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Operations StrategyOperations Strategy
Operations ManagementOperations Management
Chapter 2Chapter 2
Dr. Pavlos Panayi MBA650
Lecture OutlineLecture Outline
Strategy FormulationStrategy Formulation Competitive PrioritiesCompetitive Priorities Operations’ Role in Corporate StrategyOperations’ Role in Corporate Strategy Strategy and the InternetStrategy and the Internet Strategic Decisions in OperationsStrategic Decisions in Operations Strategy DeploymentStrategy Deployment Issues and Trends in OperationsIssues and Trends in Operations
Dr. Pavlos Panayi MBA650 2-2
Four Steps for Strategy Four Steps for Strategy FormulationFormulation
Defining a primary taskDefining a primary task What is the firm in the business of doing?What is the firm in the business of doing?
Assessing core competenciesAssessing core competencies What does the firm do better than anyone else?What does the firm do better than anyone else?
Determining order winners and order qualifiersDetermining order winners and order qualifiers What wins the order? What wins the order? What qualifies an item to be considered for purchase?What qualifies an item to be considered for purchase?
Positioning the firmPositioning the firm How will the firm compete?How will the firm compete?
Dr. Pavlos Panayi MBA650 2-3
Competitive PrioritiesCompetitive Priorities
CostCost QualityQuality FlexibilityFlexibility SpeedSpeed
Dr. Pavlos Panayi MBA650 2-4
Competitive Priorities: Competitive Priorities: CostCost
Lincoln ElectricLincoln Electric reduced costs by $10 million a year for 10 yearsreduced costs by $10 million a year for 10 years skilled machine operators save the company millions that skilled machine operators save the company millions that
would have been spent on automated equipmentwould have been spent on automated equipment
Southwest AirlinesSouthwest Airlines one type of airplane facilitates crew changes, record-one type of airplane facilitates crew changes, record-
keeping, maintenance, and inventory costskeeping, maintenance, and inventory costs direct flights mean no baggage transfersdirect flights mean no baggage transfers $30 million annual savings in travel agent commissions by $30 million annual savings in travel agent commissions by
requiring customers to contact the airline directlyrequiring customers to contact the airline directly
Dr. Pavlos Panayi MBA650 2-5
Competitive Priorities: Competitive Priorities: QualityQuality
Ritz-Carlton - one customer at a timeRitz-Carlton - one customer at a time Every employee is empowered to satisfy a guest’s wish Every employee is empowered to satisfy a guest’s wish Teams at all levels set objectives and devise quality Teams at all levels set objectives and devise quality
action plansaction plans Each hotel has a quality leader Each hotel has a quality leader Quality reports tracksQuality reports tracks
guest room preventive maintenance cyclesguest room preventive maintenance cycles percentage of check-ins with no waitingpercentage of check-ins with no waiting time spent to achieve industry-best clean room time spent to achieve industry-best clean room
appearanceappearance Guest Preference Reports are recorded in a databaseGuest Preference Reports are recorded in a database
Dr. Pavlos Panayi MBA650 2-6
Competitive Priorities: Competitive Priorities: FlexibilityFlexibility
Andersen WindowsAndersen Windows number of products offered grew from 28,000 to 86,000number of products offered grew from 28,000 to 86,000 number of errors are down to 1 per 200 truckloadsnumber of errors are down to 1 per 200 truckloads
Custom Foot Shoe Store:Custom Foot Shoe Store: customer’s feet are scanned electronically to capture customer’s feet are scanned electronically to capture
measurementsmeasurements custom shoes are mailed to the customer’s home in weekscustom shoes are mailed to the customer’s home in weeks prices are comparable to off-the-shelf shoesprices are comparable to off-the-shelf shoes
National Bicycle Industrial CompanyNational Bicycle Industrial Company offers 11,231,862 variationsoffers 11,231,862 variations delivers within two weeks at costs only 10% above standard delivers within two weeks at costs only 10% above standard
modelsmodels
Dr. Pavlos Panayi MBA650 2-7
Competitive Priorities: Competitive Priorities: SpeedSpeed
Citicorp Citicorp advertises a 15-minute mortgage approvaladvertises a 15-minute mortgage approval
L.L. Bean L.L. Bean ships orders the day they are receivedships orders the day they are received
Wal-Mart Wal-Mart replenishes its stock twice a week replenishes its stock twice a week
Hewlett-Packard Hewlett-Packard produces electronic testing equipment in five daysproduces electronic testing equipment in five days
General Electric General Electric reduces time to manufacture circuit-breaker boxes into three days reduces time to manufacture circuit-breaker boxes into three days
and dishwashers into 18 hoursand dishwashers into 18 hours DellDell
ships custom-built computers in two daysships custom-built computers in two days Motorola Motorola
needs less than 30 minutes to build to order pagersneeds less than 30 minutes to build to order pagers
Dr. Pavlos Panayi MBA650 2-8
Operations’ Role in Operations’ Role in Corporate StrategyCorporate Strategy
Operations provides support for a Operations provides support for a differentiated strategydifferentiated strategy
Operations serves as a firm’s Operations serves as a firm’s distinctive distinctive competence competence in executing similar strategies in executing similar strategies better than competitorsbetter than competitors
Dr. Pavlos Panayi MBA650 2-9
Operations Strategy at Operations Strategy at Wal-MartWal-Mart
Dr. Pavlos Panayi MBA650 2-10
Strategy and the InternetStrategy and the Internet
Internet can be used to create a Internet can be used to create a distinctive business strategydistinctive business strategy
eBayeBay unlimited capacity and a huge marketunlimited capacity and a huge market all work is done by buyers and sellers and all work is done by buyers and sellers and
there is no marginal costthere is no marginal costCiscoCisco
integrated value chain is its competitive integrated value chain is its competitive advantageadvantage
Dr. Pavlos Panayi MBA650 2-11
Strategy and the Internet Strategy and the Internet (cont.)(cont.)
Internet can be used to strengthen existing competitive Internet can be used to strengthen existing competitive advantages by integrating new and traditional activitiesadvantages by integrating new and traditional activities GE’s Trading Process Network: an automated Web-based GE’s Trading Process Network: an automated Web-based
purchasing systempurchasing system cut average purchasing cost in halfcut average purchasing cost in half enabled a much larger group of suppliers to bid on jobsenabled a much larger group of suppliers to bid on jobs customers were able to track their orders through shop in real timecustomers were able to track their orders through shop in real time
Intel Intel sells $2 billion a month over the Internetsells $2 billion a month over the Internet purchases 80% of its direct materials onlinepurchases 80% of its direct materials online replaced 19,000 sales-order faxes received dailyreplaced 19,000 sales-order faxes received daily
Dr. Pavlos Panayi MBA650 2-12
Strategy and the Internet Strategy and the Internet (cont.)(cont.)
Lessons from the dot com shakedownLessons from the dot com shakedown Internet is the great equalizerInternet is the great equalizer
allows innovations to be copied with little investmentallows innovations to be copied with little investment companies may reach larger marketcompanies may reach larger market customers have more information and can compare customers have more information and can compare
prices and features of their products.prices and features of their products. These benefits are temporary unless…These benefits are temporary unless…
Companies provide unique value to customerCompanies provide unique value to customer
Dr. Pavlos Panayi MBA650 2-13
Strategic Decisions in Strategic Decisions in OperationsOperations
ProductsProducts
ServicesServices ProcessProcess
andand
TechnologyTechnology
CapacityCapacity
HumanHuman
ResourcesResources QualityQuality
FacilitiesFacilities SourcingSourcing OperatingOperating
SystemsSystems
Dr. Pavlos Panayi MBA650 2-14
Operations Strategy: Operations Strategy: Products and ServicesProducts and Services
Make-to-orderMake-to-order products and services are made to customer products and services are made to customer
specifications after an order has been receivedspecifications after an order has been received
Make-to-stockMake-to-stock products and services are made in anticipation of products and services are made in anticipation of
demanddemand
Assemble-to-orderAssemble-to-order products and services add options according to products and services add options according to
customer specificationscustomer specifications
Dr. Pavlos Panayi MBA650 2-15
Production Strategy:Production Strategy:Processes and technologyProcesses and technology
ProjectProject one-at-a-time production of a product to customer orderone-at-a-time production of a product to customer order
Batch productionBatch production systems process many different jobs at the same time systems process many different jobs at the same time
in groups (or batches)in groups (or batches) Mass productionMass production
large volumes of a standard product for a mass marketlarge volumes of a standard product for a mass market Continuous productionContinuous production
used for very high volume commodity productsused for very high volume commodity products
Dr. Pavlos Panayi MBA650 2-16
Product-Process MatrixProduct-Process Matrix
Source: Source: Adapted from Robert Adapted from Robert Hayes and Steven Wheelwright, Hayes and Steven Wheelwright, Restoring the Competitive Restoring the Competitive Edge: Competing Through Edge: Competing Through Manufacturing Manufacturing (New York: John (New York: John Wiley & Sons, 1984), p. 209Wiley & Sons, 1984), p. 209
Dr. Pavlos Panayi MBA650 2-17
Mor
e Sta
ndar
dize
d –
Hig
her V
olum
e
Mor
e Sta
ndar
dize
d –
Hig
her V
olum
e
ProjectConstruction of the aircraft carrier USS Nimitz was a huge project that took almost 10 years to complete.
Batch ProductionAt Martin Guitars bindings on the guitar frame are installed by hand and are wrapped with a cloth webbing until glue is dried.
Mass Production Here in a clean room a worker performs quality checks on a computer assembly line.
Continuous ProductionA paper manufacturer produces a continuous sheet paper from wood pulp slurry, which is mixed, pressed, dried, and wound onto reels.
Dr. Pavlos Panayi MBA650 2-18
Service Strategy:Service Strategy:Processes and TechnologyProcesses and Technology
Professional serviceProfessional service highly customized and very labor intensivehighly customized and very labor intensive
Service shopService shop customized and labor intensivecustomized and labor intensive
Mass serviceMass service less customized and less labor intensiveless customized and less labor intensive
Service FactoryService Factory least customized and least labor intensiveleast customized and least labor intensive
Dr. Pavlos Panayi MBA650 2-19
Service-Process MatrixService-Process Matrix
Source: Source: Adapted from Roger Adapted from Roger Schmenner, “How Can Service Schmenner, “How Can Service Businesses Survive and Businesses Survive and Prosper?” Prosper?” Sloan Management Sloan Management Review Review 27(3):2927(3):29
Dr. Pavlos Panayi MBA650 2-20
Professional ServiceA doctor provides personal service to each patient based on extensive training in medicine.
Service ShopAlthough a lecture may be prepared in advance, its delivery is affected by students in each class.
Mass ServiceA retail store provides a standard array of products from which customers may choose.
Service FactoryElectricity is a commodity available continuously to customers.
Less
Cus
tom
ized
-Les
s La
bor I
nten
sive
Less
Cus
tom
ized
-Les
s La
bor I
nten
sive
Dr. Pavlos Panayi MBA650 2-21
Operations Strategy:Operations Strategy:Capacity and FacilityCapacity and Facility
Capacity strategic decisions includeCapacity strategic decisions include: : WhenWhen, , how muchhow much, and in , and in what what form to alter form to alter
capacitycapacity Facility strategic decisions include: Facility strategic decisions include:
whether demand should be met with a few large whether demand should be met with a few large facilities or with several smaller onesfacilities or with several smaller ones
whether facilities should focus on serving certain whether facilities should focus on serving certain geographic regions, product lines, or customersgeographic regions, product lines, or customers
facility location can also be a strategic decisionfacility location can also be a strategic decision
Dr. Pavlos Panayi MBA650 2-22
Operations Strategy: Operations Strategy: Human ResourcesHuman Resources
What is skill levels and degree of autonomy What is skill levels and degree of autonomy required to operate production system?required to operate production system?
What are training requirements and selection What are training requirements and selection criteria?criteria?
What are policies on performance evaluations, What are policies on performance evaluations, compensation, and incentives?compensation, and incentives?
Will workers be salaried, paid an hourly rate, or Will workers be salaried, paid an hourly rate, or paid a piece rate?paid a piece rate?
Will profit sharing be allowed, and if so, on what Will profit sharing be allowed, and if so, on what criteria?criteria?
Dr. Pavlos Panayi MBA650 2-23
Operations Strategy: Operations Strategy: Human Resources (cont.)Human Resources (cont.)
Will workers perform individual tasks or work Will workers perform individual tasks or work in teams?in teams?
Will they have supervisors or work in self-Will they have supervisors or work in self-managed work groups?managed work groups?
How many levels of management will be How many levels of management will be required?required?
Will extensive worker training be necessary?Will extensive worker training be necessary? Should workforce be cross-trained?Should workforce be cross-trained? What efforts will be made in terms of What efforts will be made in terms of
retention?retention?
Dr. Pavlos Panayi MBA650 2-24
Operations Strategy: Operations Strategy: QualityQuality
What is target level of quality for our What is target level of quality for our products and services?products and services?
How will it be measured? How will it be measured? How will employees be involved with How will employees be involved with
quality?quality? What will be the responsibilities of the What will be the responsibilities of the
quality department? quality department?
Dr. Pavlos Panayi MBA650 2-25
Operations Strategy: Operations Strategy: Quality (cont.)Quality (cont.)
What types of systems will be set up to What types of systems will be set up to ensure quality? ensure quality?
How will quality awareness be maintained?How will quality awareness be maintained? How will quality efforts be evaluated?How will quality efforts be evaluated? How will customer perceptions of quality be How will customer perceptions of quality be
determined? determined? How will decisions in other functional areas How will decisions in other functional areas
affect quality?affect quality?
Dr. Pavlos Panayi MBA650 2-26
Operations Strategy: Operations Strategy: SourcingSourcing
Vertical integrationVertical integration degree to which a firm produces parts that go degree to which a firm produces parts that go
into its productsinto its products Strategic DecisionsStrategic Decisions
How much of work should be done outside the How much of work should be done outside the firm? firm?
On what basis should particular items be On what basis should particular items be made in-house?made in-house?
When should items be outsourced?When should items be outsourced? How should suppliers be selected?How should suppliers be selected?
Dr. Pavlos Panayi MBA650 2-27
Operations Strategy: Operations Strategy: Sourcing (cont.)Sourcing (cont.)
What type of relationship should be What type of relationship should be maintained with suppliers?maintained with suppliers?
What is expected from suppliers?What is expected from suppliers? How many suppliers should be used?How many suppliers should be used? How can quality and dependability of How can quality and dependability of
suppliers be ensured?suppliers be ensured? How can suppliers be encouraged to How can suppliers be encouraged to
collaborate?collaborate?
Dr. Pavlos Panayi MBA650 2-28
Operations Strategy: Operations Strategy: Operating SystemsOperating Systems
How will operating systems execute strategic How will operating systems execute strategic decisions?decisions?
How to align information technology and How to align information technology and operations strategic goals?operations strategic goals?
How information technology supports both How information technology supports both customer and worker demands for rapid access, customer and worker demands for rapid access, storage, and retrieval of information?storage, and retrieval of information?
How information technology support decisions How information technology support decisions making process related to inventory levels, making process related to inventory levels, scheduling priorities, and reward systems?scheduling priorities, and reward systems?
Dr. Pavlos Panayi MBA650 2-29
Strategic PlanningStrategic Planning
Missionand VisionMission
and Vision
CorporateStrategy
CorporateStrategy
OperationsStrategy
OperationsStrategy
MarketingStrategy
MarketingStrategy
FinancialStrategyFinancialStrategy
Voice of theBusiness
Voice of theBusinessVoice of the
CustomerVoice of the
Customer
Dr. Pavlos Panayi MBA650 2-30
Policy DeploymentPolicy Deployment
Translating corporate strategy into measurable
objectives
Dr. Pavlos Panayi MBA650 2-31
Key Key Performance Performance IndicatorsIndicators
Source: Source: Robert Kaplan and DavidRobert Kaplan and DavidNorton, Norton, Strategy Maps:Strategy Maps:Converting IntangibleConverting IntangibleAssets into TangibleAssets into TangibleOutcomes Outcomes (Boston:(Boston:Harvard Business SchoolHarvard Business SchoolPress, 2004), Figure 3-2,Press, 2004), Figure 3-2,p. 67p. 67
Dr. Pavlos Panayi MBA650 2-32
Balanced ScorecardBalanced Scorecard
Radar ChartRadar Chart DashboardDashboard
Dr. Pavlos Panayi MBA650 2-33
Issues and Trends in Issues and Trends in OperationsOperations
Global markets, global sourcing, and Global markets, global sourcing, and global operationsglobal operations
Virtual companiesVirtual companies Greater choice, more individualismGreater choice, more individualism Emphasis on serviceEmphasis on service Speed and flexibilitySpeed and flexibility
Dr. Pavlos Panayi MBA650 2-34
Issues and Trends in Issues and Trends in Operations (cont.)Operations (cont.)
Supply chainsSupply chains Collaborative commerceCollaborative commerce Technological advancesTechnological advances Knowledge and ability to learnKnowledge and ability to learn Environmental and social Environmental and social
responsibilitiesresponsibilities
Dr. Pavlos Panayi MBA650 2-35
Characteristic20th-CenturyCorporation
21st-CenturyCorporation
Changing CorporationChanging Corporation
OrganizationOrganization
FocusFocus
StyleStyle
Source of strengthSource of strength
StructureStructure
ResourcesResources
PyramidPyramid InternalInternal StructuresStructures StabilityStability Self-sufficiencySelf-sufficiency Physical assetsPhysical assets
WebWeb ExternalExternal FlexibleFlexible ChangeChange InterdependenciesInterdependencies InformationInformation
Source: Source: Reprinted from John Byrne, “Management by Web,” Reprinted from John Byrne, “Management by Web,” Business Week Business Week (August 28, 2000), p. 87 (August 28, 2000), p. 87 by special permission, copyright 2000 by The McGraw-Hill Companies, Inc.by special permission, copyright 2000 by The McGraw-Hill Companies, Inc.
Dr. Pavlos Panayi MBA650 2-36
Characteristic20th-CenturyCorporation
21st-CenturyCorporation
Changing Corporation Changing Corporation (cont.)(cont.)
OperationsOperations
ProductsProducts
ReachReach
FinancialsFinancials
InventoriesInventories
StrategyStrategy
Vertical integrationVertical integration Mass productionMass production DomesticDomestic QuarterlyQuarterly MonthsMonths Top-downTop-down
Virtual integrationVirtual integration Mass customizationMass customization GlobalGlobal Real-timeReal-time HoursHours Bottom-upBottom-up
Source: Source: Reprinted from John Byrne, “Management by Web,” Reprinted from John Byrne, “Management by Web,” Business Week Business Week (August 28, 2000), p. 87 (August 28, 2000), p. 87 by special permission, copyright 2000 by The McGraw-Hill Companies, Inc.by special permission, copyright 2000 by The McGraw-Hill Companies, Inc.
Dr. Pavlos Panayi MBA650 2-37
Characteristic20th-CenturyCorporation
21st-CenturyCorporation
Changing Corporation Changing Corporation (cont.)(cont.)
LeadershipLeadership
WorkersWorkers
Job expectationsJob expectations
MotivationMotivation
ImprovementsImprovements
QualityQuality
InspirationalInspirational Employees, free agentsEmployees, free agents Personal growthPersonal growth To buildTo build RevolutionaryRevolutionary No compromiseNo compromise
Source: Source: Reprinted from John Byrne, “Management by Web,” Reprinted from John Byrne, “Management by Web,” Business Week Business Week (August 28, 2000), p. 87 (August 28, 2000), p. 87 by special permission, copyright 2000 by The McGraw-Hill Companies, Inc.by special permission, copyright 2000 by The McGraw-Hill Companies, Inc.
DogmaticDogmatic EmployeesEmployees SecuritySecurity To competeTo compete IncrementalIncremental Affordable bestAffordable best
Dr. Pavlos Panayi MBA650 2-38
Copyright 2006 John Wiley & Sons, Inc.All rights reserved. Reproduction or translation of this work beyond that permitted in section 117 of the 1976 United States Copyright Act without express permission of the copyright owner is unlawful. Request for further information should be addressed to the Permission Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages caused by the use of these programs or from the use of the information herein.
Dr. Pavlos Panayi MBA650 2-39