p. 1

B7801 Operations ManagementIntroduction

18 August 2000Nelson M. Fraiman

p. 2

Outline

• Course requirements and administration

• What is this course about?

• The role of operations and its impact on the firm’s performance

• Begin operations strategy discussion

p. 3

Course requirements

• Readings– Casebook– The Goal

• Class participation (20%)– Bring tent cards to every class

• Case assignments (28%)– 4 assignments (see schedule)– groups of 3 max. – executive summary format (1 page + exhibits)

• Midterm exam on 22 September 2000 (25%)

• Project (27%)

p. 4

Course administration

• Web syllabus– http://www.gsb.columbia.edu/faculty/nfraiman– “One-stop shopping” for ...

• schedule of assignments• case questions• data sets• announcements• useful links

– Bookmark it and check it often!• Office hours: W 5-6:30 pm and by appointment• Chatroom hours: W 6:30 – 7:30 pm

nmf1@columbia.edu212 854 2076405A Uris Hall

• TA:Srinivas Krishnamoorthy • sk711@columbia.edu

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What exactly are a firm’s operations ?

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The activities/processes involved in producing the firm’s outputs(products & services)

suppliers plants distribution center

retailers

customers

customer service

replenishmentorders

orders/service requests

How does (or could) the firm’s work get done?

What is the business impact?

p. 7

Ex: Can of Coke

• Where did you buy it? How did it get there?• Where was it made?

• What is it made of? Where did the materials come from?• When was it made?• Why did you buy it?

• How did someone know you were going to buy it?• Is the quality okay? How do “they” know the quality is okay?• How many other units where made at the same time?

• Does the plant produce other products? How many?• Do different plants produce different products? Why/why not?• Why is this can of Coke produced and distributed this way?

• Are there alternatives?• What decisions had to be made to make all this possible?

p. 8

Operations at “Coke” is the entire range of activities and processes involved in producing and distributing this can of Coke to you the end consumer.

p. 9

Coca-Cola Enterprises (CCE)(images and figures from www.cokecce.com)

• World’s largest bottler of nonalcoholic beverages, $13.4B 1998 revenue

• Markets, produces and distributes Coke and other soft drinks, waters and teas

• What do operations at CCE entail?

p. 10

Geographical market CCE serves

3.8 Billion cases distributed ‘98

72% of North America

All of Belgium, Great Britain, Luxembourg and The Netherlands

90% of France

p. 11

CCE Infrastructure

• 66,000 employees

• 444 production/distribution facilities

• 47,235 vehicles

• 1.9M vending machines/dispensers

p. 12

Typical facility distributes over 300 product/package combinations

North America: Products of The Coca-Cola Company: Coca-Cola classic, caffeine

free Coca-Cola classic, diet Coke, caffeine free diet Coke, Sprite, dietSprite, Cherry Coke, diet Cherry Coke, Barq's, Citra, Fanta, Fresca,Fruitopia, Hi-C fruit drinks, Mello Yello, Minute Maid and diet MinuteMaid soft drinks, Minute Maid juices, Mr. PiBB, POWERaDE,SURGE, and TAB

Products of Other Companies: Canada Dry, Dr Pepper,Diet Dr Pepper, Evian, Mendota Springs, NAYA, Nestea, Cool fromNestea, diet Nestea, Schweppes, Seagrams, and Squirt

International markets: Aquarius, Buxton Mineral Water, caffeine free Coca-Cola, caffeine freeCoca-Cola light, Canada Dry, Capri Sun, Cherry Coke, Coca-Cola,Coca-Cola light, caffeine free diet Coke, diet Coke, Dr Pepper, Fanta,Five Alive, Kia-Ora, Lilt, Malvern Waters, Minute Maid juices, Nestea,Oasis, Perrier Mineral Water, Schweppes, Sprite, Sprite light, and Vittel Water

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Process

p. 14

(cont.)

p. 15

In the early morning hours, U.S. warehouse employees finish fillingsales orders from the day before, then place the products on deliverytrucks for distribution to our customers by our employees. In Europe,where delivery systems to our customers vary, warehouse employeesload trucks for bulk delivery to customer warehouses, or for localdelivery. We deliver most of our products in Europe to customerwarehouses rather than directly to stores.

Still early in the morning, sales managers, account representatives,merchandisers, and drivers across the Company convene at our salescenters to plan the day's efforts and discuss sales opportunities.

Local delivery drivers then check their already-loaded trucks, makesure loads are correct, and head to market using routes created theday before by dispatchers at each sales center. Each day, localdelivery drivers routinely deliver and help merchandise 400 or morecases of product.

Sales personnel assemble marketing materials, organize their calllists, handle paperwork, then begin their work assisting customers.Account representatives will call on 15 or more customers each day,working with those customers as beverage experts to help them growtheir business.

A day in the life of CCE’s operations ...

p. 16

Throughout the day, the production lines keep rolling, bottling theproduct needed to keep the pipeline full. Some lines operate 24 hoursa day; most lines operate at least 20 hours. This continuousproduction helps assure product freshness, keeps inventories to aminimum, and helps keep costs down by making maximum use of ourfacilities. Generally, warehouses in Europe and North Americacompletely turn over their inventory in seven days.

As local drivers deliver product to our customers, they record thedeliveries on hand-held computers that help them reconcile theirdeliveries at the end of the day. In all of our territories, merchandisersthen work in the stores to display our products attractively andcorrectly. As account managers call on customers, they send in neworders, electronically or by phone, keeping the cycle of sales,production, and delivery moving forward.

Information Systems personnel make certain that important Companyoperating and sales data are available to managers, generally within 24hours. Managers and administrative employees work to providefront-line employees the tools they need. For example, they createmarketing programs and strategies, plan fleet requirements, developand conduct employee training programs, and provide overall local andcompany-wide leadership.

p. 17

Consider repeating this exercise for each product/service in the room!

• Products– pencils– paper

– laptop computers

– cell phone– clothes

– shoes

– contact lenses/eyeglasses– furniture

– carpet

– food & beverage.

.

.

• Services– credit cards– bank accounts

– telephone service

– cell phone service– pager

– ISP

– medical care– insurance

– MBA education

.

.

.

p. 18

What is involved in operating this business?

• Plant Management• Product Development

• Purchasing / Vendor Relations

• Distribution• Quality Control

• Process Engineering

• Facility Layout• Production Planning

• Capacity Planning

• Inventory Control • Order Processing

• Service Parts / Repairs

• Service Center Management• Work Methods/Procedures

• Site Selection

• New Service Development• Work Force Planning

• Technology Planning

This is a wide range of activit ies –How should we begin thinking about them?

p. 19

Operations ManagementDefinition

Operations management may be defined as the

design, operation, and improvement of the

production system that creates the firm’s primary

products and services

p. 20

Operations Management

Marketplace

Corporate Strategy

Operations Strategy

Operations management

Marketing StrategyFinance Strategy

People Systems Technology Processes

Leadership

Production System

Inputs:MaterialsCustomers

Outputs:ProductsServices

p. 21

The activities/processes involved in producing the firm’s outputs(products & services)

suppliers plants distribution center

retailers

customers

customer service

replenishmentorders

orders/service requests

How does (or could) the firm’s work get done?

What is the business impact?

p. 22

Some more processes..A service process...

makereservations

airportcheck-in

collectbaggage

in-flightservices

ticketing

A product development process...

productconcept

processengineering

productionramp-up

sourcingproductengineering

p. 23

OM Involves Managing Transformations

• Leadership• People• Processes• Systems• Technology

Input OutputTransformation

Process

(Value Adding)

Transformation is enabled by “LPPST”

p. 24

Transformations

• Physical--manufacturing

• Locational--transportation

• Exchange--retailing

• Storage--warehousing

• Physiological--health care

• Informational--telecommunications

p. 25

Operations impact business performance

ROEPROFIT

MARGINASSET

TURNOVERFINANCIALLEVERAGE= xx

2) Returns to shareholders

1) Creating value for the customer

… not financial leverage

pricequalityvarietyspeedconvenienceserviceinnovation

ROA

Operations impact ROA ...

p. 26

CCE’s 1998 ROAWhere and how do operations impact performance?

1998 INCOME Base Net Operating Revenues 13,414 Cost of sales 8,391 Gross Profit 5,023 SG&A + Delivery 4,154 Operating Income 869

1998 ASSETS Acct. Rec. 1,337 Franchises 13,956 Inventory 543 Plant & Equipment 4,891 Other 405 Total Assets 21,132

Oper. Inc. 4.11%ASSETS

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Key operations drivers of ROA

• Revenue – better quality, service, speed, variety– product/service availability– supply-demand matching (markdowns/discounting)

• Cost of goods– effective purchasing & sourcing– scrap/waste reduction

• S,G & A– production & service delivery costs

– labor productivity

• Asset turnover– facility and equipment utilization– inventory turnover

p. 28

What if CCE improved operating performance a little?

Explanation?

1998 INCOME Base Modified % Net Operating Revenues 13,414 13,448 0.25% Cost of sales 8,391 8,349 -0.50% Gross Profit 5,023 5,098 1.50% SG&A + Delivery 4,154 4,133 -0.50% Operating Income 869 965 11.08%

1998 ASSETS Acct. Rec. 1,337 1,337 Franchises 13,956 13,956 Inventory 543 434 -20.00% Plant & Equipment 4,891 4,402 -10.00% Other 405 405 Total Assets 21,132 20,534 -2.83%

Oper. Inc. 4.11% 4.70%ASSETS

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What if CCE’s operating performance declined a little?

Explanation?1998 INCOME Base Modified % Net Operating Revenues 13,414 13,380 -0.25% Cost of sales 8,391 8,433 0.50% Gross Profit 5,023 4,948 -1.50% SG&A + Delivery 4,154 4,175 0.50% Operating Income 869 773 -11.08%

1998 ASSETS Acct. Rec. 1,337 1,337 Franchises 13,956 13,956 Inventory 543 652 20.00% Plant & Equipment 4,891 5,380 10.00% Other 405 405 Total Assets 21,132 21,730 2.83%

Oper. Inc. 4.11% 3.56%ASSETS

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Summary: CCE

OI/A ROE

Poor operations 3.56% ?

Base case 4.11% ?

Improved operations 4.70% ?

p. 31

Summary: CCE

OI/A ROE

Poor operations 3.56% 1.84%

Base case 4.11% 5.78%

Improved operations 4.70% 9.73%

ROE based on interest and tax expenses of $728 and equity of $2,438.

p. 32

“We improve volume by improving service, especially in well-developed markets. If we reduce out-of-stocks at a full service location, for example, we reduce the times a purchase occasion is missed.”

“The [capital investment] program is absolutely essential. We simply have to do the things necessary to build our base of production, warehouses, trucks, and people while still investing in high margin cold drink opportunities. We see the opportunities every day, and this capital program prepares us to meet the needs they create. “

“The bottling business favors larger bottlers that have the ability to purchase in large quantities, produce more efficiently, and make the investments in people and systems needed to compete in today's environment. …acquisitions enable us to take advantage of efficiencies and economies of scale and create value for the Company and our share owners.”

1998 Annual Report: Comments on Operations

p. 33

Stock price performance ...

p. 34

CCE ’99 quality problems in Europe

“As Coca-Cola Co. tries to regain its footing in Europe after a contamination scare that caused the biggest product recall in the company's 113-year history, executives have made a rare admission: that mistakes were made in manufacturing. “

“As the bans on Coke products continued into Monday, June 21, Ivesterissued a memo to all of his company's 28,000 employees. The subject was the ‘Belgian Issue,’ and it said, among other things, that the company's ‘quality control processes in Belgium faltered.’ ”

“In the biggest recall in Coke history, the governments of France, Belgium, Luxembourg and the Netherlands have ordered products from Coca-Cola Co., off their shelves after dozens of people who drank the soft drinks became ill. “

Source: NYTimes June 1999

p. 35

Where does knowing something about operations matter in your career?

• Managing a business

• Justifying real investments (corp. finance)

• Industry analysis/fundamental investing

• Restructuring initiatives (consulting)

• Merges & acquisitions (cost structure/synergies)

• New business planning

p. 36

Operations strategy in a nutshell

WHAT do we need to do well operationally to succeed?

HOW are we going to do it?

– What collection of assets, resources and processes (e.g. configuration) do we need?

– What capabilities do we need?

p. 37

p. 38

Some Current OM Challenges

• Speeding product development time

• Developing production systems to enable mass customization of products and services

• Managing global production networks

• Developing and integrating new process technologies into existing production systems

p. 39

Some Current OM Challenges (Continued)

• Achieving high quality quickly and maintaining it in the face of restructuring

• Managing an increasingly diverse workforce

• Conforming to environmental constraints, ethical standards, and government regulations

p. 40

Summary

• Our focus in this course is on the business impact of a firm’s operations

– creating value for customers– providing returns to the firm

• Operations strategy provides the blueprint for achieving superior operating results

– What do we need to provide? – How are we going to provide it?

• Strategy and operational excellence are distinct but complimentary concepts; both are important.

• A good working knowledge of operations will be important many times in your career.

p. 41

How are operating results achieved?

plantequipmentinventory

materialslaborenergy

outputsqualityvarietyconvenienceservice

FIRM

customer

revenue

How do we structure what goes on inside the “black box” so that the firm captures value?

investment

?costs

p. 42

“The burden of it all is on the shoulders of management. Labor works along under any system. There is little or no concern in the shop whether the best method is being used, whether the best results are being had from materials and from the motions of men; it is a day’s work just the same.

The difference in a day’s work is in production value, and this is the business of management.”

Henry Ford

Today and Tomorrow (1926)

p. 43

“A company’s operations function typically is either a competitive weapon or a corporate millstone. It is seldom neutral. Yet, theconnection between operations and corporate success is rarely seen as more than the achievement of high efficiency and low costs ..

…what appears to be routine operations decisions frequently come to limit the corporation’s strategic options, binding it with facilities, equipment, personnel, and basic controls and policies to a noncompetitive posture which may take years to turn around.”

From; Wickham Skinner, Harvard Business Review,May-June 1969

p. 44

Operations StrategyStarts with business strategy (business model)Viability Test

Two key questions:1) To what (quantifiable) extent do our customers prefer our product to

alternatives? (Or prefer it less than alternatives?)

2) To what extent do we have a cost advantage or disadvantage relative to the providers of the alternatives?

A viable strategy must have:customer preferences exceeding a cost disadvantage, or

cost advantages exceeding a disadvantage in customer

preferences, or, in the best of worlds,customer preferences and cost advantages together.

Not to mention sustainability . . .

p. 45

Operations Strategy Framework

1) WHAT do we need to do well to succeed?Objectives?

• low cost• high variety

• high quality

• speed/convenience• service/support

• innovation

Priorities? • cost / quality

• cost / variety• cost / speed

• speed / quality

• speed / variety

Qualifier ...Parity with competitors; necessary for basic survival.

vs.

Differentiator ...Excellence (best in class performance); distinguishes you from your competitors.

p. 46

Strategy vs. Operational Excellence (Porter HBR ‘96)

Cost

Variety

L

L H

H

operational excellenceHow do we get to (and stay on) the efficient frontier?

strategyWhere on the frontier should we position ourselves?

WARNING: The efficient frontier is constantly shifting!

p. 47

Operations strategy

Structural elements – capac i ty

– facil it ies

– vertical integration

– technology/equipment

Infrastructure elements– work force

organization & skills– customer relations– process expertise– quality programs– logistics planning

How do we go about formulating an operations strategy?

M e a s u r e s o f P e r f o r m a n c e

– c o s t

– q u a l i t y

– s p e e d

– v a r i e t y

– s e r v i c e

p. 48

Operations Strategy: A Summary

T h e r e a r e m a n y w a y s t o c o m p e t e a n d f i r m s c a n n o t

b e a l l t h i n g s t o a l l p e o p l e … t h e r e a r e t r a d e o f f s i n

o p e r a t i n g d e c i s i o n s a b o u t s t r u c t u r e ( b r i c k s a n d

m o r t a r , m a c h i n e r y ) a n d i n f r a s t r u c t u r e ( p e o p l e ,

s y s t e m s , p r o c e d u r e s ) … a n o p e r a t i n g s t r a t e g y ’ s s u c c e s s

i s d e t e r m i n e d b y t h e c o h e r e n c e o f t h e p a t t e r n

a c r o s s d e c i s i o n c a t e g o r i e s , a n d b y t h e m a t c h

b e t w e e n o p e r a t i o n s s t r a t e g y a n d t h e o t h e r f u n c t i o n a l

a n d o v e r a l l b u s i n e s s s t r a t e g i e s … o v e r t h e l o n g t e r m

a n o p e r a t i o n s s t r a t e g y i s d e e m e d s u c c e s s f u l i f i t

g u i d e s t h e o r g a n i z a t i o n i n b u i l d i n g c a p a b i l i t i e s

e s s e n t i a l t o a t t a i n i n g c o m p e t i t i v e a d v a n t a g e .

p. 49

2) HOW will we achieve our objectives?Infrastructure

• Facilities• Equipment/technology

• Employees

Processes • How will the infrastructure be used?• What is the work method?

• Communication and control

Capabilities• Expertise/knowledge• Gained by targeted development and learning over time

p. 50

Some examples ….

p. 51

kozmo.com / urbanfetch.com

• History– kozmo.com

• Founded 1997 by Joseph Park, Yong Kang (former investment bankers).

• Serves NY, Boston, San Francisco, Seattle and Washington D.C.

– Urbanfetch.com• Founded 1999 by Ross Steven (Ph.D. in finance & statistics)

• Business objectives/concept– The “Polaroid” of e-commerce– “Amazon in an hour”– Instant gratification– NY customer quote: “If I could get everything delivered, I

would.”

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p. 53

Operating strategy is a “secret”

Park:

“It’s basically a localized same-day Fed-Ex system. Everything is tied to the integrated data pipeline connected to the Web.”

Stevens:

“We have a hub-and-spoke network. The heavy lifting in this business in designing the internal fulfillment and external distribution systems, and ours is proprietary. We have heavy-duty algorithms that route orders in optimal fashion.”

“There are such efficiencies in our business that we can afford to pay our couriers above market wages.. [and] we’ve eliminated tipping.”

Source: NY Times, 10/21/99

p. 54

A “guess” at the design …

Regional warehouse

Small footprint, in-citystocking points

bicycle routedelivery

Information system

frequent replenishment shipments

300+ couriers

p. 55

Results …

?

p. 56

Benetton SpA

• Business objectives– Youth/fashion market– Bring color fashion to knitwear (“United Colors of Benetton”)– Small, easy-to-operate store format

– Competitive quality/price point

• Operating strategy– Vertical integration to lower costs

• Sheep farms • Largest wool buyer in the world

• Knitting

• Distribution

– Economies of scale through technology• Automated knitting• Automated distribution center

p. 57

– Flexibility• Selected subcontracting of labor intensive operations• Garment dyeing process provides postponement (delayed

differentiation) capability

– Franchise network• Close contact to customers (owners match customer base)

• “Agents” manage and develop the network freeing Benetton to focus on product development, production and distribution

knitting cutting sewing dyeing

store orders

store

p. 58

• Results– $610/sq-ft. sales vs. $125 typical European store (‘84)– 2,500+ variations in a typical collection (94’)– Replenishment orders filled in 10 days

– Target 85% of sales at full price (only 15% markdown)– 70% owned by Benetton family (Mkt Cap. $U.S. 3.2B)– Somewhat poor returns of late (ROA of 6.32% vs. industry

avg. of 9.62% over last 5 yrs.)

p. 59

Dell Computer• Business objectives

– Produce customized PCs incorporating the latest technology Target institutional and experienced-consumer markets

– Service/support relationship with large institutions

• Operating strategy– Direct sales, direct customer relationship

– Build-to-order production– Extensive supplier partnerships + 3rd party logistics

Dell

Quantum(disk drives)

Intel (CPU’s)

STB Systems (video cards)

Caliper Logistics

End Customer

UPS

Sony(monitors)

p. 60

• Operating performance– Components on average are 60 days “newer” than those in

IBM/Compaq– Can build a computer in 6 hours.– 7-10 days of inventory (PC’s depreciate 1-2% per week)

– Build-to-order allows extra service options ...• user-specific software configurations

• asset tags

• Financial performance– 200% return on invested capital

– negative 8 days cash-conversion cycle– $1,000 invested in 1990 worth $564,700 by Jan. 1999.

p. 61

• Some quotes from Michael Dell“When the company started, I don’t think we knew how far the direct model

could take us. It has provided a consistent underlying strategy for Dell despite a lot of change in our industry”

“We substitute information for inventory and ship only when we have real demand from real end customers.”

“Its not just that we sell direct, it’s also our ability to forecast demand - It’s both the design of the product and the way the information from the customer flows all the way through manufacturing to our suppliers.

“So looking for value shifts is probably the most important dimension of leadership. Then there’s the question of managing such a tightlycoordinated value chain - and there it’s all about execution.”

Source: HBR, March/April 98

p. 62

Southwest AirlinesHistory

– Started 1971 with 3 Boeing 737’s serving 3 Texas cities.– Operates 296 Boeing 737 (as of 6/99) serving 56 airports

Business objective– Short-haul (avg. 1 hr. flight), city-pair markets– Leisure and business-commuter market (not transient

business market)– Low prices; good service

Operating strategy– Point-to-point, shuttle-like routes (no hub & spoke network)– Quick turnaround at gates– Single equipment class (all 737 fleet)– Simple boarding process and in-flight service– Simple fare structure

p. 63

• Performance– 20 min. avg. turnaround at gate (1/2 industry avg.)– Lowest cost structure of all major U.S. airlines– High customer satisfaction

• Rated #1 domestic airline in ‘97 by Money Magazine

• Lowest lost luggage & missed connection rate; high on-time perf.

– 25 consecutive years of profitability (only consistently profitable U.S. airline)

p. 64

“Southwest is and always has been a very different airline — from theoperating strategy we employ to the way we treat our Employees andCustomers. But the difference we are most famous for is our ability togenerate high profits with low fares. The secret, of course, is low costs,and our operating strategy is a significant ingredient of our low costformula.

Our operating strategy is unique in the airline industry, and it has, indeed,revolutionized air travel over the last 26 years. We start with a principalfocus on the shorthaul traveler, where our average flight time is about anhour. We streamline service to meet the shorthaul traveler’ s needs. Then,we identify city pairs that can generate substantial amounts of businessand leisure traffic with Southwest service.

We offer lots of flights to meet business travelers’ demands for scheduleconvenience and flexibility. We offer low fares that meet all travelers’needs, especially leisure travelers. We specialize in nonstop, notconnecting, service. In our experience, this is what Customers want inshorthaul markets. And it is far more cost-efficient than the accepted “huband spoke” industry standard.

p. 65

This market focus allows us to be substantially more efficient andproductive than the rest of the airline industry. Our aircraft and airportfacilities are used continuously throughout the day, maximizing utilizationand minimizing ground time. Our aircraft “turn” times at the airport areless than half the industry standard. Therefore, we get lots more use of ouraircraft and much lower unit costs.

We also use only one aircraft type, the Boeing 737, in an all-coachconfiguration. This substantially reduces costs versus the industry due tosimplified operations, training, scheduling, and maintenance. Our fleet of737s is young, safe, comfortable, clean, and perfectly suited for shorthaulflights.

Our fare structure is simple and this means the cost of selling our productis less than industry average. Over 60 percent of our Customers buytravel on Southwest on a ticketless basis — it is easier for our Customersand less expensive for Southwest than a paper ticket. Boarding theaircraft is also fast and efficient.

Finally, and most importantly, we have a Culture that values efficiency,hard work, innovation, and simplicity. Our People have the will and thedesire to produce low costs. That’ s how the low cost producer keepsfinding ways to reduce costs further.”

Source: 1997 Annual Report

p. 66

“Waussau Paper” (disguised name)

• The situation– Paper manufacturer in Wisconsin– Money-losing operation for many years– Major shareholder called BCG to get opinion about shutting Waussau

paper down• Operations

– Large number of small, narrow machines (less efficient than modern, wide machines)

– Cost 1/3 higher than best competitors• Reevaluated strategy

– Life as a paper mill customer• Deliveries only once every 4-7 days• Must buy in 40,000 lb. lots (1 truck load)• 5 weeks for special orders (color) due to traditional mill scheduling for most

efficient run lengths• Few colors/specialty papers stocked due to low turnover

Source: George Stalk, BCG

p. 67

– BCG’s suggested positioning• premium prices & high service for color and specialty paper • 2 trucks/day to customer locations• Overnight delivery• 2,000 lb. minimum order size• 2 week production cycle

– Operating strategy• Exploit small run size capability of older machines• Computerize order entry and scheduling to speed up processing• Tandem drivers to deliver overnight• Excess capacity to allow rapid turnaround time• Expanded customer base (small sales to large numbers of customers not

big sales to a few customers)

• Performance– Spectacular shareholder returns in the last 10 yrs.– BCG lead partner “bought his house” on his stock options – Company is replicating strategy by buying up other small mills.

p. 68

What generic ideas are there in these examples?

p. 69

Characteristics of an effective operations strategy:

• Internally and externally consistent with...– corporate/business strategy– other functional strategies (marketing, finance, R&D)

– pattern of structural/infrastructure investment– competitive environment (customers, competitors)

• Explicit recognition of trade-offs– targets key performance dimensions – sets clear priorities/promotes clarity

• Builds core operations capabilities– competitive advantages– new opportunities

• Timeless and enduring

... defined by what managers do , not what they say.

p. 70

Some reasons for inconsistencies

• Operations has a new task but continues the old policies and structure

• The organization lacks a focus. It is attempting to cover too many technologies or too many products and markets, too wide a range of volume…

• The organization has the wrong equipment and process technology for the present task

p. 71

Some reasons for inconsistencies

• The organization uses only economic hurdles for capital investment instead of also considering what operations must do to become a competitive weapon

• The organization’s decision orientation is based too much on achieving economies of scale instead of looking at total performance.

p. 72

Mission Investment Marketing SalesRequirements Strategy Strategy

Low Unit Cost Automation Narrow line and Priceconservative design competition

Tight Incremental Special market Pricetolerances performance segment premium

High service Inventory Image of dependability Rapidlevel delivery

Wide line Multiple setups Broad market coverage Full lineand short runs

Custom Reserve Ability Analysis ofservice capacity to respond customers’

needs

Product Product Market New marketinnovation development leadership segments

Linking Strategies to Missions

p. 73

The Classic Facility Missions

Mission Facilities Infrastructure Labor

Low Unit Cost Specialized Materials Repetitive

machines linked planning & control work

by the time cycle

Tight Reliable control of Building quality into Heightened

Tolerances components and product and process responsibility

systems design of workers for

product quality

High service Reserve machine Inventory management Overtime and

level capacity idle time

Wide line General purpose Production scheduling Changing

machines and inventory assignments

of tools

Custom General purpose Design to cost Reliance on

service machines workers skills

Product Flexible general Design and industrial Team

innovation purpose machines engineering responsiveness

p. 74

Summary

• Operations strategy provides the operational blueprint for executing a business strategy

– What do we need to provide? – How are we going to provide it?

• The operations strategy must be consistent with the business strategy. Strategy and operational excellence are distinct concepts, but they may be intimately related.

• An operating strategy that is aligned with the key business objectives of the firm can produce startling operating and financial performance.