Operations Strategy

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(No Transcript)
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Chapter 2

• Operations Strategies
• in a Global Economy

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Overview

• Introduction
• Todays Global Business Conditions
• Operations Strategy
• Forming Operations Strategies
• Wrap-Up What World-Class Producers Do

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Introduction

• Operational effectiveness is the ability to
  perform similar operations activities better than
  competitors.
• It is very difficult for a company to compete
  successfully in the long run based just on
  operational effectiveness.
• A firm must also determine how operational
  effectiveness can be used to achieve a
  sustainable competitive advantage.
• An effective competitive strategy is critical.

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Factors Affecting Todays Global Business
Conditions

• Reality of global competition
• Quality, customer service, and cost challenges
• Rapid expansion of advanced technologies
• Continued growth of the service sector
• Scarcity of operations resources
• Social responsibility issues

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Reality of Global Competition

• Changing nature of world business
• International companies
• Strategic alliances and production sharing
• Fluctuation of international financial conditions

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Changing Nature of World Business

• The US gross domestic product (GDP) is, at 10
  trillion, the largest in the world.
• Companies all over the globe are aggressively
  exporting their products/services to the US
• Many US companies are targeting foreign markets
  to shore up profits.
• The global economy that interconnects the
  economies of all nations has been termed the
  global village.
• One of the most important new markets is China.

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International Companies

• International companies are those whose scope of
  operations spans the globe as they buy, produce,
  and sell.
• International firms search out opportunities for
  profits relatively unencumbered by national
  boundaries.
• Operations managers must coordinate
  geopraphically dispersed operations.

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International Companies

• Worlds Largest Corporations
• 1. General Motors US
• 2. Wal-Mart Stores US
• 3. Exxon Mobil US
• 4. Ford Motor US
• 5. DaimlerChrysler Germany
• 6. Mitsui Japan
• 7. Mitsubishi Japan
• 8. Toyota Japan
• 9. General Electric US
• 10. Itochu Japan

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Strategic Alliances

• Strategic alliances are joint ventures among
  international companies to exploit global
  business opportunities.
• Alliances are often motivated by
• Product or production technology
• Market access
• Production capability
• Pooling of capital

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Strategic Alliances
Kia might help sell and market GM cars in South
Korea
General Motors (US) Kia Motor Corp. (S.K.)
Manufacture 100,000 vehicles annually near Moscow
Renault (France) City of Moscow
Forming Texas-based Sino Swearingen Aircraft Co.
Sino Aerospace Invest- ment Corp. (Taiwan)
Swearingen Aircraft (US)
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Strategic Alliances

• Japanese companies have long practiced keiretsu,
  the linking of companies into industrial groups.
• A financial keiretsu links companies together
  with cross-holding of shares, sales and purchases
  within the group, and consultation.
• A production keiretsu is a web of interlocking
  relationships between a big manufacturer (Toyota)
  and its suppliers.

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Production Sharing

• Production sharing was coined by Peter Drucker
• It means that a product might be designed and
  financed in one country, its materials produced
  in other countries, assembled in another country,
  and sold in yet other countries.
• The country that is the highest-quality,
  lowest-cost producer for a particular activity
  would perform that portion of the production of
  the product.

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Pros and Cons of Globalization

• Pros (Pluses)
• Productivity grows more quickly (living standards
  can go up faster)
• Global competition and cheap imports keep a lid
  on prices (inflation less likely to derail
  economic growth)
• Open economy spurs innovation (with fresh ideas
  from abroad)
• Export jobs often pay more than other jobs
• US has more access to foreign investment (keeps
  interest rates low)

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Pros and Cons of Globalization

• Cons (Minuses)
• Millions of Americans have lost jobs due to
  imports or production shifts abroad
• Most displaced workers find new jobs that pay
  less
• Workers face pay-cuts demands from employers
• Service and white-collar jobs are increasingly
  vulnerable
• US employees lose their comparative advantage
  when companies build advanced factories abroad

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International Financial Conditions

• International financial conditions are complex
  due to
• inflation
• fluctuating currency exchange rates
• turbulent interest rates
• volatility of international stock markets
• huge national debts of some countries
• enormous trade imbalances between countries

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International Financial Conditions

• The Dollar Versus the Yen and the Mark
• Year Yen per Dollar Mark per
  Dollar
• 1975 305 2.7
• 1980 215 2.0
• 1985 210 2.4
• 1990 135 1.6
• 1995 85 1.4
• 2000 108 2.2

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International Financial Conditions

• Example of Currency Exchange Rate Changes
• A product produced and sold in the US for 1
  would have sold in Japan for 135 yen in 1990 and
  85 yen in 1995, a price decrease of 37.
• A product produced and sold in Japan for 135 yen
  in 1990 and sold for 1 in the US would have sold
  in the US for 1.57 in 1995, a 57 price increase.

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International Financial Conditions

• Due, in part, to the fall in the value of the
  dollar between 1975 and 1995, the following
  occurred
• Prices of US products/services abroad fell and
  demand increased
• Japan and other countries built factories in US
• Japanese manufacturers moved upscale toward
  higher priced products

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International Financial Conditions

• Companies must be ready to move quickly to shift
  strategies as world financial conditions change.
• Opportunities are usually available to reduce
  risk
• Building smaller, more flexible factories
• Using foreign suppliers for materials, parts, or
  products
• Carefully planning and forecasting so that
  changing conditions can be anticipated

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Quality, Service, and Cost Challenges

• Quality
• The goal of adequate quality must be replaced
  with the objective of perfect product and service
  quality.
• The entire corporate culture must be redirected
  and committed to the ideal of perfect quality.
• All employees must be empowered to act.
• A commitment to continuous improvement has to be
  organization-wide.

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Quality, Service, and Cost Challenges

• Customer Service
• Companies must quickly develop innovative
  products and respond quickly to customers needs.
• Organizational structures must be made more
  horizontal to quickly accommodate change.
• Multidisciplined teams must have decision-making
  authority, responding better to the marketplace.
• Large, unwieldy companies are spinning off whole
  business units making them autonomous businesses
  that can compete with small, aggressive
  competitors.

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Quality, Service, and Cost Challenges

• Cost
• There is continuing pressure to reduce direct
  costs (of producing and selling) and overhead
  costs.
• It cost the US automakers 1,500 more per auto
  for labor in 1980 than it cost the Japanese
  auto-makers. By the 1990s the difference was
  almost zero.
• Giant retailers (like Wal-Mart) squeezed weaker
  competitors out of the market, giving the
  retailers the leverage to force their suppliers
  to streamline operations and reduce costs/prices.

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Quality, Service, and Cost Challenges

• Cost
• Cost-cutting measures being used include
• Moving production to low-labor-cost countries
• Negotiating lower labor rates with unions and
  workers
• Automating processes to reduce the amount of
  labor needed, particularly processes that are
  labor intensive.

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Advanced Technologies

• The use of automation is one of the most
  far-reaching developments to affect manufacturing
  and services in the past century.
• The initial cost of these assets is high.
• The benefits go far beyond a reduction in labor
  costs.
• Increased product/service quality
• Reduced scrap and material costs
• Faster responses to customer needs
• Faster introduction of new products and services

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Advanced Technologies

• US companies cannot use automated production
  technology as a long-term competitive advantage.
• Automation systems are available to any company
  in the world today, although the price is
  prohibitive for some companies.
• Not investing, or delaying investing in this
  technology could be disastrous for a company.

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Continued Growth of Service Sector

• A robust service sector helps support the
  manufac-turing sector.
• There is much opportunity for quality improvement
  in US service firms.
• Many operations managers are being employed in
  services.
• Planning, analyzing, and controlling approaches
  from manufacturing are being adapted to service
  systems.
• The US service sector, like the manufacturing
  sector, must streamline and improve operations if
  it is to survive.

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Scarcity of Operations Resources

• Raw materials like titanium, nickel, coal,
  natural gas, water, and petroleum products are
  periodically unavailable or in short supply.
• A shortage of any necessary input to a conversion
  subsystem, including skilled personnel, can be a
  challenge for an operations manager.
• An important issue in the formation of business
  strategy is how to allocate scarce resources
  among business opportunities.

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Social-Responsibility Issues

• Corporate attitudes are evolving from doing what
  companies have a legal right to do, to doing what
  is right.
• Factors influencing this evolution include
• Consumer attitude -- Consumers are expressing
  their likes/dislikes by such means as
  stockholder meetings, liability suits, and buying
  preferences.
• Regulation The EPA, OSHA, Clean Air Act, and
  Family Leave Act place constraints on businesses.
• Self-interests -- Companies realize that profits
  will be greater if they act responsibly.

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Social-Responsibility Issues

• Environmental Impact
• Product-Safety Impact
• Employee Impact

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Social-Responsibility Issues

• Environmental Impact
• Concerns about the global environment include
• Landfill waste reduction
• Recycling
• Energy conservation
• Chemical spills
• Acid rain
• Radioactive waste disposal
• and more

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Social-Responsibility Issues

• Environmental Impact
• There is a need for standardizing government
  regulations of the environment.
• Otherwise, companies will gravitate to the
  less-regulated countries.
• The International Organization for
  Standardization has developed a set of
  environmental guidelines called ISO 14000.

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Social-Responsibility Issues

• Product-Safety Impact
• Harm to people or animals that results from poor
  product design can
• Damage a companys reputation
• Require a large expense to remedy
• Cause governments to impose more regulations

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Social-Responsibility Issues

• Employee Impact
• Employee benefits and policies include
• Safety and health programs
• Fair hiring and promotion practices
• Day-care
• Family leave
• Health care
• Retirement benefits
• Educational assistance
• and more

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Social-Responsibility Issues

• Employee Impact
• Employee benefits and policies impact long-term
  profitability due to their effect on
• Employee morale and productivity
• Recruitment and retention of employees
• Demand for a companys products
• Cost of defending against lawsuits and boycotts

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Developing Operations Strategy
Corporate Mission
Assessment of Global Business Conditions
Distinctive Competencies or Weaknesses
Business Strategy
Product/Service Plans
Competitive Priorities
Operations Strategy
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Corporate Mission

• A corporate mission is a set of long-range goals
  and including statements about
• the kind of business the company wants to be in
• who its customers are
• its basic beliefs about business
• its goals of survival, growth, and profitability

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Business Strategy

• Business strategy is a long-range game plan of an
  organization and provides a road map of how to
  achieve the corporate mission.
• Inputs to the business strategy are
• Assessment of global business conditions -
  social, economic, political, technological,
  competitive
• Distinctive competencies or weaknesses - workers,
  sales force, RD, technology, management

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SWOT Strategic Planning Tool

Opportunity
Treat
Strength
Weakness
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Competitive Priorities
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Competitive Priorities

• Low Production Costs
• Definition
• Unit cost (labor, material, and overhead) of
  each product/service
• Some Ways of Creating
• Redesign of product/service
• New technology
• Increase in production rates
• Reduction of scrap/waste
• Reduction of inventory

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Competitive Priorities

• Delivery Performance
• Definition
• a) Fast delivery b) On-time delivery
• Some Ways of Creating
• a) larger finished-goods inventory
• a) faster production rates
• a) quicker shipping methods
• b) more-realistic promises
• b) better control of production of orders
• b) better information systems

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Competitive Priorities

• High-Quality Products/Services
• Definition
• Customers perception of degree of excellence
  exhibited by products/services
• Some Ways of Creating
• Improve product/services
• Appearance
• Performance and function
• Wear, endurance ability
• After-sales service

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Competitive Priorities

• Customer Service and Flexibility
• Definition
• Ability to quickly change production to other
  products/services. Customer responsiveness.
• Some Ways of Creating
• Change in type of processes used
• Use of advanced technologies
• Reduction in WIP through lean manufacturing
• Increase in capacity

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Operations Strategy

• Operations strategy is a long-range game plan for
  the production of a companys products/services,
  and provides a road map for the production
  function in helping to achieve the business
  strategy.

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Elements of Operations Strategy

• Positioning the production system
• Product/service plans (Chapter 4)
• Outsourcing plans (Chapter 11)
• Process and technology plans (Chapters 4 6)
• Strategic allocation of resources (Chapter 8)
• Facility plans capacity, location, and layout
  (Chapter 5)

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Positioning the Production System

• Select the type of product design
• Standard
• Custom
• Select the type of production processing system
• Product focused
• Process focused
• Select the type of finished-goods inventory
  policy
• Produce-to-stock
• Produce-to-order

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Product/Service Plans

• As a product is designed, all the detailed
• characteristics of the product are established.

Each product characteristic directly affects how
the product can be made.
How the product is made determines the design of
the production system.
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Stages in a Products Life Cycle

• Introduction- Sales begin, production and
  marketing are developing, profits are negative.
• Growth - sales grow dramatically, marketing
  efforts intensify, capacity is expanded, profits
  begin.
• Maturity - production focuses on high-volume,
  efficiency, low costs marketing focuses on
  competitive sales promotion profits are at peak.
• Decline - declining sales and profit product
  might be dropped or replaced.

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Stages of a Products Life Cycle
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Outsourcing Plans

• Outsourcing refers to hiring out or
  subcontracting some of the work that a company
  needs to do.
• This strategy is being used more and more as
  companies strive to operate more efficiently.
• Outsourcing has many advantages and
  disadvantages.
• Companies try to determine the best level of
  out-sourcing to achieve their operations
  business goals.
• More outsourcing requires a company to have less
  equipment, fewer employees, and a smaller
  facility.

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Outsourcing Plans

• A company might outsource any of the following
  manufacturing related functions
• Designing the product
• Purchasing the basic raw materials
• Processing the subcomponents, subassemblies,
  major assemblies, and finished product
• Distributing the product

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Outsourcing Plans

• Many companies even outsource some service
  functions such as
• Payroll
• Billing
• Order processing
• Developing/maintaining a website
• Employee recruitment
• Facility maintenance

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Process and Technology Plans

• An essential part of operations strategy is the
  determination of how products/services will be
  produced.
• The range of technologies available to produce
  products/services is great and is continually
  changing.

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Strategic Allocation of Resources

• For most companies, the vast majority of the
  firms resources are used in production/operations
  .
• Some or all of these resources are limited.
• The resources must be allocated to products,
  services, projects, or profit opportunities in
  ways that maximize the achievement of the
  operations objectives.

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Facility Plans

• How to provide the long-range capacity to produce
  the firms products/services is a critical
  strategic decision.
• The location of a new facility may need to be
  decided.
• The internal arrangement (layout) of workers,
  equipment, and functional areas within a facility
  affects the ability to provide the desired
  volume, quality, and cost of products/services.

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Characteristics of Servicesand Manufactured
Products

• Services Products
• Output Intangible Tangible
• Output Inventoried No Yes
• Customer Contact Extensive Little
• Lead Time Short Long
• Intensity Labor Capital
• Quality Subjective Objective

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Competitive Priorities for Services

• The competitive priorities listed earlier for
  manufacturers apply to service firms as well
• Low production costs
• Fast and on-time delivery
• High-quality products/services
• Customer service and flexibility
• Providing all the priorities simultaneously to
  customers is seldom possible.

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Positioning Strategies for Services

• Type of Service Design
• Standard or custom products
• Amount of customer contact
• Mix of physical goods and intangible services
• Type of Production Process
• Quasi manufacturing
• Customer-as-participant
• Customer-as-product

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Positioning Strategies for Services

• Example McDonalds
• Highly standardized service design
• Low amount of customer contact
• Physical goods dominating intangible services
• Quasi-manufacturing approach to back-room
  production process

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Forming Operations Strategies

• Support the product plans and competitive
  priorities defined in the business strategy.
• Adjust to the evolving positioning strategies.
• Link to the marketing strategies.
• Look at alternative operations strategies.

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Evolution of Positioning Strategies

• The characteristics of production systems tend to
  evolve as products move through their product
  life cycles.
• Operations strategies must include plan for
  modifying production systems to a changing set of
  competitive priorities as products mature.
• The capital and production technology required to
  support these changes must be provided.

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Evolution of Positioning Strategies
Life Stage
Intro.
Early Growth
Late Growth
Maturity
Product
Custom
Slightly Standard
Standard
Highly Standard
Volume
Very Low
Low
High
Very High
Prod mode
Process
Process
Product
Product
Inventory.
To-Order
To-Order
To-Stock
To-Stock
Batch Size
Very Small
Small
Large
Very Large
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Linking Operations and Marketing Strategies

• Operations Strategy
• Product-focused
• Make-to-stock
• Standardized products
• High volume
• Marketing Strategy
• Low production cost
• Fast delivery of products
• Quality
• Example TV sets

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Linking Operations and Marketing Strategies

• Operations Strategy
• Product-focused
• Make-to-order
• Standardized products
• Low volume
• Marketing Strategy
• Low production cost
• Keeping delivery promises
• Quality
• Example School buses

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Linking Operations and Marketing Strategies

• Operations Strategy
• Process-focused
• Make-to-stock
• Custom products
• High volume
• Marketing Strategy
• Flexibility
• Quality
• Fast delivery of products
• Example Medical instruments

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Linking Operations and Marketing Strategies

• Operations Strategy
• Process-focused
• Make-to-order
• Custom products
• Low volume
• Marketing Strategy
• Keeping delivery promises
• Quality
• Flexibility
• Example Large supercomputers

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No Single Best Strategy

• Start-up and Small Manufacturers
• Usually prefer positioning strategies with
• Custom products
• Process-focused production
• Produce-to-order policies
• These systems are more flexible and require less
• capital.

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No Single Best Strategy

• Start-up and Small Services
• Successfully compete with large corporations by
• Carving out a specialty niche
• Emphasizing close, personal customer service
• Developing a loyal customer base

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No Single Best Strategy

• Technology-Intensive Business
• Production systems must be capable of producing
  new products and services in high volume soon
  after introduction
• Such companies must have two key strengths
• Highly capable technical people
• Sufficient capital

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Wrap-Up World-Class Practice

• Put customers first
• Get new products/services to market faster
• Are high quality producers
• Have high labor productivity low production
  costs
• Carry little excess inventory
• . . . more

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Wrap-Up World-Class Practice

• Think more globally in purchasing and selling
• Quickly adopt and develop new technologies
• Trim organizations to be lean and flexible
• Are less resistant to strategic alliances/joint
  ventures
• Consider relevant social issues when setting
  strategies