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  • Bozarth & Handfield, Chapter 2 (3/26/02) Chapter 2 Outline: Operations and Supply Chain Strategies Dell Computer Corporation Introduction Elements of the Business Strategy Strategic Planning Mission statement Business strategy Targeted customers Sustainable competitive advantage Core competencies The role of supply chain partners in the business strategy Operations and Supply Chain Strategies Customer value Five performance dimensions Trade-offs among performance dimensions Order winners and qualifiers Alignment of operations, supply chain, and business strategis Core competencies in operations and supply chains Chapter Summary Discussion Questions Exercises Chapter 2 1
  • Bozarth & Handfield, Chapter 2 (3/26/02) Operations and Supply Chain Strategies Dell Computer Corporation Sure, operations and supply chains are important, but can firms gain their main competitive advantage through superior performance in these areas? Charles Fine of MIT certainly thinks so. Take the case of Dell Computer Corporation1: Dell Computer has no propriety technology propelling it to such stratospheric growth and profitability. In fact, nearly all the components going into Dell's computers are available off-the-shelf. Yet Dell has succeeded by timing its purchasing, production, and distribution activities so well that the company holds no finished goods inventory and minimal inventory of parts, yet is still able to assemble and ship orders in less than 24 hours . . . [Dell's] primary advantage is its preeminent supply chain design, augmented with precise supply chain management. Dell’s operations strategy is based on a build-to-order production system. This means that Dell only assembles computers once they have actual customer orders. Yet Dell is still able to maintain five to six day lead times to its customers. On the supply chain side, Dell buys only the latest technology components, and then just a few days or even hours worth at a time. Not only does this minimize their inventory holding costs, it reduces Dell’s exposure to potentially obsolete parts inventories. (Imagine the poor computer manufacturer who has 100 days worth of a particular computer chip when the 1 The Primacy of Chains, Supply Chain Management Review, Spring, 1999, pp. 79-91. 2
  • Bozarth & Handfield, Chapter 2 (3/26/02) latest version comes out!) Dell also taps into the supply chain to outsource its after-sales service as well as delivery of computers2. Dell is one in a long line of organizations that has succeeded by implementing superior operations and supply chain strategies. Of course, there is no assurance that these strategies will always work for Dell. After all, IBM, Apple, and Compaq Computers were all considered “leaders” in the PC industry at one time or another. But in the PC world, Dell Computers is on top – at least for now. Introduction Discussing operations or supply chain management without someone mentioning the word “strategy” is almost impossible. But what does that term really mean? What constitutes an operations or supply chain strategy, and how does it support a firm’s overall efforts? In this chapter, we will start by introducing some key concepts in business strategy. We will describe how businesses actually create strategies, and then position operations and supply chain strategy within that larger process. The second half of the chapter is devoted exclusively to operations and supply chain strategy. We will discuss the three main objectives of operations and supply chain strategy, and consider some of the decisions managers face in developing and implementing their strategies. Throughout this discussion we will stress the key role operations and supply chains play in creating value for the customer Elements of the Business 2“The power of virtual integration: An interview with Dell Computer’s Michael Dell”< Joan Magretta, Harvard Business Review, March-April, 1998, pp. 73-84. 3
  • Bozarth & Handfield, Chapter 2 (3/26/02) Before we jump into our main discussion, let’s take a moment to consider the business elements that make up the typical organization. These elements include business processes, resources, information systems, and policies and procedures. Business processes address the question of how work is organized and managed across the organization. Operations and supply chain activities account for just a fraction of these business processes. Others include selling, financing, and hiring and training, just to name a few. Resources can include people, capital (buildings, equipment, or cash), intellectual property (patents and copyrights), and even intangible “know-how” needed to make the processes work. As you might suspect, many such resources are found in abundance in the operations and supply chain areas. Information systems provide the data that are needed to plan, control and coordinate organizational processes, both within the firm and between the firm and its supply chain partners. Imagine the information systems a large retailer must put in place just to assure that goods will get from suppliers to the stores. Finally, policies and procedures are the rules and steps organizations follow in executing their business processes. These policies and procedures ensure that the firm’s actions will take place as smoothly and consistently as possible. To make these ideas more concrete, think about the business elements at a typical university. There are literally hundreds of business processes in a university that cover everything from feeding and housing students, assigning parking spaces, building and maintaining facilities, to performing basic research. (Oh yeah, universities also do some teaching as well.) The university’s resources include professors and support personnel, classroom buildings, laboratories, and dormitories, as well as any patents and copyrights the university may own. Its information systems allow students to register for classes, 4
  • Bozarth & Handfield, Chapter 2 (3/26/02) track their grades, and access web-based instructional material; they also help university personnel to track payrolls, accounts payable, and other financial information. Finally, the university’s policies and procedures guide admissions and hiring decisions, tenure reviews, the assignment of grades, and the administration of scholarships and research grants. Schools even have policies and procedures that guide how students get tickets to football and basketball games! For a business to compete successfully, all of these elements must work together. Because some of these elements can take years and millions of dollars to develop, businesses need to ensure that their decisions are appropriate and consistent with one another. Thus the need for strategy. Strategy Strategies are the mechanisms by which businesses coordinate their decisions regarding business processes, resources, information systems, and policies and procedures. Strategies can be thought of as long-term game plans. What is considered "long-term" can differ from one industry to the next, but generally the phrase covers several years or more. Operations and supply chain strategies are an attempt to coordinate decisions about business elements at the operations and supply chain levels. Strategies can be explicit and well-documented, or they can be identifiable only from the firm’s actions. Like any game plan, strategies represent a balance between responsiveness and rigidity. Though strategies should be updated as markets or technologies change, a firm should not change its strategy overnight, for little or no reason. 5
  • Bozarth & Handfield, Chapter 2 (3/26/02) As Figure 2.1 suggests, most organizations have more than one level of strategy, from upper-level business strategies to more detailed and lower-level functional strategies. (When organizations have multiple distinct businesses, they often distinguish between an overall corporate strategy and individual business unit strategies.) Business strategies usually focus on the needs of a particular set of customers or products, while functional strategies translate a business strategy into specific actions. For example, an operations strategy might address the manufacturing or service processes needed to make a specific product, while a supply chain strategy might specify how suppliers will be selected and how the products will be distributed. Other functional strategies would cover marketing, finance, and human resources, to name a few. 6
  • Bozarth & Handfield, Chapter 2 (3/26/02) Figure 2.1: A Top-Down Model of Strategy Mission Statement ¥Reason for existence ¥Core values ¥Domain Business Strategy ¥Targeted customers / markets ¥Areas of sustainable competitive advantage / core competency ¥Role of supply chain partners ¥Time frames & performance objectives Strategic alignment Operations & Supply Chain Strategies Other Functional Strategies ¥Translate business strategy into operations & Marketing ¥supply chain actions Finance ¥Provide value to targeted customers / markets Human Resources ¥Develop supporting core competencies in Research & Development operations & supply chain practices Engineering Business strategies should always be linked to functional strategies. Consider Microsoft. For years, part of Microsoft's business strategy has been to dominate the world-wide market for PC-based business software. To that end, Microsoft’s product development strategy emphasized the development of general-purpose office software that was comprehensive yet easy to use. In the mid-1990s, however, Microsoft shifted its business strategy in response to the burgeoning Internet market. As a result, the company adjusted its product development strategy, introducing its own Internet browser and “bundling” it in with its Windows operating system. While these actions have 7
  • Bozarth & Handfield, Chapter 2 (3/26/02) caused some of Microsoft’s competitors to cry foul, they can nonetheless be traced back to a shift in business strategy. Strategic Planning Strategic planning has its origins in warfare. Famous generals such as Alexander the Great, Napoleon, and Julius Caesar followed a common approach to strategic planning, which included defining their objectives, evaluating their own and their opponents’ strengths and weaknesses, and then deciding how best to achieve their objectives – in their case, how to win the battle. Business leaders follow essentially the same model. In fact, even today, many managers read books such as The Book of Five Rings for inspiration on leadership and strategic planning. Let’s return to the model of strategy shown in Figure 2.1. Note that the strategy- making process begins with a broad mission statement, from which a general business strategy is derived. From the business strategy, more specific functional strategies are derived. Thus strategic planning is generally a top-down process, although core competencies at the functional level (a concept we will talk about later) can “feed back” into the development of business strategies. In most cases, only the board of directors can develop or change the mission statement, while the executive team (the CEO, the president, and so forth) is responsible for the business strategy. Even though functional strategies are approved by the executive team, they are developed and executed by functional-level managers, such as the vice presidents of manufacturing, purchasing, and logistics. 8
  • Bozarth & Handfield, Chapter 2 (3/26/02) The model in Figure 2.1 shows how the mission statement, business strategy, and functional strategies are related to one another. Managers should be able to pick any specific strategic action at the functional level (for example, "Develop a European source for raw material X") and trace it back to the business strategy ("Increase our European business presence") and ultimately to the firm’s mission statement ("Become a world-class competitor in our industry"). When the different levels of the strategic planning process fit together well, an organization is said to have good strategic alignment. Mission Statement The mission statement explains why an organization exists; describes what is important to the organization, called its core values; and identifies the organization’s domain. If it is prepared correctly, a mission statement can provide managers with invaluable guidance in developing the strategies to follow. Consider the mission statement for one non-profit hospital (italics added): The mission of the Finch Health System is to improve the health status of the people of mid-Michigan by providing quality, compassionate, comprehensive and cost-effective health services that are accessible to all. As a non-profit, community governed, comprehensive integrated health system this will be accomplished by: • Providing excellent and responsible patient care; • Serving as a recognized leader and as a valued partner in developing and delivering a full continuum of services; 9
  • Bozarth & Handfield, Chapter 2 (3/26/02) • Improving health status through public education, professional education, research, public advocacy, and health plans; • Being accountable for the value of our services to all patients, health plan members, physicians, health care purchasers, and communities; • Living our values of excellence, service, people, responsibility, innovation and teamwork. This mission statement is effective because it states how the organization will be governed; what range of services will be offered, and to whom (the domain); and what is really important to the organization (core values). Business Strategy Once an organization has settled on its mission, managers can turn their attention to developing the business strategy. Much has been written on what a business strategy should accomplish3. To keep things simple, we will focus only on those parts of a business strategy that are directly relevant to the development of successful operations and supply chain strategies. These include: • Clearly identify the firm's targeted customers, and broadly indicate what the operations and supply chain functions will need do to provide value to those customers. 3For a comprehensive discussion of this topic, see Strategic Management and Business Policy, Thomas Wheelen and David Hunger, Prentice-Hall, 2002. 10
  • Bozarth & Handfield, Chapter 2 (3/26/02) • Identify and support the development of core competencies in the operations and supply chain areas. Core competencies represent one way in which firms can build a sustainable competitive advantage. • Set time frames and performance objectives that managers can use to track the firm's progress toward fulfilling its business strategy. If prepared correctly, a business strategy can provide helpful guidance in fleshing out the more detailed functional strategies. To illustrate, suppose Finch Health Systems’ business strategy were to include the following statements: • Put in place Finch-owned health care facilities that include trauma, pediatrics and geriatrics. • Locate these facilities so that no patient in Kent, Montcalm, or Ionia counties has to travel more than 30 miles to reach a Finch facility. • Partner with local health services organizations to provide in-home health care. • Within four years, become the primary health care provider to 20% of the targeted population. Notice how this business strategy fits within the general guidelines provided by the mission statement. Still, it does not list specific actions – such as construction, staffing, and even hospital equipment selection – that must take place in order to meet the 4-year goal of a 20% market share. Note too that this business strategy indicates how Finch will 11
  • Bozarth & Handfield, Chapter 2 (3/26/02) partner with outside companies to serve the targeted customers. How the organization will use the supply chain is a often a key part of the business strategy. In describing the objectives of a business strategy, we introduced some new terms: targeted customers, sustainable competitive advantage, and core competencies. Let’s take a few minutes to describe just what these terms mean. Targeted Customers Customers are not homogeneous. Rather, most markets can be divided into groups of customers who have distinctive needs, called market segments. To develop successful operations and supply chain strategies, managers must understand who makes up the targeted market segment and what they value. For example, WolfByte Computers, a manufacturer of PCs, might try to cut their product costs to win the business of price-sensitive buyers. However, cutting costs might mean using lower-quality components and less skilled service personnel. And such a decision might actually make WolfByte PCs less attractive to performance-minded buyers. Suppose, in fact, that WolfByte wants to target customers who demand high quality products, short lead times, and/or high quality after-sales support. If WolfByte’s overall business strategy is directed toward these customers, then its operations and supply chain decisions should be consistent with their needs. WolfByte might hire and train skilled employees to handle customers’ technical questions, and pay extra money for top-of-the-line components. The point is, companies are more likely to make logical and consistent operations and supply chain decisions if they focus on the needs of a 12
  • Bozarth & Handfield, Chapter 2 (3/26/02) specific targeted market. Companies that do not have a clear target will shoot everywhere, and will miss the mark much of the time. Sustainable Competitive Advantage As important as the needs of targeted customers are, organizations also need to consider how they stack up against their competitors. Going back to our example, WolfByte may do an excellent job serving performance-minded PC buyers. But if another firm offers identical products and after-sales support, what is WolfByte's competitive advantage? In short, businesses should strive to provide their customers with sources of value that competitors cannot easily mimic. When a firm's competitive advantage cannot be easily duplicated by the competition, it is said to be sustainable. A sustainable competitive advantage gives the firm the appearance of "owning" the market, and forces competitors into a reactive posture. Core Competencies Some of the most important sources of sustainable competitive advantage are core competencies—organizational strengths or abilities, developed over a long period, which customers find valuable and competitors find difficult or even impossible to copy. Honda, for example, is recognized for having core competencies in the engineering and manufacture of small gas-powered engines. Those core competencies have helped Honda to conquer numerous markets, including the markets for motorcycles, cars, lawnmowers, jet skis, and home generators. Core competencies can take many forms and even shift over time. IBM, for example, used to be known as a computer hardware company. Nowadays, IBM's core 13
  • Bozarth & Handfield, Chapter 2 (3/26/02) competency is arguably its ability to provide customers with integrated information solutions and the consulting services needed to make them work. As a recent magazine article noted, “Good IT staffers re hard to find, but IBM Global Services alone has 150,000. That makes IBM the world’s largest IT services provider.”4 You can imagine how hard it would be for other firms to try to duplicate IBM’s advantage. Last, we should note that core competencies are by no means limited to operations and supply chain activities. Some firms succeed through superior marketing, financial, or even IT efforts. The Role of Supply Chain Partners in the Business Strategy In some cases, the ability of firm to manage its supply chain partners may in itself be considered a core competency. This is certainly the case for Dell Computer Corporation, who practices what Michael Dell calls “virtual integration.” While not all organizations are as dependent on their supply chain partners as Dell, current industry trends suggest that more and more organizations are focusing on developing only a few core competencies, and outsourcing everything else. This type of strategy puts a premium on an organization's ability to select good partners and coordinate the flow of information and material between partners. It also creates risks, especially if the organization’s selected core competencies fall out of favor in the future. In fact, insourcing / outsourcing decisions are becoming so important to firms that we deal with it in detail in Chapter 8. Operations and Supply Chain Strategies 4 “The future of IBM”, David Kirpatrick, Fortune Magazine, 2/18/02, pp. 60-8. 14
  • Bozarth & Handfield, Chapter 2 (3/26/02) Now that we have some understanding of how business strategies “set the boundaries” for lower-level functional strategies, let’s turn our attention to operations and supply chain strategies. The need for sound operations and supply chain strategies is very clear. For one thing, operations and supply chain activities often account for the lion’s share of the firm’s resources. These resources can include: • Materials in the form of purchased goods, work in progress, or even finished items that are ready to sell (Chapters 12, 13, and 14). • People, including direct labor, managers, and administrative staff. • Equipment and Facilities, such as machinery, retail stores, distribution centers, and manufacturing plants (Chapters 4, 5 and 7). This list doesn’t even touch on the other business elements that must be put in place to pull all these pieces together. Imagine the confusion operations and supply chain managers would face if they did not have some way to relate their decisions in these areas to the firm’s overall business strategy. In this book, we will distinguish between a firm’s operations strategy, which is internally focused, and its supply chain strategy, which is externally focused. That is, operations strategies deal with business elements within the four walls of an organization. Supply chain strategies, in contrast, deal with business elements that link the organization to its outside supply chain partners. For example, process choice is often a key part of an operations strategy, while purchasing and logistics, because of their strong linkages to outside firms, fall under the supply chain strategy. Some activities, such as materials management and planning and control systems, have characteristics that make them fall under both the operations and supply chain strategies. 15
  • Bozarth & Handfield, Chapter 2 (3/26/02) At the risk of over-simplifying, executing successful operations and supply chain strategies really boils down to choosing and implementing the right mix of these elements. At this point in time, you might have only a rough idea of what goes into this mix. Nevertheless, we can still discuss what makes some operations and supply chain strategies effective, while others flounder. Effective operations and supply chain strategies accomplish three things: 1. They ensure that the firm's operations and supply chains excel on the performance dimensions that are valued by the firm's targeted customers. 2. They ensure that the firm’s operations and supply chain decisions are strategically aligned with the firm’s business strategy. 3. They help develop core competencies in the firm’s operations and supply chains. 16
  • Bozarth & Handfield, Chapter 2 (3/26/02) Customer Value As we noted in Chapter 1, operations and supply chains help firms to provide products or services that someone values. But how should we define value? To begin, most customers evaluate products and services based on multiple performance dimensions such as functionality, delivery speed, after-sales support, and cost. The organization that provides the best mix of these dimensions will be seen as providing the highest value. To illustrate, suppose you want to buy a personal computer for use with your school assignments. To keep the task simple, you decide to evaluate your choices on four dimensions: 1. Functionality. How much memory does each computer have? How fast are the processor and modem? How much disk space does each computer have? 2. Delivery speed. How quickly can you receive the computer? 3. After-sales support. Will the manufacturer help you to resolve any technical problems? Will you be able to get help 24 hours a day, or just at certain times? 4. Cost. What is the total cost to own the computer? If you were to rate the importance of each of these dimensions on a scale from 1 to 5 (“completely unimportant” to “critical”), you might come up with the following ratings: 17
  • Bozarth & Handfield, Chapter 2 (3/26/02) Dimension Importance to you Functionality 3 Delivery speed 1 After-sales support 2 Cost 4 Armed with these ratings, you head to the campus store to see what might be available. The store carries two different PCs, one made by WolfByte Computers and the other by Dole Microsystems. How closely do these two PCs match your ratings on the four dimensions that are important to you? WolfByte’s PC costs $1500, but it has a faster processor and modem, can be delivered the same day, and includes around-the- clock technical support for a full year. Dole Microsystems’ PC sells for half the price, but it is not nearly as fast, requires a week for delivery, and comes with only a month of technical support. If you were to rate the performance of each of these PCs on your four dimensions, you might come up with the following: Importance to WolfByte Dole Microsystems Dimension you Performance Performance Functionality 3 4 2 Delivery speed 1 5 3 After-sales support 2 4 2 Cost 4 2 4 To find which PC provides the greater value, you can calculate a value index for each PC. The formula for the value index is: Value Index = Σ (Importance of dimension I) * (Performance on dimension I). 18
  • Bozarth & Handfield, Chapter 2 (3/26/02) For WolfByte, the value index equals (3*4 + 1*5 + 2*4 + 4*2 = 33); for Dole Microsystems, (3*2 + 1*3 + 2*2 + 4*4 = 29). So even though the WolfByte computer is more expensive, its performance on the other three dimensions make it a better value for you. Five Performance Dimensions Operations and supply chains can have an enormous impact on many performance dimensions. Experience suggests that there are five performance dimensions that are particularly relevant to operations and supply chain activities. These are: 1. Quality 2. Delivery 3. Flexibility 4. Cost 5. After-sales support. Let’s look at each of these performance dimensions in depth. Quality. The concept of quality is a broad one that can be subdivided into the following categories: Functionality. What are the characteristics or features of a product or service that determine how well it works? Products with many features or services that provide superior performance are often thought of as being of “higher quality.” 19
  • Bozarth & Handfield, Chapter 2 (3/26/02) Conformance. Was the product made or the service performed to specification? Examples of conformance quality include degree of purity, the weight of a product, and the amount of time it takes to perform a service. Reliability. Will a product work for a long time without failing or requiring maintenance? Does a service operation perform its tasks consistently over time? Durability. Can a product withstand adverse conditions, such as temperature extremes or rough handling? What is its "expected life"? Safety. Was the product or service designed to be safe? Serviceability. If necessary, can the product can be easily repaired or serviced? Aesthetics. Does the product or service appeal to the senses? Fresh-baked cookies or a shiny paint job are obvious examples. The relative importance of these quality dimensions will differ from one customer to the next. One buyer may be more interested in reliability and serviceability, another in performance and aesthetics. To compete on the basis of quality, a firm’s operations and supply chain must consistently meet or exceed customer expectations or requirements on the most critical quality dimensions. Quality will be discussed in detail in Chapters 13 and 14. Delivery. Delivery performance has two basic characteristics: speed and reliability. Delivery speed is the elapsed time from the receipt of an order to final delivery.i A firm with superior delivery speed can "deliver more quickly than its competitors or meet a required delivery date when only some or even none of the competition can do so".ii Typical strategies for improving delivery speed include streamlining the order entry 20
  • Bozarth & Handfield, Chapter 2 (3/26/02) process, holding inventory at key points in the supply chain (in stores or regional warehouses), maintaining excess capacity with which to meet “rush” orders, and using faster transportation. Delivery reliability refers to the ability to deliver products or services on time. Note that a firm can have long lead times yet still maintain a high degree of delivery reliability. Typical measures of delivery reliability include the percentage of orders that is delivered by the promised time and the average tardiness of late orders. Delivery reliability is especially important to companies that are linked together in a supply chain. Consider the relationship between a fish wholesaler and its major customer, a fish processing facility. If the fish arrive too late, the processing facility may be forced to shut down. On the other hand, fish that arrive too early may go bad before they can be processed. Obviously, these two supply chain partners must coordinate their efforts so that the fish will arrive within a specific time “window,” usually a few hours. Today, many firms are requiring increasingly tighter delivery windows. Whereas in the past, a delivery was considered to be on time if it was made within a few days of the promised date, the acceptable time frame is now as little as two hours -- even for goods that are not perishable. One automobile manufacturer charges suppliers a penalty fee of $10,000 for every minute deliveries are late. That practice may seem extreme until one considers that late deliveries may shut down an entire production line. Another measure of delivery reliability is the accuracy of the quantity shipped. For example, Sam's Club demands 95 percent accuracy in stock deliveries from suppliers. If suppliers ship more than the quantity ordered, they are still considered to be in error. Some firms will consider a partial shipment to be on time if it arrives by the promised 21
  • Bozarth & Handfield, Chapter 2 (3/26/02) date, but others will accept only complete shipments, delivered within the scheduled window. Flexibility. Many operations and supply chains compete by responding quickly to the unique needs of different customers. Both manufacturing and service firms can demonstrate flexibility. A full-service law firm, for instance, will handle any legal issue a client faces. (Some law firms specialize only in real estate transactions or divorce settlements.) And a full-service hotel will go to great lengths to fulfill a guest’s every need. A staff member at the Ritz-Carlton in Dearborn, Michigan, once noticed a guest standing outside the gift shop, waiting for it to open. The employee found out what the guest wanted, picked it up when the shop opened, and waited outside a conference hall to deliver it to the guest. Many manufacturers distinguish among several types of flexibility, including: Mix flexibility, or the ability to produce a wide range of different products. Changeover flexibility, or the ability to begin production of a new product with minimal delay. Design flexibility, or the ability to change the design of a product to accommodate specific customers. Volume flexibility, or the ability to produce whatever volume the customer needs. As you might imagine, different types of flexibility may require different operations and supply chain solutions. Firms must decide which types of flexibility are important to their customers and adjust their operations and supply chain efforts accordingly. 22
  • Bozarth & Handfield, Chapter 2 (3/26/02) Consider the case of Solectron, a company that buys components and manufactures goods for many original equipment manufacturers (OEMs)iii in the electronics industry. Because the electronics industry is notorious for short product life cycles and unpredictable demand, Solectron must be able to adjust the mix, volume, and design of the products it produces quickly. Solectron’s supply chain partners must be equally flexible. For instance, Solectron might order 10,000 units of Product A on Friday for delivery on Monday, then call back on Monday and ask the supplier to take back the 10,000 units and deliver 8,000 units of Product B instead! Flexibility has become particularly valuable in new product development. Some firms compete by developing new products or services faster than their competitorsiv, a competitive posture that requires operations and supply chain partners that are not only flexible, but willing to work closely with designers, engineers, and marketing personnel. A well-known example is the “motorcycle war” between Honda and Yamaha, which took place in the early 1980sv. In eighteen months, Honda introduced 81 new motorcycle models to the Japanese market, while Yamaha introduced just 34. The ability to quickly produce "fresh" models gave Honda with a significant competitive advantage. More recently, Intel’s CEO noted that the company tries to introduce a new chip about once every two years—a pace designed to keep competitors in perpetual catch-up mode.vi Chapter 3 includes a detailed discussion of how operations and supply chains can support new product development. Cost. Cost is always a concern, even for companies that compete primarily on some other dimension. In fact, in some industries, competition is so intense that firms are experiencing unrelenting pressure to reduce costs, even as their performance improves 23
  • Bozarth & Handfield, Chapter 2 (3/26/02) in other ways. Because operations and supply chain activities often account for most of an organization’s costs, they are natural targets in cost reduction efforts. Cost is such an important performance dimension that we will return to it throughout this book. Afer-sales support. After-sales support can be a critical performance dimension, especially if the purchased good or service has a high price tag or is critical to customers’ success. For example, some of the advanced Enterprise Resource Planning (ERP) software packages being sold today can cost companies hundreds of thousands of dollars – and that’s just for the license! Any firm investing in such a complex and expensive IT system is almost certainly going to expect a high level of after-sales support. At the individual level, your decision to buy a new car may depend in part on your previous experiences with the service department at the dealership. 24
  • Bozarth & Handfield, Chapter 2 (3/26/02) Trade-offs among Performance Dimensions Take a moment to think about the differences between a world-class sprinter and a marathon runner. The sprinter is built for explosive speed off the line, while the marathon runner is built for paced distance running. Both athletes are in peak condition, yet neither would dream of competing in both types of event. The same is true in business. In a competitive marketplace, no firm can sustain an advantage on all performance dimensions indefinitely. Excellence on some dimensions may conflict with excellence on others, preventing any one firm from becoming the best on all. In such cases firms must make trade-offs, emphasizing some dimensions at the expense of others. Nearly all operations and supply chain decisions require such trade- offs. To make logical and consistent decisions, then, operations and supply chain managers must understand which performance dimensions are most valued by the firm's targeted customers, and act accordingly. Consider some of the trade-offs Delta Airlines might face in scheduling flights between Raleigh and Orlando. More flights mean greater flexibility but higher costs. Similarly, larger, more comfortable seats would improve the quality of the service, but would also raise costs and reduce the number of passengers a plane can carry. Delta managers know that business flyers will pay a premium for flexibility and comfortable seats, but casual flyers (such as families on their way to Disney World) will be more price-sensitive. Now suppose a competitor of Delta’s decides to offer flights between Raleigh and Orlando. Given this move, Delta's flight schedule and seat design take on added importance. If managers choose frequent flights and larger seats, costs may climb higher than the competitor's; if they choose fewer flights and smaller seats, flexibility and 25
  • Bozarth & Handfield, Chapter 2 (3/26/02) quality may suffer. Delta’s managers must decide whose needs - those of business flyers or casual flyers - will guide their operational decisions. Order Winners and Qualifiers Some managers use the concepts of order winners and order qualifiers to determine the relative importance of different performance dimensions5. Order winners are performance dimensions that differentiate a company's products and services from its competitors'. Firms win the customer's business by providing superior levels of performance on order winners. Order qualifiers are performance dimensions on which customers expect a minimum level of performance. Superior performance on an order qualifier will not, by itself, give a company a competitive advantage. The industrial chemical market will illustrate the difference between order winners and qualifiers. Buyers of industrial chemicals expect a certain level of purity (i.e., conformance quality) before they will even consider purchasing a chemical from a particular source. Since all potential sources must meet this minimum requirement, purity is incredibly important. Once the purity requirement has been satisfied, however, other performance dimensions -- cost, delivery, and flexibility -- will be used to determine the "best" source. From the supplier’s perspective, then, product quality is the order qualifier; cost, delivery, and flexibility are order winners. Now suppose we have two suppliers, A and B, that are competing head-to-head in this industry. Figure 2.2 illustrates how the order winner / qualifier logic can be used to evaluate the two suppliers. Supplier A meets the minimum requirements on all four performance dimensions. Supplier B, however, has purity levels below the minimum 5 Terry Hill, Manufacturing Strategy: Texts and Cases (Homewood, Ill.: Dow Jones-Irwin, 1989). 26
  • Bozarth & Handfield, Chapter 2 (3/26/02) requirement. So even though Supplier B is superior to A on two performance dimensions, Supplier B would be dropped from consideration since it fails to “qualify” on one of the dimensions. Figure 2.2: Performance of two chemical suppliers vis-à-vis customers’ order- winners and qualifiers Minimum order size of 50 liters Per A 99.9% 2 days A pure B $20 per liter for ma B nce B 3 days A Minimum order size of 100 liters A Qualifier Level $30 per liter (Minimum 99% pure Requirements) 98% pure B Order Qualifiers Order Winners Conformance Delivery Cost Flexibility Quality How quickly How much Can we Are the can the do the place small chemicals chemicals be chemicals orders for pure? delivered? cost? the chemicals? Understanding what the relevant order qualifiers and order winners are helps operations and supply chain managers to formulate strategy in three ways. First, it helps identify potential problem areas, as well as strengths. Second, it clarifies the issues surrounding decisions on trade-offs. Finally, it helps managers to prioritize their efforts. 27
  • Bozarth & Handfield, Chapter 2 (3/26/02) Take a look again at Supplier B. Supplier B must immediately address its quality problems if it wants to compete at all. After that, the company might look for ways to protect or even increase its delivery and cost advantages. Furthermore, if improving purity involves increasing costs (for example, new equipment), Supplier B should understand what the appropriate trade-off is! Alignment of Operations, Supply Chain, and Business Strategies To illustrate how a firm’s operations and supply chain strategies might be aligned with its overall business strategy, let's revisit Dole Microsystems and WolfByte Computers. Suppose that as part of its business strategy, Dole decides to target price-sensitive buyers who want adequate but not functionality, delivery, and after-sales support. In contrast, WolfByte decides to focus on buyers who want excellent functionality, delivery, and after-sales support. Table 2.1 shows how managers might begin to align their operations and supply chain strategies with the business strategies of these two distinctive companies. 28
  • Bozarth & Handfield, Chapter 2 (3/26/02) Table 2.1: Aligning operations, supply chain, and business strategies Dole Microsystems WolfByte Computers Business strategy Assemble, sell, and support PCs Assemble, sell, and support PCs targeted at price-sensitive buyers targeted at buyers who are willing who require adequate but not to pay for excellent performance, exceptional performance, delivery, and customer service delivery, and support. Supply chain • Buy components from the • Buy components from state- strategy lowest-cost suppliers who of-the-art suppliers. Price is meet minimum quality and important, but not the critical delivery capabilities. factor. • Use 3-day ground shipment • Use overnight air freight to to keep costs low minimize lead time to customer Operations • Keep minimum levels of • Keep enough inventory in strategy inventory in factories to hold factories to meet rush orders down inventory costs. and shorten lead times. • Hire and train support staff • Hire and train support staff to to provide acceptable provide superior customer customer service level. service. Notice how the operations and supply chain decisions outlined in Table 2.1 seem to naturally flow from the different business strategies. Table 2.1 vividly illustrates how operations and supply chain decisions that are appropriate in one case may be inappropriate in another. Purchasing low-cost components, for example, would make sense for Dole, given its business strategy, but would run counter to WolfByte's emphasis on high functionality. 29
  • Bozarth & Handfield, Chapter 2 (3/26/02) Core Competencies in Operations and Supply Chains Finally, operations and supply chains are ideal area in which to develop core competencies, precisely because they are so difficult and expensive to manage. Consider how Lowe’s, a large hardware retailer, uses its supply chain to build a sustainable competitive advantage (see Figure 2.3). Lowe’s uses large distribution centers (called DCs) to coordinate shipments between suppliers and retail stores. The DCs receive large truckload shipments from suppliers, a strategy that allows Lowe’s to save on item costs as well as transportation costs. Employees at the DCs then remix the incoming goods and deliver them to individual stores, as often as twice a day. But that isn’t all; the DCs use computer-based information systems to closely coordinate incoming shipments from suppliers with outgoing shipments to individual stores. In fact, more than half the goods that come off suppliers’ trucks are immediately put onto trucks bound for individual stores, a method known as cross-docking. The result is that both the DCs and the retail stores hold minimal amounts of inventory, yet Lowe’s receives the cost breaks associated with large shipments from suppliers. Why has Lowe’s spent millions of dollars developing this distribution system? One reason is that it helps to keep costs low and the availability of goods high – performance dimensions its targeted customers value highly. But just as important, Lowe’s distribution system has emerged as a core competency that will serve the company well, even as the marketplace changes. Figure 2.3: Building core competencies at the operationsCenter Regional Distribution and supply chain level: Large shipments in ... Lowe’s distribution system … some to Mfr. inventory ... X Mfr. Y Mfr. Z 30 … and the rest immediately shipped (“cross- docked”)
  • Bozarth & Handfield, Chapter 2 (3/26/02) We mentioned earlier in the chapter how core competencies at the functional level can “feed back” into the business strategy. This is often referred to as a closing the loop. Figure 2.4 illustrates the idea. Firms like Dell, Lowe’s, Honda and others have developed significant core competencies at the functional level. It makes sense, then, for top managers look for ways to exploit these strengths. More generally, by closing the loop, top managers assure that the business strategy adequately considers the current capabilities – both good and bad -- within the functional areas. 31
  • Bozarth & Handfield, Chapter 2 (3/26/02) Figure 2.4: “Closing the loop” between business strategy and functional area strategies Mission Statement ¥Reason for existence ¥Core values ¥Domain Business Strategy ¥Targeted customers / markets Strengths and ¥Areas of sustainable competitive advantage / weaknesses as well as core core competency competencies ¥Role of supply chain partners at the functional ¥Time frames & performance objectives level “feed back” into the business strategy Strategic alignment Operations & Supply Chain Strategies Other Functional Strategies ¥Translate business strategy into operations & Marketing ¥supply chain actions Finance ¥Provide value to targeted customers / markets Human Resources ¥Develop supporting core competencies in Research & Development operations & supply chain practices Engineering Chapter Summary Operations and supply chains are important providers of value in any organization. To assure that managers make sound operations and supply chain decisions, firms must develop strategies for these functions that are tied to their overall business strategy. This chapter has presented a top-down model of the strategic planning process, with particular attention to the concepts of value, competitive advantage, and core competency. It has outlined the key objectives of any operations or supplies chain strategy, and described some of the decisions managers face in developing and implementing such strategies. 32
  • Bozarth & Handfield, Chapter 2 (3/26/02) Discussion Questions 1. Go onto the web and see if you can find the mission statement for a business or school you are familiar with. Is it a useful mission statement? Why or why not? From what you can tell, are the operations and supply chain strategies consistent with the mission statement? 2. We have talked about how operations and supply chain strategies should be based on the business strategy. But can strategy flow the other way? That is, can operations and supply chain capabilities drive the business strategy? Can you think of any examples in industry? 3. We noted earlier that “strategies can be explicit and well-documented, or they can be identifiable only from the firm’s actions.” Is it enough to just write-down the strategy? Why or why not? Conversely, what are the limitations of not writing down the strategy, but depending on the “firm’s actions” to define the strategy? 4. Chances are, you are a college student taking a course in Operations or Supply Chain Management. What were the order winners and qualifiers you used in choosing a school? A degree program? 5. Different customers can perceive the value of the same product or service very differently. Explain how this can occur. What are the implications for developing successful operations and supply chain strategies? Exercises 33
  • Bozarth & Handfield, Chapter 2 (3/26/02) 1. You have just graduated from college, and are looking to buy your first car. Money is tight right now, so you are concerned with initial cost as well as ongoing expenses. But at the same time, you don’t want to drive a slow, ugly car. You have narrowed your choices down to two vehicles: a Honda Enigma or Porsche Booster. Based on the numbers below, calculate the value index for each car. Which car provides you with the greatest value? Importance to Honda Porsche Dimension you Enigma Booster Fuel Economy 3 5 1 Reliability 5 5 2 Speed & Handling 4 2 5 Aesthetics 4 2 5 After-sales support 2 4 3 Purchase price 4 4 1 34
  • Bozarth & Handfield, Chapter 2 (3/26/02) A Chicago-based manufacturer is looking for someone to handle its shipments to the West Coast. In order to evaluate potential shippers, the manufacturer has developed the following criteria: At a minimum, a shipper must be able to: a. Pick up shipments in less then 8 hours from the time they are notified (the manufacturer doesn’t have enough space for shipments to sit around at the dock). b. Deliver the shipment in less than 72 hours. Beyond this, shippers will be evaluated according to cost and the percentage of shipments that arrive undamaged. Three shippers – McAdoo, Klooless and Big Al -- have put in bids for the business. The relevant performance information for the shippers is shown in the chart below: McAdoo Klooless Big Al Pick-up time 6 hours 8 hours 9 hours Shipping time 48 hours 72 hours 36 hours Cost per 100 lbs. shipped $20 $30 $15 % of shipments that arrive undamaged 98% 95% 99% 2a. Using Figure 2.2 as a guide, graph how well each of the shippers performs with regard to the order winners and qualifiers. 35
  • Bozarth & Handfield, Chapter 2 (3/26/02) 2b. Who would be the most likely to win the business? Why? 2c. What’s going on with Big Al? What does Big Al need to do in order to compete successfully for the business? 2d. Comment on Klooless’ competitive position. Do they meet the minimum requirements? Are they very competitive? Why or why not? 36
  • Bozarth & Handfield, Chapter 2 (3/26/02) 2. Reconsider Figure 2.2. Suppose Supplier B improves its conformance quality so that the chemicals it produces are now 99.9% pure. The chart below shows the new competitive situation: a. Will this be enough to make Supplier B competitive? Which supplier do you think will win the business? b. Managers at Supplier A have determined that if they increase the minimum order size to 80 liters, they decrease their costs to $18 per liter. Should they do it? Explain your logic (hint: There is no single right answer to this problem). 37
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