Chapter 2 - Operations Strategy and Competitiveness

1. Chapter 2 - Operations Strategy and Competitiveness Operations Management 6th Edition R. Dan Reid & Nada R. Sanders

2. Learning Objectives • 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.

3. The Role of Operations Strategy • 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)

4. Business/Functional Strategy

5. Importance of Operations Strategy • 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

6. Developing a Business Strategy • 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)

7. Core Competencies

8. Creating the Business Strategy

9. Examples of Key Factors • 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

10. Developing an Operations Strategy 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

11. Designing the Operations Function

12. Competitive Priorities – The Edge Four Key Operations Questions - Can a company compete on: • Cost? • Quality? • Time? • Flexibility? All of the above? Some? Tradeoffs?

13. 1. Competing on Cost 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

14. 2. Competing on Quality Quality is often subjective & is defined differently depending on who is defining it • Two major quality dimensions include • High performance design: • Superior features, high durability, & excellent customer service • 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

15. 3. Competing on Time • 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

16. 4. Competing on Flexibility • 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

17. The Need for Trade-offs • Decisions • must emphasize priorities that support business strategy • often required trade-offs • must focus on order qualifiers and order winners

18. Order Qualifiers & Winners 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 McDonald’s competes on consistency FedEx competes on speed Pizzerias compete on homemade taste

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

20. Example: Dell Computer 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

21. Strategic Role of Technology Technology must support competitive priorities • Three Types of Technology Applications: • Product Technology – (New technology) Examples: Teflon, CD’s, fiber optic cable • Process Technology – (Improves process) Examples: flexible automation, CAD, CAM • Information Technology – (Enables communication) Examples: POS, EDI, ERP, B2B

22. Technology as a Tool for Competitive Advantage Positive Potential Negative Potential • Benefits • Improve processes • Maintain up-to-date standards • Gain competitive advantage • Risks • Costly • Can overstate benefits • Obsolescence

23. Technology as a Tool for Competitive Advantage 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

24. Measuring Productivity • 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

25. Measuring Productivity

26. Productivity Examples

27. Productivity Examples

28. Interpreting Productivity Measures • 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?

29. Interpreting Productivity Measures • 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

30. Productivity and Competitiveness • 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

31. Changes in U.S. Productivity

32. Productivity and the Service Sector • Measuring service sector productivity is a unique challenge • Traditional measures focus on tangible outcomes • Service industries primarily produce intangible outcomes • Measuring intangibles is challenging

33. Operations Strategy within OM • 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.

34. Chapter 2 Highlights • 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.

35. Chapter 2 Highlights • 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.