Operations Strategy

Operations strategyOperations strategy is the tool that helps to define the methods of producing goods or a service offered to the customerDefinitionOperations strategyis the total pattern of decisions which shape the long-term capabilities of any type of operations and their contribution to the overall strategy, through the reconciliation of market requirements with operations resources. -Slack and Lewis,Developing Operations StrategyCorporate MissionBusiness StrategyProduct/Service PlansCompetitive PrioritiesCost, Time, Quality and flexibilityOperations StrategyPositioning the production SystemProduct/Service PlanOutsourcing PlanProcess and Technology PlanStrategic Allocation Of ResourcesFacility Plans: Capacity, Location and LayoutAssessmentof GlobalBusinessConditionsDistinctiveCompetenciesorWeaknesses3Corporate MissionA corporate mission is a set of long-range goals and including statements about:the kind of business the company wants to be inwho its customers areits basic beliefs about businessits goals of survival, growth, and profitability4Business StrategyBusiness strategy is a long-range game plan of an organization and provides a road map of how to achieve the corporate mission.Inputs to the business strategy areAssessment of global business conditions - social, economic, political, technological, competitiveDistinctive competencies or weaknesses - workers, sales force, R&D, technology, management5Competitive PrioritiesLow Production CostsDefinitionUnit cost (labor, material, and overhead) of each product/serviceSome Ways of CreatingRedesign of product/serviceNew technologyIncrease in production ratesReduction of scrap/wasteReduction of inventory

6Competitive PrioritiesDelivery PerformanceDefinitiona) Fast deliveryb) On-time deliverySome Ways of Creatinga) larger finished-goods inventorya) faster production ratesa) quicker shipping methodsb) more-realistic promisesb) better control of production of ordersb) better information systems

7Competitive PrioritiesHigh-Quality Products/Services DefinitionCustomers perception of degree of excellence exhibited by products/servicesSome Ways of CreatingImprove product/servicesAppearancePerformance and functionWear, endurance abilityAfter-sales service8Competitive PrioritiesCustomer Service and Flexibility DefinitionAbility to quickly change production to other products/services. Customer responsiveness.Some Ways of CreatingChange in type of processes usedUse of advanced technologiesReduction in WIP through lean manufacturingIncrease in capacity9Operations StrategyOperations strategy is a long-range game plan for the production of a companys products/services, and provides a road map for the production function in helping to achieve the business strategy.10Elements of Operations StrategyPositioning the production systemProduct/service plans Outsourcing plans Process and technology plans Strategic allocation of resourcesFacility plans: capacity, location, and layout11Positioning the Production SystemSelect the type of product designStandardCustomSelect the type of production processing systemProduct focusedProcess focusedSelect the type of finished-goods inventory policyProduce-to-stockProduce-to-order

12Positioning the Production SystemSelect the type of production processing systemProduct focusedProcess focused

Select the type of finished-goods inventory policyProduce-to-stockEx McDonald:The McDonald's Corporation is the world's largest chain of hamburger fast food restaurants, serving around 68 million customers daily in 119 countriesProduce-to-order- Ex burger king

Product/Service PlansAs a product is designed, all the detailedcharacteristics of the product are established.Each product characteristic directly affects how the product can be made.How the product is made determines the design of the production system.16Stages in a Products Life CycleIntroduction- Sales begin, production and marketing are developing, profits are negative.Growth - sales grow dramatically, marketing efforts intensify, capacity is expanded, profits begin.Maturity - production focuses on high-volume, efficiency, low costs; marketing focuses on competitive sales promotion; profits are at peak.Decline - declining sales and profit; product might be dropped or replaced.17Stages of a Products Life Cycle Introduction Growth Maturity DeclineB&W TVAutomobileVideo RecorderCD PlayerColor CopierCell Phone Internet RadioFax MachineDot-Matrix Printer18Outsourcing PlansOutsourcing refers to hiring out or subcontracting some of the work that a company needs to do.This strategy is being used more and more as companies strive to operate more efficiently.Outsourcing has many advantages and disadvantages. Companies try to determine the best level of out-sourcing to achieve their operations & business goals.More outsourcing requires a company to have less equipment, fewer employees, and a smaller facility.19Outsourcing PlansA company might outsource any of the following manufacturing related functions:Designing the productPurchasing the basic raw materialsProcessing the subcomponents, subassemblies, major assemblies, and finished productDistributing the product20Outsourcing PlansMany companies even outsource some service functions such as:PayrollBillingOrder processingDeveloping/maintaining a websiteEmployee recruitmentFacility maintenance

21Process and Technology PlansAn essential part of operations strategy is the determination of how products/services will be produced.The range of technologies available to produce products/services is great and is continually changing.22Strategic Allocation of ResourcesFor most companies, the vast majority of the firms resources are used in production/operations.Some or all of these resources are limited.The resources must be allocated to products, services, projects, or profit opportunities in ways that maximize the achievement of the operations objectives.23Facility Plans: Capacity , Location and LayoutHow to provide the long-range capacity to produce the firms products/services is a critical strategic decision.The location of a new facility may need to be decided.The internal arrangement (layout) of workers, equipment, and functional areas within a facility affects the ability to provide the desired volume, quality, and cost of products/services.24OPERATION STRATEGY IN SERVICE -Characteristics of Servicesand Manufactured Products Services ProductsOutput Intangible TangibleOutput Inventoried No YesCustomer Contact Extensive LittleLead Time Short LongIntensity Labor CapitalQuality Subjective Objective25Competitive Priorities for ServicesThe competitive priorities listed earlier for manufacturers apply to service firms as wellLow production costsFast and on-time deliveryHigh-quality servicesCustomer service and flexibilityProviding all the priorities simultaneously to customers is seldom possible.26Positioning Strategies for ServicesType of Service DesignStandard or custom products Amount of customer contactMix of physical goods and intangible servicesType of Production ProcessQuasi manufacturingCustomer-as-participantCustomer-as-product27Positioning Strategies for ServicesExample: McDonaldsHighly standardized service designLow amount of customer contactQuasi-manufacturing approach to back-room production process(banking, insurance, and postal service facilities)

28FORMING OPERATIONS STRATEGIESStructure of operation is determined by the positioning strategy be linked to the product plans and competitive priorities defined in the business strategy.29Evolution of Positioning StrategiesThe characteristics of production systems tend to evolve as products move through their product life cycles.Operations strategies must include plan for modifying production systems to a changing set of competitive priorities as products mature.The capital and production technology required to support these changes must be provided.30Evolution of Positioning StrategiesVolumeVeryLowLowHighVeryHighFocusProcessProcessProductProductFin.Gds.To-OrderTo-OrderTo-StockTo-StockBatchSizeVerySmallSmallLargeVeryLargeProductCustomSlightlyStandardStandardHighlyStandardLifeStageIntro.EarlyGrowthLateGrowthMaturity31Linking Operations and Marketing StrategiesOperations StrategyProduct-focusedMake-to-stockStandardized productsHigh volumeMarketing StrategyLow production costFast delivery of productsQualityExample: TV sets32Linking Operations and Marketing StrategiesOperations StrategyProduct-focusedMake-to-orderStandardized productsLow volumeMarketing StrategyLow production costKeeping delivery promisesQualityExample: School buses

33Linking Operations and Marketing StrategiesOperations StrategyProcess-focusedMake-to-stockCustom productsHigh volumeMarketing StrategyFlexibilityQualityFast delivery of productsExample: Medical instruments

34Linking Operations and Marketing StrategiesOperations StrategyProcess-focusedMake-to-orderCustom productsLow volumeMarketing StrategyKeeping delivery promisesQualityFlexibilityExample: Large supercomputers35No Single Best StrategyStart-up and Small ManufacturersUsually prefer positioning strategies with:Custom productsProcess-focused productionProduce-to-order policiesThese systems are more flexible and require lesscapital.

36No Single Best StrategyStart-up and Small ServicesSuccessfully compete with large corporations by:Carving out a specialty nicheEmphasizing close, personal customer serviceDeveloping a loyal customer base37No Single Best StrategyTechnology-Intensive BusinessProduction systems must be capable of producing new products and services in high volume soon after introductionSuch companies must have two key strengths:Highly capable technical peopleSufficient capital

38STRATEGIC FITStrategic fit expresses the degree to which an organization is matching its resources and capabilities with the opportunities in the external environment.The matching takes place through strategy and it is therefore vital that the company have the actual resources and capabilities to execute and support the strategy

Achieving Strategic Fit Achieved The steps involvedStep 1: Understanding the customer and Supply chain uncertaintyStep 2: Understanding the supply chain capabilitiesStep 3: Achieve strategic fit2-40Step 1: Understanding the Customer and Supply Chain UncertaintyIdentify the needs of the customer segment being served by the following attributes:Quantity of product needed in each lotResponse time customers will tolerateVariety of products neededService level requiredPrice of the productDesired rate of innovation in the product2-41411. Understanding the Customer and Supply Chain UncertaintyUnderstanding customer (demand) uncertaintyDemand varies along certain attributesQuantity in each lot, response time, variety of products needed, service, price, innovation, etcImplied demand uncertaintyDemand uncertainty due to the portion of demand that the supply chain is targeting, not the entire demand

SYST 4050 SlidesChapter 1421. Understanding the Customer and Supply Chain UncertaintyUnderstanding supply uncertaintySupply uncertainty is strongly affected by the life-cycle position of the product. New products being introduced have higher supply uncertainty than mature products

SYST 4050 SlidesChapter 1432. Understanding the Supply Chain CapabilitiesSupply chain capabilitiesSupply chain responsivenessRespond to wide ranges of quantity demanded, meet short lead times, large variety, innovative products, high service level, etcSupply chain efficiency (low cost)Highly efficientHighly responsiveSomewhat responsiveSomewhat efficientIntegrated steel millsHanes apparelMost automotiveproductionSeven-Eleven JapanSYST 4050 SlidesChapter 1443. Achieving Strategic FitStrategic fitGiven a competitive strategy, what should a companys supply chain do particularly well?Wal-MartEveryday low prices (low cost retailer for a wide variety of products)Buys from low cost producers, owns its infrastructure and distribution network CoorsThe coldest tasting beer in the world, brewed with Rocky Mountain spring waterRefrigerated transport, main facility near Rocky MountainsDellCustom-made computer systems at a reasonable costOnline ordering, no middle-manSYST 4050 SlidesChapter 145Business strategies change over timeIn the 1990s, outsourcing was the focus of many manufacturers. Example: Nike ShoesNikes strategy: R and D on one hand and marketing, sales, and distribution on the other.Example 2: CISCOCISCOs strategy: Focus on Internet sales; increased productivity and save on business expenses. Example 3: Apple ComputersApple computers: outsourced most of its mfg.2-46Firms considered outsourcing everything from the procurement function to production and manufacturing. Managers focused on stock value and consequently, profits. Easy way to increase profits, reduce costs through outsourcing. Purchasing volume increased as a percentage of sales.

CISCO established manufacturing plants all over the world. Developed close arrangements with major suppliers. Created a single enterprise system that connected customers, employees, chip manufacturers, component distributors, contract manufacturers, logistic companies, and system integrators.

The Landscape changedIn 2001, Nike reported a profit shortfall due to inventory buildup, shortage for others, and late deliveries.In 2000, CISCO was forced to announce 2.25 B write-down for obsolete inventory.In 1999, Apple had huge customer dissatisfaction because of shortage of G4 chip supplied by Motorola.

2-472-48What went wrong?In the examples, the difficulties reflect problems with procurement chain strategies.Nike, CISCO, Apple have short product life cycles.When technologies changed, uncertainties related to customer demand increased.Procurement landscape changed significantly with the introduction of independent, private, and consortium-based e-market places.With changes in procurement landscape, both problems and opportunities also changed. But, Nike, CISCO, and Apple were not able to react to these changes and formulate a new corporate and procurement strategy.The need for a good strategyThe most important requirement for sustainability is a well-formulated corporate strategy; A corporate strategy, in turn, requires forming sub strategies such as product strategy, procurement strategy, marketing strategy, and so on. And,A firm should continually evaluate its corporate strategy and its sub strategies and ensure that they are appropriate for a changing environment.2-49Strategic FrameworkThe framework consists of five steps:

1. Define corporate objectives2. Determine marketing strategies to meet these objectives3. Assess how different products win orders against competitors4. Establish the most appropriate mode to deliver these sets of products5. Provide the infrastructure required to support operations

1. Define corporate objectives

Involves establishing corporate objectives that provide a direction for the organisation and performance indicators that allow progress in achieving those objectives to be measured. The objectives will be dependent on the needs of external and internal stakeholders and so will include financial measures such as profit and growth rates as well as employee practices such as skills development and appropriate environmental policies.

2. Market strategy This involves identifying target markets and how to compete in these markets.

3. How Do Products Win Orders in the Market Place?This is the crucial stage in Hills methodology where any mismatches between the requirements of the organisations strategy and the operations capability are revealedThis step provides the link between corporate marketing proposals and the operations processes and infrastructure necessary to support themThis is achieved by translating the marketing strategy into a range of competitive factors (e.g. price, quality, delivery speed) on which the product or service wins orders.These external competitive factors provide the most important indicator as to the relative importance of the internal operations performance objectives.The five basic internal operations performance objectives allow the organisation to measure its operations performance in achieving its strategic goals. The performance objectives are Quality, Speed, Dependability,Flexibility and Cost.Step 4 Delivery System Choice and Step 5 Infrastructure choiceservice delivery systems and capacity provision (Structural Decision)Operations Infrastructural decisions describe the systems, policies and practices that determine how the structural elements covered in step 4 are managed