Copyright 2013 John Wiley & Sons, Inc.

Chapter 1

Operations Strategy

and

Global Competitiveness

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Overview

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Two Central Themes

1. Customer satisfaction2. Competitiveness• Apple obtained a competitive advantage with

innovation, their production process, and supply chain

• Pepsi example showed that organizations that focus on a few things outperform those that lack focus

• Toyota showed how losing your focus on your strengths can damage competitiveness

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A New Business Environment

• Businesses try to break down the “silos” that used to define business functions.

• Which is the most important department in an organization?

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• Technological progress is moving at a tremendous rate

• There are many new products and services in addition to old ones

• Rapid change is the norm

A New Business Environment

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International Marketplace

• Consumers purchase their products from the providers that offers them the most value for their money

• Many of our products are produced overseas

• Most of our services are provided domestically

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Operations

• Heart of every organization

• Organizations exist to create value

• Operations are the tasks that create value

• Operational innovation can provide organizations with long-term strategic advantages

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The Production System

Figure 1.1

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Operations Defined

• Production system: the conversion process• System: a purposeful collection of people,

objects, and procedures for operating within an environment

• Operations: concerned with transforming inputs into useful outputs according to an agreed-upon strategy and thereby adding value to some entity

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Operations Management

Operations Management – The planning, scheduling, and control of the activities that transform inputs into finished goods and services.

Figure 1.1

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Operations Management

– “The management of resources used to create saleable products and services.”

– The management of an organization’s productive resources or its production system, which converts inputs into the organization’s products and services.

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Systems Perspective

• Inputs• Transformation System

– Alter– Transport– Store– Inspect

• Outputs• Environment

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Inputs

• Inputs include facilities, labor, capital, equipment, raw materials, and supplies.

• A less obvious input is knowledge of how to transform the inputs into outputs.

• The operations function quite frequently fails in its task because it cannot complete the transformation activities within the required time limit.

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Transformation System Transformation System

• The part of the system that adds value to the inputs.

• Four major ways 1. Alter: changed structurally

2. Transport: located somewhere else

3. Store: kept in a protected environment

4. Inspect: understand its properties

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Outputs

• Two types of outputs commonly result from a production system– Services (physical goods) – Products (abstract or nonphysical)

• Any physical entity accompanying a service that adds value is a facilitating good

• Pure service: if there is no facilitating good• Services are bundles of benefits

– Some are tangible and others intangible– May be accompanies by a facilitating goods

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Historical Development of OM

• The Industrial Revolution

• Post-civil war period

• Scientific Management

• Human Relations and Behaviorism

• Operations Research

• Service Revolution

• Computer Revolution

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Historical Development of Operations and Supply Chain Management

Late 1970sEarly

1980s Mid 1980s Early

1990sMid 1990s Late

1990sEarly 2000s

Mid 2010s

Manufacturing strategy developedJust-in-time (JIT)

production pioneered by the Japanese

Service quality and productivity

Total quality management (TQM) and Quality certification programs

Business process reengineering (BPR)

Electronic commerce

Business analytics

Service science

Supply chain management (SCM)

Six-sigma quality

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Contributions to Society

• Higher standard of living

• Better quality goods and services

• Concern for the environment

• Improved working conditions

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Manufacturing

Tangible product

Key decisions driven by physical characteristics of the product: How is the product made? How do we store it? How do we move it? Etc.

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Services

Intangible Product or Service

Location, Exchange, Storage, Physiological, Information

Key decisions:

How much customer involvement?

How much customization?

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Characteristics of Products and Services

Table 1.1

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Goods, Services, and Products?

• Goods - Tangible products that customers can see, hear, smell, taste, or touch

• Services - Intangible tasks that satisfy the needs of consumers and business users

• Product - Bundle of physical, service, and symbolic attributes designed to satisfy a customer’s wants and needs

• Goods–services continuum - Spectrum along which goods and services fall according to their attributes, from pure good to pure service

22

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Goods versus Services

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Tangible Resources

• Inventory

• Workforce

• Capacity

• Facilities

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Intangible Resources

• Customer relationships

• Resource planning

• Lean systems

• Total Quality management (TQM)

• Constraint management

• Supply chain management

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Efficiency, Effectiveness, and Value

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Efficiency and Wall Street

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Receivables Turnover Ratio

The company’s efficiency in collecting its sales on credit..

Operating on a cash-basis; collection methods are efficient; quick collection of cash

Operating on a credit-basis; collection methods take longer

Speed of delivery; how customer orders are taken; more important when it is web-based ordering

MeasuresMeasures

HIGHHIGH

LOWLOW

IIMPACTIIMPACT

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Inventory Turnover Ratio

The company’s efficiency in turning its inventory into sales..

Strong sales; firm is buying too often and in small quantities; inadequate inventory levels

Low sales; firm is having excessive inventory relative to sales; obsolescence

Order lead times; purchasing practices; stock level

MeasuresMeasures

HIGHHIGH

LOWLOW

IIMPACTIIMPACT

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Asset Turnover Ratio

The company’s efficiency in using its assets in generating sales revenue..

Low profit margins

High profit margins

Plants, warehouses, and facilities

MeasuresMeasures

HIGHHIGH

LOWLOW

IIMPACTIIMPACT

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Professional Organizations

APICS – Association for Operations Management

ISM – Institute for Supply Management CSCMP – The Council of Supply Chain

Management Professionals ASQ – The American Society for

Quality

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Customer Value

• Value = perceived benefits / costs• Perceived benefits can take a wide

variety of forms• Costs…

– Upfront monetary investment– Life cycle costs, such as maintenance– Hassles involved in obtaining the product or

service

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Customer Value (Continued)

• Efficiency = output / input• Productivity: output per worker-hour

– This is a partial factor measure of productivity

– Only includes one productive factor

• Multifactor productivity: uses more than a single factor

• Total factor productivity: uses all the factors of production

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Four Performance Dimensions

Quality

Time

Flexibility

Cost

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Four Performance Dimensions

• Quality– Performance Quality – The basic operating

characteristics of the product or service.

– Conformance Quality – Was the product made or the service performed to specifications?

– Reliability Quality – Will a product work for a long time without failing?

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• Time– Delivery Speed - The ability for the

operations or supply chain function to quickly fulfill a need once it has been identified.

– Delivery Reliability – The ability to deliver products or services when promised.

– Delivery Window

Four Performance Dimensions

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Four Performance Dimensions

• Flexibility– Mix Flexibility – The ability to produce a

wide range of products or services.

– Changeover Flexibility – The ability to produce a new product with minimal delay.

– Volume Flexibility – The ability to produce whatever volume the customer needs.

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Four Performance Dimensions

• Cost

– Labor costs

– Material costs

– Engineering costs

– Quality-related costs

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Quality Dimensions

1. Conformance to specification– Extent to which the product matches the

design

2. Performance– Customers equate quality with

performance

3. Features– Options that a product or service offers

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Quality Dimensions Continued

4. Quick response– Time required to react to customers’

demands

5. Reliability– Probability that a product or service will

perform as intended for a period of time

6. Durability– How tough a product is

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Quality Dimensions (Continued)

7. Serviceability– Ease with which maintenance can be

performed

8. Aesthetics– Factors that appeal to human senses

9. Humanity– How the customer is treated

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Quality’s Benefits

• Customers are more pleased with a high-quality product or service

• More likely to encourage friends to patronize the firm

• Gives firm a good reputation• Allows firm to charge a premium price• Increases market share• Makes follow-up products more attractive

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Quality’s Costs

1. Prevention costs– Including planning, training, design, maintenance

2. Appraisal costs– Measuring, testing, test equipment, inspectors,

reports3. Internal costs of defects

– Extra labor and material, scrap, rework, interruptions, expediting

4. External costs of defects– Ill-will, complaints, correction, warranties,

insurance, recalls, lawsuits

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Customization

• Customization: offering a product or service exactly suited to a customer’s desires– Low customization is called standardization

• Customization demands flexibility• Flexibility: the ability to change or react

with little penalty in time, effort, cost, or performance

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Continuum of Customization

Figure 1.5

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Competitive Advantages of Flexibility

• Faster matches to customers’ needs• Closer matches to customers’ needs• Ability to supply needed items as markets

develop• Faster design-to-market time• Lower cost of changing production• Ability to offer a full line without large

inventories• Ability to meet market demand even with

production delays

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Mass CustomizationMass Customization

• Seek to produce low-cost, high-quality outputs in high variety

• Not all products lend themselves to being customized– Sugar, gas, electricity, and flour

• Is applicable to products characterized by short life cycles, rapidly advancing technology, or changing customer requirements

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Four Mass Customization Strategies

1. Collaborative customizers– Help customers articulate their needs

2. Adaptive customizers– Offer a standard product that customers can

modify themselves3. Cosmetic customizers

– Produce a standard product but present it differently to different customers

4. Transparent customizers– Provide custom products without customers

knowing they are customized

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Global Trends

• US imports have grown for more than 30 years

• Exports have increased, but not as fast as imports

• Resulted in exploding trade deficient• US now largest debtor nation in the

world• Cumulative deficit is about ½ GDP

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Definitions

Strategies - The mechanisms by which businesses

coordinate their decisions regarding their structural and

infrastructural elements.

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Strategy

• Business strategy: set of objectives, plans, and policies for the organization to compete

• Specifies competitive advantage– How achieved and sustained

• Key is defining core competencies and focus

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Strategy Formulation

Figure 1.7

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Definitions Corporate Strategy

Business Strategy - The strategy that identifies a

firm’s targeted customers and sets time frames and

performance objectives for the business.

Functional Strategy - A strategy that translates

a business strategy into specific functional areas.

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Vision and Mission Statements

• Vision statements used to express organization’s values and aspirations

• Mission statements express organization’s purpose or reason for existence

• Some organizations may choose to combine the vision and mission statements into a single statement

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Definitions

Mission Statement - Explains why an

organization exists and what is important to the

organization (its core values) and identifies the

organization’s domain.

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The Life Cycle

• Strategies often tied to product life cycle

• Length of life cycles shrinking

• Business strategy should match life cycles stages

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Categories of Business Strategies

1. First-to-market

2. Second-to-market

3. Cost minimization (late-to-market)

4. Market segmentation

Slide on each of these

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First-to-Market Strategy

• Products available before competition

• Strong applied research capability needed

• Can set high price to skim market or set lower price to gain market share

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Second-to-Market Strategy

• Quick imitation of first-to-market companies

• Less emphasis on applied research and more emphasis on development

• Learn from first-to-market’s mistakes

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Cost Minimization or Late-to-Market Strategy

• Wait until market becomes standardized and large volumes demanded

• Compete on basis of costs instead of product features

• Research efforts focus on process development versus product development

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Market Segmentation

• Serving niche markets

• Applied engineering skills and flexible manufacturing processes needed

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Order Winners, Losers, and Qualifiers• Order qualifiers are those dimensions that are necessary

for a firm’s products to be considered for purchase by customers– Features customers will not forego

Order Losers are performance dimension that repel particular customers.

• Order winners are criteria used by customers to differentiate the products and services of one firm from those of other firms– Features that customers use to determine which product to

ultimately purchase

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Reasons to Produce OffshoreReasons to Produce Offshore

• Circumvent governmental regulations

• Avoid effects of currency fluctuations

• Avoid fees and quotas

• Placate local customers

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Core Capabilities

• Core competencies: the collective knowledge and skills an organization has that distinguish it from competition

• Core capabilities: organizational practices and business processes

• Should be used to gain access to a variety of markets

• Should be strongly related to key benefits provides by products or services

• Should be difficult to imitate

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Outsourcing

• Subcontracting out production of parts or performance of activities

• Activities and parts fall on a continuum ranging from strategically unimportant to strategically important

• Activities not strategically important are candidates to be outsourced

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Hollowed Out

• The extent that most of a firm’s complex parts and production are outsourced

• Often when complex parts outsourced, engineering talent follows

• Supplier may become competitor

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Productivity Measurement

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Productivity is a measure of how well resources are used

Productivity =Productivity is a relative measure

Must be compared to something else to be meaningfulOperations can be compared to each otherFirms can be compared to other firms

Partial productivity measures compare output to a single input

Multifactor productivity measures compare output to a group of inputs

Total productivity measures compare output to all inputs

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Measures of Productivity (Financial Standpoint)

• What is Net Income?

• Profit Margin – how much profit is generated per dollar of sales

• Return on Assets (ROA) – profit per dollar of assets

• Return on Equity (ROE) – profit per dollar of equity

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• Net income:Net Sales – Cost of Goods sold – Selling and Administrative

Costs - Depreciation – Interest - Taxes

Challenge of Net Income “My business made $50,000 last year” How did I do???

Consider the amount invested to generate the profit:• If I used $10,000 • If I used $1,000,000 • If I used $10,000,000

Net Income

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• Profit Margin

– Income/sales - Profit generated per dollar of sales.– Low costs efficient use of operations resources in processes– High sales high levels of value created by those processes

Evaluating Profitability

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• Return on Assets (ROA)– Net Income/Total Assets– Profit per dollar of assets– Efficient use of resources reduces asset needs– Relevant because operations managers control so many

valuable assets

• Return on Equity (ROE)– Net Income/Total Equity– Productivity of stockholder investment– Less directly applicable to operations managers because ROA

measures the assets themselves• But ultimately how the company is judged by investors

Evaluating Profitability

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• Resource categories:– Inventory– Capacity – Workforce– Facilities– Customer relationships

• Productivity measures for resources are often like local profitability measures.

Measures of Productivity (Operations Standpoint)

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Exhibit 2.2 Daily orders vs MonthlyOrders to Meet 100 unit/Month Demand

Inventory

• Products and components of products sold

• Average inventory level is basis for productivity measurement.

• Inventory turnover is most common productivity measure.

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Beginning Inv. + Ending Inv.2

Inventory• Inventory turnover is the most common

inventory productivity measure

Inventory Turnover = Net Sales /Average Inventory

• Average inventory level is basis for productivity measurement

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Example 2.1

Deliveries of 800 cases weekly (assume all are consumed evenly during a five-day week)

Cases are valued at $265

• Financial consequences of inventory turnover

Average investment in inventoryWeekly: $106,000Daily: $21,200-------------------------Difference: $84,800

• What is average level of inventory?

• What is average level of inventory if we change from weekly to daily delivery?

Inventory

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• Capacity is the capability to produce output in a given amount of time.

• Utilization: Comparison of time spent actually working against theoretical time available to work• Actual running time/time available

Capacity: Utilization

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Capacity: Efficiency• Efficiency

– Efficiency is the comparison of what actually happened to what “should have” happened

– Actual output/ Standard output

Standard = 5400/hour

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• Often the greatest resource

• Often the most difficult resource to manage

• Productivity measurement depends on the objective and the behavior desired.

Exhibit 2.5: Monthly Performance Data for Sales Force

Example 2.4

Exhibit 2.6: Possible Productivity Measures for Sales Force

Workforce

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The Balanced Scorecard

• Measuring performance beyond financial measures.