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Chapter 2 Powerpoint

  1. 1. Chapter 2 - Operations Strategy and Competitiveness Operations Management by R. Dan Reid & Nada R. Sanders 3rd Edition © Wiley 2007 PowerPoint Presentation by R.B. Clough – UNH M. E. Henrie - UAA © Wiley 2007
  2. 2. Learning Objectives <ul><li>Define the role of Business Strategy </li></ul><ul><li>Explain how a Business strategy is developed </li></ul><ul><li>Explain the role of Operations Strategy in the organization </li></ul><ul><li>Explain the relationship between business strategy and operations strategy </li></ul><ul><li>Describe how an operations strategy is developed </li></ul>© Wiley 2007
  3. 3. Learning Objectives <ul><li>Identify competitive priorities for of the operations function </li></ul><ul><li>Explain the strategic role of technology </li></ul><ul><li>Define productivity and identify productivity measures </li></ul><ul><li>Compute productivity measures </li></ul>© Wiley 2007
  4. 4. The Role of Operations Strategy <ul><li>Provide a plan that makes best use of resources which; </li></ul><ul><ul><li>Specifies the policies and plans for using organizational resources </li></ul></ul><ul><ul><li>Supports Business Strategy as shown on next slide </li></ul></ul>© Wiley 2007
  5. 5. Business/Functional Strategy © Wiley 2007
  6. 6. Background: Business Strategy © Wiley 2007
  7. 7. Importance of Operations Strategy <ul><li>Companies often do not understand the differences between operational efficiency and strategy </li></ul><ul><ul><li>Operational efficiency is performing tasks well, even better than competitors </li></ul></ul><ul><ul><li>Strategy is a plan for competing in the marketplace </li></ul></ul><ul><li>Operations strategy is to ensure all tasks performed are the right tasks </li></ul>© Wiley 2007
  8. 8. Developing a Business Strategy <ul><li>A business strategy is developed after taking into many factors and following some strategic decisions such as; </li></ul><ul><ul><li>What business is the company in (mission) </li></ul></ul><ul><ul><li>Analyzing and understanding the market (environmental scanning) </li></ul></ul><ul><ul><li>Identifying the companies strengths (core competencies) </li></ul></ul>© Wiley 2007
  9. 9. Three Inputs to a Business Strategy © Wiley 2007
  10. 10. Examples from Strategies <ul><li>Mission: Dell Computer- “to be the most successful computer company in the world” </li></ul><ul><li>Environmental Scanning: political trends, social trends, economic trends, market place trends, global trends </li></ul><ul><li>Core Competencies: strength of workers, modern facilities, market understanding, best technologies, financial know-how, logistics </li></ul>© Wiley 2007
  11. 11. Example: Nokia © Wiley 2007 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.
  12. 12. Developing an Operations Strategy <ul><li>Operations Strategy is a plan for the design and management of operations functions </li></ul><ul><li>Operation Strategy developed after the business strategy </li></ul><ul><li>Operations Strategy focuses on specific capabilities which give it a competitive edge – competitive priorities </li></ul>© Wiley 2007
  13. 13. Operations Strategy – Designing the Operations Function © Wiley 2007
  14. 14. Competitive Priorities- The Edge <ul><li>Four Important Operations Questions: Will you compete on – </li></ul><ul><li>Cost? </li></ul><ul><li> Quality? </li></ul><ul><li>Time? </li></ul><ul><li> Flexibility? </li></ul><ul><li>All of the above? Some? Tradeoffs? </li></ul>© Wiley 2007
  15. 15. Competing on Cost ? <ul><li>Offering product at a low price relative to competition </li></ul><ul><ul><li>Typically high volume products </li></ul></ul><ul><ul><li>Often limit product range & offer little customization </li></ul></ul><ul><ul><li>May invest in automation to reduce unit costs </li></ul></ul><ul><ul><li>Can use lower skill labor </li></ul></ul><ul><ul><li>Probably use product focused layouts </li></ul></ul><ul><ul><li>Low cost does not mean low quality </li></ul></ul>© Wiley 2007
  16. 16. Competing on Quality ? <ul><li>Quality is often subjective </li></ul><ul><li>Quality is defined differently depending on who is defining it </li></ul><ul><li>Two major quality dimensions include </li></ul><ul><ul><li>High performance design: </li></ul></ul><ul><ul><ul><li>Superior features, high durability, & excellent customer service </li></ul></ul></ul><ul><ul><li>Product & service consistency: </li></ul></ul><ul><ul><ul><li>Meets design specifications </li></ul></ul></ul><ul><ul><ul><li>Close tolerances </li></ul></ul></ul><ul><ul><ul><li>Error free delivery </li></ul></ul></ul><ul><li>Quality needs to address </li></ul><ul><ul><li>Product design quality – product/service meets requirements </li></ul></ul><ul><ul><li>Process quality – error free products </li></ul></ul>© Wiley 2007
  17. 17. Competing on Time ? <ul><li>Time/speed one of most important competition priorities </li></ul><ul><li>First that can deliver often wins the race </li></ul><ul><li>Time related issues involve </li></ul><ul><ul><li>Rapid delivery: </li></ul></ul><ul><ul><ul><li>Focused on shorter time between order placement and delivery </li></ul></ul></ul><ul><ul><li>On-time delivery: </li></ul></ul><ul><ul><ul><li>Deliver product exactly when needed every time </li></ul></ul></ul>© Wiley 2007
  18. 18. Competing on Flexibility ? <ul><li>Company environment changes rapidly </li></ul><ul><li>Company must accommodate change by being flexible </li></ul><ul><ul><li>Product flexibility: </li></ul></ul><ul><ul><ul><li>Easily switch production from one item to another </li></ul></ul></ul><ul><ul><ul><li>Easily customize product/service to meet specific requirements of a customer </li></ul></ul></ul><ul><ul><li>Volume flexibility: </li></ul></ul><ul><ul><ul><li>Ability to ramp production up and down to match market demands </li></ul></ul></ul>© Wiley 2007
  19. 19. The Need for Trade-offs <ul><li>Decisions must emphasis priorities that support business strategy </li></ul><ul><li>Decisions often required trade offs </li></ul><ul><li>Decisions must focus on order qualifiers and order winners </li></ul><ul><ul><li>Which priorities are “Order Qualifiers”? </li></ul></ul><ul><ul><li>e.g. Must have excellent quality since everyone expects it </li></ul></ul><ul><ul><li>Which priorities are “Order Winners”? </li></ul></ul><ul><ul><li>e.g. Southwest Airlines competes on cost </li></ul></ul><ul><ul><li>McDonald’s competes on consistency </li></ul></ul><ul><ul><li>FedEx competes on speed </li></ul></ul><ul><ul><li>Custom tailors compete on flexibility </li></ul></ul>© Wiley 2007
  20. 20. Competitive Priorities front & center <ul><li> </li></ul><ul><li> </li></ul><ul><li> </li></ul>© Wiley 2007
  21. 21. Translating to Production Requirements <ul><li>Specific Operation requirements include two general categories </li></ul><ul><ul><li>Structure – decisions related to the production process, such as characteristics of facilities used, selection of appropriate technology, and the flow of goods and services </li></ul></ul><ul><ul><li>Infrastructure – decisions related to planning and control systems of operations </li></ul></ul>© Wiley 2007
  22. 22. Translating to Production Requirements <ul><li>Dell Computer example – structure & infrastructure </li></ul><ul><ul><li>They focus on customer service, cost, and speed </li></ul></ul><ul><ul><li>ERP system developed to allow customers to order directly from Dell </li></ul></ul><ul><ul><li>Product design and assembly line allow a “make to order” strategy – lowers costs, increases turns </li></ul></ul><ul><ul><li>Suppliers ship components to a warehouse within 15 minutes of the assembly plant - VMI </li></ul></ul><ul><ul><li>Dell set up a shipping arrangement with UPS </li></ul></ul>© Wiley 2007
  23. 23. … but strategies must adapt to ever-changing markets! © Wiley 2007
  24. 24. Strategic Role of Technology <ul><li>Technology should support competitive priorities </li></ul><ul><li>Three Applications: product technology, process technology, and information technology </li></ul><ul><ul><li>Products - Teflon, CD’s, fiber optic cable </li></ul></ul><ul><ul><li>Processes – flexible automation, CAD </li></ul></ul><ul><ul><li>Information Technology – POS, EDI, ERP, B2B </li></ul></ul>© Wiley 2007
  25. 25. Technology for Competitive Advantage <ul><li>Technology has positive and negative potentials </li></ul><ul><ul><li>Positive </li></ul></ul><ul><ul><ul><li>Improve processes </li></ul></ul></ul><ul><ul><ul><li>Maintain up-to-date standards </li></ul></ul></ul><ul><ul><ul><li>Obtain competitive advantage </li></ul></ul></ul><ul><ul><li>Negative </li></ul></ul><ul><ul><ul><li>Costly </li></ul></ul></ul><ul><ul><ul><li>Risks such as overstating benefits </li></ul></ul></ul>© Wiley 2007
  26. 26. Technology for Competitive Advantage <ul><li>Technology should </li></ul><ul><ul><li>Support competitive priorities </li></ul></ul><ul><ul><li>Can require change to strategic plans </li></ul></ul><ul><ul><li>Can require change to operations strategy </li></ul></ul><ul><li>Technology is an important strategic decision </li></ul>© Wiley 2007
  27. 27. Measuring Productivity <ul><li>Productivity is a measure of how efficiently inputs are converted to outputs </li></ul><ul><li> Productivity = output/input </li></ul><ul><li>Total Productivity Measure, for example: </li></ul><ul><li>Total Productivity = $sales/inputs $ </li></ul><ul><li>Partial Productivity Measure; for example </li></ul><ul><li> Partial Productivity = cars/employee </li></ul><ul><li>Multifactor Productivity Measure; for example </li></ul><ul><li> Multi-factor Productivity = sales/total $costs </li></ul>© Wiley 2007
  28. 28. Total Productivity: example © Wiley 2007 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%
  29. 29. Partial Productivity: example © Wiley 2007 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
  30. 30. Multifactor Productivity: example © Wiley 2007 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
  31. 31. Interpreting Productivity Measures <ul><li>Productivity measures must be compared to something, i.e. another year, a different company </li></ul><ul><li>Raw productivity calculations do not tell the complete story unless there are no major structure differences. </li></ul><ul><li>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? </li></ul>© Wiley 2007
  32. 32. Interpreting Productivity Measures <ul><li>Other productivity measure questions; </li></ul><ul><ul><li>Is this partial productivity measurement enough to make an investment decision? </li></ul></ul><ul><ul><li>Is the Total Cost Productivity measure a better reflection of year to year productivity at 4.2% and 1.6%. Why? </li></ul></ul><ul><ul><li>Should you also look at productivity measures for the two major competitors for comparison? </li></ul></ul><ul><li>Productivity measure provides information on how the firm is doing relative to what is critical to the firm </li></ul>© Wiley 2007
  33. 33. Productivity, Competitiveness, and the Service Sector <ul><li>Productivity is a scorecard on effective resource use </li></ul><ul><ul><li>A nation’s Productivity effects its standard of living </li></ul></ul><ul><ul><li>US productivity growth averaged 2.8% from </li></ul></ul><ul><ul><li>1948-1973 </li></ul></ul><ul><ul><li>Productivity growth slowed for the next 25 years to 1.1% </li></ul></ul><ul><ul><li>Productivity growth in service industries has been less than in manufacturing </li></ul></ul>© Wiley 2007
  34. 34. Productivity and the Service Sector <ul><li>Measuring service sector productivity is a unique challenge </li></ul><ul><ul><li>Traditional measures focus on tangible outcomes </li></ul></ul><ul><ul><li>Service industries primarily produce intangible outcomes </li></ul></ul><ul><ul><li>Measuring intangibles is challenging </li></ul></ul>© Wiley 2007
  35. 35. Operations Strategy Across the Organization <ul><li>Business strategy defines long-term plan </li></ul><ul><li>Operations strategy support the business strategy </li></ul><ul><li>Marketing strategy needs to fully understand operations capability </li></ul><ul><li>Financial plans in effect support operations activities. </li></ul>© Wiley 2007
  36. 36. Chapter 2 Highlights <ul><li>Business Strategy is a long range plan and vision. Each individual business function develop needs to support the business strategy </li></ul><ul><li>An organization develops its business strategy by doing environmental scanning and considering its mission and its core competencies. </li></ul><ul><li>The role of operations strategy is to provide a long-range plan for the use of the company’s resources in producing the company’s primary goods and services. </li></ul><ul><li>The role of business strategy is to serve as an overall guide for the development of the organization’s operations strategy. </li></ul>© Wiley 2007
  37. 37. Chapter 2 Highlights <ul><li>The operations strategy focuses on developing specific capabilities called competitive priorities. </li></ul><ul><li>There are four categories of competitive priorities: cost, quality, time, and flexibility </li></ul><ul><li>Technology can be sued by companies to gain a competitive advantage and should be acquired to support the company’s chosen competitive priorities </li></ul><ul><li>Productivity is a measure that indicates how efficiently an organization is using its resources </li></ul><ul><li>Productivity is computed as the ratio or organizational outputs divided by inputs </li></ul>© Wiley 2007
  38. 38. Example: Detroit Edison © Wiley 2007 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.
  39. 39. Example: Nestle © Wiley 2007 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.