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Operations Management

Operations Strategy Unit 2 - Chapter 2


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Learning Objectives
Define: define mission, strategy, ten decisions of OM, multinational corporations describe specific approaches used by OM to achieve strategies Explain differentiation, low cost, and response strategies explain four global operations strategies and why global issues are important

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Managerial Issues
Developing and Implementing Effective Strategies
Meeting the challenges

of increased competition in a globalized business environment. Keeping up with technology advances. Learning to do more with less. Staying ahead of copycat competitors. Keeping an eye on the future.
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Examples of Global Strategies


Boeing both sales and production are worldwide. Benetton moves inventory to stores around the world faster than its competitor by building flexibility into design, production, and distribution Sony purchases components from suppliers in Thailand, Malaysia, and around the world GM is building four similar plants in Argentina, Poland, China, and Thailand

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Management Issues in Global Operations


Global Strategic Context
Differentiation Cost leadership Response

Supply Chain Management

Location Decisions

Logistics Management

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Management Issues in Global Operations


Supply chain management

Location Decisions

Sourcing Vertical integration Make-or-buy decisions Partnering Country-related issues Product-related issues Government policy/political risk Organizational issues Flow of materials Transportation options and speed Inventory levels Packaging Storage

Materials Management

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Defining Global Operations


International business - engages in cross-border transactions Multinational Corporation - has extensive involvement in international business, owning or controlling facilities in more than one country Global company - integrates operations from different countries, and views world as a single marketplace

Transnational company - seeks to combine the benefits of global-scale efficiencies with the benefits of local responsiveness
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Reasons to Globalize Operations


Tangible

Reduce costs (labor, taxes, tariffs, etc.) Improve the supply chain Provide better goods and services Attract new markets Learn to improve operations Attract and retain global talent
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Intangible

Free trade may take us into the era of the floating factory - a six person crew will take a factory from port to port in order to obtain the best market, material, labor and tax advantages

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Achieving Global Operations -Four Considerations Global product design (social and cultural differences) Global process design and technology (work around the clock reduce time to market) Global factory location analysis country selection) Impact of Culture and Ethics - differences
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To Establish Global Services


Determine if sufficient people or facilities exist to support the service Identify foreign markets that are open - not controlled by governments Determine what services are of most interest to foreign customers Determine how to reach global customers
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Managing Global Service Operations


Must take a different perspective on Capacity planning Location Planning Facilities design and layout Scheduling

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Four International Operations Strategies


International Strategy: uses exports and licenses to penetrate the global area Multidomestic Strategy: uses decentralized authority with substantial autonomy at each business Global Strategy: Uses a high degree of centralization, with headquarters coordinating to seek standardization and learning between plants Transnational Strategy: Exploits economies of scale and learning, as well as pressure for responsiveness, by recognizing that core competencies reside everywhere in the organization
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Four International Operations Strategies

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Developing a Mission - what


Philosophy & Values Environment Mission Customers Benefit to Society Public Image Profitability & Growth

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Developing a Strategy - how


Action plan to achieve mission Shows how mission will be achieved Company has a business strategy Functional areas have strategies

1995 Corel Corp.

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Strategy Process
Company Mission Business Strategy Functional Functional Area Area Strategies

Marketing Decisions

Operations Decisions

Fin./Acct. Decisions
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Strategies for Competitive Advantage


Differentiation - Uniqueness can go beyond both the physical characteristics and service attributes to encompass everything that impacts customers perception of value Cost leadership - Provide the maximum value as perceived by customer. Does not imply low value or low quality.

Quick response Flexibility, Reliability, Timeliness. Requires institutionalization within the firm of the ability to respond, change and adapt.
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Operations Strategy
Operations Strategy
How the operations function contributes to

competitive advantage.

Competitive Priorities
How the operations function provides a firm with a

competitive advantage. PrioritiesLow cost, high quality, fast delivery, flexibility, and service.

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What is Operations Strategy?


Operations Strategy
Determining how to best utilize the firms resources

to achieve corporate objectives.

Major long-term structural issues


How big do we make the facilities? Where do we locate them? When do we build them? What type of process(es)

do we install to make the


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products?

Hierarchy of Operational Planning

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Operations Strategy Means Adding Value for the Customer


Perceived Customer Value Total Benefits Total Costs
Perceived Customer Value Total Benefits - Total Costs

If benefits exceed costs, the customer perceives value for the product or service. Value is in the eye of the beholder What affects customer perceptions of value?
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Maximizing Value Added in Operations

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Exhibit 2.2

Operations Strategy Means Adding Value for the Customer


How to add value:
Reduce

product costs to customer. Make the product more readily available. Provide faster service. Provide customers with additional relevant information. Customize the product to the customers specific needs.
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10 Operations Strategic Decisions


1. Quality
2. Product 3. Process 4. Location 5. Layout

OMs Contribution to Strategy


Examples Specific Strategy Used
FLEXIBILITY

Competitive Advantage

Sonys constant innovation of new products HPs ability to follow the printer market Southwest Airlines No-frills service

Design Volume
LOW COST DELIVERY

Pizza Huts five-minute guarantee at lunchtime Federal Expresss absolutely, positively on time

Speed Dependability
QUALITY

6. Human Resource 7. Supply Chain


Motorolas automotive products ignition systems Motorolas pagers

Differentiation (Better) Cost leadership (Cheaper)


Response (Faster)

Conformance Performance

8. Inventory
9. Scheduling 10.Maintenance
IBMs after-sale service on mainframe computers Fidelity Securitys broad line of mutual funds
AFTER-SALE SERVICE

BROAD PRODUCT LINE

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10 Strategic OM Decisions
Goods & service design Quality Process & capacity design Location selection Layout design Human resource and job design Supply-chain management Inventory Scheduling Maintenance
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Goods & Services and the 10 OM Decisions


Operations Decisions Goods & services decisions Quality Process and capacity design Goods
Product is usually tangible Objective quality standards Customer not involved in most of process

Services
Product is usually intangible Subjective quality standards Customer may be directly involved in process. Capacity must match demand to avoid lost sales
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Goods & Services and the 10 OM Decisions Continued


Operations Decisions Location Selection Layout Design Human Resources and Job Design Goods
May need to be near raw materials or labor force Layout can enhance production efficiency Workforce focused on technical skills. Labor standards consistent. Output-based wage system.

Services
Product is usually intangible Subjective quality standards Customer may be directly involved in process. Capacity matches demand to avoid lost sales
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Goods & Services and the 10 OM Decisions Continued


Operations Decisions Goods Services
Supply-chain relationships Supply chain Supply-chain management relationships critical to important, not necessarily final product critical Most services cannot be stored Primarily concerned with meeting the customer's immediate schedule
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Inventory

Raw materials, workin-process, and finished goods Ability to convert inventory may allow leveling of production rates

Scheduling

Goods & Services and the 10 OM Decisions Continued


Operations Decisions Goods Services Maintenance Maintenance is often
Maintenance is often preventive and takes "repair" and takes place at place at the production the customer's site site

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Process Design
High

Process-focused

Job Shops
Variety of Products (Print shop, emergency room , machine shop, fine dining
Moderate

Mass Customization
(Dell Computers PC) Repetitive (modular) focus

Customization at high Volume

Assembly line
(Cars, appliances, TVs, fast-food restaurants) Product-focused

Continuous
(steel, beer, paper, bread, institutional kitchen)
Low Low Moderate High
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Volume

Characteristics of High ROI Firms


High quality product High capacity utilization High operating effectiveness Low investment intensity Low direct cost per unit

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Strategic Options Managers Use to Gain Competitive Advantage


Low- cost product Product-line breadth Technical superiority Product characteristics/differentiation Continuing product innovation Low-price/high-value offerings Efficient, flexible operations adaptable to consumers Engineering research development Location Scheduling

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Preconditions To Implement a Strategy


One must understand:
Strengths & weaknesses of competitors and new entrants into the market Current and prospective environmental, legal, and economic issues The notion of product life cycle Resources available with the firm and within the OM function Integration of OM strategy with company strategy and with other functions.

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Stages in the Product Life Cycle


Growth rate

Introduction
Growth

Maturity
Decline

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Strategy and Issues During a Products Life

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SWOT Analysis Process


Environmental Analysis

Determine Corporate Mission

Form a Strategy
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SWOT Analysis to Strategy Formulation


Mission Internal Strengths Strategy Internal Weaknesses External Threats External Opportunities

Competitive Advantage

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Identifying Critical Success Factors


Marketing
Service Distribution Promotion Channels of distribution Product positioning (image, functions)

Finance/Accounting
Leverage Cost of capital Working capital Receivables Payables Financial control Lines of credit

Production/Operations

Decisions
Product Quality Process Location Layout Human resource Supply chain Inventory Schedule Maintenance

Sample Option

Chapter

Customized, or standardized 5 Define customer expectations and how to achieve them 6, S6 Facility size, technology, capacity 7, S7 Near supplier or customer 8 Work cells or assembly line 9 Specialized or enriched jobs 10, S10 Single or multiple source suppliers 11, S11 When to reorder, how much to keep on hand 12, 14,16 Stable or fluctuating productions rate 13, 15 Repair as required or preventive maintenance 17
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Activity Mapping: Southwest Airlines Low Cost Competitive Advantage

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Trends Affecting Operations Strategy Decisions


Globalization Technology
Connectivity, Speed, Intangibility

Simultaneous Competition on Multiple Competitive Priorities


No traditional trade-offs of priorities

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Competitive Priorities
Type Low Cost Quality Delivery Flexibility Priority Providing low cost products. Controlling costs across the board. Providing high quality products. Focus is on product and process quality. Providing products reliably and quickly. Providing a wide variety of products (mass customization). How fast a firm can produce a new product line. Providing value-added service. How products are delivered and supported.

Service

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The Next Sources of Competitive Advantage?


Two New Trends
The use of environmentally friendly processes

and

environmentally friendly products The use of information


Large quantities data can now be accurately stored and

transmitted inexpensively. Competitive advantage can be gained through products and services that provide enhanced levels of feedback.
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Developing an Operations Strategy from Competitive Priorities


Factory Focus and Trade-offs
A factory could not focus on all four competitive

quality, delivery, and flexibility).

priorities (cost,

Plant-within-a-Plant (PWP) concept (Skinner)


Different locations

Focusing performance on one priority limits/eliminates the ability to focus on another priority.

Questioning the Trade-Offs


World-class

priority.

with a facility would focus on their own competitive

operations led to the establishment of a hierarchy among the competitive priorities.


Increased competitive capabilities led to increased performance on all priorities by all competitors. Focus shifted from cost minimization to maximizing the value added.

Customer value

is enhanced by the focus on multiple priorities.


adapted by Fabio Emanuele Noia 2005 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458

Time Line for Operations Strategies

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Superior Performance Curves

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Distinguishing between Order Qualifiers and Order Winners

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Focusing on Core Capabilities


Core Capabilities
Specific strengths that allow a company to achieve

its competitive priorities. The skill or set of skills that the operations management function develops that allows the firm to differentiate itself from its competitors.

Focusing is achieved by:


Divesting non-critical activities.
Subcontracting ancillary activities and services.
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Integration of Manufacturing and Services


The Customers Activity Cycle (CAC)
Component Pre-purchase activities Actions Being responsive to customer inquires and the ability to demonstrate technical expertise. Actual sale and delivery of the product and collecting payment. After-sales service and product warranties

Purchase activities Post-purchase activities

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Service Strategies for Manufacturing Firms


Service Strategy Embedded Services Comprehensive Services Integrated Solutions Function Specific functions that are a part of the product itself. The manufactured product is married to additional services. Combining product and services into a seamless offering that addresses a specific customer requirement. Manufacturing goes downstream to assume responsibility for product distribution.
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Distribution Control

Additional Approaches for Integrating Manufacturing and Services


Demonstration of Knowledge and Expertise
Reassuring

customers by allowing them to view the production process and have access to production employees.

Customer Training
Providing product training to customers to build

product loyalty and increased use of products.


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Practice Problems
Problem 1:
Identify how changes in the external environment may affect the OM strategy for a company. For example, what impact are the following factors likely to have on OM strategy? a. The occurrence of a major storm or hurricane. b. Terrorist attacks of 9/11/01. c. The much discussed decrease in the quality of American primary and secondary school systems. d. Trade Legislation such as WTO and NAFTA and changes in tariffs and quotas. e. The rapid rate at which the cost of health insurance is increasing. f. The Internet.
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Practice Problems
Problem 2:
Identify how the changes in the internal environment may affect the OM strategy for a company. For example, what impact are the following factors likely to have on OM strategy? a. The increased use of Local and Wide Area Networks (LANs and WANs). b. An increased emphasis on service. c. The increased role of women in the workplace. d. The seemingly increasing rate at which both internal and external environments change.

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Practice Problems
Problem 3:
Operations managers are called upon to support the organization's strategy. OM does this with some combination of one of three strategies. What are these three strategies? a. Differentiation. b. Low-cost leadership. c. Response.

adapted by Fabio Emanuele Noia 2005 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458