Chapter 2 - Operations

Strategy and Competitiveness

Operations Management
by
R. Dan Reid & Nada R. Sanders
4th Edition Wiley 2010

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The Role of Operations

Strategy

Provide a plan that makes best use of

resources which;

Specifies the policies and plans for using

organizational resources
Supports Business Strategy as shown on
next slide

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Business/Functional Strategy

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Background: Business Strategy

http://www.youtube.com/watch?v=mYF2_FBCvXw
http://www.youtube.com/watch?v=ehMAwIHGN0Y

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Importance of Operations
Strategy

Companies often do not understand the

differences between operational
efficiency and strategy

Operational efficiency is performing tasks

well, even better than competitors
Strategy is a plan for competing in the
marketplace

Operations strategy is to ensure all

tasks performed are the right tasks
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Developing a Business
Strategy

A business strategy is developed after

taking into many factors and following
some strategic decisions such as;

What business is the company in (mission)

Analyzing and understanding the market
(environmental scanning)
Identifying the companies strengths (core
competencies)
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Three Inputs to a Business Strategy

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Examples from Strategies

Mission: Dell Computer- to be the most

successful computer company in the world
Environmental Scanning: political trends,
social trends, economic trends, market place
trends, global trends
Core Competencies: strength of workers,
modern facilities, market understanding, best
technologies, financial know-how, logistics
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Example: Nokia
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.
http://www.businessweek.com/globalbiz/content/jan2008/gb20080124_974301.htm?chan=search

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Developing an Operations
Strategy

Operations Strategy is a plan for the

design and management of operations
functions
Operation Strategy developed after the
business strategy
Operations Strategy focuses on specific
capabilities which give it a competitive
edge competitive priorities
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Operations Strategy Designing

the Operations Function

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Competitive Priorities- The Edge

Four Important Operations Questions:

Will you compete on
Cost?
Quality?
Time?
Flexibility?
All of the above? Some? Tradeoffs?
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Competing on Cost?

Offering product at a low price relative to competition

Typically high volume products

Often limit product range & offer little

customization

May invest in automation to reduce unit costs

Can use lower skill labor

Probably use product focused layouts

Low cost does not mean low quality

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Competing on Quality?

Quality is often subjective

Quality is defined differently depending on who is
defining it
Two major quality dimensions include

High performance design:

Product & service consistency:

Superior features, high durability, & excellent customer service

Meets design specifications

Close tolerances
Error free delivery

Quality needs to address

Product design quality product/service meets requirements

Process quality error free products

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Competing on Time?

Time/speed one of most important

competition priorities

First that can deliver often wins the race

Time related issues involve

Rapid delivery:

Focused on shorter time between order placement and delivery

On-time delivery:

Deliver product exactly when needed every time

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Competing on Flexibility?

Company environment changes rapidly

Company must accommodate change by being
flexible

Product flexibility:

Easily switch production from one item to another

Easily customize product/service to meet specific requirements
of a customer

Volume flexibility:

Ability to ramp production up and down to match market

demands

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The Need for Trade-offs

Decisions must emphasis priorities that support business

strategy
Decisions often required trade offs
Decisions must focus on order qualifiers and order winners

Which priorities are Order Qualifiers?

e.g. Must have excellent quality since everyone expects it
Which priorities are Order Winners?
e.g. Southwest Airlines competes on cost
McDonalds competes on consistency
FedEx competes on speed
Custom tailors compete on flexibility

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Competitive Priorities front & center

http://www.businessweek.com/magazin
e/content/06_13/b3977009.htm
http://www.businessweek.com/magazin
e/content/06_13/b3977010.htm?chan=
search
http://www.businessweek.com/technolo
gy/content/dec2007/tc20071228_10685
7.htm?chan=search
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Translating to Production Requirements

Specific Operation requirements include

two general categories
Structure decisions related to the
production process, such as characteristics
of facilities used, selection of appropriate
technology, and the flow of goods and
services
Infrastructure decisions related to
planning and control systems of operations
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Translating to Production Requirements

Dell Computer example structure & infrastructure

They focus on customer service, cost, and speed

ERP system developed to allow customers to order
directly from Dell
Product design and assembly line allow a make to
order strategy lowers costs, increases turns
Suppliers ship components to a warehouse within
15 minutes of the assembly plant - VMI
Dell set up a shipping arrangement with UPS
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Strategic Role of Technology

Technology should support competitive

priorities

Three Applications: product technology, process

technology, and information technology

Products - Teflon, CDs, fiber optic cable

Processes flexible automation, CAD

Information Technology POS, EDI, ERP, B2B

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Technology for Competitive

Advantage

Technology has positive and negative

potentials

Positive

Improve processes
Maintain up-to-date standards
Obtain competitive advantage

Negative

Costly
Promotes dependency
Risks such as overstating benefits
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Technology for Competitive

Advantage

Technology should

Support competitive priorities

Can require change to strategic plans
Can require change to operations strategy

Technology is an important strategic

decision

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Measuring Productivity

Productivity is a measure of how efficiently inputs are

converted to outputs
Productivity = output/input

Total Productivity Measure:

Total Productivity = (total output)/(total of all inputs)

Partial Productivity Measure:

Partial Productivity = (total output)/(single input)

Multifactor Productivity Measure:

Multi-factor Productivity = (total output)/(several inputs)

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Total Productivity: example

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%

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Partial Productivity: example

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

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Multifactor Productivity: example

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
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Interpreting Productivity Measures

Productivity measures must be compared to

something, i.e. another year, a different
company
Raw productivity calculations do not tell the
complete story unless there are no major
structure differences.

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Interpreting Productivity Measures

Other productivity measure questions;

Is this partial productivity measurement

enough to make an investment decision?
Should you also look at productivity measures
for the two major competitors for
comparison?

Productivity measure provides information

on how the firm is doing relative to what
is critical to the firm

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Productivity, Competitiveness, and

the Service Sector

Productivity is a scorecard
on effective resource use

A nations Productivity
effects its standard of living
US productivity growth
averaged 2.8% from
1948-1973
Productivity growth slowed
for the next 25 years to
1.1%
Productivity growth in
service industries has been
less than in manufacturing

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Productivity and the Service

Sector

Measuring service sector productivity is

a unique challenge

Traditional measures focus on tangible

outcomes
Service industries primarily produce
intangible outcomes
Measuring intangibles is challenging

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Operations Strategy Across

the Organization

Business strategy defines long-term

plan
Operations strategy support the
business strategy
Marketing strategy needs to fully
understand operations capability
Financial plans in effect support
operations activities.
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Review of Learning Objectives

Define the role of Business Strategy

Explain how a Business strategy is developed
Explain the role of Operations Strategy in
the organization
Explain the relationship between business
strategy and operations strategy
Describe how an operations strategy is
developed
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Review of Learning Objectives

Identify competitive priorities for of the

operations function
Explain the strategic role of technology
Define productivity and identify
productivity measures
Compute productivity measures

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Chapter 2 Highlights

Business Strategy is a long range plan and vision. Each

individual business function develop needs to support
the business strategy
An organization develops its business strategy by doing
environmental scanning and considering its mission and
its core competencies.
The role of operations strategy is to provide a longrange plan for the use of the companys resources in
producing the companys primary goods and services.
The role of business strategy is to serve as an overall
guide for the development of the organizations
operations strategy.

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Chapter 2 Highlights

The operations strategy focuses on developing specific

capabilities called competitive priorities.
There are four categories of competitive priorities: cost,
quality, time, and flexibility
Technology can be sued by companies to gain a
competitive advantage and should be acquired to support
the companys chosen competitive priorities
Productivity is a measure that indicates how efficiently an
organization is using its resources
Productivity is computed as the ratio or organizational
outputs divided by inputs
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Example: Detroit Edison

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
needsDistributed 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.
http://www.businessweek.com/bwdaily/dnflash/jul2001/nf2001072_224.htm?chan=search

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Example: Nestle
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.
http://www.businessweek.com/magazine/content/01_24/b3736644.htm?chan=search

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