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CHAPTER 2
OPERATIONS AND SUPPLY CHAIN STRATEGY

Review and Discussion Questions (on Connect)

1. Can a factory be fast, dependable, flexible, produce high-quality products, and still provide
poor service from a customer’s perspective?

Yes, if a customer’s needs are not considered and do not influence strategy development, an
organization could be delivering the wrong service or product. Even though the product or
service is delivered fast, is dependable, and flexible in design and features, and is of high
technical quality, overall service could be rated “poor” by a customer who demands a different
mix of features and attributes. It is often best not to be fastest to the market, but to be the best
firm in the market as judged by the ultimate customer.

2. Why should a Canadian service organization worry about being world class if it does not
compete outside Canada? What impact does the Internet have on this?

As the environment changes, firms can find themselves faced with competition from outside their
industry or from outside their home country. Even if they do not, the principles of a world class
firm can be applied to any and all manufacturing and service concerns. Benchmarking or rating
your firm’s performance to the best in your industry or class can provide future strategic
directions for improvements.

The Internet is global by its very nature. Retail stores must now compete with Internet stores.
Local auction houses will be in competition with Internet auction sites such as eBay. Virtually all
organizations will be impacted in some form by the Internet. It is important that this impact be
considered.

3. What are the major priorities associated with operations strategy? How has their relationship
to each other changed over the years?

The four major imperatives are cost, quality, delivery, and flexibility. In the sixties, these four
imperatives were viewed from a tradeoff’s perspective. For example, this meant that improving
quality would result in higher cost. However, more recent thought posits that these four
imperatives can improve simultaneously, and in many industries may be necessary for success.
The problem then becomes one of prioritizing and managing towards orderly improvement.

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4. For each of the different priorities in question 3, describe the unique characteristics of the
market niche with which it is most compatible.

Cost is most compatible with products that are commodities (i.e., highly standardized products
with many alternative suppliers). Quality provides companies a means of (1) differentiating a
product and winning orders or (2) competing in a market and qualifying for orders. Quality is
now pervasive among all market niches in that customers now expect high quality. Speed and
reliability of delivery are essential in those markets where there is a large degree of
customization. In addition, reliable delivery may be a competitive advantage in some regions of
the world where delivery is difficult due to geographical or political reasons. Flexibility is
important where customers demand low volume but wide varieties of products.

5. Why does the “proper” operations strategy keep changing for companies that are world-class
competitors?

The top three priorities have generally remained the same over time: make it good, make it fast,
and deliver it on time. Others have changed. Part of this may be explained by realizing that world
class organizations have achieved excellence in these three areas and are, therefore, focusing
attention on some of the more minor areas to gain competitive advantage. The changes in the
minor priorities may result from recognizing opportunities or from changes in customer desires or
expectations.

6. In your opinion, do business schools have competitive priorities?

Their competitive priorities include:

Quality of professors and curriculum—consistent quality and high performance

Leader in development of new curriculum topics—design changes

Academic level of student attracted—consistent quality

Quantity and quality of research published—consistent quality

Quality of library resources—quality

What companies recruit at the school—after sales service

Success rate of graduates—consistent quality

Availability of financial aid—low price and after sales service

Cost of tuition—low price

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7. What is meant by the expressions order winners and order qualifiers? What was the order
winner(s) for your last purchase of a product or service?

Order winners are dimensions that differentiate the product or service or services of one firm
from another. Order qualifiers are dimensions that are used to screen a product or service as a
candidate for purchase. Obviously, answers will vary for the order winners from your last
purchase.

8. Find examples where companies have used features related to environmental sustainability to
“win” new customers.

Car companies use environmental concerns in marketing ads. The development of hybrid and
flex-fuel cars is one way they have operationalized those concerns. Consumer goods companies
display the “made with recycled material” logo on the packaging. Bottled water manufacturers
are using and advertising bottles made with less plastic.

9. Identify an operations and supply chain–related “disruption” that recently impacted a company.
What could the company have done to have minimized the impact of this type of disruption prior
to it occurring?

The March 2011 tsunami that struck Japan was geographically concentrated but had global
impact on multiple firms, many of which had no physical presence at all in the affected area.
Examples include firms that had sole source agreements with suppliers in the affected area. The
tsunami left these companies scrambling to find new suppliers to feed into their supply chains.
These firms could have reduced the impact of the tsunami by having a few high-quality,
dependable suppliers located in different geographical regions. There are many other examples
that could be taken from this one event. A simple Internet search will provide plenty of material
for discussion.

Cases (on Connect)

Case: The Tao of Timbuk21 - Teaching Notes

You can have a lot of fun with this case. Start off by logging on to the Timbk2 website and
explore what is going on there. If you have a little money in a teaching account you might
actually order a custom bag and give it away or raffle it off in class, this will really get their
attention. You make a big deal of it all when the back comes in and you give it to the lucky
student. This also helps to reinforce the topic with the students.

1. Consider the two categories of products that Timbk2 makes and sells. For the custom
messenger bag, what are the key competitive dimensions that are driving sales? Are their
competitive priorities different for the new laptop bags sourced in China?

This is one of the “other dimensions” and in this case it is the customization of the bag. Other
than being able to get the colors they prefer, the customer also get pockets that meet the unique
needs the customer has in mind. They can be successful with standardizing the laptop bags since
the purpose here is pretty well defined.

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Many thanks to Kyle Cattani for the idea behind this case. He does this regularly in his MBA class at
Indiana University.

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2. Compare the assembly line in China to that in San Francisco along the following dimensions:
(1) volume or rate of production, (2) required skill of the workers, (3) level of automation, and (4)
amount of raw materials and finished goods inventory.

Dimension China San Francisco

Volume/rate of production High Low

Required skill of workers Low High

Level of automation High Low

Raw materials and finished good Low raw materials, but High raw materials, virtually
inventory may have finished goods no finished goods

3. Draw two diagrams, one depicting the supply chain for those products sourced in China and
the other depicting the bags produced in San Francisco. Show all the major steps including raw
material, manufacturing, finished goods, distribution inventory, and transportation. Other than
manufacturing cost, what other costs should Timbuk2 consider when making the sourcing
decision?

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Bag Fabrication and Assembly in China

Raw Bag Fabrication Finished Bags
Raw Materials Transport
Materials and Assembly Inventory
Inventory to USA
(China) (China) (USA)

Bag Fabrication and Assembly in USA

Raw Bag Fabrication
Transport Raw Materials
Materials and Assembly
to USA Inventory
(China) (USA)

The big cost other than manufacturing is the cost to transport material to the USA versus the cost
of transporting the completed bags to the USA. Here we assume that the material would be
sourced in China. This is probably not a bad assumption.

Case 2: Lasik Vision Corp

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Questions:

1. What was Lasik Vision’s competitive priority?

Lasik’s priority:

It is clear that Henderson is focusing on high volumes and thus low cost. At least to Henderson,
cost is the order winner. What about the other priorities? The Lasik technique is an in-patient
procedure and appears to have reduced post- operative care requirements also. So one could argue
that delivery in a priority. On the other hand flexibility, i.e., the ability to treat patients with
different eye conditions is definitely not a priority. Sutton seems to have been burnt by lawsuits
relating to his treating high-risk patients to the extent the BC College mad a rare public statement
about him agreeing to restrict himself to low risk patients. This reinforces the notion that
flexibility is contrary to cost. The fact that the optometrists have been cut out may make it even
more difficult to handle flexibility. The optometrist might have caught the complication early,
indicating the need for flexibility during the surgery. Also they could handle any complications
during post-operative care. Again the fact that they have cut out results in reduced flexibility.

What about quality? Consider this quote from Reinstein; “People think they can equate cost with
quality. Maybe that is true for leather and maybe it is true for cars. But medicine is medicine”.
The message is that quality cannot be compromised. Thus it is an order qualifier. So competing
on low cost cannot be at the expense of quality. Perhaps one can compete on quality by promising
better pre- and post-operative care in terms of visits etc., i.e., makes it an order winner.

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2. Is it an appropriate approach in this industry? What repercussions, actual or perceived

might occur with this priority?

Is the strategy appropriate?

One of the problems with competing on standardization (low cost) in health care is how to hand
situations where customization is required. Products and services are different from health care.
While in the shop floor or at McDonalds, or even at hair dresser a complication from a customer
requiring customization can be handled through delay or money, this may not something that is
feasible in an operation theatre especially if the skill is not available. This is also evident from
lawsuits against Sutton resulting from patient dissatisfaction over surgery results and the BC
College’s statement. Another question is whether a surgeon performing standardized operations
over the long term loses part of his or her skills to handle unexpected complications, i.e., the
inability to customize, which will be present is a job shop type hospital.

Also Henderson’s strategy is contrary to Sutton’s nature. Sutton likes to do innovative surgeries.
Clearly this is not conducive to high volume and low cost. The analogue in a manufacturing
organization would be the CEO proclaiming a low cost standardized product strategy while the
employed are skilled craftsman, with low automation and company has traditionally placed a lot
of value of customized products and services. Achieving low cost can be difficult given that the
factory and human resources are geared to customization (with high cost) rather than efficient
automated production.

Also regardless of how well Lasik is actually designing quality and conforming to it, the
perception of ‘low cost- low quality’ can exist. Hence, Reinstein’s statement: Advertisements with
fine print don’t help. This is an issue of ‘perceived quality’. In fact, one could argue that cutting
the optometrists out could compromise the design quality.

From a personal perspective Sutton has antagonized the optometrists. It is interesting to note that
the optometrists are customers and suppliers. In JIT terms, instead of long-term partnership
relationships with your suppliers and customers, you have antagonized them. How will this work
in the long term? Of course Dell has eliminated the middlemen and succeeded. But that is the
computer industry. Will it work in health care? Also Suttons colleagues at UBC were mortified by
his descent into ‘discount medicine’.

3. What might be some of the external influences on strategy formulation?

External influences on strategy formulation

Government and professional regulations regarding practices and performance standards in the
medical industry, e.g. what technologies have been approved by the FDA in the USA;

Customer expectations regarding practices and performance, e.g. what prices and/or recovering
times are considered acceptable;

Introduction of new technologies, making it possible to offer higher standards of quality,

delivery, and cost;

Competitor’s practices and standards, regarding performance in cost, quality, delivery, and
flexibility

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4. Given that a company has chosen this priority, what would it have to do in order to
achieve success?

What can Lasik do to make its strategy work?

Given that Lasik has decided to go for high volume and standardization, they have to take great
pains to ensure that there is not variability in the raw material i.e., high-risk cases are detected
and not allowed to go through the process. As discussed earlier, the operations theatre may not be
the place to customize given that the process is standardized and not geared to handle
uncertainties like a hospital. Also since this is medicine they have to be careful in recruiting and
training since they cannot afford mistakes.

Another issue to how to convince prospective patients that your ‘cut rate’ does not reflect a
lowering of design quality and that it reflects the fact that you can deliver the required quality at a
lower price.

5. What are the order qualifiers and order winners in this business?

Order Winners and Qualifiers

Order Qualifier: Conformance quality

Lasik is an example of where input quality is crucial. It is important to screen out unsuitable
patients in a standardized process such as Lasik where the process is only capable of repairing
limited type of eye ailments (unlike a general hospital). Thus poor incoming quality (unsuitable
eyes) can be disastrous as the case showed.

In addition of course the surgery must be done correctly (conformance). So the machine has to be
set correctly and the surgeon has to use the correct procedures and so on

The same logic can be applied to incoming quality in automobile plants though the results would
increased repair work and cost inefficiency, not disaster
Order Winners: Cost, Service (post operative visits etc.), Flexibility (ability to handle different
types of vision problems, or eye characteristics) and Delivery (ability to schedule surgeries
promptly)

6. Based on their mission (posted on their website at http:lasikeyecentres.com, do Lasik Eye

Centres' competitive priorities seem different from Lasik Vision's?

Current strategy based on website:

Clearly they have moved away from cost based competition and are focusing on quality through
the capability of the surgeons and other personnel as well as technology. They have also brought
the optometrists back into the loop to provide more service and patient assurance.

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Some history from the current Marketing Director:

Dear Sabina:

Here is the updated history as I see it:

From the inception of its business, LASIK Vision experienced significant growth in the number
of procedures performed. However, this rapid growth and expansion into the US led to operating
losses and a substantial working capital deficit.

On January 15, 2001 ICON Laser Eye Centers Inc, a direct competitor to LASIK Vision in the
laser eye surgery industry, announced its intention to make a share exchange offer for all of
LASIK Vision's shares. During March 2001, ICON completed its takeover bid for LASIK Vision
when it acquired 97% of LASIK Vision shares.

At the time of the takeover, LASIK Vision was in arrears with the majority of its trade creditors,
had a significant working capital deficiency and was experiencing cash flow difficulties. By the
end of March, LASIK's employees had been informed that LASIK was unable to meet its payroll
obligations and, as a result, operations at the company's locations were temporarily suspended.

On March 29, 2001, the ICON Board of Directors announced it would hold a strategic corporate
planning session to discuss the deteriorating financial situation of its newly acquired subsidiary,
LASIK Vision.

On April 4, 2001, ICON took steps to assign LASIK Vision into bankruptcy.

On April 23, 2001, Dr. Hugo Sutton, and other parties, purchased the assets of the Vancouver,
British Columbia clinic. Since then, the clinic has been operating as LASIK Eye Centres, with
surgeries consistently increasing towards the levels of LASIK Vision - with a more controlled
growth strategy targeting US patients.

(Lots more images on the Web site: www.lasikeyecentres.com)  

Rod Solar
Director of Marketing and Sales