Operations and Supply Chain Strategies Chapter 2
Chapter Objectives 2 Be able to: • Explain the relationship between business strategies and functional strategies and the difference between structural and infrastructural elements of the business. • Describe the main operations and supply chain decision categories. • Explain the concept of customer value and calculate a value index score. • Differentiate between order winners and qualifiers and explain why this difference is important to developing the operations and supply chain strategy for a firm. • Discuss the concept of trade-offs and give an example. • Define core competencies and give an example of how core competencies in the operations and supply chain areas can be used for competitive advantage. • Explain the importance of strategic alignment and describe the four stages of alignment between the operations and supply chain strategy and the business strategy.
Business Elements 2 Structural (Tangible) • Buildings • Equipment • Computer systems • Other capital assets • Infrastructural • (Intangible) • People • Policies • Decision rules • Organizational structure
Decisions Guided by the Structural Strategy 2 Capacity • Amount, Type, Timing Facilities • Services/Manufacturing, Warehouses, Distribution hubs • Size, location, degree of specialization Technology • Services/Manufacturing, Material handling equipment, Transportation equipment, Information systems
Decisions Guided by the Infrastructural Strategy 2 Organization • Structure, Control/reward systems, Workforce decisions Sourcing/Purchasing • Sourcing strategies, Supplier selection, Supplier performance measurement Planning and Control • Forecasting, Tactical planning, Inventory management, Production planning and control Business Processes and Quality Management • Six Sigma, Continuous improvement, Statistical process control Product and service development • The developmental process, Organizational and supplier roles
Definitions 2 • Strategies- The mechanisms by which businesses coordinate their decisions regarding their structural and infrastructural elements. • Mission Statement - Explains why an organization exists and what is important to the organization (its core values) and identifies the organization’s domain.
Definitions 2 • Corporate Strategy • Business Strategy- The strategy that identifies a firm’s targeted customers and sets time frames and performance objectives for the business. • Functional Strategy - A strategy that translates a business strategy into specific functional areas.
Definitions 2 • Core Competency- An organizational strength or ability that customers find valuable and competitors find difficult or impossible to copy.
A Top-Down Model of Strategy Figure 2.1
Operations and Supply Chain Strategies 2 The operations and supply chain strategy is a functional strategy that indicates how the structural and infrastructural elements within the operations and supply chain areas will be acquired and developed to support the overall business strategy. • What mix of structural and infrastructural elements ? • Is the mix aligned with the business strategy? • Does it support the development of core competencies?
Functional Strategy 2 • Translates the business strategy into functional terms. • Assures coordination with other areas. • Provides direction and guidance for operations and supply chain decisions.
Key Interactions 2 MIS What IT solutions to make it all work together? Finance Budgeting. Analysis. Funds. Human Resources Skills? Training? # of employees? Design Sustainability. Quality. Manufacturability. Supply Chain and Operations Marketing What products? What volumes? Costs? Quality? Delivery? Accounting Performance measurement systems. Planning and control.
Value Attributes of Consumer Customers • Cost – What does it cost for the total time of ownership? • Quality – Does it meet my needs? • World’s 10 Most Expensive Hotel Rooms • Convenience – How easy is it to get? • Timeliness – How quickly can I get it? • Personalization – Will the business treat me as special? Do they know me? • Ethical Issues – Is the business acting responsibly? • Disneyland Ride Accident • Disneyland Employee Hurt • Style/Fashion – Is the product the most current style? • Technology – Do I need technical skills to use this product? • The Kindle Fire • http://www.apple.com/
Value Attributes of Business Customers • When determining product or service value, a Business evaluates its potential to add value to the products or services it sells to its customers. • Cost – What does it cost for the total time of ownership? • Quality – Does it meet our specifications? • Delivery Dependability – Does the firm meet delivery promises? • Flexibility – Can they adapt to special needs? • Response Time – How quickly can they get it to us?
The Value Transfer Model Those producers sell it to consumers if it matches the value attributes they desire. Supplierscreate value. They sell it to product and service producers.
Customer Value 2 • Value Analysis - A process for assessing the value of a product or service. • Value Index - A measure that uses the performance and importance scores for various dimensions of performance for an item or a service to calculate a score that indicates the overall value of an item or a service to a customer.
Value Index Determination 2 Where: V = Value index for product or service In= Importance of dimension n Pn = Performance with regard to dimension n
Threshold score = 720 Performance Importance Score Value Criterion (A) (B) (A x B) Market potential 30 Unit profit margin 20 Operations compatibility 20 Competitive advantage 15 Investment requirement 10 Project risk 5 100% Value Analysis:Introduce new product?
Value Analysis:Introduce new product? Threshold score = 720 Performance Importance Score Value Criterion (A) (B) (A x B) Market potential 30 6 Unit profit margin 20 10 Operations compatibility 20 6 Competitive advantage 15 10 Investment requirement 10 3 Project risk 5 4
Threshold score = 720 Performance Importance Score Value Criterion (A) (B) (A x B) Market potential 30 6 180 Unit profit margin 20 10 200 Operations compatibility 20 6 120 Competitive advantage 15 10 150 Investment requirement 10 3 30 Project risk 5 4 20 Value Index = 700 Value Analysis:Introduce new product? Not at this time!
Four Performance Dimensions 2 Quality Time Flexibility Cost
Four Performance Dimensions 2 • Quality • Performance Quality – The basic operating characteristics of the product or service. • Conformance Quality – Was the product made or the service performed to specifications? • Reliability Quality – Will a product work for a long time without failing?
Four Performance Dimensions 2 • Time • Delivery Speed - The ability for the operations or supply chain function to quickly fulfill a need once it has been identified. • Delivery Reliability – The ability to deliver products or services when promised. • Delivery Window
Four Performance Dimensions 2 • Flexibility • Mix Flexibility – The ability to produce a wide range of products or services. • Changeover Flexibility – The ability to produce a new product with minimal delay. • Volume Flexibility – The ability to produce whatever volume the customer needs.
Four Performance Dimensions 2 • Cost • Labor costs • Material costs • Engineering costs • Quality-related costs
Trade-offs among Performance Dimensions 2 • Generally very difficult to excel at all four performance dimensions. • Some common conflicts • Low cost versus high quality • Low cost versus flexibility • Delivery reliability versus flexibility • Conformance quality versus product flexibility
Order Winners and Order Qualifiers 2 • Order Winners A performance dimension that differentiates a company’s products and services from its competitors. • Order Losers A performance dimension that repel particular customers. • Order Qualifiers A performance dimension on which customers expect a minimum level of performance to be considered.
Four Measures of Productivity • Profit Margin – how much profit is generated per dollar of sales • Return on Assets (ROA) – profit per dollar of assets • Return on Equity (ROE) – profit per dollar of equity • Economic Value Added (EVA) – wealth from capital • What is Net Income? Next
Evaluating Progress Toward “The Goal” • Net income: Net Sales – Cost of Goods sold – Selling and Administrative Costs - Depreciation – Interest - Taxes Challenge of Net Income “My business made $50,000 last year” How did I do??? • Consider the amount invested to generate the profit: • If I used $10,000 • If I used $1,000,000 • If I used $10,000,000 Back
Evaluating Profitability • Profit Margin • Income/sales - Profit generated per dollar of sales. • Low costs efficient use of operations resources in processes • High sales high levels of value created by those processes Back
Evaluating Profitability • Return on Assets (ROA) • Net Income / Total Assets • Profit per dollar of assets • Efficient use of resources reduces asset needs • Relevant because operations managers control so many valuable assets • Return on Equity (ROE) • Net Income / Total Equity • Productivity of stockholder investment • Less directly applicable to operations managers because ROA measures the assets themselves • But ultimately how the company is judged by investors Back
Economic Value Added • Economic Value Added (EVA) • Operating profit minus cost of capital • Not a ratio, but an absolute measure of the value created • Book Example: • You use $3,000 to start your business. • “Cost of Capital” is 8% • $3,000 * 8% = $240 • $240 is the “opportunity cost” of the resources you used. • Profit > $240 means you created “economic value” • Profit < $240 means you destroyed “economic value” Back • EVA is increased by reducing cost or by selecting high return investments for the firm.
Profitability from Operations Resources • Resource categories: • Inventory • Capacity • Workforce • Facilities • Customer relationships • Productivity measures for resources are often like local profitability measures. Next
Inventory • Products and components of products sold • Average inventory level is basis for productivity measurement. • Inventory turnover is most common productivity measure. Exhibit 2.2 Daily orders vs Monthly Orders to Meet 100 unit/Month Demand
Inventory • Inventory turnover is the most common inventory productivity measure Inventory Turnover = Net Sales /Average Inventory • Average inventory level is basis for productivity measurement Beginning Inv. + Ending Inv. 2
Inventory • Financial consequences of inventory turnover • What is average level of inventory? • What is average level of inventory if we change from weekly to daily delivery? Example 2.1 Deliveries of 800 cases weekly (assume all are consumed evenly during a five-day week) Cases are valued at $265 Average investment in inventory Weekly: $106,000 Daily: $21,200 ------------------------- Difference: $84,800 Back
Capacity: Utilization • Capacity is the capability to produce output in a given amount of time. • Utilization: Comparison of time spent actually working against theoretical time available to work • Actual running time/time available
Capacity: Efficiency • Efficiency • Efficiency is the comparison of what actually happened to what “should have” happened • Actual output/ Standard output Standard = 5400/hour Back
Facilities • Buildings used to house all aspects of a business. • Expensive, long-term investments. • Output per square foot of facilities is common productivity measure. Back
Example 2.4 Exhibit 2.5: Monthly Performance Data for Sales Force Exhibit 2.6: Possible Productivity Measures for Sales Force Workforce • Often the greatest resource • Often the most difficult resource to manage • Productivity measurement depends on the objective and the behavior desired. Back