Operation management 4th reil sanders wiley chapter 2

© Wiley 2010 11Operations Strategy – Designing the Operations Function... © Wiley 2010 17The Need for Trade-offs  Decisions must emphasis priorities that support business strategy  De

The Role of Operations

Business/Functional Strategy

© Wiley 2010

Background: Business Strategy

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

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

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Importance of Operations

Strategy

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

tasks performed are the right tasks

Developing a Business

Strategy

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

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: Nokia

Nokia 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

Developing an Operations

Strategy

design and management of operations functions

business strategy

capabilities which give it a competitive

edge – competitive priorities

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Operations Strategy – Designing the Operations Function

Competitive Priorities- The Edge

Will you compete on –

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 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

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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 Time/speed one of most important

competition priorities

 First that can deliver often wins the race

 Time related issues involve

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

Competitive Priorities front & center

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Translating to Production Requirements

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

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

Technology for Competitive

 Negative

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Technology for Competitive

Advantage

 Support competitive priorities

 Can require change to strategic plans

 Can require change to operations strategy

decision

Measuring Productivity

converted to outputs

Productivity = output/input

Total Productivity = (total output)/(total of all inputs)

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

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

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Total Productivity: example

Bluegill 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%

Partial Productivity: example

Bluegill 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: example

Bluegill 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

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

Productivity, Competitiveness, and

the Service Sector

 Productivity growth slowed

for the next 25 years to

1.1%

 Productivity growth in

service industries has been

less than in manufacturing

Operations Strategy Across

understand operations capability

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

Review of Learning Objectives

operations function

productivity measures

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Chapter 2 Highlights

individual business function develop needs to support

the business strategy

environmental scanning and considering its mission and

its core competencies.

long-range plan for the use of the company’s resources in

producing the company’s primary goods and services.

guide for the development of the organization’s

operations strategy.

 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 Edison

DTE'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

Example: Nestle

Brabeck'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