). For example, if customer relationships are effectively managed, the value of the customers for the organization can be maximized (Kumar & Reinhartz, 2011). Furthermore, as emphasized in Lean Production, if an organization strives for continuous improvement together with its partners, quality can be improved (Liker, 2005). This might imply educating partners. Driving continuous improvement with partners can, for example, be done using the quality management tools as described in section 2.3.4 to expose problems and encourage improvements. Additionally, innovation can be pursued together with suppliers to maintain a technological advantage on the market. 2.3.4 Strategic Quality Management Decisions Quality is not just a performance objective; it is also a critical aspect of strategic decision-making in production processes (Bellgran & Säfsten, 2010). Garvin (1987) defines quality based on eight dimensions, namely: performance, features, reliability, conformance, durability, serviceability, aesthetics, and perceived quality. It is, according to Bellgran and Säfsten (2010) essential to establish routines that ensure these eight dimensions are met to maintain consistency. Another definition of quality is proposed by the Swedish Standards Institute (2016), as the ability of products and services to satisfy customers and the impact they have, intended or unintended, on other 26 stakeholders. Examples of stakeholders are the government, society, and employees (Gremyr et al., 2020). Defining the Desired Level of Quality It is important to provide quality according to specifications, as stressed by Gremyr et al. (2020). However, Sandy (2020) emphasizes the importance of avoiding excessive investments in early product development phases, because as the product’s value might still be uncertain, prioritizing top-tier quality continuously could be counterproductive. Overemphasizing quality and scale too soon could result in significant waste, such as delaying time-to-market and impeding the collection of crucial customer feedback needed to steer the product's development (Sandy, 2020). This risk is especially high if the product fails or shifts direction substantially after its initial launch. It is thus important to find the level of product specification providing good enough quality. Quality standards can be viewed as one way to establish a certain desired level of quality (Kelemen, 2003). It is common that conformance to certain quality standards is required by, for example, customers or governments, or by regulations in the industry. The ISO 9000 series, regarding consistent quality, and the ISO 14000 series, regarding environmental aspects, are two of the most important standards, according to Kelemen (2003). While quality standards are a way of achieving customer satisfaction as they serve as a signal of quality, their implementation entails considerable documentation and, in certain cases, substantial costs. Proactive & Reactive Quality Approach Bellgran and Säfsten (2010) mean that quality often serves as an order-qualifier by meeting customer requirements and establishing a baseline for acceptability for many companies. When it comes to quality in production, two key questions emerge regarding quality. Firstly, organizations should decide between a reactive and a proactive quality approach. A reactive approach focuses on identifying faults during or after production and preventing faulty products from reaching the customer, while a proactive approach aims to prevent issues from arising in the first place (Bellgran & Säfsten, 2010). The second key question is about roles and responsibilities. Bellgran and Säfsten (2010) argue that it is often challenging to separate responsibility from execution, as the person in charge of a task is also responsible for ensuring the right quality. Due to the high importance of assuring quality, companies typically invest significant effort in securing their processes to uphold quality standards. Black (2008) highlights methods from Lean Production theory to be used in production systems to assure quality in the manufacturing process. Poka-yoke is one concept rooted in Lean Production theory, which serves as a mistake proofing device or procedure designed to prevent or highlight defects (Black, 2008). Thus, poka-yoke is a quality approach aiming to proactively ensure quality is secured throughout the manufacturing process. It could be in the form of either a warning or control 27 mechanism. Warnings provide alerts designed to prevent additional errors or defects from occurring, while control mechanisms stop the next step of a work in progress item from happening if defects or errors are found. In manufacturing, Black (2008) describes three main types of poka-yoke to assure quality: contact, fixed-value, and motion-step methods. Contact methods use sensing devices to ensure proper product positioning, either physically or through photoelectric beams. Fixed-value methods track the completion of tasks or parts assembly, signaling when requirements are met correctly, and the item is ready for the next step. Motion-step methods monitor sequences or timing, alerting if steps are not performed correctly. The Three Principles of Quality Management Dean and Bowen (1994) propose three fundamental principles of quality management: customer focus, continuous improvements, and teamwork. Firstly, an organization-wide effort is needed to provide products that customers need. Secondly, processes must constantly be revised and improved to maintain customer satisfaction. Thirdly, teamwork is needed, both internally and with customers and suppliers, to achieve the two previous principles of customer focus and continuous improvement. The first principle, customer focus, is described by Gremyr et al. (2020) as divided into several parts, two of which are understanding customer needs and expectations and becoming more customer oriented. To understand customer needs, it is important to understand both explicit and implicit needs, hence, needs that customers explicitly express when asked and needs that customers do not explicitly say, either because they consider them obvious or because they are not aware of them (Gremyr et al., 2020). Gremyr et al. (2020) argue that it is essential that all parts of an organization are customer oriented to ensure the highest quality. Additionally, Modig and Åhlström (2015) emphasize the role of internal customers, where each production step has an internal supplier and internal customer, and it is of high importance for the internal supplier to understand three things: what the internal customer needs to produce the product for the external customer, when they need it to be able to deliver the product at the specified time, and how much they need to produce the product. The internal supplier in this specific process then acts as an internal customer in the preceding production step, and so on. This is a common method of working in Lean Production, where material is pulled through the production system. The second principle, continuous improvement, is described by Gremyr et al. (2020) as the systematic translation of customer needs into improvements. As a basis for continuous improvement, processes are a relevant starting point (Grem