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Chapter 2 - Operations Strategy and Competitiveness

Operations Managementby

R. Dan Reid & Nada R. Sanders

4th Edition © Wiley 2010

2

The Role of Operations Strategy Provide a plan that makes best use

of resources which; Specifies the policies and plans for

using organizational resources Supports Business Strategy as shown

on next slide

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Business/Functional Strategy

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Background: Business Strategy

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http://www.youtube.com/watch?v=mYF2_FBCvXw

http://www.youtube.com/watch?v=ehMAwIHGN0Y

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Importance of Operations Strategy Companies often do not understand

the differences between operational efficiency and strategy Operational efficiency is performing

tasks well, even better than competitors Strategy is a plan for competing in the

marketplace Operations strategy is to ensure all

tasks performed are the right tasks

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Developing a Business Strategy A business strategy is developed after

taking into many factors and following some strategic decisions such as; What business is the company in

(mission) Analyzing and understanding the market

(environmental scanning) Identifying the companies strengths (core

competencies)

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Three Inputs to a Business Strategy

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Examples from Strategies Mission: Dell Computer- “to be the most

successful computer company in the world” Environmental Scanning: political trends,

social trends, economic trends, market place trends, global trends

Core Competencies: strength of workers, modern facilities, market understanding, best technologies, financial know-how, logistics

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Example: NokiaNokia extended its already formidable dominance of the global handset business on Jan. 24, announcing it had achieved 40% market share in the fourth quarter of 2007. But perhaps the biggest surprise was that the Finnish company achieved this long-promised and psychologically important milestone while also becoming more profitable.

http://www.businessweek.com/globalbiz/content/jan2008/gb20080124_974301.htm?chan=search

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Developing an Operations Strategy Operations Strategy is a plan for the

design and management of operations functions

Operation Strategy developed after the business strategy

Operations Strategy focuses on specific capabilities which give it a competitive edge – competitive priorities

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Operations Strategy – Designing the Operations Function

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Competitive Priorities- The Edge Four Important Operations

Questions: Will you compete on – Cost? Quality? Time? Flexibility? All of the above? Some? Tradeoffs?

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Competing on Cost? Offering product at a low price relative to competition

Typically high volume products Often limit product range & offer little

customization May invest in automation to reduce unit costs Can use lower skill labor Probably use product focused layouts Low cost does not mean low quality

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Competing on Quality? Quality is often subjective Quality is defined differently depending on who is

defining it Two major quality dimensions include

High performance design: Superior features, high durability, & excellent customer service

Product & service consistency: Meets design specifications Close tolerances Error free delivery

Quality needs to address Product design quality – product/service meets

requirements Process quality – error free products

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Competing on Time? Time/speed one of most important

competition priorities First that can deliver often wins the race Time related issues involve

Rapid delivery: Focused on shorter time between order placement and

delivery On-time delivery:

Deliver product exactly when needed every time

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Competing on Flexibility? Company environment changes rapidly Company must accommodate change by

being flexible Product flexibility:

Easily switch production from one item to another Easily customize product/service to meet specific

requirements of a customer

Volume flexibility: Ability to ramp production up and down to match

market demands

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The Need for Trade-offs Decisions must emphasis priorities that support

business strategy Decisions often required trade offs Decisions must focus on order qualifiers and order

winners Which priorities are “Order Qualifiers”? e.g. Must have excellent quality since everyone

expects it

Which priorities are “Order Winners”? e.g. Southwest Airlines competes on cost McDonald’s competes on consistency FedEx competes on speed Custom tailors compete on flexibility

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Competitive Priorities front & center http://www.businessweek.com/

magazine/content/06_13/b3977009.htm

http://www.businessweek.com/magazine/content/06_13/b3977010.htm?chan=search

http://www.businessweek.com/technology/content/dec2007/tc20071228_106857.htm?chan=search

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Translating to Production Requirements Specific Operation requirements

include two general categories Structure – decisions related to the

production process, such as characteristics of facilities used, selection of appropriate technology, and the flow of goods and services

Infrastructure – decisions related to planning and control systems of operations

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Translating to Production Requirements Dell Computer example – structure &

infrastructure They focus on customer service, cost, and speed ERP system developed to allow customers to

order directly from Dell Product design and assembly line allow a “make

to order” strategy – lowers costs, increases turns Suppliers ship components to a warehouse within

15 minutes of the assembly plant - VMI Dell set up a shipping arrangement with UPS

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Strategic Role of Technology Technology should support competitive

priorities Three Applications: product technology, process

technology, and information technology Products - Teflon, CD’s, fiber optic cable Processes – flexible automation, CAD Information Technology – POS, EDI, ERP, B2B

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Technology for Competitive Advantage Technology has positive and

negative potentials Positive

Improve processes Maintain up-to-date standards Obtain competitive advantage

Negative Costly Promotes dependency Risks such as overstating benefits

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Technology for Competitive Advantage Technology should

Support competitive priorities Can require change to strategic plans Can require change to operations

strategy

Technology is an important strategic decision

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Measuring Productivity Productivity is a measure of how efficiently inputs

are converted to outputs Productivity = output/input

Total Productivity Measure: Total Productivity = (total output)/(total of all

inputs)

Partial Productivity Measure: Partial Productivity = (total output)/(single input)

Multifactor Productivity Measure: Multi-factor Productivity = (total output)/(several inputs)

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Total Productivity: exampleBluegill Furniture makes kitchen chairs. The weekly dollar value of its output, including finished goods and work-in-progress, is $14,280. The value of inputs (labor, materials, capital) is approximately $16,528. What is the total productivity measure for Bluegill?

Total productivity = output/input = $14,280/$16,528 = .864 or

86.4%

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Partial Productivity: exampleBluegill Furniture has hired 2 new workers to paint chairs. Together they have painted 10 chairs in 4 hours. What is labor productivity for the pair?

Labor productivity = output/labor

= (10 chairs)/(2 x 4 hr) = (10 chairs)/(8 hr) or 1.25

chairs/hr

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Multifactor Productivity: exampleBluegill Furniture averages 35 chairs/day. Labor costs average $480, material costs are typically $200, and overhead cost is $250. Bluegill sells the chairs to a retailer for $70/unit. Find multifactor productivity.Multifactor productivity =

(value of output)/(labor + material + overhead costs)= ($70/chair x 35 chairs)/(480+200+250)

= ($2450)/($930) or 2.63

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Interpreting Productivity Measures Productivity measures must be

compared to something, i.e. another year, a different company

Raw productivity calculations do not tell the complete story unless there are no major structure differences.

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Interpreting Productivity Measures Other productivity measure

questions; Is this partial productivity measurement

enough to make an investment decision?

Should you also look at productivity measures for the two major competitors for comparison?

Productivity measure provides information on how the firm is doing relative to what is critical to the firm

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Productivity, Competitiveness, and the Service Sector Productivity is a scorecard

on effective resource use A nation’s Productivity

effects its standard of living

US productivity growth averaged 2.8% from

1948-1973 Productivity growth

slowed for the next 25 years to 1.1%

Productivity growth in service industries has been less than in manufacturing

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Productivity and the Service Sector Measuring service sector

productivity is a unique challenge Traditional measures focus on

tangible outcomes Service industries primarily produce

intangible outcomes Measuring intangibles is challenging

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Operations Strategy Across the Organization Business strategy defines long-

term plan Operations strategy support the

business strategy Marketing strategy needs to fully

understand operations capability Financial plans in effect support

operations activities.

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Review of Learning Objectives Define the role of Business Strategy Explain how a Business strategy is

developed Explain the role of Operations Strategy

in the organization Explain the relationship between business

strategy and operations strategy Describe how an operations strategy is

developed

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Review of Learning Objectives Identify competitive priorities for of

the operations function Explain the strategic role of

technology Define productivity and identify

productivity measures Compute productivity measures

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Chapter 2 Highlights Business Strategy is a long range plan and vision.

Each individual business function develop needs to support the business strategy

An organization develops its business strategy by doing environmental scanning and considering its mission and its core competencies.

The role of operations strategy is to provide a long-range plan for the use of the company’s resources in producing the company’s primary goods and services.

The role of business strategy is to serve as an overall guide for the development of the organization’s operations strategy.

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Chapter 2 Highlights The operations strategy focuses on developing

specific capabilities called competitive priorities. There are four categories of competitive priorities:

cost, quality, time, and flexibility Technology can be sued by companies to gain a

competitive advantage and should be acquired to support the company’s chosen competitive priorities

Productivity is a measure that indicates how efficiently an organization is using its resources

Productivity is computed as the ratio or organizational outputs divided by inputs

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Example: Detroit EdisonDTE's journey into the distributed-energy business began in 1994 when CEO Anthony Earley took over Detroit Edison. Convinced that the utility industry was on an eventual collision course with customer needs…Distributed generation soon became a strategic goal of the company. The idea behind distributed generation is that a school, hospital, or office complex can produce its own power just as cheaply as it can buy it from the grid. When rates go up, it can produce extra energy and sell it back to the grid. When rates go lower, it can shut down its generator and buy the cheaper electricity from the utility. This approach allows customers to get slightly cheaper electricity from a more stable source that won't suffer interruptions (which is especially important to computer-intensive companies) and can flexibly meet changing demands. http://www.businessweek.com/bwdaily/dnflash/jul2001/nf2001072_224.htm?chan=search

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Example: NestleBrabeck's other strategic goal is transforming Nestle from a set of far-flung operations into a single global machine. He has inked a $200 million deal with SAP to link its five e-mail systems and permit Nestle's headquarters in Vevey, Switzerland, to know for the first time how many raw materials its subsidiaries buy, in total, from around the world. The company then will be able to negotiate better contracts with suppliers and centralize production. Last year alone, Brabeck closed 38 different factories. All told, he has slashed $1.6 billion in costs, without labor strife.

http://www.businessweek.com/magazine/content/01_24/b3736644.htm?chan=search