operation and supply chain management mcgraw hill

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Chapter 2
Strategy
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Competitive Dimensions
Price Make the product or deliver the service
cheap
Quality Make a great product or delivery a great
service
Delivery Speed Make the product or deliver the service
quickly
Delivery Reliability Deliver it when promised
Coping with Changes in
Demand
Change its volume
Flexibility and New-Product
Introduction Speed
Change it

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The Notion of Trade-Offs
Management must decide which parameters of performance
are critical and concentrate resources on those
characteristics.
• For example, a firm that is focused on low-cost production
may not be capable of quickly introducing new products.
A strategic position is not sustainable unless there are
compromises with other positions.
Straddling is seeking to match a successful competitor while
maintaining its existing position.
• It adds features, services, or technology to existing
activities.
• It’s often a risky strategy.

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Strategies Are Implemented Using Operations
and Supply Chain Activities
• All operations activities relate to one another.
• To be efficient, the firm must minimize total cost without
compromising customers’ needs.
• Activity-system maps are diagrams that show how a
company’s strategy is delivered through a set of supporting
activities.

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IKEA’s Strategy
• Targets young, low-cost buyers.
• Uses a self-service model
showing furniture in familiar
settings.
• Designs its own low-cost,
modular, ready-to-assemble
furniture.
• Stocks the products in boxes.
• Customers pick their own boxes
from inventory.
• Offers in-store childcare and
extended hours.

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IKEA—Stylish Low-Cost Furniture
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IKEA – Supply Chain

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Assessing the Risk Associated with
Operations and Supply Chain Strategies
The recent Covid-19 pandemic has changed the global business
environment and highlighted the importance of adaptability and
crisis management to endure radical changes.
Supply chain risk is defined as the likelihood of a disruption that
would impact the ability of the company to continuously supply
products or services.
Categorizing risk:
1. Supply chain coordination risks that are associated with the
day-to-day management of the supply chain.
2. Disruption risks, which are caused by natural or manmade
disasters, such as earthquakes, hurricanes, terrorism, and
even pandemics.

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Supply Chain Risk Examples
• In March 2011, a massive earthquake unleashed a powerful
tsunami that shut down virtually all manufacturing capability in
Sukagawa City, Japan.
• In 2012, excessive rain ruined the grape harvest for Nyetimber,
an English winemaker.
• In 2004 and in 2021, oil tankers ran aground in the Suez Canal,
blocking traffic through the canal for nearly a week.
• In 2005, Hurricane Katrina knocked out power and
transportation routes along the Gulf of Mexico.
• In 2000, a 10-minute fire at a Phillips plant that supplied
integrated circuits led to a $400 million loss.
• In 2014, an explosion at the Evonik plant in Marl, Germany,
caused shortage of a specialty resin called nylon 12.

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Risk Management Framework
1. Identify the sources of potential disruptions.
• Focus on highly unlikely events that would cause a significant
disruption to normal operations.
2. Assess the potential impact of the risk.
• Here the goal is to quantify the probability and the potential impact
of the risk.
• Could be based on financial impact, environmental impact, ongoing
business viability brand image/reputation, potential human lives,
and so on.
3. Develop plans to mitigate the risk.
• A detailed strategy for minimizing the impact of the risk could take
many different forms, depending on the nature of the problem.

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Risk Mitigation Strategies 1
Risk Risk Mitigation Strategies
Natural disaster Contingency planning (alternate sites,
etc.) insurance
Country risks Hedge currency, produce/source locally
Supplier failures Use multiple suppliers
Network provider failures Support redundant digital networks
Regulatory risk Up-front and continuing research; good
legal advice, compliance

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Risk Mitigation Strategies 2
Risk Risk Mitigation Strategies
Logistics failures Safety stock, detailed tracking and
alternate suppliers
Inventory risks safety stock
Major quality failures Carefully select and monitor suppliers
Loss of customers Service/product innovation
Theft and vandalism Insurance, security precautions,
knowledge of likely risks, patent
protection, etc.

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How to Succeed in an
Era of Volatility

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Era of Volatility!
One cold, hard truth laid bare by the pandemic is how
vulnerable a business can become when strategic foresight
and operational flexibility are low on the list of priorities.
H-E-B, the Texas-based regional supermarket chain, was a
notable exception. In mid-January 2020, H-E-B began
putting out feelers across its network of global suppliers, and
it reached out to retailers in China to learn about what
the early weeks of the pandemic looked like there and
what lessons they had learned.

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Era of Volatility!
Winning companies adapted their organizations to the
trends, embracing such mantras as “Move fast” and “Adapt
or die” to create enormous amounts of value.

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Era of Volatility!
But they’ll also need to revive strategies that boost
investment in two other capabilities that have fallen out of
favor in recent years: resilience and prediction.

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Prediction
Companies must constantly work at developing scenarios,
testing them against their risk and reward potential, and
selecting a strategy that will adjust their exposures over time.
Consider the case of Reliance Jio, which accurately predicted the
shifts in India’s mobile-phone-services market toward
smartphones and high data consumption.
In 2016, having recognized the potential for greater smartphone
penetration despite a landscape crowded with well-established
and well-funded incumbents, the company predicted that demand
would increase if smartphones were made more affordable.

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Adaptability
Large companies should be able to use adaptability to
reap advantages at scale, but too often their size creates
complexity that makes it hard to pick up important signals.
Satya Nadella famously demonstrated adaptability when
he decided to commit Microsoft to cloud services. When
Nadella became CEO, in 2014, going all-in on cloud services
was far from the obvious move, but he saw signals that the
company needed to adapt: Amazon’s AWS was already
moving forcefully to a business model anchored in cloud
services and the underlying technology, and other
enterprises

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Resilience
Companies with superior resilience survive shocks
better than their competitors do. Many shocks that
companies should prepare for (perhaps even most) are
known to them, but too often leaders don’t do.
Southwest Airlines has adopted a notable approach to
resilience, with a target of hedging at least 50% of its fuel
costs each year. The program hasn’t changed Southwest’s
fundamental exposure, but by using financial instruments
such as futures contracts and options to lock in prices for
specific time frames, the company mitigates the risks to its
business from spikes in jet-fuel prices.

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Track signals
Ask yourself,
• What is our ongoing capability to monitor these trends?
• Who is in charge, what are the key inputs from different
sources and constituencies, and
• how can we ensure that a change in these inputs triggers
quick actions with conviction?

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Risk Intelligence
and Resilient
Company

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Risk Intelligence!
At a time when a container ship grounded in the Suez
Canal can bottle up 12% of the world’s trade, or a virus
can disrupt the global flow of commodities, components,
and talent, a corporation’s ability to quickly adapt in the
face of unfolding events is essential to its survival and
prosperity.
We define risk intelligence as the honed ability to
rigorously interpret risks and the consequences or
opportunities they pose for a company.

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Identify, Categorize, and Interpret
Risk Events
The first step is to work through each business value function
and identify plausible risk events.
Next, leaders should characterize and group risk events by
their scope of impact, the permanence of the changes they
induce, and the frequency of event occurrence.

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Risk Categorization
Risk categorization begins with understanding a risk event’s
scope.
To fully categorize risk events, leaders must also consider
the permanence of their consequences.
How often a risk event occurs is important too, because
the enterprise mechanisms needed to handle frequent
events can be different from those employed for singular
events.

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Productivity Measurement
Productivity is a measure of how well resources are used.
Outputs
Productivity
Inputs

Productivity is a relative measure.
• Must be compared to something else to be meaningful.
• Operations can be compared to each other.
• Firms can be compared to other firms or themselves over time.
Partial productivity measures compare output to a single input.
Multifactor productivity measures compare output to a group of
inputs.
Total productivity measures compare output to all inputs.

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Examples of Productivity Measures
(Equations)
Partial measure
Output Output Output Output
or or or
Labor Capital Materials Energy
Multifactor measure
Output Output
or
Labor + Capital + Energy Labor + Capital + Materials
Total measure
Output Goods and services produced
or
Inputs All resources used

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Examples of Productivity Measures
(Calculations)
Input and Output Production Data ($1,000)
Output
Total output $ 13,500
Input
1. Labor $ 153
2. Material 3,000
3. Capital 10,000
4. Energy 540
5. Other expenses 1,500
Total output $ 15,193
Productivity Measure Examples
Total measure
Total output 13,500
0.89
Total input 15,193
 
Multifactor measures:
Total output 13,500
4.28
Labor + Material 3,153
 
Partial measures:
Total output 13,500
25
Energy 540
 
Total output 13,500
88.2
Labor 153
 

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Partial Measures of Productivity
Business Productivity measures
Restaurant Customers (meals) per labor hour
Retail store Sales per square foot
Chicken farm Pounds of meat per pound of feed
Utility plant Kilowatt hours per ton of coal
Paper mill Tons of paper per cord of wood
Restaurant Customers (meals) per labor hour

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A Sustainable Operations and Supply
Chain Strategy
The firm’s strategy describes how it will create and sustain
value for its current shareholders.
• Shareholders—individuals or companies that legally own
one or more shares of stock in the company.
• Stakeholders—individuals or organizations who are
directly or indirectly influenced by the actions of the firm.
Adding a sustainability requirement means meeting value
goals without compromising the ability of future generations
to meet their own needs.
Triple bottom line—evaluating the firm against social,
economic, and environmental criteria

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Triple Bottom Line 1
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Triple Bottom Line 2
• Social responsibility pertains to fair and beneficial
business practices toward labor, the community, and the
region in which a firm conducts its business.
• Economic prosperity means that the firm is obligated to
compensate shareholders who provide capital.
• Environmental stewardship refers to the firm’s impact on
the environment.

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Summary 1
Operations and supply chain strategy involves setting the
broad policies for using a firm’s resources.
• Coordinates operational goals with those of the larger
organization.
Strategies are implemented through a set of activities
designed to deliver products and services in a manner
consistent with the firm's overall business strategy.
Operations and supply chain strategies need to be evaluated
relative to their riskiness.
Supply chain disruptions are unplanned and unanticipated
events that disrupt the normal flow of goods and materials.
• Supply chain coordination risks and disruption risks.

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Summary 2
• Productivity measures are used to ensure that the firm
makes the best use of its resources.
• A strategy that is sustainable needs to create value.
• Shareholders are equity owners in the company.
• Stakeholders are individuals and organizations that are
influenced by the firm.