1 Chapter 2 Operations Strategies in a Global Economy

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Chapter 2Chapter 2Chapter 2Chapter 2

Operations StrategiesOperations Strategies

in a Global Economyin a Global Economy

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OverviewOverviewOverviewOverview

IntroductionIntroduction Today’s Global Business ConditionsToday’s Global Business Conditions Operations StrategyOperations Strategy Forming Operations StrategiesForming Operations Strategies Wrap-Up: What World-Class Producers DoWrap-Up: What World-Class Producers Do

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IntroductionIntroductionIntroductionIntroduction

Need for Better Business Strategy Foreign competitors focus on long-range strategyForeign competitors focus on long-range strategy

Operation’s Role in U.S. Business Strategy Equal footing with Marketing and Finance Equal footing with Marketing and Finance

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IntroductionIntroduction IntroductionIntroduction

Operational effectivenessOperational effectiveness is the ability to perform is the ability to perform similar operations activities better than competitorssimilar operations activities better than competitors

It is very difficult for a company to compete It is very difficult for a company to compete successfully in the long run based just on operational successfully in the long run based just on operational effectivenesseffectiveness

A firm must also determine how operational A firm must also determine how operational effectiveness can be used to achieve a sustainable effectiveness can be used to achieve a sustainable competitive advantagecompetitive advantage

An effective An effective competitive strategycompetitive strategy is critical is critical

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Factors Affecting Today’s Factors Affecting Today’s Global Business ConditionsGlobal Business ConditionsFactors Affecting Today’s Factors Affecting Today’s Global Business ConditionsGlobal Business Conditions

Reality of global competitionReality of global competition Quality, customer service, and cost challengesQuality, customer service, and cost challenges Rapid expansion of advanced technologiesRapid expansion of advanced technologies Continued growth of the service sectorContinued growth of the service sector Scarcity of operations resourcesScarcity of operations resources Social responsibility issuesSocial responsibility issues

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Reality of Global CompetitionReality of Global CompetitionReality of Global CompetitionReality of Global Competition

Changing nature of world businessChanging nature of world business International companiesInternational companies Strategic alliances and production sharingStrategic alliances and production sharing Fluctuation of international financial conditionsFluctuation of international financial conditions

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Changing Nature of World BusinessChanging Nature of World BusinessChanging Nature of World BusinessChanging Nature of World Business

The US gross domestic product (GDP) is, at $10 The US gross domestic product (GDP) is, at $10 trillion, the largest in the world.trillion, the largest in the world.

Companies all over the globe are aggressively Companies all over the globe are aggressively exporting their products/services to the USexporting their products/services to the US

Many US companies are targeting foreign markets to Many US companies are targeting foreign markets to shore up profits.shore up profits.

The global economy that interconnects the economies The global economy that interconnects the economies of all nations has been termed the of all nations has been termed the global villageglobal village..

One of the most important new markets is China.One of the most important new markets is China.

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International CompaniesInternational CompaniesInternational CompaniesInternational Companies

International companies International companies are those whose scope of are those whose scope of operations spans the globe as they buy, produce, and operations spans the globe as they buy, produce, and sell.sell.

International firms search out opportunities for profits International firms search out opportunities for profits relatively unencumbered by national boundaries.relatively unencumbered by national boundaries.

Operations managers must coordinate geographically Operations managers must coordinate geographically dispersed operations.dispersed operations.

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International CompaniesInternational CompaniesInternational CompaniesInternational Companies

World’s Largest CorporationsWorld’s Largest Corporations1. General Motors1. General Motors USUS2. Wal-Mart Stores2. Wal-Mart Stores USUS3. Exxon Mobil3. Exxon Mobil USUS4. Ford Motor4. Ford Motor USUS5. DaimlerChrysler5. DaimlerChrysler GermanyGermany6. Mitsui6. Mitsui JapanJapan7. Mitsubishi7. Mitsubishi JapanJapan8. Toyota8. Toyota JapanJapan9. General Electric9. General Electric USUS10. Itochu10. Itochu JapanJapan

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Home Country of Parent Corporation?Home Country of Parent Corporation?Home Country of Parent Corporation?Home Country of Parent Corporation?

Braun household appliances: Braun household appliances: a. Switzerland a. Switzerland b. Germanyb. Germany c. US c. US d. Japand. Japan

Gillette Company - US

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Bic pens: Bic pens: a. Japan a. Japan b. The Czech Republic b. The Czech Republic c. U.S. c. U.S. d. Franced. France Bic S.A. - France

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Haagen-Dazs ice cream: Haagen-Dazs ice cream: a. France a. France b. Sweden b. Sweden c. Great Britain c. Great Britain d. U.Sd. U.S

Grand Metropolitan PLC. – Great Britain

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RCA television: RCA television: a. Japan a. Japan b. U.S .b. U.S .c. France c. France d. Koread. Korea

Thomson S.A. – France

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Arrow shirts: Arrow shirts: a. Thailand a. Thailand b. Italy b. Italy c. U.S .c. U.S .d. Franced. France

Bidermann International – France

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Godiva chocolate: Godiva chocolate: a. France a. France b. Belgium b. Belgium c. Switzerland c. Switzerland d. U.S.d. U.S.

Campbell Soup Company – US

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Vaseline Intensive Care: Vaseline Intensive Care: a. U.S. a. U.S. b. France b. France c. Britain/Netherlands c. Britain/Netherlands d. Germanyd. Germany

Unilever PLC. – Great Britain/Netherlands

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Firestone tires: Firestone tires: a. Japan a. Japan b. U.S. b. U.S. c. Germany c. Germany d. France d. France

Bridgestone – Japan

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Daimler-Chrysler automobiles: Daimler-Chrysler automobiles: a. Japan a. Japan b. U.S. b. U.S. c. Germany c. Germany d. France d. France

Daimler-Benz – Germany

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Strategic AlliancesStrategic AlliancesStrategic AlliancesStrategic Alliances

Strategic alliancesStrategic alliances are joint ventures among are joint ventures among international companies to exploit global business international companies to exploit global business opportunities.opportunities.

Alliances are often motivated byAlliances are often motivated by Product or production technologyProduct or production technology Market accessMarket access Production capabilityProduction capability Pooling of capitalPooling of capital

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General Motors (US) &General Motors (US) &Kia Motor Corp. (S.K.)Kia Motor Corp. (S.K.)

Kia might help sellKia might help selland market GM carsand market GM carsin South Koreain South Korea

Renault (France) &Renault (France) &City of MoscowCity of Moscow

Manufacture 100,000Manufacture 100,000vehicles annually vehicles annually near Moscownear Moscow

Sino Aerospace Invest-Sino Aerospace Invest-ment Corp. (Taiwan) &ment Corp. (Taiwan) &Swearingen Aircraft (US)Swearingen Aircraft (US)

Forming Texas-basedForming Texas-basedSino SwearingenSino SwearingenAircraft Co.Aircraft Co.

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Japanese companies have long practiced Japanese companies have long practiced keiretsukeiretsu, the , the linking of companies into industrial groups.linking of companies into industrial groups. A A financial keiretsufinancial keiretsu links companies together with links companies together with

cross-holding of shares, sales and purchases within cross-holding of shares, sales and purchases within the group, and consultation.the group, and consultation.

A A production keiretsuproduction keiretsu is a web of interlocking is a web of interlocking relationships between a big manufacturer (Toyota) relationships between a big manufacturer (Toyota) and its suppliers.and its suppliers.

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Production SharingProduction SharingProduction SharingProduction Sharing

Production sharingProduction sharing means that a product might be means that a product might be designed and financed in one country, its materials designed and financed in one country, its materials produced in other countries, assembled in another produced in other countries, assembled in another country, and sold in yet other countries.country, and sold in yet other countries.

The country that is the highest-quality, lowest-cost The country that is the highest-quality, lowest-cost producer for a particular activity would perform that producer for a particular activity would perform that portion of the production of the product.portion of the production of the product.

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Production SharingProduction SharingProduction SharingProduction Sharing

Production sharingProduction sharing means that a product might be means that a product might be designed and financed in one country, its materials designed and financed in one country, its materials produced in other countries, assembled in another produced in other countries, assembled in another country, and sold in yet other countriescountry, and sold in yet other countries

The Mercury Capri automobile is an example:The Mercury Capri automobile is an example: designed by Ghia and Italdesign in Italydesigned by Ghia and Italdesign in Italy most of its components made in Japanmost of its components made in Japan assembled in Australiaassembled in Australia sold in the U.Ssold in the U.S

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Pros and Cons of GlobalizationPros and Cons of GlobalizationPros and Cons of GlobalizationPros and Cons of Globalization

Pros (Pluses)Pros (Pluses) Productivity grows more quickly (living standards Productivity grows more quickly (living standards

can go up faster)can go up faster) Global competition and cheap imports keep a lid Global competition and cheap imports keep a lid

on prices (inflation less likely to derail economic on prices (inflation less likely to derail economic growth)growth)

Open economy spurs innovation (with fresh ideas Open economy spurs innovation (with fresh ideas from abroad)from abroad)

Export jobs often pay more than other jobsExport jobs often pay more than other jobs US has more access to foreign investment (keeps US has more access to foreign investment (keeps

interest rates low)interest rates low)

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Pros and Cons of GlobalizationPros and Cons of GlobalizationPros and Cons of GlobalizationPros and Cons of Globalization

Cons (Minuses)Cons (Minuses) Millions of Americans have lost jobs due to Millions of Americans have lost jobs due to

imports or production shifts abroadimports or production shifts abroad Most displaced workers find new jobs that pay lessMost displaced workers find new jobs that pay less Workers face pay-cuts demands from employersWorkers face pay-cuts demands from employers Service and white-collar jobs are increasingly Service and white-collar jobs are increasingly

vulnerablevulnerable US employees lose their comparative advantage US employees lose their comparative advantage

when companies build when companies build advancedadvanced factories abroad factories abroad

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International Financial ConditionsInternational Financial ConditionsInternational Financial ConditionsInternational Financial Conditions

International financial conditions are complex due to:International financial conditions are complex due to: inflationinflation fluctuating currency exchange ratesfluctuating currency exchange rates turbulent interest ratesturbulent interest rates volatility of international stock marketsvolatility of international stock markets huge national debts of some countrieshuge national debts of some countries enormous trade imbalances between countriesenormous trade imbalances between countries

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The Dollar Versus the Yen and the MarkThe Dollar Versus the Yen and the Mark

YearYear Yen per DollarYen per Dollar Mark per DollarMark per Dollar 19751975 305 305 2.7 2.7 19801980 215 215 2.0 2.0 19851985 210 210 2.4 2.4 19901990 135 135 1.6 1.6 19951995 85 85 1.4 1.4 20002000 108 108 2.2 2.2

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Example of Currency Exchange Rate ChangesExample of Currency Exchange Rate Changes A product produced and sold in the US for $1 A product produced and sold in the US for $1

would have sold in Japan for 135 yen in 1990 and would have sold in Japan for 135 yen in 1990 and 85 yen in 1995, a price decrease of 37%.85 yen in 1995, a price decrease of 37%.

A product produced and sold in Japan for 135 yen A product produced and sold in Japan for 135 yen in 1990 and sold for $1 in the US would have sold in 1990 and sold for $1 in the US would have sold in the US for $1.57 in 1995, a 57% price increase.in the US for $1.57 in 1995, a 57% price increase.

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Due, in part, to the fall in the value of the dollar Due, in part, to the fall in the value of the dollar between 1975 and 1995, the following occurred:between 1975 and 1995, the following occurred: Prices of US products/services abroad fell and Prices of US products/services abroad fell and

demand increaseddemand increased Japan and other countries built factories in USJapan and other countries built factories in US Japanese manufacturers moved upscale toward Japanese manufacturers moved upscale toward

higher priced productshigher priced products

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Companies must be ready to move quickly to shift Companies must be ready to move quickly to shift strategies as world financial conditions change.strategies as world financial conditions change.

Opportunities are usually available to reduce riskOpportunities are usually available to reduce risk Building smaller, more flexible factoriesBuilding smaller, more flexible factories Using foreign suppliers for materials, parts, or Using foreign suppliers for materials, parts, or

productsproducts Carefully planning and forecasting so that Carefully planning and forecasting so that

changing conditions can be anticipatedchanging conditions can be anticipated

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Quality, Service, and Cost ChallengesQuality, Service, and Cost ChallengesQuality, Service, and Cost ChallengesQuality, Service, and Cost Challenges

QualityQuality The goal of adequate quality must be replaced with The goal of adequate quality must be replaced with

the objective of perfect product and service the objective of perfect product and service quality.quality.

The entire corporate culture must be redirected and The entire corporate culture must be redirected and committed to the ideal of perfect quality.committed to the ideal of perfect quality.

All employees must be empowered to act.All employees must be empowered to act. A commitment to continuous improvement has to A commitment to continuous improvement has to

be organization-wide.be organization-wide.

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Customer ServiceCustomer Service Companies must quickly develop innovative Companies must quickly develop innovative

products and respond quicklyproducts and respond quickly to customers’ needs. to customers’ needs. Organizational structures must be made more Organizational structures must be made more

horizontal to quickly accommodate change.horizontal to quickly accommodate change. Multidisciplined teams must have decision-making Multidisciplined teams must have decision-making

authority, responding better to the marketplace.authority, responding better to the marketplace. Large, unwieldy companies are spinning off whole Large, unwieldy companies are spinning off whole

business units making them autonomous business units making them autonomous businesses that can compete with small, aggressive businesses that can compete with small, aggressive competitors.competitors.

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CostCost There is continuing pressure to reduce direct costs There is continuing pressure to reduce direct costs

(of producing and selling) and overhead costs.(of producing and selling) and overhead costs. It cost the US automakers $1,500 more per auto It cost the US automakers $1,500 more per auto

for labor in 1980 than it cost the Japanese auto-for labor in 1980 than it cost the Japanese auto-makers. By the 1990s the difference was almost makers. By the 1990s the difference was almost zero.zero.

Giant retailers (like Wal-Mart) squeezed weaker Giant retailers (like Wal-Mart) squeezed weaker competitors out of the market, giving the retailers competitors out of the market, giving the retailers the leverage to force their suppliers to streamline the leverage to force their suppliers to streamline operations and reduce costs/prices.operations and reduce costs/prices.

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CostCost Cost-cutting measures being used include:Cost-cutting measures being used include:

Moving production to low-labor-cost countriesMoving production to low-labor-cost countries Negotiating lower labor rates with unions and Negotiating lower labor rates with unions and

workersworkers Automating processes to reduce the amount of Automating processes to reduce the amount of

labor needed, particularly processes that are labor needed, particularly processes that are labor intensivelabor intensive..

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Advanced TechnologiesAdvanced TechnologiesAdvanced TechnologiesAdvanced Technologies

The use of automation is one of the most far-reaching The use of automation is one of the most far-reaching developments to affect manufacturing and services in developments to affect manufacturing and services in the past century.the past century.

The initial cost of these assets is high.The initial cost of these assets is high. The benefits go far beyond a reduction in labor costs.The benefits go far beyond a reduction in labor costs.

Increased product/service qualityIncreased product/service quality Reduced scrap and material costsReduced scrap and material costs Faster responses to customer needsFaster responses to customer needs Faster introduction of new products and servicesFaster introduction of new products and services

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Advanced TechnologiesAdvanced TechnologiesAdvanced TechnologiesAdvanced Technologies

US companies cannot use automated production US companies cannot use automated production technology as a long-term competitive advantage.technology as a long-term competitive advantage.

Automation systems are available to any company in Automation systems are available to any company in the world today, although the price is prohibitive for the world today, although the price is prohibitive for some companies.some companies.

Not investing, or delaying investing in this Not investing, or delaying investing in this technology could be disastrous for a company.technology could be disastrous for a company.

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Advanced Production TechnologyAdvanced Production TechnologyAdvanced Production TechnologyAdvanced Production Technology

Computer-aided designComputer-aided design (CAD) (CAD) - allows engineers to - allows engineers to design products directly on computer terminalsdesign products directly on computer terminals

Computer-aided manufacturingComputer-aided manufacturing (CAM) - translates (CAM) - translates CAD information into machinery instructionsCAD information into machinery instructions

Flexible manufacturing systemsFlexible manufacturing systems (FMS) - clusters of (FMS) - clusters of automated machinery produce a variety of productsautomated machinery produce a variety of products

Automated storage & retrieval systemsAutomated storage & retrieval systems (ASRS) - (ASRS) - computer-controlled warehousescomputer-controlled warehouses

Automatic identification systemsAutomatic identification systems (AIS) - data is (AIS) - data is “read” into computers using bar coding and the like“read” into computers using bar coding and the like

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Continued Growth of Service Sector Continued Growth of Service Sector Continued Growth of Service Sector Continued Growth of Service Sector

A robust service sector helps support the A robust service sector helps support the manufacturing sector.manufacturing sector.

There is much opportunity for quality improvement There is much opportunity for quality improvement in US service firms.in US service firms.

Many operations managers are being employed in Many operations managers are being employed in services.services.

Planning, analyzing, and controlling approaches from Planning, analyzing, and controlling approaches from manufacturing are being adapted to service systems.manufacturing are being adapted to service systems.

The US service sector, like the manufacturing sector, The US service sector, like the manufacturing sector, must streamline and improve operations if it is to must streamline and improve operations if it is to survive.survive.

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Scarcity of Operations ResourcesScarcity of Operations ResourcesScarcity of Operations ResourcesScarcity of Operations Resources

Raw materials like titanium, nickel, coal, natural gas, Raw materials like titanium, nickel, coal, natural gas, water, and petroleum products are periodically water, and petroleum products are periodically unavailable or in short supply.unavailable or in short supply.

A shortage of any necessary input to a conversion A shortage of any necessary input to a conversion subsystem, including skilled personnel, can be a subsystem, including skilled personnel, can be a challenge for an operations manager.challenge for an operations manager.

An important issue in the formation of business An important issue in the formation of business strategy is how to allocate scarce resources among strategy is how to allocate scarce resources among business opportunities.business opportunities.

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Social-Responsibility IssuesSocial-Responsibility IssuesSocial-Responsibility IssuesSocial-Responsibility Issues

Corporate attitudes are evolving from doing what Corporate attitudes are evolving from doing what companies have a legal right to do, to doing what is companies have a legal right to do, to doing what is right.right.

Factors influencing this evolution include:Factors influencing this evolution include: Consumer attitudeConsumer attitude -- Consumers are expressing -- Consumers are expressing

their likes/dislikes by such means as stockholder their likes/dislikes by such means as stockholder meetings, liability suits, and buying preferences.meetings, liability suits, and buying preferences.

RegulationRegulation – The EPA, OSHA, Clean Air Act, and – The EPA, OSHA, Clean Air Act, and Family Leave Act place constraints on businesses.Family Leave Act place constraints on businesses.

Self-interestsSelf-interests -- Companies realize that profits will -- Companies realize that profits will be greater if they act responsibly.be greater if they act responsibly.

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Environmental ImpactEnvironmental Impact Product-Safety ImpactProduct-Safety Impact Employee ImpactEmployee Impact

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Environmental ImpactEnvironmental Impact

Concerns about the global environment include:Concerns about the global environment include: Landfill waste reductionLandfill waste reduction RecyclingRecycling Energy conservationEnergy conservation Chemical spillsChemical spills Acid rainAcid rain Radioactive waste disposalRadioactive waste disposal … … and moreand more

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Environmental ImpactEnvironmental Impact There is a need for standardizing government There is a need for standardizing government

regulations of the environment.regulations of the environment. Otherwise, companies will gravitate to the less-Otherwise, companies will gravitate to the less-

regulated countries.regulated countries. The International Organization for Standardization The International Organization for Standardization

has developed a set of environmental guidelines has developed a set of environmental guidelines called ISO 14000.called ISO 14000.

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Product-Safety ImpactProduct-Safety Impact

Harm to people or animals that results from poor Harm to people or animals that results from poor product design can:product design can: Damage a company’s reputationDamage a company’s reputation Require a large expense to remedyRequire a large expense to remedy Cause governments to impose more regulationsCause governments to impose more regulations

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Employee ImpactEmployee ImpactEmployee benefits and policies include:Employee benefits and policies include: Safety and health programsSafety and health programs Fair hiring and promotion practicesFair hiring and promotion practices Day-careDay-care Family leaveFamily leave Health careHealth care Retirement benefitsRetirement benefits Educational assistanceEducational assistance … … and moreand more

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Employee ImpactEmployee Impact

Employee benefits and policies impact long-term Employee benefits and policies impact long-term profitability due to their effect on:profitability due to their effect on: Employee morale and productivityEmployee morale and productivity Recruitment and retention of employeesRecruitment and retention of employees Demand for a company’s productsDemand for a company’s products Cost of defending against lawsuits and boycottsCost of defending against lawsuits and boycotts

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Developing Operations StrategyDeveloping Operations StrategyDeveloping Operations StrategyDeveloping Operations Strategy

Corporate MissionCorporate MissionCorporate MissionCorporate Mission

Business StrategyBusiness StrategyBusiness StrategyBusiness Strategy

Product/Service PlansProduct/Service PlansProduct/Service PlansProduct/Service Plans

Competitive PrioritiesCompetitive PrioritiesCompetitive PrioritiesCompetitive Priorities

Operations StrategyOperations StrategyOperations StrategyOperations Strategy

AssessmentAssessmentof Globalof GlobalBusinessBusiness

ConditionsConditions

AssessmentAssessmentof Globalof GlobalBusinessBusiness

ConditionsConditions

DistinctiveDistinctiveCompetenciesCompetencies

ororWeaknessesWeaknesses

DistinctiveDistinctiveCompetenciesCompetencies

ororWeaknessesWeaknesses

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The Role of the MarketThe Role of the MarketThe Role of the MarketThe Role of the Market

Adding ValueAdding Value

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Corporate MissionCorporate MissionCorporate MissionCorporate Mission

A A corporate missioncorporate mission is a set of long-range goals and is a set of long-range goals and including statements about:including statements about: the kind of business the company wants to be inthe kind of business the company wants to be in who its customers arewho its customers are its basic beliefs about businessits basic beliefs about business its goals of survival, growth, and profitabilityits goals of survival, growth, and profitability

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Business StrategyBusiness StrategyBusiness StrategyBusiness Strategy

Business strategyBusiness strategy is a long-range game plan of an is a long-range game plan of an organization and provides a road map of how to organization and provides a road map of how to achieve the corporate mission.achieve the corporate mission.

Inputs to the business strategy areInputs to the business strategy are Assessment of global business conditionsAssessment of global business conditions - social, - social,

economic, political, technological, competitiveeconomic, political, technological, competitive Distinctive competenciesDistinctive competencies or weaknesses - workers, or weaknesses - workers,

sales force, R&D, technology, managementsales force, R&D, technology, management

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Low Production CostsLow Production Costs DefinitionDefinition

Unit cost (labor, material, and overhead) of Unit cost (labor, material, and overhead) of each product/serviceeach product/service

Some Ways of CreatingSome Ways of Creating Redesign of product/serviceRedesign of product/service New technologyNew technology Increase in production ratesIncrease in production rates Reduction of scrap/wasteReduction of scrap/waste Reduction of inventoryReduction of inventory

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Delivery PerformanceDelivery Performance DefinitionDefinition

a) Fast deliverya) Fast delivery b) On-time deliveryb) On-time delivery Some Ways of CreatingSome Ways of Creating

a) larger finished-goods inventorya) larger finished-goods inventorya) faster production ratesa) faster production ratesa) quicker shipping methodsa) quicker shipping methodsb) more-realistic promisesb) more-realistic promisesb) better control of production of ordersb) better control of production of ordersb) better information systemsb) better information systems

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High-Quality Products/ServicesHigh-Quality Products/Services DefinitionDefinition

Customers’ perception of degreeCustomers’ perception of degree of of excellence exhibited by products/servicesexcellence exhibited by products/services

Some Ways of CreatingSome Ways of Creating

Improve product/service’sImprove product/service’s AppearanceAppearance Performance and functionPerformance and function Wear, endurance abilityWear, endurance ability After-sales serviceAfter-sales service

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Customer Service and FlexibilityCustomer Service and Flexibility DefinitionDefinition

Ability to quickly change production to Ability to quickly change production to other products/services. Customer responsiveness.other products/services. Customer responsiveness.

Some Ways of CreatingSome Ways of Creating Change in type of processes usedChange in type of processes used Use of advanced technologiesUse of advanced technologies Reduction in WIP through lean manufacturingReduction in WIP through lean manufacturing Increase in capacityIncrease in capacity

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Operations StrategyOperations StrategyOperations StrategyOperations Strategy

Operations strategyOperations strategy is a long-range game plan for the is a long-range game plan for the production of a company’s products/services, and production of a company’s products/services, and provides a road map for the production function in provides a road map for the production function in helping to achieve the business strategy.helping to achieve the business strategy.

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Elements of Operations StrategyElements of Operations StrategyElements of Operations StrategyElements of Operations Strategy

OMOM Mission andMission and StrategyStrategy

ProductProductDesignDesignProcurementProcurement

Quality Quality ManagementManagement

ScheduleSchedule

LocationLocation

LayoutLayout

ProcessProcess DesignDesign

Reliability &Reliability &MaintenanceMaintenance InventoryInventory

HumanHumanResources &Resources &Job DesignJob Design

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Elements of Operations StrategyElements of Operations StrategyElements of Operations StrategyElements of Operations Strategy

Positioning the production systemPositioning the production system Product/service plans (Chapter 4)Product/service plans (Chapter 4) Outsourcing plans (Chapter 11)Outsourcing plans (Chapter 11) Process and technology plans (Chapters 4 & 6)Process and technology plans (Chapters 4 & 6) Strategic allocation of resources (Chapter 8) Strategic allocation of resources (Chapter 8) Facility plans: capacity, location, and layout Facility plans: capacity, location, and layout

(Chapter 5)(Chapter 5)

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Positioning the Production SystemPositioning the Production SystemPositioning the Production SystemPositioning the Production System

Select the type of Select the type of product designproduct design StandardStandard CustomCustom

Select the type of Select the type of production processing systemproduction processing system Product focusedProduct focused Process focusedProcess focused

Select the type of Select the type of finished-goods inventory policyfinished-goods inventory policy Produce-to-stockProduce-to-stock Produce-to-orderProduce-to-order

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Strategy Development ProcedureStrategy Development ProcedureStrategy Development ProcedureStrategy Development Procedure

COMPETITIVE SITUATION ANALYSIS

Environment Expectations Economic Critical factor Competitor threats Competitive position Industry opportunities Future moves

DEVELOP A MISSIONIdentify Strategy Alternatives strength & opportunities match? can weaknesses be overcome? anticipate competitor moves? Secure a competitive advantage?

Form a Strategy steps to competitive advantage steps to build market share steps to become world class critical strategic decisions ease of implementation

Make & Implement a Strategy make necessary decisions

COMPANY SITUATION

Present performance

TOWS Analysis Relative strengths Strategic issues Weaknesses

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Product/Service PlansProduct/Service PlansProduct/Service PlansProduct/Service Plans

As a product is designed, all the detailedAs a product is designed, all the detailedcharacteristics of the product are established.characteristics of the product are established.

Each product characteristic directlyEach product characteristic directly affects how the product can be made.affects how the product can be made.

How the product is made determinesHow the product is made determines

the design of the production system.the design of the production system.

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Stages in a Product’s Life CycleStages in a Product’s Life CycleStages in a Product’s Life CycleStages in a Product’s Life Cycle

IntroductionIntroduction- Sales begin, production and marketing - Sales begin, production and marketing are developing, profits are negative.are developing, profits are negative.

GrowthGrowth - sales grow dramatically, marketing efforts - sales grow dramatically, marketing efforts intensify, capacity is expanded, profits begin.intensify, capacity is expanded, profits begin.

MaturityMaturity - production focuses on high-volume, - production focuses on high-volume, efficiency, low costs; marketing focuses on efficiency, low costs; marketing focuses on competitive sales promotion; profits are at peak.competitive sales promotion; profits are at peak.

DeclineDecline - declining sales and profit; product might be - declining sales and profit; product might be dropped or replaced.dropped or replaced.

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Stages of a Product’s Life CycleStages of a Product’s Life CycleStages of a Product’s Life CycleStages of a Product’s Life Cycle

Introduction Growth Maturity DeclineIntroduction Growth Maturity Decline

B&W TVB&W TV

AutomobileAutomobile

Video RecorderVideo Recorder

CD PlayerCD PlayerColor CopierColor Copier

Cell PhoneCell Phone

Internet RadioInternet Radio

Fax MachineFax MachineDot-MatrixDot-Matrix PrinterPrinter

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Outsourcing PlansOutsourcing PlansOutsourcing PlansOutsourcing Plans

OutsourcingOutsourcing refers to hiring out or subcontracting refers to hiring out or subcontracting some of the work that a company needs to do.some of the work that a company needs to do.

This strategy is being used more and more as This strategy is being used more and more as companies strive to operate more efficiently.companies strive to operate more efficiently.

Outsourcing has many advantages and disadvantages. Outsourcing has many advantages and disadvantages. Companies try to determine the best level of out-Companies try to determine the best level of out-

sourcing to achieve their operations & business goals.sourcing to achieve their operations & business goals. More outsourcing requires a company to have less More outsourcing requires a company to have less

equipment, fewer employees, and a smaller facility.equipment, fewer employees, and a smaller facility.

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A company might outsource any of the following A company might outsource any of the following manufacturing related functionsmanufacturing related functions:: Designing the productDesigning the product Purchasing the basic raw materialsPurchasing the basic raw materials Processing the subcomponents, subassemblies, Processing the subcomponents, subassemblies,

major assemblies, and finished productmajor assemblies, and finished product Distributing the productDistributing the product

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Many companies even outsource some Many companies even outsource some service service functionsfunctions such as: such as: PayrollPayroll BillingBilling Order processingOrder processing Developing/maintaining a websiteDeveloping/maintaining a website Employee recruitmentEmployee recruitment Facility maintenanceFacility maintenance

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Process and Technology PlansProcess and Technology PlansProcess and Technology PlansProcess and Technology Plans

An essential part of operations strategy is the An essential part of operations strategy is the determination of how products/services will be determination of how products/services will be produced.produced.

The range of technologies available to produce The range of technologies available to produce products/services is great and is continually changing.products/services is great and is continually changing.

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Strategic Allocation of ResourcesStrategic Allocation of ResourcesStrategic Allocation of ResourcesStrategic Allocation of Resources

For most companies, the vast majority of the firm’s For most companies, the vast majority of the firm’s resources are used in production/operations.resources are used in production/operations.

Some or all of these resources are limited.Some or all of these resources are limited. The resources must be allocated to products, services, The resources must be allocated to products, services,

projects, or profit opportunities in ways that projects, or profit opportunities in ways that maximize the achievement of the operations maximize the achievement of the operations objectives.objectives.

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Facility PlansFacility PlansFacility PlansFacility Plans

How to provide the long-range How to provide the long-range capacitycapacity to produce to produce the firm’s products/services is a critical strategic the firm’s products/services is a critical strategic decision.decision.

The The locationlocation of a new facility may need to be of a new facility may need to be decided.decided.

The internal arrangement (The internal arrangement (layoutlayout) of workers, ) of workers, equipment, and functional areas within a facility equipment, and functional areas within a facility affects the ability to provide the desired volume, affects the ability to provide the desired volume, quality, and cost of products/services.quality, and cost of products/services.

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Characteristics of ServicesCharacteristics of Servicesand Manufactured Productsand Manufactured ProductsCharacteristics of ServicesCharacteristics of Services

and Manufactured Productsand Manufactured Products

ServicesServices ProductsProducts

OutputOutput Intangible Intangible Tangible Tangible

Output InventoriedOutput Inventoried No No YesYes

Customer ContactCustomer Contact Extensive Extensive Little Little

Lead TimeLead Time Short Short Long Long

IntensityIntensity Labor Labor Capital Capital

QualityQuality Subjective Subjective Objective Objective

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Services in the U.S. EconomyServices in the U.S. EconomyServices in the U.S. EconomyServices in the U.S. Economy

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Competitive Priorities for ServicesCompetitive Priorities for ServicesCompetitive Priorities for ServicesCompetitive Priorities for Services

The competitive priorities listed earlier for The competitive priorities listed earlier for manufacturers apply to service firms as wellmanufacturers apply to service firms as well Low production costsLow production costs Fast and on-time deliveryFast and on-time delivery High-quality products/servicesHigh-quality products/services Customer service and flexibilityCustomer service and flexibility

Providing all the priorities simultaneously to Providing all the priorities simultaneously to customers is seldom possible.customers is seldom possible.

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Positioning Strategies for ServicesPositioning Strategies for ServicesPositioning Strategies for ServicesPositioning Strategies for Services

Type of Service DesignType of Service Design Standard or custom products Standard or custom products Amount of customer contactAmount of customer contact Mix of physical goods and intangible servicesMix of physical goods and intangible services

Type of Production ProcessType of Production Process Quasi manufacturingQuasi manufacturing Customer-as-participantCustomer-as-participant Customer-as-productCustomer-as-product

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Positioning Strategies for ServicesPositioning Strategies for ServicesPositioning Strategies for ServicesPositioning Strategies for Services

Example:Example: McDonald’s McDonald’s Highly standardized service designHighly standardized service design Low amount of customer contactLow amount of customer contact Physical goods dominating intangible servicesPhysical goods dominating intangible services Quasi-manufacturing approach to back-room Quasi-manufacturing approach to back-room

production processproduction process

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Forming Operations StrategiesForming Operations StrategiesForming Operations StrategiesForming Operations Strategies

Support the product plans and competitive priorities Support the product plans and competitive priorities defined in the business strategy.defined in the business strategy.

Adjust to the evolving positioning strategies.Adjust to the evolving positioning strategies. Link to the marketing strategies.Link to the marketing strategies. Look at alternative operations strategies.Look at alternative operations strategies.

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Evolution of Positioning StrategiesEvolution of Positioning StrategiesEvolution of Positioning StrategiesEvolution of Positioning Strategies

The characteristics of production systems tend to The characteristics of production systems tend to evolve as products move through their product life evolve as products move through their product life cycles.cycles.

Operations strategies must include plan for modifying Operations strategies must include plan for modifying production systems to a changing set of competitive production systems to a changing set of competitive priorities as products mature.priorities as products mature.

The capital and production technology required to The capital and production technology required to support these changes must be provided.support these changes must be provided.

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Evolution of Positioning StrategiesEvolution of Positioning StrategiesEvolution of Positioning StrategiesEvolution of Positioning Strategies

VolumeVolumeVeryVeryLowLow

LowLow HighHighVeryVeryHighHigh

FocusFocus ProcessProcess ProcessProcess ProductProduct ProductProduct

Fin.Gds.Fin.Gds. To-OrderTo-Order To-OrderTo-Order To-StockTo-Stock To-StockTo-Stock

BatchBatchSizeSize

VeryVerySmallSmall

SmallSmall LargeLargeVeryVeryLargeLarge

ProductProduct CustomCustomSlightlySlightlyStandardStandard

StandardStandardHighlyHighly

StandardStandard

LifeLifeStageStage

Intro.Intro.EarlyEarly

GrowthGrowthLateLate

GrowthGrowthMaturityMaturity

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Linking Operations and Marketing StrategiesLinking Operations and Marketing StrategiesLinking Operations and Marketing StrategiesLinking Operations and Marketing Strategies

Operations StrategyOperations Strategy Product-focusedProduct-focused Make-to-stockMake-to-stock Standardized productsStandardized products High volumeHigh volume

Marketing StrategyMarketing Strategy Low production costLow production cost Fast delivery of productsFast delivery of products QualityQuality

Example: Example: TV setsTV sets

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Operations StrategyOperations Strategy Product-focusedProduct-focused Make-to-orderMake-to-order Standardized productsStandardized products Low volumeLow volume

Marketing StrategyMarketing Strategy Low production costLow production cost Keeping delivery promisesKeeping delivery promises QualityQuality

Example: Example: School busesSchool buses

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Operations StrategyOperations Strategy Process-focusedProcess-focused Make-to-stockMake-to-stock Custom productsCustom products High volumeHigh volume

Marketing StrategyMarketing Strategy FlexibilityFlexibility QualityQuality Fast delivery of productsFast delivery of products

Example: Example: Medical instrumentsMedical instruments

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Operations StrategyOperations Strategy Process-focusedProcess-focused Make-to-orderMake-to-order Custom productsCustom products Low volumeLow volume

Marketing StrategyMarketing Strategy Keeping delivery promisesKeeping delivery promises QualityQuality FlexibilityFlexibility

Example: Example: Large supercomputersLarge supercomputers

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No Single Best StrategyNo Single Best StrategyNo Single Best StrategyNo Single Best Strategy

Start-up and Small ManufacturersStart-up and Small Manufacturers

Usually prefer positioning strategies with:Usually prefer positioning strategies with: Custom productsCustom products Process-focused productionProcess-focused production Produce-to-order policiesProduce-to-order policiesThese systems are more flexible and require lessThese systems are more flexible and require lesscapital.capital.

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Start-up and Small ServicesStart-up and Small Services

Successfully compete with large corporations by:Successfully compete with large corporations by: Carving out a specialty nicheCarving out a specialty niche Emphasizing close, personal customer serviceEmphasizing close, personal customer service Developing a loyal customer baseDeveloping a loyal customer base

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Technology-Intensive BusinessTechnology-Intensive Business Production systems must be capable of producing Production systems must be capable of producing

new products and services in high volume soon new products and services in high volume soon after introductionafter introduction

Such companies must have two key strengths:Such companies must have two key strengths: Highly capable technical peopleHighly capable technical people Sufficient capitalSufficient capital

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Wrap-Up: World-Class PracticeWrap-Up: World-Class PracticeWrap-Up: World-Class PracticeWrap-Up: World-Class Practice

Put customers firstPut customers first Get new products/services to market fasterGet new products/services to market faster Are high quality producersAre high quality producers Have high labor productivity & low production costsHave high labor productivity & low production costs Carry little excess inventoryCarry little excess inventory . . . more. . . more

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Wrap-Up: World-Class PracticeWrap-Up: World-Class PracticeWrap-Up: World-Class PracticeWrap-Up: World-Class Practice

Think more globally in purchasing and sellingThink more globally in purchasing and selling Quickly adopt and develop new technologiesQuickly adopt and develop new technologies Trim organizations to be lean and flexibleTrim organizations to be lean and flexible Are less resistant to strategic alliances/joint venturesAre less resistant to strategic alliances/joint ventures Consider relevant social issues when setting strategiesConsider relevant social issues when setting strategies

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End of Chapter 2End of Chapter 2End of Chapter 2End of Chapter 2

Documents

1 Chapter 2 Operations Strategies in a Global Economy