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Operations Strategies in a Global Economy
Introduction Today’s Global Business Conditions Operations Strategy Forming Operations Strategies Wrap-Up: What World-Class Producers Do
Operational effectiveness is the ability to perform similar operations activities better than competitors. It is very difficult for a company to compete successfully in the long run based just on operational effectiveness. A firm must also determine how operational effectiveness can be used to achieve a sustainable competitive advantage. An effective competitive strategy is critical.
customer service.Factors Affecting Today’s Global Business Conditions Reality of global competition Quality. and cost challenges Rapid expansion of advanced technologies Continued growth of the service sector Scarcity of operations resources Social responsibility issues 4 .
Reality of Global Competition Changing nature of world business International companies Strategic alliances and production sharing Fluctuation of international financial conditions 5 .
One of the most important new markets is China. the largest in the world.Changing Nature of World Business The US gross domestic product (GDP) is. The global economy that interconnects the economies of all nations has been termed the global village. 6 . at $10 trillion. Companies all over the globe are aggressively exporting their products/services to the US Many US companies are targeting foreign markets to shore up profits.
produce. Operations managers must coordinate geopraphically dispersed operations. 7 . and sell. International firms search out opportunities for profits relatively unencumbered by national boundaries.International Companies International companies are those whose scope of operations spans the globe as they buy.
International Companies World’s Largest Corporations 1. Wal-Mart Stores US 3. Toyota Japan 9. DaimlerChrysler Germany 6. Itochu Japan 8 . Mitsui Japan 7. Exxon Mobil US 4. General Electric US 10. Mitsubishi Japan 8. General Motors US 2. Ford Motor US 5.
Strategic Alliances Strategic alliances are joint ventures among international companies to exploit global business opportunities. Alliances are often motivated by Product or production technology Market access Production capability Pooling of capital 9 .
10 .K.000 vehicles annually near Moscow Forming Texas-based Sino Swearingen Aircraft Co. (Taiwan) & Swearingen Aircraft (US) Kia might help sell and market GM cars in South Korea Manufacture 100. (S.Strategic Alliances General Motors (US) & Kia Motor Corp.) Renault (France) & City of Moscow Sino Aerospace Investment Corp.
11 . A production keiretsu is a web of interlocking relationships between a big manufacturer (Toyota) and its suppliers. A financial keiretsu links companies together with cross-holding of shares. and consultation. sales and purchases within the group.Strategic Alliances Japanese companies have long practiced keiretsu. the linking of companies into industrial groups.
assembled in another country.Production Sharing Production sharing means that a product might be designed and financed in one country. its materials produced in other countries. The country that is the highest-quality. and sold in yet other countries. lowest-cost producer for a particular activity would perform that portion of the production of the product. 12 .
Pros and Cons of Globalization Pros (Pluses) Productivity grows more quickly (living standards can go up faster) Global competition and cheap imports keep a lid on prices (inflation less likely to derail economic growth) Open economy spurs innovation (with fresh ideas from abroad) Export jobs often pay more than other jobs US has more access to foreign investment (keeps interest rates low) 13 .
Pros and Cons of Globalization Cons (Minuses) Millions of Americans have lost jobs due to imports or production shifts abroad Most displaced workers find new jobs that pay less Workers face pay-cuts demands from employers Service and white-collar jobs are increasingly vulnerable US employees lose their comparative advantage when companies build advanced factories abroad 14 .
International Financial Conditions International financial conditions are complex due to: inflation fluctuating currency exchange rates turbulent interest rates volatility of international stock markets huge national debts of some countries enormous trade imbalances between countries 15 .
International Financial Conditions The Dollar Versus the Yen and the Mark Year 1975 1980 1985 1990 1995 2000 Yen per Dollar 305 215 210 135 85 108 Mark per Dollar 2.4 1.2 16 .6 1.4 2.7 2.0 2.
a 57% price increase.International Financial Conditions Example of Currency Exchange Rate Changes A product produced and sold in the US for $1 would have sold in Japan for 135 yen in 1990 and 85 yen in 1995. A product produced and sold in Japan for 135 yen in 1990 and sold for $1 in the US would have sold in the US for $1.57 in 1995. a price decrease of 37%. 17 .
International Financial Conditions Due. to the fall in the value of the dollar between 1975 and 1995. in part. the following occurred: Prices of US products/services abroad fell and demand increased Japan and other countries built factories in US Japanese manufacturers moved upscale toward higher priced products 18 .
or products Carefully planning and forecasting so that changing conditions can be anticipated 19 . Opportunities are usually available to reduce risk Building smaller. parts.International Financial Conditions Companies must be ready to move quickly to shift strategies as world financial conditions change. more flexible factories Using foreign suppliers for materials.
All employees must be empowered to act. Service. 20 . The entire corporate culture must be redirected and committed to the ideal of perfect quality. and Cost Challenges Quality The goal of adequate quality must be replaced with the objective of perfect product and service quality. A commitment to continuous improvement has to be organization-wide.Quality.
21 .Quality. unwieldy companies are spinning off whole business units making them autonomous businesses that can compete with small. Large. Service. and Cost Challenges Customer Service Companies must quickly develop innovative products and respond quickly to customers’ needs. aggressive competitors. Multidisciplined teams must have decision-making authority. Organizational structures must be made more horizontal to quickly accommodate change. responding better to the marketplace.
By the 1990s the difference was almost zero. 22 . Service.Quality.500 more per auto for labor in 1980 than it cost the Japanese automakers. Giant retailers (like Wal-Mart) squeezed weaker competitors out of the market. and Cost Challenges Cost There is continuing pressure to reduce direct costs (of producing and selling) and overhead costs. giving the retailers the leverage to force their suppliers to streamline operations and reduce costs/prices. It cost the US automakers $1.
Service. particularly processes that are labor intensive. 23 . and Cost Challenges Cost Cost-cutting measures being used include: Moving production to low-labor-cost countries Negotiating lower labor rates with unions and workers Automating processes to reduce the amount of labor needed.Quality.
The benefits go far beyond a reduction in labor costs. Increased product/service quality Reduced scrap and material costs Faster responses to customer needs Faster introduction of new products and services 24 . The initial cost of these assets is high.Advanced Technologies The use of automation is one of the most far-reaching developments to affect manufacturing and services in the past century.
although the price is prohibitive for some companies. Not investing. Automation systems are available to any company in the world today. 25 .Advanced Technologies US companies cannot use automated production technology as a long-term competitive advantage. or delaying investing in this technology could be disastrous for a company.
26 . analyzing.Continued Growth of Service Sector A robust service sector helps support the manufacturing sector. There is much opportunity for quality improvement in US service firms. The US service sector. like the manufacturing sector. Many operations managers are being employed in services. Planning. and controlling approaches from manufacturing are being adapted to service systems. must streamline and improve operations if it is to survive.
and petroleum products are periodically unavailable or in short supply. water. can be a challenge for an operations manager. natural gas. A shortage of any necessary input to a conversion subsystem. 27 . coal. nickel. including skilled personnel. An important issue in the formation of business strategy is how to allocate scarce resources among business opportunities.Scarcity of Operations Resources Raw materials like titanium.
28 . Clean Air Act.Companies realize that profits will be greater if they act responsibly. Factors influencing this evolution include: Consumer attitude -.Consumers are expressing their likes/dislikes by such means as stockholder meetings. to doing what is right.Social-Responsibility Issues Corporate attitudes are evolving from doing what companies have a legal right to do. Regulation – The EPA. Self-interests -. and Family Leave Act place constraints on businesses. liability suits. OSHA. and buying preferences.
Social-Responsibility Issues Environmental Impact Product-Safety Impact Employee Impact 29 .
Social-Responsibility Issues Environmental Impact Concerns about the global environment include: Landfill waste reduction Recycling Energy conservation Chemical spills Acid rain Radioactive waste disposal … and more 30 .
Otherwise. companies will gravitate to the lessregulated countries. The International Organization for Standardization has developed a set of environmental guidelines called ISO 14000. 31 .Social-Responsibility Issues Environmental Impact There is a need for standardizing government regulations of the environment.
Social-Responsibility Issues Product-Safety Impact Harm to people or animals that results from poor product design can: Damage a company’s reputation Require a large expense to remedy Cause governments to impose more regulations 32 .
Social-Responsibility Issues Employee Impact Employee benefits and policies include: Safety and health programs Fair hiring and promotion practices Day-care Family leave Health care Retirement benefits Educational assistance … and more 33 .
Social-Responsibility Issues Employee Impact Employee benefits and policies impact long-term profitability due to their effect on: Employee morale and productivity Recruitment and retention of employees Demand for a company’s products Cost of defending against lawsuits and boycotts 34 .
Developing Operations Strategy Assessment of Global Business Conditions Corporate Mission Business Strategy Product/Service Plans Competitive Priorities Operations Strategy 35 Distinctive Competencies or Weaknesses .
growth.Corporate Mission A corporate mission is a set of long-range goals and including statements about: the kind of business the company wants to be in who its customers are its basic beliefs about business its goals of survival. and profitability 36 .
social. technology. sales force. R&D. political. management 37 . Inputs to the business strategy are Assessment of global business conditions . competitive Distinctive competencies or weaknesses . economic.workers.Business Strategy Business strategy is a long-range game plan of an organization and provides a road map of how to achieve the corporate mission. technological.
material. and overhead) of each product/service Some Ways of Creating Redesign of product/service New technology Increase in production rates Reduction of scrap/waste Reduction of inventory 38 .Competitive Priorities Low Production Costs Definition Unit cost (labor.
Competitive Priorities Delivery Performance Definition a) Fast delivery b) On-time delivery Some Ways of Creating a) larger finished-goods inventory a) faster production rates a) quicker shipping methods b) more-realistic promises b) better control of production of orders b) better information systems 39 .
endurance ability After-sales service 40 .Competitive Priorities High-Quality Products/Services Definition Customers’ perception of degree of excellence exhibited by products/services Some Ways of Creating Improve product/service’s Appearance Performance and function Wear.
Customer responsiveness. Some Ways of Creating Change in type of processes used Use of advanced technologies Reduction in WIP through lean manufacturing Increase in capacity 41 .Competitive Priorities Customer Service and Flexibility Definition Ability to quickly change production to other products/services.
Operations Strategy Operations strategy is a long-range game plan for the production of a company’s products/services. 42 . and provides a road map for the production function in helping to achieve the business strategy.
location. and layout (Chapter 5) 43 .Elements of Operations Strategy Positioning the production system Product/service plans (Chapter 4) Outsourcing plans (Chapter 11) Process and technology plans (Chapters 4 & 6) Strategic allocation of resources (Chapter 8) Facility plans: capacity.
Positioning the Production System Select the type of product design Standard Custom Select the type of production processing system Product focused Process focused Select the type of finished-goods inventory policy Produce-to-stock Produce-to-order 44 .
all the detailed characteristics of the product are established. 45 .Product/Service Plans As a product is designed. Each product characteristic directly affects how the product can be made. How the product is made determines the design of the production system.
declining sales and profit.sales grow dramatically. production and marketing are developing. 46 .Stages in a Product’s Life Cycle Introduction. marketing efforts intensify. Decline . Maturity .Sales begin. capacity is expanded.production focuses on high-volume. low costs. profits are at peak. marketing focuses on competitive sales promotion. product might be dropped or replaced. efficiency. profits begin. Growth . profits are negative.
Stages of a Product’s Life Cycle Automobile Dot-Matrix Fax Machine Printer Cell Phone Video Recorder Internet Radio Color Copier CD Player B&W TV Introduction Growth Maturity Decline 47 .
Outsourcing has many advantages and disadvantages. and a smaller facility. This strategy is being used more and more as companies strive to operate more efficiently. More outsourcing requires a company to have less equipment. fewer employees. Companies try to determine the best level of outsourcing to achieve their operations & business goals.Outsourcing Plans Outsourcing refers to hiring out or subcontracting some of the work that a company needs to do. 48 .
Outsourcing Plans A company might outsource any of the following manufacturing related functions: Designing the product Purchasing the basic raw materials Processing the subcomponents. and finished product Distributing the product 49 . subassemblies. major assemblies.
Outsourcing Plans Many companies even outsource some service functions such as: Payroll Billing Order processing Developing/maintaining a website Employee recruitment Facility maintenance 50 .
51 .Process and Technology Plans An essential part of operations strategy is the determination of how products/services will be produced. The range of technologies available to produce products/services is great and is continually changing.
services. The resources must be allocated to products. Some or all of these resources are limited.Strategic Allocation of Resources For most companies. projects. 52 . the vast majority of the firm’s resources are used in production/operations. or profit opportunities in ways that maximize the achievement of the operations objectives.
53 .Facility Plans How to provide the long-range capacity to produce the firm’s products/services is a critical strategic decision. The location of a new facility may need to be decided. quality. and functional areas within a facility affects the ability to provide the desired volume. and cost of products/services. The internal arrangement (layout) of workers. equipment.
Characteristics of Services and Manufactured Products Output Output Inventoried Customer Contact Lead Time Intensity Quality Services Intangible Yes Extensive Short Labor Subjective Products Tangible No Little Long Capital Objective 54 .
55 .Competitive Priorities for Services The competitive priorities listed earlier for manufacturers apply to service firms as well Low production costs Fast and on-time delivery High-quality products/services Customer service and flexibility Providing all the priorities simultaneously to customers is seldom possible.
Positioning Strategies for Services Type of Service Design Standard or custom products Amount of customer contact Mix of physical goods and intangible services Type of Production Process Quasi manufacturing Customer-as-participant Customer-as-product 56 .
Positioning Strategies for Services Example: McDonald’s Highly standardized service design Low amount of customer contact Physical goods dominating intangible services Quasi-manufacturing approach to back-room production process 57 .
Forming Operations Strategies
Support the product plans and competitive priorities defined in the business strategy. Adjust to the evolving positioning strategies. Link to the marketing strategies. Look at alternative operations strategies.
Evolution of Positioning Strategies
The characteristics of production systems tend to evolve as products move through their product life cycles. Operations strategies must include plan for modifying production systems to a changing set of competitive priorities as products mature. The capital and production technology required to support these changes must be provided.
Evolution of Positioning Strategies
Life Stage Product Volume Focus Fin.Gds. Batch Size Intro. Custom Very Low Process Early Growth Slightly Standard Low Process Late Growth Standard High Product Maturity Highly Standard Very High Product
To-Order To-Order To-Stock To-Stock Very Small Small Large Very Large
Linking Operations and Marketing Strategies Operations Strategy Product-focused Make-to-stock Standardized products High volume Marketing Strategy Low production cost Fast delivery of products Quality Example: TV sets 61 .
Linking Operations and Marketing Strategies Operations Strategy Product-focused Make-to-order Standardized products Low volume Marketing Strategy Low production cost Keeping delivery promises Quality Example: School buses 62 .
Linking Operations and Marketing Strategies Operations Strategy Process-focused Make-to-stock Custom products High volume Marketing Strategy Flexibility Quality Fast delivery of products Example: Medical instruments 63 .
Linking Operations and Marketing Strategies Operations Strategy Process-focused Make-to-order Custom products Low volume Marketing Strategy Keeping delivery promises Quality Flexibility Example: Large supercomputers 64 .
No Single Best Strategy Start-up and Small Manufacturers Usually prefer positioning strategies with: Custom products Process-focused production Produce-to-order policies These systems are more flexible and require less capital. 65 .
personal customer service Developing a loyal customer base 66 .No Single Best Strategy Start-up and Small Services Successfully compete with large corporations by: Carving out a specialty niche Emphasizing close.
No Single Best Strategy Technology-Intensive Business Production systems must be capable of producing new products and services in high volume soon after introduction Such companies must have two key strengths: Highly capable technical people Sufficient capital 67 .
Wrap-Up: World-Class Practice Put customers first Get new products/services to market faster Are high quality producers Have high labor productivity & low production costs Carry little excess inventory . . . more 68 .
Wrap-Up: World-Class Practice Think more globally in purchasing and selling Quickly adopt and develop new technologies Trim organizations to be lean and flexible Are less resistant to strategic alliances/joint ventures Consider relevant social issues when setting strategies 69 .
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