Operations Management


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Operations Management

  1. 1. OPSM 901: Operations Management Session 1: The Process View Process Positioning Strategic Fit Ko ç Un iversity Graduate School of Business E MBA Program Zeynep Aksin zaksin @ku.edu.tr
  2. 2. Key Principle of course: 1. The Strategic Role of Ops <ul><li>“ A company’s operations function is </li></ul><ul><li>either a competitive weapon </li></ul><ul><li>or </li></ul><ul><li>a corporate millstone . </li></ul><ul><li>It is seldom neutral.” [ Skinner ‘69 ] </li></ul>
  3. 3. Operations as a Competitive Weapon <ul><li>Dell Computers </li></ul><ul><li>Innovative Supply Chain Strategy (direct model) </li></ul><ul><li>Southwest Airlines </li></ul><ul><li> L eader in lowfare flights, by elimination of all waste </li></ul><ul><li>Zara </li></ul><ul><li>More on this later today.. </li></ul><ul><li>Vestel Durable Goods </li></ul><ul><li>Distribution optimization leads to increased customer satisfaction as well as lower costs </li></ul>
  4. 4. Key Principle of Course: 2. The Process View of Ops UL Sup. WH WH Sub. WH KA Ind. Markets Groceries Markets . . . Sana KA: 64 days Groceries:132 days Shelf life: 120 days! 76 days collection time Sales cost: 4% Trade rebate: 12% Logistics: complex 1997: 35000/76000 tons Sana and Aymar collected
  5. 5. Consumer centric-efficient SC UL Distributors Groceries Market KA Consumer Sana KA: 2 weeks 36 days collection time Warehouse stock level 12% -  8% Sales cost: 6% Trade rebate: 5.2% Logistics: simple 120000-140000/180000 outlets Make-to-order
  6. 6. Operations & the Process View: What is a Process? Inputs Outputs Goods Services Labor & Capital Information structure Network of Activities and Buffers Flow units (customers, data, material, cash, etc.) Resources Process Management
  7. 7. Organization Chart
  8. 8. Process customer customer suppliers
  9. 9. Life is a process.. <ul><li>Projects: one time processes </li></ul><ul><li>Eating lunch at the cafeteria </li></ul><ul><li>EMBA program </li></ul><ul><li>Your career </li></ul><ul><li>Your life </li></ul>
  10. 10. What is Operations Management? <ul><li>Management of business processes </li></ul><ul><li>How to structure the processes and manage resources to develop the appropriate capabilities to convert inputs to outputs. </li></ul><ul><ul><li>What is appropriate ? </li></ul></ul>
  11. 11. All Managers are Operations Managers <ul><li>All managers must transform inputs into outputs </li></ul><ul><li>Example: Accounting Manager </li></ul><ul><ul><li>Inputs : data, information, labor </li></ul></ul><ul><ul><li>Transformation : application of accounting principles and knowledge </li></ul></ul><ul><ul><li>Outputs : accounting reports, knowledge of performance, ... </li></ul></ul><ul><li>All managers have an “operation” to run </li></ul>
  12. 12. What defines a “good process”? Performance: Financial Measures <ul><li>Absolute measures: </li></ul><ul><ul><li>revenues, costs, operating income, net income </li></ul></ul><ul><ul><li>Net Present Value (NPV) = </li></ul></ul><ul><li>Relative measures: </li></ul><ul><ul><li>ROI, ROE </li></ul></ul><ul><ul><li>ROA = </li></ul></ul><ul><li>Survival measure: </li></ul><ul><ul><li>cash flow </li></ul></ul>
  13. 13. Performance Measurement <ul><li>Basing performance measurement only on financial ratios may be deceiving in that it does not capture continuous improvement and innovation </li></ul><ul><li>The Balanced Score Card (BSC) s ystem was developed by R. Kaplan ve D. Norton in 1992 ( HBS 1,1992 .) </li></ul><ul><li>The objective is to give managers measurements that reflect both financial and operational performance in a balanced way </li></ul>
  14. 14. Balanced Score Card (BSC) <ul><li>BSC, complements financial measures with </li></ul><ul><ul><li>Customer satisfaction </li></ul></ul><ul><ul><li>Process </li></ul></ul><ul><ul><ul><li>Throughput times </li></ul></ul></ul><ul><ul><ul><li>Defect rates, etc. </li></ul></ul></ul><ul><ul><li>Learning and development </li></ul></ul><ul><li>related measures that help to reflect future financial success </li></ul>
  15. 15. BSC Vision and Strate gy Finan cial Customer Processes Learning and Development How should our shareholders view us so that we can claim financial success Which processes should we perfect to be seen as successful by our customers and shareholders How can we sustain learning and development to adhere to our vision How should customers view us so that we attain our vision Objective Measurements Targets Initiatives
  16. 16. Firms compete on product attributes. This requires process capabilities. <ul><li>Price (Cost) P </li></ul><ul><li>Quality Q </li></ul><ul><ul><li>Customer service </li></ul></ul><ul><ul><li>Product quality </li></ul></ul><ul><li>Time T </li></ul><ul><ul><li>Rapid, reliable delivery </li></ul></ul><ul><ul><li>New product development </li></ul></ul><ul><li>Variety V </li></ul><ul><ul><li>Degree of customization </li></ul></ul>“ order winners” To deliver we need “capabilities”
  17. 17. Performance Measures Time needed to develop new products/services, range of products/services, machine change-over time, average batch siz e , time to increase activity rate, average capacity/maximum capacity, time to change schedules Flexibility Customer query time, Order lead time, frequency of delivery, actual versus theoretical throughput time, cycle time Speed Number of defects per unit, level of customer complaints, scrap level, mean time between failures, customer satisfaction scores Quality Minimum delivery time/average delivery time, utilization of resources, labor productivity, added value, efficiency, cost per operation hour Cost Some typical Measures Performance Objective
  18. 18. Process Capabilities are affected by Process Structure and Management <ul><li>Process structure or architecture: </li></ul><ul><ul><li>(1) inputs and outputs </li></ul></ul><ul><ul><li>(2) flow unit (“jobs”) </li></ul></ul><ul><ul><li>(3) network of activities & buffers </li></ul></ul><ul><ul><ul><li>quantity & location </li></ul></ul></ul><ul><ul><ul><li>precedence relationships </li></ul></ul></ul><ul><ul><li>(4) resource allocation </li></ul></ul><ul><ul><ul><li>capacity & throughput </li></ul></ul></ul><ul><ul><li>(5) information structure </li></ul></ul><ul><li>Operations Planning & Control </li></ul><ul><li>Organization </li></ul>
  19. 19. Fit between Strategy and Processes <ul><li>Processes must fit the operations strategy of the firm: </li></ul><ul><li>Competing on </li></ul><ul><ul><li>- Cost (Southwest Airlines) </li></ul></ul><ul><ul><li>-Quality (Toyota) </li></ul></ul><ul><ul><li>-Flexibility (HP) </li></ul></ul><ul><ul><li>-Speed (McDonalds) </li></ul></ul><ul><li>all require different process designs and different </li></ul><ul><li>measures to focus on. </li></ul><ul><li>Corporate Strategy  Key Performance Indicators </li></ul><ul><li> Operations Strategy  Process Design& Improvement </li></ul>
  20. 20. Linking the strategic role & process view: Strategic Operational Audit Desired Business Strategy Operations Strategy Desired Capabilities Marketing, …, Financial Strategy Desired Oper’l Structure: Processes & Infrastructure Product Attributes P , T , Q, V Process Attributes C , T , Q, Flex Existing Capabilities Operational Structure: Processes & Infrastructure Existing Desired Feasible Business Strategies Strategy Gap? Measures Capability Gap? Process Gap?
  21. 21. Strategy vs. Operational Effectiveness: The Operations Frontier as the minimal curve containing all current positions in an industry Low High Value/ Responsiveness operations frontier A B C Cost High Low
  22. 22. Increasing Customer Value Value A B C Cost High Low High Low Operations Frontier Değer Artırımı
  23. 23. Lowering Costs Value A B C Cost High Low HIgh Low Operations Frontier Lowering Costs
  24. 24. Some process classifications and terminology…
  25. 25. Low complexity, high divergence
  26. 26. High complexity, low divergence
  27. 27. High complexity, high divergence
  28. 28. Classifying by degree of judgement complexity vs. divergence what is done? how is it done?
  29. 29. Classification of Processes by process architecture <ul><li>Project </li></ul><ul><li>Job Shop </li></ul><ul><li>Batch </li></ul><ul><li>Line Flow </li></ul><ul><li>Continuous Flow </li></ul>Job Shop Flow Shop
  30. 30. The Job Shop Process <ul><li>Process Layout </li></ul><ul><li>One of a Kind Build </li></ul><ul><ul><li>(To Customer Order) </li></ul></ul><ul><li>Absence of Rigid Flow Pattern </li></ul><ul><li>Usually High Product Mix </li></ul>
  31. 31. Process Layout Lathe#1 Lathe#2 Lathe#3 Lathe#4 Product #1735B: Start of Production Drill Press #1 Drill Press #2 Paint Machine Packaging Machine #1 Packaging Machine #2 Finish Production
  32. 32. The Flow Line Process <ul><li>Product Layout </li></ul><ul><li>Discrete Parts </li></ul><ul><li>Rigid Flow Pattern </li></ul><ul><li>Product Mix of Standard Products </li></ul>
  33. 33. Product Layout Product #1735B Lathe Start Production Drill Press #2 Paint Machine Drill Press #1 Packaging Machine #2 Finish Production
  34. 34. Classification of Processes: by Positioning Strategy <ul><li>Functional Focus: </li></ul><ul><li>Product Focus: </li></ul>A B C D Product 1 Product 2 A D B C B A Product 1 Product 2 = resource pool ( e.g. , X-ray dept, billing)
  35. 35. Classification of Processes: by Customer Interface SUPPLIER CLIENT Make-to-Stock Assemble-to-Order Make-to-Order Engineer-to-Order Raw Material Components Semifinished Finished Forecast Order
  36. 36. Shouldice Hospital Video Case
  37. 37. Shouldice Business Model <ul><li>Medical </li></ul><ul><ul><li>Simple hernias </li></ul></ul><ul><ul><li>Optimized process </li></ul></ul><ul><ul><li>Check-ups and follow-up </li></ul></ul><ul><li>Social </li></ul><ul><ul><li>Club Med like experience </li></ul></ul><ul><ul><li>Co-production at individual and cohort level </li></ul></ul><ul><ul><li>A network for life </li></ul></ul>
  38. 38. Shouldice Patient Experience COST QUALITY SPEED FLEXIBILITY Low, both real and opportunity Low recurrence, satisfaction with experience Fast operation and recovery The process rules; only simple hernias
  39. 39. Comparison to General Hospital General Hospital: prepares for the most complex Hernia complexity Shouldice: prepares for the simplest
  40. 40. A product/process matrix Process Flexible job Rigid line flow Product High customization Low volume High unit margin High standardization High volume Low unit margin Industrialization Shouldice Hospital: Standardization Cost, speed, quality Low Cost High margins High cost Low margins General Hospital: Variety & flexibility
  41. 41. Shouldice as a lean enterprise Womack and Jones (2000) From Lean Production to Lean Enterprise, HBR March-April 1994 Push patients through process Pull patients into process View patients as functional tasks Manage patient flows Tolerate some excess Eliminate waste Strive for threshold perf. Strive for perfection Unpredictable process Predictable process Confusion of value prop. Clear single value prop. No focus, multiple goals Focus on low risk cases General Hospital Shouldice
  42. 42. Shouldice Process Life Cycle <ul><li>Birth of the Shouldice formula </li></ul><ul><li>P rocess selection, design, </li></ul><ul><li>and improvement </li></ul><ul><li>Innovation at the interfaces </li></ul><ul><li>Process overtaken (when?) </li></ul>
  43. 43. Focus at Shouldice: the results <ul><li>Breakthrough service </li></ul><ul><li>High customer and employee satisfaction </li></ul><ul><li>Industrial approach </li></ul>
  44. 44. Matching Process Choice with Strategy: Product-Process Matrix Process Flexibility Jumbled Flow. Process segments loosely linked. Disconnected Line Flow/Jumbled Flow but a dominant flow exists. JOB SHOP (Commercial Printer, Architecture firm) BATCH (Heavy Equipment, Auto Repari) LINE FLOWS (Auto Assembly, Car lubrication shop) CONTINUOUS FLOW (Oil Refinery) Product Variety Low Low Standardization One of a kind Low Volume Many Products Few Major Products High volume High Standardization Commodity Products Connected Line Flow (assembly line) Continuous, automated, rigid line flow. Process segments tightly linked. Opportunity Costs Out-of-pocket Costs High Low High
  45. 45. Marks & Spencer vs. Zara
  46. 46. Why is profitability in textile so low, when margins are so high? Expected demand Actual demand Perfect forecast Excess demand Excess stock
  47. 47. Zara Business Concept <ul><li>Low Cost </li></ul><ul><li>Focus on getting it approximately correct </li></ul><ul><li>Define a fast process </li></ul><ul><li>Solve the material constraint </li></ul><ul><li>Constrain designers </li></ul><ul><li>Optimize the offer </li></ul><ul><li>Offer follow-up (next batch) and create customer flows </li></ul><ul><li>Fashion </li></ul><ul><li>Store experience </li></ul><ul><li>Copy fashion </li></ul><ul><li>Involve the customers and his group </li></ul><ul><li>Create a network/brand </li></ul>Integrated fashion delivery: Fashion at low cost
  48. 48. Zara Customer Offer : Product/Process Attributes <ul><li>Quality: </li></ul><ul><ul><li>Raw Material: poor/OK </li></ul></ul><ul><ul><li>Knit: poor </li></ul></ul><ul><ul><li>Look: grand </li></ul></ul><ul><ul><li>Customer satisfaction: fashion at low price </li></ul></ul><ul><li>Cost: </li></ul><ul><ul><li>Low monetary cost </li></ul></ul><ul><ul><li>Low time cost “The Zara experience” </li></ul></ul><ul><li>Time: </li></ul><ul><ul><li>Fast copying of leading styles </li></ul></ul><ul><ul><li>Fast delivery in own stores </li></ul></ul><ul><ul><li>Limited editions </li></ul></ul><ul><li>Variety/Flexibility: </li></ul><ul><ul><li>Limited product variety: only what is on display </li></ul></ul><ul><ul><li>Every customer is participating in t he process </li></ul></ul><ul><ul><li>Customer defines the next batch </li></ul></ul>
  49. 49. Classical textile business process: 12 month lead time Design Purchase RM Mfg Dist Sell Discount
  50. 50. Zara Business Process: 5 day lead time 1.Scan fashion shows 2.Simplify hits & Library of designs Purchase RM 2.Shoppers and store mgrs. PULL next design Designers adapt Shopping Experience 3.Final design of Next batch . Mfg Dist
  51. 51. The design process Creative design Preliminary designs Final product design Final product design Preliminary designs Creative design Outsource And scan Copy and simplify Adapt and optimize Traditional Zara
  52. 52. Accurate Response <ul><li>Improving Forecasts </li></ul>Initial Forecast Total Sales
  53. 53. Accurate Response <ul><li>Improving Forecasts </li></ul>Updated Forecast, Incorporating 20% of Sales Data Total Sales
  54. 54. Accurate Response <ul><li>Improving Forecasts </li></ul>Updated Forecast, Incorporating 80% of Sales Data Total Sales
  55. 55. Zara’a Approach to Newsboy Losses Expected demand Actual demand Small batches Excess stock and unmet demand are avoided by stopping production when market saturates
  56. 56. Disrupti ve Technological Change Time Performance Zara Quality Freshness M&S Zara
  57. 57. Zara as a lean enterprise Pushes customers through the system Pull customers into process View customers as a sequence of tasks Manage customer flows Tolerate some excess Eliminate waste Satisfied with threshold performance Strive for perfection Unpredictable and fuzzy process Predictable process Confusion of implicit value proposition Unique and clear value prop. No focus, multiple and simultaneous goals Clear focus on one customer type and one process M&S Zara
  58. 58. Industrialization 1: Standardizing Process Product Flexible Job Shop Batch Flow Rigid Line Flow High Customization Some Customization High Stardardization Mass Merchants Marks &Spencer High Fashion
  59. 59. Industrialization 2: Flexibility Process Product Flexible Job Shop Batch Flow Rigid Line Flow High Customization Some Customization High Stardardization Mass Merchants Marks &Spencer Zara High Fashion
  60. 60. Strategic Value Gained Process Product Flexible Job Shop Batch Flow Rigid Line Flow High Customization Some Customization High Stardardization Mass Merchants Marks &Spencer Out of Fashion ! Zara High Fashion Out of price!
  61. 61. Textile Apparel Industry: history <ul><li>1920s M&S: Investment in technical part of the design; high quality products </li></ul><ul><li>After World War II: Les Nouvelles Galeries offered novelty at low prices </li></ul><ul><li>Mid-70s Benetton: process reversal and color flexibility; outsourcing of design, manufacturing, retail </li></ul><ul><li>Gap Inc. and C&A: position between low-end mass merchandisers and higher-end department stores </li></ul><ul><li>Mid-80s Zara: brand consistency and very fast product cycles </li></ul><ul><li>Mango : shopping experience </li></ul><ul><li>H&M: Zara fashion at C&A price </li></ul>
  62. 62. For next time <ul><li>Read the case TEMSA </li></ul><ul><li>Think through the questions at the end of the case (in the section “What to do next?) </li></ul>