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Chapter 2 - Operations Strategy and Competitiveness

Operations Managementby

R. Dan Reid & Nada R. Sanders3rd Edition © Wiley 2007

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Learning Objectives Define the role of Business Strategy Explain how a Business strategy is developed Explain the role of Operations Strategy Explain the relationship between Business and

Operations strategy Describe how an Operations strategy is developed Identify competitive priorities for Operations

function Explain the strategic role of technology Define and compute productivity measures

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The Role of Business Strategy

Provides a plan (business strategy) making the best use of resources that: Defines the long-range plan to compete in

the marketplace Helps to differentiate the firm from

competitors Provides a game plan upon which

functional strategies are developed Focuses on doing the “right tasks”

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Business/Functional Strategy

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Service-enhancedProduct or

Delivered Service

Policy

Satisfied Customer

Corporate Strategy

Focus: Survival

Business StrategyFocus: Distinctive Competence

Cost LeadershipProduct Differentiation

Focus (cost or differentiation)

Operations Strategy

Focus: Competitive PrioritiesCost Flexibility Quality Delivery

ImplementationCapability Building

ResourcesProcess Product

Structure Infrastructure

Other FunctionalStrategies

MarketingFinanceHuman ResourcesEngineeringInformation Systems

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Three Inputs to a Business Strategy

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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 products/services at a low price relative to

competitors. 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 should not mean low quality

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Competing on Quality? Quality is sometimes subjective Quality may be defined differently by

customers versus employees Quality dimensions:

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

service Product & service consistency:

Meets design specifications Close tolerances Error free delivery

Quality issues to address: Product design quality – products/services must meet

requirements Process quality will produce error-free products/services

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Competing on Time? Time is one of the most important competitive priorities

Being first-to-deliver often wins the race

Time –related issues:

Fast delivery:

Focused on shorter time between order placement and

delivery

On-time delivery:

Deliver product exactly when needed every time

Rapid development speed

Using concurrent processes to shorten product development

time

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Competing on Flexibility? The company’s environment often changes

rapidly Flexibility is needed to accommodate these

changes 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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Are There Priority Tradeoffs?

Emphasize priorities that support the business strategy, which may require “trade-offs”

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. Dell competes on all four priorities Southwest Airlines competes on cost McDonald’s competes on consistency FedEx competes on speed Custom tailors compete on flexibility Can you have both high quality and low cost? e.g. Yes, Coke and Pepsi are good examples Can you offer design flexibility and short delivery? e.g. Yes, modular housing manufacturers do it

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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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Strategic Role of Technology

Technology should support competitive

priorities

Three Applications: New 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 Risks such as overstating benefits

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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Productivity: DefinitionProductivity is the relationship between the Outputs generated from a system and the Inputs that are used to create those outputs. Mathematically

P OI

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Productivity Improvement

OIOIOIOIOI

Productivity Improvement (PI) is the result of Productivity Improvement (PI) is the result of managing and intervening in key managing and intervening in key transformation or work processes. transformation or work processes.

PI will occur if:PI will occur if:

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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 = $sales/inputs

$

Partial Productivity Measure Partial Productivity = cars/employee

Multifactor Productivity Measure Multi-factor Productivity = sales/total $costs

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Measuring Productivity Static Measures: P=O/I in a given period of

time (t). Useful for cross-sectional (benchmarking?) purposes.

Dynamic measures:t(1)=O(1)/I(1); t(2)=O(2)/I(2);then t(2)/t(1) yields a dimensionless index that reflects change in productivity between periods and ((t(2)-t(1))/t(1))*100 yields the percentage change between periods.

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Measuring Productivity (cont..)

Partial-Factor: Uses a single “I” factor; e.g., output/labor-hour, sales/employee.

Multi-Factor: Uses more than one “I” factor; e.g. output/direct costs (labor, materials, and overhead).

Total-Factor: Uses all “I” factors.(Note: Total-Factor captures “trade-offs”

between input factors.).

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Interpreting Productivity Measures

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

In the prior automobile business example, it is obvious that some major changes were taking place to yield 15.8% and 13.7% year-to-year cars/employee productivity improvements. What changes could improve car sales per employee? Automation? Out sourcing? Major re-design?

Is this partial productivity measurement enough to make an investment decision?

Is the Total Cost Productivity measure a better reflection of year to year productivity at 4.2% and 1.6%. Why?

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

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Productivity Growth Rate Can be used to compare a process’

productivity at a given time (P2) to the same process’ productivity at an earlier time (P1)

1

12

P

PPRateGrowth

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Productivity Growth RateExample:

Last week a company produced 150 units using 200 hours of labor

This week, the same company produced 180 units using 250 hours of labor

rategrowthnegativeaor

P

PPRateGrowth

hourunitshours

unitsP

hourunitshours

unitsP

%4

04.075.0

75.072.0

/72.0250

1802

/75.0200

150

1

12

1

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EFFECTIVENESS Measures what the system sets out to

accomplish (objective) with what was actually accomplished; budget vs. actual

Hence, effectiveness is an output measure. (Did the system output the “right” things--right quality, right quantity, on time, etc.)

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EFFICIENCY Measures the resources expected to

be consumed to the resources actually consumed.

Hence, it focuses on the input side of the system. (To what degree did the system utilize the “right” things.)

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Productivity, Competitiveness, and the Service Sector

A nation’s Productivity effects its standard of living

Productivity is a measure of how effectively resources are used

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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Competing on Productivity At the national level, growing

productivity leads to a higher standard of living holds inflation in check enhances international competitiveness.

The annual growth in GDP is due to growth in productivity growth in inflation

(Macroeconomic Theory)

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Productivity Portfolios Investments in facilities and

equipment Investments in programs and systems Investments in people.

(Note: these alternatives are not mutually exclusive; however, most organizations tend to choose one as their dominant orientation.)

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Chapter 2 Highlights Business Strategy is a

long range plan. Functions develop supporting plans

Strategy must address mission, environment, and core competencies

Business strategy provides a guide for designing operations strategy

Operations strategy must consider which competitive priorities are essential to meet business objectives

Competitive priorities are cost, quality, time, and flexibility

Companies must consider which product, process, and information technologies to use

Productivity measures how effectively a firm is using resources

Productivity is computed as a ratio of outputs divided by inputs

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Chapter 2 Homework Hints6. Output (minus defects); use per day

data; determine P1 and P2, then % change.

7. Output (minus defects); use per month data.a. Determine P1 and P2.b. Determine % change

8. a. Cost to patient=>revenue (output).b. Output = # patients; input = time