Operations Management Research Paper

On
Impact of manufacturing flexibility on the
performance of the firm

Submitted By:
Adit Agrawal (PRN 003)
Ankit Gupta (PRN 013)
Anuj Agrawal (PRN 014)
Manish Puri (PRN 032)

Impact of Manufacturing Flexibility on Performance of the firm

Abstract
To cater to the ever changing needs of customers in competitive scenarios the importance of
meeting the process requirements without adding on to much investment in the existing system
has been realized throughout the industry. Hence the concept of manufacturing flexibility has
been studied, analyzed & implemented in manufacturing systems. This paper is written as an
attempt to study the effect of manufacturing flexibility on the overall and segmental performance
of an FMCG firm. Effect of various dimensions of manufacturing flexibility on the performance
parameters of the organization are being studied using advanced statistical tools. The strength of
relationship amongst flexibility dimensions and the performance parameters will help to
understand the major flexibilities contributing to the firms performance.

Introduction:
In developing economies, customer requirements largely depends on the constantly evolving
market environment; whereas in advanced developed economies customers have differentiated
product and service requirements that fit individuals requirements. These differentiated products
and services require a market characterized by wide variety, low cost, and customized and short
life cycle products. Thus, in order to cater to the requirements of such market, an organization
needs not only be efficient but also be flexible. In line with this, an organization needs to balance
between continuity and change forces in its external environment (Sushil, 2005). Moreover,
increasing globalization has led to the creation of a tough and competitive environment which
has brought the industries under immense pressure to develop frameworks in order to keep up
with the changing market environment. In other words, an organization needs to strike out a
balance between customer requirements and market needs such as rapid delivery, product variety,
customized product design and higher product design turnover. Thus, in order to cope up with
the changing market scenario, flexibility has been considered as one of the most relevant
elements. In the field of operations management, manufacturing flexibility has been recognized
as a strategic imperative that should be given prominent importance along with other competing
criteria (Slack 2005) (Ruchi et al 2011) (Pundir et al 2013). Manufacturing flexibility has been
defined as an ability to change or react with minimum time, effort, cost or performance (Upton
1994; Sushil 2001). An organization can implement manufacturing flexibility at different levels
such as strategic, tactical or operational. In order to get best results flexibility should be
implemented at all the three levels mentioned above.
Previous studies on manufacturing flexibility confirm that the relationship between
manufacturing flexibility and performance is complex in nature, providing mix results regarding

the relationship. Both positive and negative relationship between manufacturing flexibility and
performance may emerge (Chang 2006) (Larso et al 2009). Manufacturing flexibility is multidisciplinary in nature and researchers propose that additional studies are required to contemplate
the effects of flexibility of the performance of the firm. Thus, the main objective of this study is
to understand the relationship between manufacturing flexibility and the performance of the firm.
The study can be divided into two major aspects, first is to identify various indices for
measurement of manufacturing flexibility and firms operational performance and second is
finding out the dependencies of each manufacturing flexibility index on every other firms
performance index.

Literature Review:
With rise in need to improve the manufacturing efficiencies and increase in the output, the
flexibility of manufacturing elements is gathering focus of researchers since 1980s. As stated in
Ajay Jain et al. (2013) Manufacturing flexibility is widely recognized as a critical component to
achieving a competitive advantage in the market place. It is one of the most sought after
properties for manufacturing enterprises and has aroused considerable interest among researchers
and professionals. There have been a lot of other attempts to study the relationship of the
manufacturing flexibility with the organizational performance. In the review an attempt is being
done to classify the available literature related to Manufacturing Flexibility and also related to
the dependency of overall company performance on manufacturing flexibility. This theme has
been studied by various authors, according to various approaches and considering the numerous
dimensions of flexibility. The purpose of the present review is to study the past works done on
the above subject and to contribute to qualitative and conceptual systemization of the materials,
which focus on defining various flexibilities and study the relationship with performance of a
particular firm or an industry.
Although the fact that research on the subject is vast (Suarez and Cusumano 1991), there is a
certain ambiguity in the definitions. `The confusion and ambiguity about a concept that often
represents a critical competitive capability seriously inhibits its effective management (Upton
1994); `Ten or 15 years ago, quality was much like Flexibility is today: vague and difficult to
improve yet critical to competitiveness. Flexibility is only beginning to be explored . . . It means
different things to different people (Upton 1995b). There is a lot of research present on the
detailed studies on flexibility, its definition, its classification & interpretation but a little has been
done on studying the impact of flexibility dimensions onto the organization performance. In
previous papers Flexibility has been defined as characteristic of the interface between a system
and its external environment (Correa 1994) and as a degree of homeostatic control and dynamic
efficiency of a system (Mariotti 1995).In extension to these works in another work A. DE TONI
and S. TONCHIA(2012)an attempt is made to classify the vast literature regarding
manufacturing flexibility; the aim is to contribute to the conceptual systemization of the debate,
whose richness plays witness of the abundance of themes and the difficulty of obtaining a unitary

and univocal framework. The research on manufacturing flexibility is analyzed according to a

pattern which considers different aspects like Definition of flexibility, classification of flexibility,
measurement of flexibility etc.
However in context of the description and composition of manufacturing flexibility vast research
material is available, there is a little in literature about the dependency of performance
parameters onto the manufacturing flexibility. As stated in a research there is a lack of adequate
research on the relationship between manufacturing flexibility and other variables such as
environmental uncertainties, business strategies, organizational attributes, innovation and product
types (b) several other dimensions of performance, such as innovation performance,
environmental performance and social performance have been ignored while measuring impact
of manufacturing flexibility on performance (c) further attention required on issues like
measurement of overall manufacturing flexibility level of an organization (d) domination of
manufacturing flexibility research in developed countries. Ruchi Mishra et al. (2014).
In a recent research by Divesh Ojhaa et al. (2012) a similar attempt has been made in attempt to
implicate the law of requisite variety to analyze effect of manufacturing flexibility on operational
performance and workflow. The paper is aimed at providing a better and substantial
understanding on manufacturing flexibility and its impact on operational performance. Secondly,
the various requisite varieties of constructs help to understand the complex relationship. Thirdly,
it provides evidence to the positive relationship of the manufacturing flexibility with the work
flow speed, inventory and costs incurred by the organization. The research has tended to focus
upon the relationship between flexibility parameters and the workflow parameters by using
psychometric tests whereas the paper being reviewed looks to study the direct impact of the
flexibility parameters on the varied performance parameters of the organization.
Another research done by Minkyun Kima et al. (2013) focusses on examining the contribution of
the business environment to the relationship between flexibility and supply chain sensitivity. In
an attempt to introduce a framework to facilitate the development of flexibility measures Rodney
P. Parker et al.(1998) helps to develop the fact that is essential in validating measures of
flexibility classifications. The measures of varied flexibility types are taken up from the literature
and are compared with the requirement and criteria for the flexibility types.
When it comes to methodologies used in previous works for analyzing the impact of
manufacturing flexibility Untung Setiyo Purwanto et al. (2014) has used an approach of using
surveys to collect data by single correspondent design and studying the individual experts view
on the subject. In opposition to this, the paper being reviewed uses Likerts rating scale to rate the
strength of relationship about the subject and subsequently analyzing it by using advanced
statistical techniques to evaluate the relationship strength. The research referred to mentions the
results provided evidence that manufacturing flexibility is positively and significantly associated

with operational performance; suggesting that more flexible manufacturing system is equivalent
to the higher operational performance. In addition, the results highlighted the important role of
machine flexibility, product flexibility, volume flexibility, routing flexibility, and labour
flexibility in improving the operational performance.
On the lines of above findings the paper being reviewed is an attempt to provide substantial
evidence in favor of presence of strong relationship between the manufacturing flexibility and
the overall performance of an organization by using an entirely new methodology.

Definition of Flexibility:
Manufacturing flexibility could be regarded as the ability of manufacturing organizations to
adapt quickly with any changes in relevant factors such as product, process, work-load or
machine failure (Tsubone et al 1999); capability to manage and utilize the existing resources
effectively in response to the internal and external environmental changes (Petroni et al 2002); or
the capability to produce a variety of products in a certain quantities in response to the
customers needs while maintaining high performance (Zhang et al 2003).
It is necessary to differentiate between flexibility and change capability. The ability of a
manufacturing system to adapt to different states such that it can regain its original state is called
manufacturing flexibility. However change capability is defined as the ability to permanently
alter the original state of a manufacturing system to other state quickly, and easily.

Table 1. Definitions of manufacturing flexibility

Author

The ability of the manufacturing function to make adjustments needed to

react to environmental changes without significant sacrifices to firm
performance. Such adjustments are typically in the range of outputs and/or
the mobility to respond to change.

(DSouza and
Williams 2000).

The ability of manufacturing function to react to changes in its

environment without significant sacrifices to firm performance.

(Koste and Malhotra

1999).

The ability of a manufacturing system to respond to changes and

uncertainties associated with the production processes.

(Tsourveloudis and
Phillis 1998).

The ability of a manufacturing system to respond cost effectively and

rapidly to changing product needs and requirements.
The ability to implement changes in the internal operating environment in

(Benjaafar and
Ramakrishnan 1996).

(Watts, Hahn, and

a timely manner at a reasonable cost in response to changes in market

conditions.

Sohn 1993)

(Nagarur 1992)

The ability of the system to quickly adjust to any change in relevant

factors like product, process, loads and machine failure.
The ability of manufacturing system to cope with changing circumstances
or instability caused by the environment.
Being able to reconfigure manufacturing resources so as to produce
efficiently different products of acceptable quality.
The quickness and ease with which plans can respond to changes in
market conditions.
The ability of a manufacturing system to adapt to changes in
environmental conditions and in the process requirements.
The ability of a firm to change its competitive priorities or businesses.

(Guptaand Goyal
1989).

(Sethi and Sethi

1990).
(Cox 1989).

(Zelenovich 1982).

(Hayes and Pisana

1994) (Stalk, Evans,
and Shulman 1992).

(Harrigan 1985).

The ability of firms to reposition themselves in a market, change their

game plans or dismantle their current strategies when the customers they
serve are no longer as attractive as they once were
In the short run, flexibility means the ability to adapt to changing
conditions using the existing set and amount of resources. In the long run,
it measures the ability to introduce new products, new resources and
production methods, and to integrate these into the existing production
system

(Olhager 1993).

(Upton 1994).

The ability to change or react with little penalty in time, effort, cost or
performance.

(Gerwin 1987; Gupta

and Gupta 1991).

The ability to respond effectively to changing circumstances

(Bahrami 1992)

The ability to precipitate intentional changes, to continuously respond to

unanticipated changes and to adjust to the unexpected consequences of

(De Groote 1994).

predictable changes
The property of technology that acts as a hedge against the diversity of
environments
The various dimensions of flexibility as established by Browne et. al (1984) has laid the basis for
research into measuring manufacturing flexibility. The eight basic classification of flexibilities as
given by Browne et. al. can be defined as follows:

Table 2. Flexibility Dimensions and Their Denitions.

Flexibility
dimension
Machine exibility

Authors
Browne et al.
(1984)
Sethi and Sethi
(1990)
Koste and
Malhotra (1999)

Operation exibility Browne et al.

(1984)
Sethi and Sethi
(1990)
Koste and
Malhotra (1999)

Routing exibility

Browne et al.
(1984)
Sethi and Sethi
(1990)
Koste and
Malhotra (1999)

Volume Flexibility

Browne et al.
(1984)

Denition
Ease of making the changes required to produce a given set
of part types
Various types of operations that the machine can perform
without requiring prohibitive effort in switching from one
operation to another
Number and variety of operations a machine can execute
without incurring high transition penalties or large changes
in performance outcomes
Ability to interchange ordering of several operations for
each part type
Ability of a part to be produced in different ways
Number of products which have alternate sequencing plans
and the heterogeneity of the plans used without incurring
high transition penalties or large changes in performance
outcomes
Ability to handle breakdowns and to continue producing the
given set of part types
Ability to produce a part by alternative routes through the
system
Number of products that have alternative routes and the
extent of variation among the routes used without incurring
high transition penalties or large changes in performance
outcomes
Ability to operate an FMS protably at different production
volumes

Sethi and Sethi

(1990)
Koste and
Malhotra (1999)

Expansion exibility Browne et al.

(1984)
Sethi and Sethi
(1990)
Koste and
Malhotra (1999)
Process Flexibility Browne et al.
(Mix Flexibility by (1984)
Koste and Malhotra
(1999))
Sethi and Sethi
(1990)
Koste and
Malhotra (1999)
Product Flexibility

Browne et al.
(1984)
Sethi and Sethi
(1990)
Koste and
Malhotra (1999)

Ability of the manufacturing system to be operated

protably at different levels of overall output
Extent of change and the degree of uctuations in aggregate
output level which the system can accommodate without
incurring high transition penalties or large changes in
performance outcomes
Capability of building a system and expanding it as needed
easily and modularly
Ease with which manufacturing system capacity and
capability can be increased when needed
Number and heterogeneity of expansion which can be
accommodated without incurring high transition penalties or
large changes in performance outcomes
Ability to produce a given set of part types, each possibly
using different material, in several ways

Set of part types that the system can produce without

major set-ups
Number and variety of products which can be produced
without incurring high transition penalties or large changes
in performance outcomes
Ability to changeover to produce a new (set of) product(s)
very economically and quickly
Ease with which new parts can be added or substituted for
existing parts
It is combination of new product exibility and
modication exibility. New product exibility refers to the
number and variety of new products which are introduced
into production without incurring high transition penalties or
large changes in performance outcomes. Modication
exibility refers to the number and heterogeneity of product
modication which are accomplished without incurring high
transition penalties or large changes in performance
outcomes. It addresses those product changes that are less
involved than the development of an entirely new product. A
product is considered modied if its functional
characteristics were maintained but other aspects of the
products were changed to better satisfy a customers needs
(Dixon 1992).

Production exibility Browne et al.

(1984)
Sethi and Sethi
(1990)
Koste and
Malhotra (1999)

Universe of part types that the FMS can produce major

capital equipment
Universe of part types that the manufacturing system can
produce without adding
Not included in the classication.

Material
handling exibility

Not included in the classication.

Browne et al.
(1984)
Sethi and Sethi
(1990)
Koste and
Malhotra 1999

Ability to move different part types efciently for proper

positioning and processing through the manufacturing
facility it serves
Number of existing paths between processing centre and the
heterogeneity of material which can be transported along
those paths without incurring high transition penalties or
large change in performance outcomes

Programme exibility Browne et al.

(1984)
Sethi and Sethi
(1990)
Koste and
Malhotra (1999)

Not included in the classication.

Market exibility

Browne et al.
(1984)
Sethi and Sethi
(1990)
Koste and
Malhotra (1999)

Not included in the classication.

Browne et al.
(1984)
Sethi and Sethi
(1990)
Koste and
Malhotra (1999)

Not included in the classication.

Labour exibility

Ability of the system to run virtually unattended for a long

enough periods
Not included in the classication.

Ease with which the manufacturing system can adapt to a

changing market environment
Not included in the classication.

Not included in the classication.

Number and variety of tasks/operations a worker can
execute without incurring high transition penalties or large
changes in performance outcomes

Parameter for Firm Performance

1. Product Quality: Generally speaking Quality of a Product is the ability of a product to
satisfy the customer; fulfilling the intended functions of the product. Product Quality has
two major dimensions: Measurable Dimensions like shape size, color, height, width etc.
and Attributes Dimensions that focusses on inspections, and controls defects per lot.

2. Delivery: The concept of delivery is defined as time taken for the manufacturer to
handover the product to the customer. For some intangible products delivery can also
mean transfer of ownership of the product. Delivery as a performance index is generally
termed as On Time Delivery that emphasizes on timely delivery of product ensuring
that the quality of product is as per customer requirements.

3. Cycle time: Cycle time of a product is the total time taken to transform the inputs to the
finished product. The performance index being used in the case is Reduction of Cycle
Time. Reduction of cycle time ensures optimization of available resources and
reallocation of savings for improvement activities.

4. Variety in Product Line: This performance index measures the ability of a firm to aptly
cater to the varied interests of diverse customers or customer segments requiring specific
desired functionalities or features in the product by providing diversity in their product
range.

5. Capacity Utilization: Capacity utilization is the measure of the ability of an organization

to utilize the available resources efficiently to optimize costs. Usually the capacity
utilization is measured as a ratio of resources used to the available resources.

6. Work In Progress: All material that has entered the production process but is not yet
finished, accounts for a firms Work in Progress inventory. A high value of WIP denotes
that a lot of money is stuck in the production line and thus does not portray a very healthy
picture of the firm to the investors and stake holders.

7. Overall Equipment Utilization: It is a function of Availability, Performance, and Quality

and is used to measure the overall effectiveness of a production unit. The overall intent is
to create a performance measurement index for each machinery or unit.

Hypothesis
H1: Relationship between manufacturing flexibility and operational performance of an FMCG
firm is positive.

Product Quality

Machine flexibility

Product Delivery

Process flexibility
Product flexibility
Routing flexibility

Reduced Cycle Time

Variety in Product Line

Volume flexibility
Expansion flexibility

Capacity Utilization

Operation flexibility
WIP/Inventory Turns
Production flexibility
Overall Equipment
Utilization

Methodology
This study will utilize data collection on a survey forwarded to industry experts having sound
knowledge of manufacturing and operational flexibility. In the concerned firm the survey method
will ensure that the researchers receive unbiased responses in large numbers to study, analyze
and make conclusions from. The survey consisted of a matrix containing different dimensions of
manufacturing flexibility and their plausible effects on firms performance parameters listed
earlier in the paper. The values have been scaled from 1 to 5 as per the dependency between the
two variables with value 1 denoting lowest dependency and 5 denoting maximum dependency.
The results of this survey will be analyzed by using analytical techniques like Kaiser-MeyerOlkin (KMO) analysis, and correlation & regression analysis.

Regression and Correlation Analysis

Regression
The results of the survey conducted will be analyzed using the Regression analysis which
involves identifying the relationship between the variables. A model of the relationship is
prepared, and estimates of the parameter values are used to develop an estimated regression
equation which is tested to determine if the model is satisfactory or not. If the model is found to
be satisfactory, the regression equation can be used to forecast the values of the dependent
variable for given values of independent variables.

Correlation
In correlation analysis linear relationship between two variables is analyzed, the variable being
dependent and independent variable. For analysis we first find out the correlation coefficient
which is the measure of linear association between two variables. The values of the correlation
coefficient lies on a scale between -1 to +1. A correlation coefficient of -1 indicates that two
variables are perfectly related in a negative linear sense while a correlation coefficient of +1
indicates that two variables are perfectly related in a positive linear sense. For a correlation
coefficient of 0, there is no linear relationship between the two variables.
Kaiser Meyer - Olkin (KMO) analysis
A KMO analysis is a method used to define if the factor analysis methodology being used is
relevant to the data and thereby testing the overall consistency of the data being tested. This
method checks the closeness of inverse correlation matrix to diagonal matrix. This is done by
comparing the values of linear coefficient with the observed values of partial correlation
coefficient. This criterion is based for the adequacy measure given by the following equation:

Where:
rjk denotes simple correlation coefficient between Xj and Xk ;
pjk denotes partial correlation coefficient between Xj and Xk ;
It gives a ratio indicating the degree of variance of the matrix data, which can be applied to all
the variables, involved i.e. which can be considered related to a common factor. Values greater
than 0.5 indicate that the analysis carried out is acceptable and can be applied, whereas a value
less than 0.5 indicate that the analysis is not acceptable and more reliable data is required.

Hypothesis:

H1: Performance of the firm is dependent on flexibility

The literature review conducted clearly states that manufacturing flexibility, when successfully
implemented in the firm is bound to give benefits to the firm. We can also say that flebility and
performance of the firm are closely linked with each other. In todays scenario, for a firm has to
be competitive enough and should be equipped with latest industry practices so that it can adopt
to changing market requirements. Manufacturing flexibility ensures long time survival of the

company in the market. Benefit that a firm gets by implementing flexibility can be in the form of
changing product range, improving product quality, reducing the lead time etc. We have
considered eight manufacturing flexibilities and eight indices of firm performance for analysis
and understanding their relationship.

Hypothesis test:
The different types of flexibilities that we have mentioned earlier in this paper have been
considered as one single manufacturing flexibility. Also, the performance indices have been
aggregated to define an overall characteristic of the firm under consideration. This data has been
statistically analyzed to understand the dependency and the significance of the data used.
The analysis of the statistical data gathered from the industry experts shows that the dependent
factor i.e. performance of the firm is largely affected by the independent variable i.e.
manufacturing flexibility in this case. The R2 value for the hypothesis was found out to be 0.512
which clearly shows that the model is very strong. Also, VIF is found to be less than 4 which
suggest that regression output is free from multicollinearity (Hair et. al., 2006). Also the data is
statistically significant as the p-value is also found to be less than 0.05.
The regression analysis output shows that linkage in the theoretical framework of the
performance of firm and flexibility is well established.

Conclusion:
In this paper we understood the link between manufacturing flexibility and performance of the
firm. Statistical analysis of data has been significant in understanding the actual effect of
flexibility on performance of the firm. Also, flexibility does not affect only the production
parameters but is also linked with the overall efficiency of the firm. It has been re-established
that the performance can be largely affected by implementing manufacturing flexibility in a firm.
It gives the firm an edge to implement the best practices and improvise the process without
making many changes in the existing process. Also, the firm is in a better position to survive any
market fluctuation. The data collected helps in understanding how various parameters are
affected with changing flexibilities. Manufacturing flexibility thus, enables in improving overall
performance of the firm and makes it more stable in the era of changing market dynamics.

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