An Overview of Operations Strategy

Operations Management

Basic Definition of OM
The effective management of valueadding transformation processes to efficiently integrate resources and achieve specified performance measures towards product/service, technology, and market goals.

Definition Expansion

Effective: doing the job right and maximizing impact; Efficient: getting the job done right with minimum waste; Value-adding transformation processes: converting inputs to outputs valued by the customer;

Definition Expansion Contd.

Integrate resources: selection and allocation of resources to enhance service value; Achieve performance targets: achievement of standards for time, cost quality, delivery, and flexibility; Goals: the contribution to the goals of the organization stated in product/service, technology, and market terms.

Planning Levels in OM

Strategic (Long-term)

How will we make the product? Where will facilities be located? What is the maximum capacity? How many workers do we need? When do we need them? What is our production and inventory policy over the medium term? What jobs do we work on today? How are jobs scheduled and allocated?

Tactical (Medium-term)

Operational (Short-term)

Basic Structure of Operations

Outputs Transformation

Inputs

Feedback

Factors Impacting OM

Corporate strategy Globalization/Competition Technological advances Customer/Supplier Intimacy Human capacity Political & economic climate

What is Strategy

The current domain of resource commitments to transformation processes and planned improvements, as a means to achieve the distinctive competence and goals of the firm.

Operations Strategy

OM strategy is concerned with the longterm configuration of an organizations productive resources to bring about synergy with between operations and corporate goals and objectives. As such the OM strategy must be aligned to the business and corporate strategy of the organization.

Porters Generic Value Chain

What is Strategy? M. Porter

Strategy is the creation of a unique and valuable position involving a different set of activities Strategy requires that you make tradeoffs in competing-choose what not to do Strategy involves creating fit among a companys activities

What is Strategy? M. Porter

Operational effectiveness is not strategy. It is necessary but not sufficient At general managements core is strategy: defining a companys position, making trade-offs, and forging fit among activities

Manufacturing Missing Link (W. Skinner)

Manufacturing can be a competitive weapon or millstone Manufacturing is often isolated from the corporate strategy table There is a mismatch between competitive strategy and the organization of manufacturing The sense of technical inadequacy on the part of top executives alienates manufacturing There is a lack of awareness that manufacturing involves trade-offs

Strategic Implications
Demand

Market 1 Decentralized finished goods Readily available product Rock-bottom costs Large lots Specialized facilities Low-medium skilled workers Concentration of manufacturing

Market 2 Many models Make to order Very high quality Quick response (small lots) Focus on reducing lead times Highly-skilled workers General purpose equipment

Manufacturing Missing Link (W. Skinner)

Trade-offs exists in several manufacturing dimensions

Plant and equipment Production planning and control Labor and staffing Product design/engineering Organization and management Supply chain management Quality and service

Manufacturing policy must be driven by corporate strategy through a systematic process

10 Decision Areas of OM

Goods & service design Quality Process & capacity design Location selection Layout design Human resource and job design Supply-chain management Inventory Scheduling Maintenance

Key Learning Points From Skinner

There is an implicit or explicit operations strategy in all organizations The operations strategy defines the deliberate organization of operations resources in support of corporate strategy There is a divide between corporate and manufacturing It is critical that corporate strategy formulation takes into consideration the operations system The operations strategy involves trade-offs on several dimensions A mismatch between the OS and corporate strategy can lead to failure

Operations-Based Strategy (Hayes and Upton)

Operations can provide companies with the means of competitive attack and competitive defense

Australian Paper Manufacturers sought to make smooth paper better than is competitor (Australian Pulp and paper Mills) Crown competed on design innovation and flexibility in design make forklift trucks look attractive Southwest competed on cost and reliability WalMart competed on cost from leveraging supply-chain efficiency through technology

Operations-Based Strategy (Hayes and Upton)

Operations can be used in the following ways:

Positioning: Appealing to a different need (WalMart, Southwest, CanJet, Crown Equipment) Capabilities: Being better at the same game (Taco Bell vs. McDonalds, Wal-Marts use of IT)

Process-based capabilities Systems-based capabilities (Cost accounting, knowledge management) Organization-based capabilities (setting up new plants, design and introduction of new products)

Operations-Based Strategy (Hayes and Upton)

Operations-based advantages are difficult to replicate - they require major change efforts and realignment of systems and processes There is a need for trade-offs and operations-based innovations can alter trade-offs (e.g. JIT and setup time reduction) Operations-based strategies are dynamic and emergent in character - (they evolve through experimentation and learning)

Operations-Based Strategy (Hayes and Upton)

Operations can be used to develop defensive strategies

Exploit ones strengths (American Connect marketed customized products while reducing costs) Attack a competitors operating-based weakness (a competitor requiring high volume sales to achieve economies of scale can have these products attracted away from them) Emulate the attackers strategy before its get too far ahead on the learning curve

Operations-Based Strategy (Hayes and Upton)

Some summative comments Operations-based capabilities cannot be developed quickly and cant be bought off-the-shelf The fact that OBCs take long to develop and can come together quite suddenly provides advantage Effective attackers are quick to recognize operating weaknesses Effective defenders are quick to recognize latent threats A critical success factor is the ability to learn and be creative (awareness, analysis, and action) While it may be good to emulate best practice, best practices can be constraining - new practices should be sought

Manufacturing Strategic Planning (Garvin)

A Model of Manufacturing Strategy Corporate Strategy Business Strategy Manufacturing Strategy Manufacturing Policies Capacity Infrastructure Quality Facilities Technology

Evaluation & Feedback

Structure

Production

Human Resources

Current Model of Mfg. Strategy

Current Model of Mfg. Strategy

Manufacturing Strategic Planning (Garvin)

Shortcomings of Skinners model

There is insufficient detail to guide the best allocation of resources Manufacturing improvements are not always carried down to the lowest level of the organization The process is fairly static. There is little incentive to improve once the policies are defined (but they are rarely defined correctly to begin with) The four strategic priorities are very aggregated and have multiple possible interpretations

Manufacturing Strategic Planning (Garvin)

Recommendations

Introduce Strategic Manufacturing Initiatives (SMIs)

SMIs drive improvement and they are inherently dynamic SMIs are targeted and ranked from a broad possible array of initiatives They help to link policies to strategic priorities (much the same way that a strategy is the link between an objective and a goal) They are the locus of activity for driving continuous improvement

Expanded Strategy Process

Disaggregation of competitive priorities (see Table 1.) (cost, quality, delivery, flexibility, service) Decomposition identifying cause and effect relationships Translation identify dominant causal elements Evaluation (criteria: leverage, capabilities, implementation) Final selection

Steps for Developing a Manufacturing Strategy

Establish the corporate strategy Establish the business units strategy (competitive strategy, products, services, markets, etc.) Identify strategic priorities (cost, quality, flexibility, delivery, service) Disaggregate strategic priorities; e.g.

Cost

Initial cost Operating cost Maintenance cost

Steps for Developing a Manufacturing Strategy

Perform a cause and effect analysis to identify the strategic drivers for each priority Conduct a performance analysis using a fishbone diagram to identify weaknesses Generate strategic manufacturing initiatives (SMIs) (actions for solving problems) Evaluate and prioritize SMIs. Enhance or acquire the necessary capabilities to support SMIs technology, HR, management talent, culture, organizational structure, etc. Implement SMIs. Perform a force field analysis for each SMI to identify forces that will negatively impact implementation Develop a schedule that is feasible and synergetic

Manufacturing Strategy Formation (D. Barnes)

Critiques Skinners model as being top-down Operations strategy exist between operations management and corporate strategy In examining operations strategy, we need to look at context, content, and process. Hence Skinners framework can be enhanced by adding new dimensions

Manufacturing Strategy Formation (D. Barnes)

Business Strategy Content External Forces Manufacturing Strategy Content Internal Context External Context Ownership Forces

Manufacturing Strategy Formation (D. Barnes)

Business strategy content

Direction and scope of the organizations activities Realized manufacturing decisions & policies (structural and infrastructural) Factors that affect business and manufacturing strategy (customers, markets, competitors, etc.) Attitudes of owners on business strategy (financial goals, corporate citizenry)

Manufacturing strategy content

External factors

Ownership factors

Manufacturing Strategy Formation (D. Barnes)

Internal context

The firms resources, capabilities, culture, politics, leadership, managerial competence, etc. Political, economic, social, technological forces in the wider business environment

External context

Manufacturing Strategy Formation (D. Barnes)

Classification of OM strategy formation Deliberate: derived from a previously determined and clearly articulated set of actions. Follows a logical sequential process. Emergent: Realized in an evolutionary but purposeful manner. Uses an iterative and adaptive process involving trial and error. Cultural: Realization of strategy influenced by the cultural aspect of the organization; its history, values and beliefs, and assumptions of its members. Political: realized through a political process of bargaining and negotiation based on power structures in the organization. Command: Realized by the control of a powerful individual.

Manufacturing Strategy Formation (D. Barnes)

Research findings showed that deliberate and emergent strategy formation were quite prevalent

Strategy and Issues During a Products Life

Best period to increase market share

Introduction

Practical to change price or quality image Strengthen niche Drive-thru restaurants CDROM

Growth

Maturity
Poor time to change image, price, or quality Competitive costs become critical Defend market Fax position machines

Decline
Cost control critical

Company Strategy/Issues

R&D product engineering critical

Sales
Color copiers HDTV Product design and development critical

Internet

3 1/2 Floppy disks Station wagons

Forecasting critical Product and process reliability Competitive product improvements and options Increase capacity Shift toward product focused Enhance distribution

Standardization Less rapid product changes - more minor changes Optimum capacity Increasing stability of process Long production runs Product improvement and cost cutting

Little product differentiation Cost minimization Overcapacity in the industry Prune line to eliminate items not returning good margin Reduce capacity

OM Strategy/Issue s

Frequent product and process design changes Short production runs High production costs Limited models Attention to quality

Strategy & Issues During Product Life

Introduction

Company Strategy & Issues

Best period to increase market share R&D engineering are critical Product design and development are critical Frequent product and process design changes Over-capacity Short production runs High skilled-labor content High production costs Limited number of models Utmost attention to quality Quick elimination of market-revealed design defects

OM Strategy & Issues

Strategy & Issues During Product Life

Growth
Company Strategy & Issues OM Strategy & Issues
Practical to change prices or quality image Marketing is critical Strengthen niche Forecasting is critical Product and process reliability Competitive product improvements and options Shift toward product oriented Enhance distribution

Strategy & Issues During Product Life

Maturity
Company Strategy & Issues
Poor time to increase market share Competitive costs become critical Poor time to change price, image, or quality Defend position via fresh promotional and distribution approaches Standardization Less rapid product changes and more minor annual model changes Optimum capacity Increasing stability of manufacturing process Lower labor skills Long production runs Attention to product improvement and cost cutting Re-examination of necessity of design compromises

OM Strategy & Issues

Strategy & Issues During Product Life

Decline
Company Strategy & Issues OM Strategy & Issues
Cost control critical to market share

Little product differentiation Cost minimization Overcapacity in the industry Prune line to eliminate items not returning Good margin Reduce capacity

Strategic Service Vision

Operating Strategy

What are important elements of the strategy: operations, financing, marketing, organization, human resources, control? On which will the most effort be concentrated? Where will investments be made? How will quality and cost be controlled: measures, incentives, rewards? What results will be expected versus competition in terms of, quality of service, cost profile, productivity, morale/loyalty of servers?

Summary of Operations Strategy Formulation

Identify market segments Establish the firms Value Proposition for each market segment Identify External Performance Objectives

Order winners Order qualifiers

Assess current performance Perform a SWOT analysis on the Operations value chain and Identify Internal Performance Objectives Establish Operations policies/strategies to achieve internal and external performance objectives Develop an improvement plan and implement it Monitor, review, and update the plan

Value Proposition
Value = Product/Service Attributes + Imag e + Relationships

Functionality Quality

Price

Time

External Performance Objectives

The needs of customers (critical success factors) that the firm must satisfy Order Winning Criteria: Factors that directly contribute to gaining more business and which are regarded by the customer as key to competitiveness Order Qualifying Criteria: Factors which the firm must have in place before a customer will even consider doing business with the firm.

Service Purchase Decision

Service Qualifier: To be taken seriously a certain level must be attained on the competitive dimension, as defined by other market players. Examples are cleanliness for a fast food restaurant or safe aircraft for an airline. Service Winner: The competitive dimension used to make the final choice among competitors. Example is price.

Service Purchase Decision (cont.)

Service Loser: Failure to deliver at or above the expected level for a competitive dimension. Examples are failure to repair auto (dependability), rude treatment (personalization) or late delivery of package (speed).

Identifying Criteria

Order Winners
1.

2.

3.

Provide a critical advantage with customers the main factor driving competitiveness Provide an important advantage with most customers factor always considered Provide a useful advantage with most customers factor usually considered

Identifying Criteria

Order Qualifiers
4.

5.

6.

Need to be at least up to good industry standard Need to be around the median industry standard Need to be within a close range of the industry

Identifying Criteria

Less Important Criteria

7.

8.

9.

Not usually considered, but could become important in the future Very rarely considered by the customer Never considered and not likely to be considered

Judging Performance
1. 2.

3.

4. 5. 6.

7. 8. 9.

Consistently and clearly better than our nearest competitor Consistently and considerably better than our nearest competitor Often marginally better than our nearest competitor Often marginally better than most competitors About the same as most competitors Often within striking distance of the main competitors Usually marginally worse than main competitors Usually worse than most competitors Consistently worse than most competitors

Source: A.T. Joseph (1999) Formulation of Manufacturing Strategy, AMT, vol. 15, 522-535

External Performance Objectives: Competitive Priorities

Quality: Make things right Delivery

Speed: Make things fast Dependability: Make things on time Flexibility: Have the ability to change what is made and how much of what is made

Cost: Make things cheap Service and After-sales Support: Make it easy to use the product Innovation: Make new things timely

Competitive Priorities for Service

Availability (24 hour ATM) Convenience (Site location) Dependability (On-time performance) Personalization (Know customers name) Price (Quality surrogate) Quality (Perceptions important) Reputation (Word-of-mouth) Safety (Customer well-being) Speed (Avoid excessive waiting)

Dimensions of COST

Initial cost - cost or price of purchasing a product Operating cost - cost of using a product over its life time Maintenance cost the cost of maintaining a product over its lifetime

Dimensions of Quality

Performance: Primary operating characteristics (picture, sound, etc.) Features: The secondary characteristics of a product or service Reliability: The probability that a product will fail within a specified time period Conformance: The degree to which the product or service meets pre-established standards Durability: The amount of use a product can sustain before deterioration or until repair is no longer economical

Dimensions of Quality

Serviceability: The speed, courtesy, and competence of repair Aesthetics: The look, feel, taste, smell, and sound of a product or service Perceived Quality: The impact of brand name, company image and advertising

Dimensions of Delivery

Accuracy: Whether the correct items were shipped Completeness: Whether shipments were filled completely Dependability: Whether product was delivered by the agreed to date Availability: Likelihood an item is available when needed Speed: The elapsed time between order and delivery

Dimensions of Delivery

Information Accessibility: The degree to which real-time information is available on a shipment Quality: The condition of the product after shipment Ease of Ordering: How easy it is to place an order Ordering Flexibility: Whether there are limits on variety and volume of the product that can be ordered Shipment Flexibility: The ability to reroute orders in order to accommodate a special circumstance Ease of Return: The willingness to absorb the cost of returning an item

Dimensions of Flexibility

Volume Flexibility

Uncertain forecasts: The ability to respond to sudden changes in product demand due to market forces Ramp-ups: speed with which the production system can be scaled Mix flexibility: The ability to manufacture a variety of products Change-over flexibility: The ability to adjust smoothly to changes in product mix

Process Flexibility

Dimensions of Flexibility

Process Flexibility

Rerouting flexibility: The degree to which the sequence of operations can be modified Material flexibility: The ability to accommodate variations in raw material and raw material substitutions. Sequencing flexibility: The ability to rearrange the order in which parts are fed into the Operations process

Dimensions of Product Innovation

New Products: The speed with which new products can be created, designed, manufactured, and introduced to the market Customization: The ability to design a product to the particular needs of a customer Modifications: The ability to modify existing products for special needs

Dimensions of Service

Customer Support: The ability to provide customers with quick responses to the concerns. Sales support: The ability to enhance sales and marketing by showcasing the product in action Problem Solving: The ability to assist both internal and external customers in problem solving Information: The ability to furnish critical data on product performance, process parameters, costs to internal groups, etc.

External Performance Objectives For South West Airlines

Order Winning Criteria:

Low cost Reliability Dependability Safety Service

Order Qualifying Criteria:

The companys value chain must be designed to support its competitive priorities!

Generic Value Chain

Inbound OutboundMarketing/ Operations Logistics Logistics Sales Service

Receiving Transform inputs Warehousing Channel selection Support Warehousing Design, develop Order-processing Advertising After-sales Inventory control Make product Shipping Pricing service

10 Decision Areas of OM

Goods & service design Quality Process & capacity design Location selection Layout design Human resource and job design Supply-chain management Inventory Scheduling Maintenance

Operations Value Chain (Infrastructure)

Plant and Equipment

Span of the process Plant size/capacity Plant location Choice of equipment Kind of tooling Investment in facilities, equipment, and research Level of automation Specialization (focus)

Operations Infrastructure

Production Planning and Control

Production quantities/batch sizes Job-machine assignment Inventory levels Inventory control Skill level Wage policies Training Supervision

Human Resources

Operations Infrastructure

Product Design/Engineering

Number of products Design stability Risk tolerance Structure (centralized vs. decentralized) Management competence Organizational culture Use of teams Control/rewards systems

Organization and Management

Operations Infrastructure

Quality

Methods Measurement Monitoring Number of suppliers Relationship with suppliers (investment) Level of integration of information systems

Sourcing

Operations Infrastructure

Vertical Integration

Direction Extent Number of suppliers Relationship with suppliers (investment) Level of integration of information systems

Sourcing

Service Design Elements

Structural:
Delivery system (front & back office) Facility design (aesthetics, layout) Location (competition, site characteristics) Capacity planning (number of servers)

Managerial
Service encounter (culture, empowerment) Quality (measurement, guarantee) Managing capacity and demand (queues) Information (data collection, resource)

Internal Performance Objectives

Internal objectives refers to the performance objectives for internal units which will drive the achievement of external objectives Internal objectives are derived by examining the choices available in each area of the value chain and identifying appropriate objectives that will support the external objectives (A SWOT analysis can be very useful in identifying internal objectives)