p03 STRT 01o PDF

Production and Service Management
- Strategic Issues
Prof. Zoltán Kovács

Department of Management
Content
 Strategies
 Strategic issues of products
 Strategic issues of processes
 Competitiveness of production and service
systems
 Production system lifecycle
 Methods
05/09/2022 (c) Zoltán Kovács: Production & Service Mgmt - Strategic Issues 2
Developing an operations strategy
 Long term thinking.
 Not to win each battle!
 Towards ideal goals.
 “… to effect basic changes in the management of manufacturing
which could shift the competitive balance in our favour in many
industries. “(Skinner, 1974)
 Seeing the problem not as `How can we increase productivity?'
but as `How can we compete?'
 Seeing the problem as encompassing the efficiency of the entire
manufacturing organisation, not only the efficiency of direct
labour.
 Learning to focus each plant on a limited, concise and
manageable set of products, technologies, volumes and markets.
 Learning to structure basic manufacturing policies and
supporting services so that they focus on one explicit
manufacturing task instead of many inconsistent, conflicting and
implicit tasks.
(c) Zoltán Kovács: Production & Service Mgmt - Strategic Issues 3/52
Strategy is a need, in order…
 To ensure that operations activities are
matched to corporate needs;
 To enable the most suitable interfaces with
other departments;
 To avoid the problems of a mismatch between
process characteristics and the product or
service marketing requirements;
 To ensure that the quality of the products or
services produced matches the requirements
of the market (not higher, not lower);
 To ensure that the products or services are
available in the volume required by the
market.
05/09/202 (c) Zoltán Kovács: Production & Service Mgmt - Strategic Issues 4/52
2
Objectives for the operations strategy
 The achievement of a given level of quality in

the product or service, and in the processes
used to produce or deliver them
 The ability to supply products or services in
the volumes and at the locations required by
customers
 Cost-efficiency (productivity)
 Dependability (on-time production or delivery)
 Flexibility and responsiveness the ability to
anticipate or react quickly to changing market
situations.
2
A strategy framework
 The operations strategy must reflect and support the overall
corporate objectives.
 The operations strategy must result in products or services to
meet the needs of the market.
 The operations strategy must address the criteria, which qualify
the organisation to meet needs of its customers - the `order
winning criteria’. The operations strategy must also enable the
organisation to outperform its competitors. For example, the
organisation must produce lower cost or higher quality products
or services in order to meet the organisation's overall goals of
profitability or growth.
 The operations strategy will have an important effect on the
investment decisions made by the organisation, in term’s
physical and human resources.
 The way in which operations meets these criteria depends on the
choice of process and the operations design, planning and
control infrastructure.
2
The effect of the external environment
`PEST'/’STEP’ analysis
2
Strategic issues in production
 The product:
– Flexibility (customisation - standardisation),
– Entry and exit strategies,
– Design.
 The process:
– Volume,
– Size,
– Location,
– Layout,
– Conversion in time,
– Material flows,
– Vertical integration,
– Focusing ,
– Make to order/inventory,
– The way of the control.
2
Relationship of strategies
Objective: business success.
Company strategy.
Business strategy/strategies.
Functional strategies:
– production, marketing, HR, financial,
maintenance, logistics, R&D, information,
quality policy, environmental policy, etc.
2
Production strategy plays important role in
business success
2
Decisions and influences
Level of strategic Key strategic decisions Influences on decision
decision making making
(External and internal)
What business to be Economic

in, i.e. how diversified environment.
to be? Social environment.
Corporate strategy Focusing and diverse. Political environment.
How to allocate cash Industrial
to different businesses? attractiveness.
How to manage the Company ownership.
relationships between Company history.
different businesses?
Company values and
ethics.
2
Level of strategic decision Key strategic decisions Influences on decision
making making
Defining the mission of Expectations of the

the business. corporate group about the
Defining the strategic business.
objectives of the business: Customer and market
growth targets, return on dynamics.
investments, profitability Competitor activity.
Business strategy targets, cash generation. Core technology
Setting the way that the dynamics.
business wishes to Financial constrains.
compete in its markets.
Company resources.
Coordinating functional
strategies to achieve Government regulations.
strategic objectives.  Willingness to take
risks.
2
Level of strategic decision Key strategic decisions Influences on decision
making making
What role to play in Expectations of the

contributing to the function by top
strategic objectives of the management.
business? Skills on functions' staff.
How to translate Current technological
business and competitive capability.
Functional strategy objectives into functional Current organization of
objectives? the function.
How to manage the Recent performance of
functions' resources so as the function.
to achieve functional
objectives?
What performance
improvement priorities to
establish?
2
Differentiation
Pricing,
Promotion,
Durability,
Services,
Quality and costs,
Safety spare part supply,
Brand,
Own distribution network.
2
Cost leadership
Optimal size (factory size, volume),

Advanced technology,
Vertical integration,
Intensive capital utilization
Robotics, automation
Continuing improvement
2
Segmentation
Geographical,
Demographical,
National,
Psychological (pl. customer behaviour),
Product.
2
There is a variety of product customisation
Customized Mixed Standard
Customized
mass
2
Product life cycle
Costs
Development
Investment
Production
Stoppage
Time
2
Product life cycle
Units sold
Time
Matured
Decline
Growth
Introduction
2
Product life cycle
Cash flow, profit
Total
/Year
Time
2
Learning curve
 Practice makes perfect

Process characteristics
Quality,
Quantity
Time
requirement,
reject
Time
2
Continuing improvement vs. BPR
Level
R eengineering
CI
Tim e
2
Entry and exit strategies
Rate of Entry Exit
Innovation Early Late
Product Late
Early
Process
Time (product
maturity)
Entry: Early Late
Exit: Early Late
2
Product design for ...
... the customers' needs (QFD)

obvious, hidden, future explicit, implicit
 ... Manufacturability (DFM, DFA)
 ... maintainability, reliability (FMEA)
 ... costs
 ... time Time Based Competition (TBC)
 ... environment, social ...
2
Volume of product
 Low,
 Middle,
 Mass production.
2
The size of capacity
Size of need, future trends

2500
Life cycle/maturation
Costs of technology
2000
Break even
Revenue
Issues
1500 of competitive analysis
Flexibility
1000 of production system,
Opportunities
500
for further development,
Financial sources for investment
0
External
0 capacities
200 400 600 can
800 be1000
involved
1200
Available resources.
2
During the location we choose…
 Region (e.e. Central Europe)

 Country (e.g. Hungary)
 Area (e.g. West)
 Site (e.g. Győr)
2
Aspects of choosing a location
 Social environment
legal, political stability, standard of life,
culture, religion.
 Economical environment
taxing, costs of labour, energy.
 Geographical environment
distance from suppliers, raw materials,
transportation opportunities (water, air,
road), climate
2
Location of facilities
Techniques:
 Locational break-even analysis
 Centre of gravity method
 Factor weighting method
Multiattribute/criterial decision
 Goals
 Evaluation factors
 Weights
 Partial utilities
 Global utilities
2
Layout has effect on ...
the way of communication with partners,

material management,
internal flow of materials and
information,
production processes,
the applicable machines and tools and
their flexibility in terms of product and
technology,
ergonomic,
costs of operations
2
Center of Gravity and cost minimum
2
Center of gravity and cost minimum
2
Layout of facilities
Objectives:
 Maximum efficiency and productivity
 Minimum lead time times
 Maximum space utilization – minimum idle capacity
 A safe and comfortable working environment
 Efficient materials handling
For service organizations we could add:

 Minimum customer contact time consistent with other
service objectives
 Separation of ‘front office’/’back office’ activities
 Efficient queue handling and customer convenience
(Disney World is an expert at this)
2
There are different ways for layout
 product
 process
 customer oriented
 fix
 manufacturing cell
?
2
Product and process layout
Cut- Turning Grinding Ins-

ting pec-
tion
Workshop
Unloa- Recei- Exp-
Storage Supply endi- Storage Picking Loading
ding ving ture
Workshop
Cut- Paint- Ins-
Milling Grindin pec-
ting ing tion
g
Loading Raw material Finished goods Loading Railway

Railway warehouse Turning Cut-
ramp warehouse ramp
Recei- ting
ving
Turning
Unloa- Recei- Inspe Exp-

Storage Supply Cutting Grinding endi- Storage Picking Loading
ding ving ction ture
Milling Paint-
ing
Loading Raw material Finished goods Loading Railway

Workshop
Calculation! Railway
ramp warehouse warehouse ramp
2
Product or process layout?
Product Demand Confidence: 90%
Mean (m), St. dev. (s) => u=1.28 ≈1.3
(unit/day) (unit/day)
A 100 20
B 50 10
C 200 50
3 product based layout (prod. lines):

C = CA+ CB + CC = (100 + 1.3 x 20) + (50 + 1.3 x 10) + (200 + 1.3 x 50) =
454 unit/day.
Process (functional) layout (1 common production facility for A + B + C):
s2= sA2+ sB2+ sC2 = 400 + 100 + 2500 = 3000, s = 54.77
C = (mA+ mB + mC) + u x s = (100 + 50 + 200) + 1.3 x 54.77 = 422 unit/day.
2
The conversion vs. time: batch
Raw material A
Raw material B
Product
Mixing
Load Empty
Conversion
time (min)
2
The conversion vs. site: continous
Raw material A Product

Raw material B
Load Mixing Empty

Conversion
length (m)
2
Low vertical integration helps focusing
(Make or buy) ?
– Macro (long term) – Micro (short term)
Final product Final product
Semi-finished Semi-finished
product product
Raw materials Suppliers
Suppliers
2
Variety of products: focus or diverse?
Diversification Focusing
More than one Few products,
product, few unproved
More technologies. technologies.
Under uncertainity. The goal is the
Many types of world class level.
recources to be Using mainly
coordinated the core
We can't be good at competencies
everything Supports
globalisation
2
Vertical integration
Courtesy of Nitrogen Works, Pét
2
Vertical integration
Thanks to the Péti Nitrogénművek

2
Make or buy?
 Macro decision (strategic, long-term) involving capital
expenditure or concerned with the degree of vertical integration
of the organisation.
 Micro decision (tactical, short-term) based on day-to-day
considerations, such as a temporary lack of capacity to meet a
sudden peak in demand.
 Typical reasons for reviewing the `buy' decision might include:
 Volume changes (a larger or smaller requirement)
 Changes to product or manufacturing technology
 Deterioration in the supplier's quality or delivery performance
 Optimisation of plant and labour usage
 Large price increases (from the supplier or in the cost of raw
materials)
 Need for design secrecy.
2
Make to order or stock?
Production
Order Stock
For example: car For example: car
(Mercedes), house (Suzuki), TV set
2
Push system
Demand
Demand
Push
Product
2
Pull system
Demand
Demand
Pull
Product
2
Pull system with inventories - kanban
Demand
Demand Demand Demand
Product Product Product Pull
2
Combination
Demand
Demand Demand
Pull
Product Product
 Push system – Pull subsystems: CONWIP
2
Competitiveness is a strategic issue
Competition factors:
Price,
Quality,
Dependability,
Flexibility,
Services.
Product-service package!
2
Objectives in production and service
systems
Maintain required levels of cost.
The issue of volume.
Labor and machine utilization.
Product quality and reliability.
On time delivery.
Return on investments and
developments.
Flexibility in product choice.
09:27 (c) Kovács Zoltán: Termelés- és szolg. mgmt - Stratégiai kérdések 50/52
Competitive factors (Porter)
Potential
Entrants
Barriers to Entry
Existing
Industry
Competitors
Suppliers Buyers
Rivalry Among
Bargaining Existing Firms Bargaining
Power Power
Differentiation
Substitutes
2
Stages of manufacturing competitiveness
Level Relationship with production
1. Minimize the negative potential:

(“Internally neutral”)
2. Achieve parity with competitors:
(“Externally neutral”)
3. Provide creditable support to business
strategy. (“Internally supportive”)
4. Source of competitive advantage:
(“Externally supportive”)
2
The case of the two hamburger producers
Dimensions of flexibility
2
The life cycle of production systems
1. Design.
2. Creation.
3. Operation.
4. Withdrawing.
2
Generic strategies (Porter, 1985, 1993)
Strategic advantage
Low cost Differentiation
Narrow, only one
given segment
Ivory Dial (deodorant)
Strategic objective
Focus+low cost Dove (skin treatment)

Focus +
Differentiation
No name brands Luxury soap

sectorial
Wide+low cost Wide+Differentiation

level
Wide
2
Uncertainty has effect on strategy (Duncan,
1972)
Complexity of situation
Simple Complex
Environmental change
Low uncertainty Low-moderate uncertainty

Stable
External elements few & Many & dissimilar external

similar elements
Elements remain the Elements remain the
same/slow change same/slow change
Beer, food &c Universities, chemicals,
insurance &c
Morderate-high uncertainty High uncertainty
Unstable
External elements few & Many & dissimilar external

similar elements
Elements change frequently & Elements change frequently &
unpredictably unpredictably
Cosmetics, fashion, music, Computers, telecoms,
toys &c airlines, &c
2

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Production and Service Management

Prof. Zoltán Kovács

 The achievement of a given level of quality in

Objective: business success.

What business to be Economic

Defining the mission of Expectations of the

What role to play in Expectations of the

Optimal size (factory size, volume),

Customized Mixed Standard

Cash flow, profit

 Practice makes perfect

... the customers' needs (QFD)

Size of need, future trends

 Region (e.e. Central Europe)

the way of communication with partners,

For service organizations we could add:

Cut- Turning Grinding Ins-

Loading Raw material Finished goods Loading Railway

Unloa- Recei- Inspe Exp-

Loading Raw material Finished goods Loading Railway

3 product based layout (prod. lines):

Raw material A Product

Load Mixing Empty

Raw materials Suppliers

Courtesy of Nitrogen Works, Pét

Thanks to the Péti Nitrogénművek

 Need for design secrecy.

Product Product Product Pull

 Push system – Pull subsystems: CONWIP

Level Relationship with production

1. Minimize the negative potential:

Focus+low cost Dove (skin treatment)

No name brands Luxury soap

Wide+low cost Wide+Differentiation

Low uncertainty Low-moderate uncertainty

External elements few & Many & dissimilar external

External elements few & Many & dissimilar external

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