Topic 2:

Supply Chain Strategy

Mohsin Jat, PhD

Office: OM 2201GDepartment of Management, International Business, Information and Supply
Chain
Bob Gaglardi School of Business & Economics | Thompson Rivers University
mjat@tru.ca
Topic 2: Strategy, Competitiveness, and
Productivity
Learning outcomes:
1. Discuss the primary ways in which organizations compete
2. Describe the elements of strategic planning and their
connection
3. Identify operations and supply chain strategic areas
4. Define and measure productivity
5. Evaluate product and production strategies
6. Define and determine different types of capacities
7. Explain the important considerations when planning
capacity
8. Perform basic breakeven analysis for capacity decisions
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Competitiveness?
• The ability and performance of an organization in the
marketplace compared to other organizations that offer
similar goods and services.

• Key purchasing criteria?

• Most customers tend to choose the best “buy” or best

“value”

 Trade-off between Benefit and Price

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The Notion of Trade-offs
• Central to the Operations and Supply Chain strategy

• Straddling: occurs when trying to match a competitor in one

dimension without compromising on other dimensions.

• Order qualifiers: criteria that permit a product to be considered

as a candidate for purchase.

• Order winners: criteria that differentiate the product from

others in a positive way.

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Strategic Planning Process

1. Determine a Mission (where it is going now) and a Vision

(where the organization desired to be in the future)

2. Develop one or more goals and a strategy (direction) to

achieve each goal

3. Break each Goal into Objectives (a target for what can be

accomplished in a year) and Implement the goal through
Action Plans (projects)

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Strategic Planning

Mission/Vision

Goals

Organizational
Strategy

Operations and
Financial Strategy Marketing
Supply Chain
Strategy
Strategy

Tactics, policies,
and plans 6
Strategic Planning examples

WestJest mission:

To enrich the lives of everyone in WestJet’s world by

providing safe, friendly, and affordable air travel

Goals and objectives?

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Strategic Planning examples

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Operation and Supply Chain Strategy?
• Operations and Supply Chain strategy – set of coordinated
policies, objectives, and action plans, directly affecting the
operations and supply chain function

– Consistent with organization strategy

– Support competitive priorities
– Aimed at securing a long-term sustainable advantage
over the competition

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IKEA Example

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 Strategic Decision Categories

Vertical
Facility Capacity
Integration/Sourcing

Supplier
Relations/Partnerships Product Mix and New Production Process
Products Types and Technology

Operations
Human Resources Quality Infrastructure and
Systems
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Productivity?
• A measure of the effective use of resources, usually
expressed as the ratio of output to input

• Productivity ratios can be computed for:

– A worker
– A department
– An organization
– A country
𝑂𝑢𝑡𝑝𝑢𝑡𝑠
𝑃𝑟𝑜𝑑𝑢𝑐𝑡𝑖𝑣𝑖𝑡𝑦=
𝑖𝑛𝑝𝑢𝑡𝑠

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Measures of Productivity
• Partial measures: Output/(single input)
Output/Labor; Output/Machine; Output/Material;
Output/Energy

• Multifactor measures: Output/(multiple inputs)

Output/(Labor+Machine);
Output/(Labor+Material+Energy)

• Total measure: Output/(all inputs)

(Goods or Service Produced)/(All inputs used)

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Measures of Productivity
• Productivity growth:

(Cp – Pp)/Pp

Where,
Cp = Current period productivity
Pp = Previous period productivity

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Productivity Calculation Examples
1) Four workers installed 720 square meters of carpet in eight hours.
What is the productivity?

2) A manufacturer produces 2,040 units. The input costs for this

production are:
Labor and staff: $1,000
Materials: $520
Machine overhead: $2,000

What is the productivity?

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Productivity Calculation Examples
A pottery manufacturer that sells to department stores had the following
output and costs during the last three weeks. Average labor cost is $10
per hour during regular time (first 40 hours of a week) and $15 per hour
during overtime (any hours in excess of 40 hours a week), and pottery
clay cost was $2/kg. Calculate the multi-factor productivity for each week
and comment on the results.

Week 1 2
Units produced 1,000 1,500
No of worker 2 2
Hours/week/worker 40 60
Material (Kg) 150 250

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Productivity – other issues

• Defective products do not count in productivity

• Service productivity is hard to measure. (intangible;

intellectual; variability)

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 Sustainability – The Triple Bottom Line
Sustainability – the ability to meet current resource
needs without compromising the ability of future
generations to meet their needs.

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 Product Mix Strategies
Standardization VS. Customization
• Standardization: Extent to which there is an absence of variety
in a product
– Advantages?

– Disadvantages?

• Customization: Extent of variety

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 Product Mix Strategies
Standardization VS. Customization

• Mass Customization: Producing standardized goods or services

with some degree of customization
– Delayed differentiation
– Modular design

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 Production Process Strategy
If, for a computer, there are 4 processor, 3 hard-drive, 4
• Choosing the memory, 2 speaker, and 4 monitor choices: total possible
production/inventory strategies combinations are 384.

– Make-to-stock: producing and Storage

holding items in inventory for Customer
a fast delivery to customers
Storage
– Make-to-order: producing to Customer
customer specifications

– Assemble-to-order: Producing
a variety of products after Storage
Customer
customer orders are received
(mixed)

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 Production Process
• Choosing the production/inventory strategies

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Defining and Measuring Capacity
• Capacity: Maximum output that can be produced over a
specific time period by an operating unit
– Output: Number of units produced; Number of customers served

Why are long term capacity

decisions important?

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 Measuring Capacity
• Design (theoretical) capacity: Maximum obtainable output rate
under ideal conditions

• Effective capacity: maximum output rate given breaks

(scheduling), product mix, equipment maintenance, delays and
other realities

• Efficiency: The ratio of actual output rate to effective capacity.

– (Actual output rate)/Effective capacity)

• Utilization: ratio of uptime and available time

– (Uptime/Available-time)

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Efficiency/Utilization Example
Design capacity = 50 trucks/day
Effective capacity = 40 trucks/day
Actual output = 36 trucks/day
Efficiency?

Available hours = 8 hrs x 5 days per week

Downtime = 5 hours per week
Utilization?

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Strategic Capacity Planning - Process

1. Forecast demand (long-term)

2. Calculate capacity requirements to meet the forecast

3. Measure the capacity now and plan to bridge the gap

– Generate technically feasible alternatives
– Evaluate each alternative economically
– Consider non-economic aspects
– Chose the best alternative and implement

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Strategic Capacity Planning – Considerations!
• Identify and take into account Bottleneck Operation [take a
systems approach to capacity changes]
– An operation in a sequence of operations whose capacity is
lower than the other operations in the sequence
– Bottleneck’s capacity is the overall capacity
• Try to balance capacity of process steps

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Strategic Capacity Planning – Considerations!
• Choose capacity timing and increments

• Prepare to deal with capacity chunks

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Strategic Capacity Planning – Considerations!
• Use capacity cushion
– Capacity shortage cost vs. cost of excess capacity

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Strategic Capacity Planning – Considerations!
FC: Fixed cost; VC: Variable cost

FC = $1000; VC = $1/unit

Economies of scale
• Fixed costs (facilities, equipment, management) spread out over
more units – reducing the average cost per unit

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Break-Even Analysis – Add Capacity
• Focuses on relationship between costs, revenue, and
volume
– Classify costs as (a) fixed and (b) variable
– Determine break-even point QBEP, i.e. quantity at which profit
=0
– If demand is expected to be larger than QBEP, only then there
will be a profit

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Break-Even Analysis – Add Capacity?
FC = fixed cost per year
v = variable cost per unit product (e.g., material)
R = revenue (sales price) per unit product
Q = quantity to produce per year

Annual Revenue = RQ
Annual cost = FC + vQ
At break-even quantity (QBE):

Revenue = Cost
RQ = FC + vQ
Q = FC/(R-v) = QBE

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Break-Even Analysis – Add Capacity?
FC = fixed cost = $10,000/year
v = variable cost = $5/unit
R = revenue = $6/unit
Q = quantity to produce

At break-even quantity (QBE):

Q = FC/(R-v) = QBE

QBE = 10,000/(6 – 5) = 10,000 units

Add capacity if demand is more than 10,000 units

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