Chapter 2 Operations Strategy and Competitiveness 1 Operations

Chapter 2 - Operations Strategy and Competitiveness 1 Operations Management 6 th Edition R. Dan Reid & Nada R. Sanders Copyright © 2016 John Wiley & Sons, Inc.

Learning Objectives 2 Explain the role of operations strategy in the organization. Explain how a business strategy is developed. Describe how an operations strategy is developed. Explain the strategic role of technology. Define productivity and identify productivity measures. Copyright © 2016 John Wiley & Sons, Inc.

The Role of Operations Strategy 3 Provides a plan that makes best use of resources and: Specifies the policies and plans for using organizational resources Supports Business Strategy - an organizations long range plan (see graph on next slide) Copyright © 2016 John Wiley & Sons, Inc.

Business/Functional Strategy 4 Copyright © 2016 John Wiley & Sons, Inc.

Importance of Operations Strategy 5 Essential differences between operational efficiency and strategy: Operational efficiency is performing tasks well, or better than competitors Strategy is a plan for competing in the marketplace Operations strategy ensures all tasks performed are the right tasks Copyright © 2016 John Wiley & Sons, Inc.

Developing a Business Strategy 6 Consider these three critical factors in developing a business strategy: What is the business goal? (mission) Does company understand the market? (environmental scanning) What are the company strengths? (core competencies) Copyright © 2016 John Wiley & Sons, Inc.

Core Competencies 7 Copyright © 2016 John Wiley & Sons, Inc.

Creating the Business Strategy 8 Copyright © 2016 John Wiley & Sons, Inc.

Examples of Key Factors 9 Mission: Dell Computer – “to be the most successful computer company in the world” Environmental Scanning: political trends, social trends, economic trends, market place trends, global trends Core Competencies: strength of workers, modern facilities, market understanding, best technologies, financial abilities, logistics Copyright © 2016 John Wiley & Sons, Inc.

Developing an Operations Strategy 10 Operations Strategy: Is a plan for the design and management of operations functions Is developed after the business strategy Focuses on specific capabilities which give it a competitive edge – competitive priorities Copyright © 2016 John Wiley & Sons, Inc.

Designing the Operations Function 11 Copyright © 2016 John Wiley & Sons, Inc.

Competitive Priorities – The Edge 12 Four Key Operations Questions - Can a company compete on: 1. Cost? 2. Quality? 3. Time? 4. Flexibility? All of the above? Some? Tradeoffs? Copyright © 2016 John Wiley & Sons, Inc.

1. Competing on Cost 13 Offer product at lower price than competition Typically high volume products Often limit product range with little customization May invest in automation to increase productivity Might offer extra training to employees Focus on cutting costs and eliminating waste Low cost does not mean low quality Copyright © 2016 John Wiley & Sons, Inc.

2. Competing on Quality 14 Quality is often subjective & is defined differently depending on who is defining it Two major quality dimensions include 1. High performance design: Superior features, high durability, & excellent customer service 2. Product & service consistency: Meets design specifications Close tolerances Error free delivery Quality must address Product design quality – product/service meets requirements Process quality – error free products Copyright © 2016 John Wiley & Sons, Inc.

3. Competing on Time 15 Time/speed a top competitive priority First to deliver often wins the race Time-related issues involve: Rapid and/or on-time delivery Focused on shorter time between order placement and delivering product exactly when needed every time Copyright © 2016 John Wiley & Sons, Inc.

4. Competing on Flexibility 16 Business environments can change rapidly; company’s must accommodate change by being flexible Product flexibility: Offer a wide variety of goods/services, easily customized to meet specific requirements of customer Easily drop or add product to meet customer demand Volume flexibility: Ability to rapidly increase or decrease production to match market demands Copyright © 2016 John Wiley & Sons, Inc.

The Need for Trade-offs 17 Decisions must emphasize priorities that support business strategy often required trade-offs must focus on order qualifiers and order winners Copyright © 2016 John Wiley & Sons, Inc.

Order Qualifiers & Winners 18 Which priorities are “Order Qualifiers”? Hint: Must meet market’s competitive priorities since market expects it Which priorities are “Order Winners”? Hint: Dell competes on all four priorities Southwest Airlines competes on cost Mc. Donald’s competes on consistency Fed. Ex competes on speed Pizzerias compete on homemade taste Copyright © 2016 John Wiley & Sons, Inc.

Translating Competitive Priorities into Production Requirements 19 Structure decisions related Infrastructure decisions to the production process: related to planning & control systems of operations: characteristics of facilities used selection of appropriate technology flow of goods and services organization of operation function skill/pay of workers quality control approaches Copyright © 2016 John Wiley & Sons, Inc.

Example: Dell Computer 20 Structure & Infrastructure Focus on customer service, cost, and speed ERP system allows customers to order directly from Dell Product design and assembly line allow a “make to order” strategy – lowers costs, increases turns Suppliers ship components to a warehouse within 15 minutes of the assembly plant - VMI Dell set up a shipping arrangement with UPS Copyright © 2016 John Wiley & Sons, Inc.

Strategic Role of Technology 21 Technology must support competitive priorities Three Types of Technology Applications: 1. Product Technology – (New technology) Examples: Teflon, CD’s, fiber optic cable 2. Process Technology – (Improves process) Examples: flexible automation, CAD, CAM 3. Information Technology – (Enables communication) Examples: POS, EDI, ERP, B 2 B Copyright © 2016 John Wiley & Sons, Inc.

Technology as a Tool for Competitive Advantage 22 Positive Potential Negative Potential Benefits Improve processes Maintain up-to-date standards Gain competitive advantage Risks Costly Can overstate benefits Obsolescence Copyright © 2016 John Wiley & Sons, Inc.

Technology as a Tool for Competitive Advantage 23 Technology at Its Best: Supports competitive priorities Can require change to strategic plans Can require change to operations strategy Technology is a crucial strategic decision Copyright © 2016 John Wiley & Sons, Inc.

Measuring Productivity 24 Productivity is a measure of how efficiently inputs are converted to outputs Productivity = Output/input Total Productivity Measure Total Productivity = Output produced/All inputs used Partial Productivity Measure Partial Productivity = Output/labor or Output/Capital Multifactor Productivity Measure Multi-factor Productivity = Output/labor + Materials Copyright © 2016 John Wiley & Sons, Inc.

Measuring Productivity 25 Copyright © 2016 John Wiley & Sons, Inc.

Productivity Examples 26 Copyright © 2016 John Wiley & Sons, Inc.

Productivity Examples 27 Copyright © 2016 John Wiley & Sons, Inc.

Interpreting Productivity Measures 28 Productivity measures must be compared to something, i. e. , another year, a different company Raw productivity calculations do not tell the complete story unless there are no major structure differences. In the prior automobile business example, it is obvious that some major changes were taking place to yield 15. 8% and 13. 7% year-to-year cars/employee productivity improvements. What changes could improve car sales per employee? Automation? Outsourcing? Major re-design? Copyright © 2016 John Wiley & Sons, Inc.

Interpreting Productivity Measures 29 Other productivity measure questions: Is this partial productivity measurement enough to make an investment decision? Is the Total Cost Productivity measure a better reflection of year to year productivity at 4. 2% and 1. 6%. Why? Should you also look at productivity measures for the two major competitors for comparison? Productivity measure provides information on how the firm is doing relative to what is critical to the firm Copyright © 2016 John Wiley & Sons, Inc.

Productivity and Competitiveness 30 Productivity is a scorecard on effective resource use A nation’s Productivity directly related to standard of living US productivity growth averaged 2. 8% from 1948 -1973 Productivity growth slowed for the next 25 years to 1. 1% Productivity growth in service industries has been less than in manufacturing Copyright © 2016 John Wiley & Sons, Inc.

Changes in U. S. Productivity 31 Copyright © 2016 John Wiley & Sons, Inc.

Productivity and the Service Sector 32 Measuring service sector productivity is a unique challenge Traditional measures focus on tangible outcomes Service industries primarily produce intangible outcomes Measuring intangibles is challenging Copyright © 2016 John Wiley & Sons, Inc.

Operations Strategy within OM 33 Strategic decisions of firm drive tactical decisions Business strategy defines long-term plan Operations strategy support the business strategy Marketing strategy needs to fully understand operations capability Financial plans in effect support operations activities. Copyright © 2016 John Wiley & Sons, Inc.

Chapter 2 Highlights 34 Business Strategy is a long range plan and vision. Each individual business function needs to support the business strategy. An organization develops its business strategy by doing environmental scanning and considering its mission and its core competencies. The role of operations strategy is to provide a long-range plan for the use of the company’s resources in producing the company’s primary goods and services. The role of business strategy is to serve as an overall guide for the development of the organization’s operations strategy. Copyright © 2016 John Wiley & Sons, Inc.

Chapter 2 Highlights 35 The operations strategy focuses on developing specific capabilities called competitive priorities. There are four categories of competitive priorities: cost, quality, time, and flexibility. Technology can be used by companies to gain a competitive advantage and should be acquired to support the company’s chosen competitive priorities. Productivity is a measure that indicates how efficiently an organization is using its resources. Productivity is computed as the ratio or organizational outputs divided by inputs. Copyright © 2016 John Wiley & Sons, Inc.