OPERATIONS MANAGEMENT 430 Professor Canan Savaskan-Ebert

Class Material & Grading Course Pack 1 (Cases & Readings) Course Pack 2 (Slides) The Goal Managing Business Process Flows (MBPF) The Course Web-Page Group Assignments 20%, Midterm 30%, Final 40%, Class Participation 10%

Student Liaison Responsibilities The objective of having Student Liaisons is to facilitate greater two-way communication between the faculty and students Professors will ask for a voluntary Student Liaison at the beginning of the first class of the term Responsibilities include: Be a sounding board for the faculty member on student related issues Communicating any scheduling conflicts regarding assignments, classes, or exams to professors Organizing dates for lunches with professors and students Collecting TCE’s and turning them in to Student Affairs during the last class Responsibilities will be very similar to Academic Rep responsibilities in 1st quarter core classes Time commitment for the student should be no more than an aggregate of 2 hours of the term

As a courtesy to those around you Please turn off your cell phones Close your computers, except in the last row (computer use only for note taking purpose) Be on time (1:30) No in-out traffic during class

Objective of this Course familiarize you with the problems and issues confronting operations managers. provide you with language, concepts, insights and tools to deal with these issues in order to gain competitive advantage through operations. at the end of this course, you will be able to identify, evaluate and make improvements.

A Road Map Module 1 : Operations Strategy (Wriston / Shouldice) Module 2 : Process Analysis (CRU / Pizza Pazza / NCC) Module 3 : Lean Operations (Toyota) Module 4 : Supply Chain Management (Shape up ship out) Module 5 : Services (The BAT Case) Module 6 : Quality (FlyRock)

Key Principle of the Course 1. Strategic View of Operations “A company’s operations function is either a competitive weapon or a corporate millstone. It is seldom neutral.” [Skinner ‘69]

An Example of Strategic Fit between Operations and Business Strategy 6 million shipments /day 3.2 million /day 2.8 million /day How are these two companies positioned in the competitive market space? What operational capabilities are critical for their success? On the operational front, how are they structured?

Operations as a Strategic Weapon versus “Bitter rivals Airbus and Boeing Co. don't agree on much, but these days their production gurus chant a common mantra: Let's copy Toyota, the company that reinvented car making. The giant jet makers and their suppliers are going back to school to learn about efficient production from companies that churn out vehicles that are just a fraction of a plane's size and complexity. Cutting production costs and speeding assembly is a vital step in the Airbus Boeing duel to stay competitive..” -- WSJ April 1, 2005.

Competing Through Services What are the service positioning of these companies? What are the service positioning of these companies? What do they do differently on the operations front to sustain the competitive position?

Key Principle of the Course 2. Process View of Operations Key Principle of the Course By rethinking the IBM Austin assembly plant and introducing cells, distance traveled by a card was cut from 1.5 miles to 200 yards floor space was reduced to half production tripled with about the same number of workers.

Operations & The Process View What is a Process? Process Management Information Structure Network of Activities and Buffers Inputs Outputs Goods Services Flow units (customers, data, material, cash, etc.) Labor & Capital Resources

What defines a “good process performance”? Financial Measures Absolute measures: revenues, costs, operating income, net income Net Present Value (NPV) = Relative measures: ROI, ROE ROA = Survival measure: cash flow

Define Operations Management as … Management of business processes How to structure the processes and manage resources to develop the appropriate capabilities to convert inputs to outputs. What is appropriate?

Firms compete on Product Attributes This requires process capabilities Price (Cost) P Quality Q Customer service Product quality Time T Rapid, reliable delivery New product development Variety V Degree of customization “order winners” To deliver we need “capabilities”

Activities and Buffers Process Capability Affected by : Inputs, Structure, Resources, Information Management Process Management Information Structure Network of Activities and Buffers Inputs Outputs Goods Services Flow units (customers, data, material, cash, etc.) Labor & Capital

Linking the Strategic role & Process view: Strategic Operational Audit Existing Desired Measures Product Attributes P, T, Q, V Feasible Business Strategies Desired Business Strategy Strategy Gap? Existing Capabilities Capability Gap? Desired Capabilities Marketing, …, Financial Strategy Operations Strategy Process Attributes C, T, Q, Flex Operational Structure: Processes & Infrastructure Desired Oper’l Structure: Processes & Infrastructure Process Gap?

Operations Capability Wal-Mart “Focused” Retailing Corporate Strategy (Gain competitive advantage by) providing customers access to quality goods, when and where needed, at competitive prices Operations Structure Cross docking * (Video) EDI * Fast transportation system Focused locations Communication between retail stores * RFID Operations Capability Short flow times Low inventory levels

(Benefits of Focused Strategy) Wal-Mart (Benefits of Focused Strategy) Inventory at retail stores turned over twice a week (Industry averages once every two weeks) Improved targeting of products to markets, better forecasting. Sales per square foot increased to $455 in 2002 (Industry average were $224 in 2002) In 2002, Wal-Mart has the biggest single day sales in history: $1.43 billion on the day after Thanksgiving.

Shouldice Hospital

Strategic Operational Audit Shouldice Hospital Operations Strategy Process Capabilities Service Positioning

Assembly Line of Simple Hernias Process Structure: Assembly Line of Simple Hernias Questionaire Diagnosis Waiting List Waiting Room 30 days max. wait 20 min Examinations 5/10 minutes Billing Less than 10 min. ROOM Orientation Dinner Tea & cookie Socialization Potential Patients REJECTS

In the health-care sector Focus and the Frontier In the health-care sector Responsiveness Shouldice high operations frontier One general facility World-class General Hospital low Low High Variety

WRISTON MANUFACTURING (to be distributed in class)

Classification of Processes by Process Architecture Project Job Shop Batch Line Flow Continuous Flow Job Shop Flow Shop

Characteristics of Processes: Job Shop vs. Batch vs. Flow Shop

Product-Process Matrix Flexibility Jumbled Flow. Process segments loosely linked. Disconnected Line Flow/Jumbled Flow but a dominant flow exists. JOB SHOP (Commercial Printer, Architecture firm) BATCH (Heavy Equipment, Auto Repari) LINE FLOWS (Auto Assembly, Car lubrication shop) CONTINUOUS FLOW (Oil Refinery) Product Variety Low Low Standardization One of a kind Low Volume Many Products Few Major Products High volume High Standardization Commodity Products Connected Line Flow (assembly line) Continuous, automated, rigid line flow. Process segments tightly linked. Opportunity Costs Out-of-pocket High

Wriston Manufacturing Corp. using Product-Process Matrix Volume Low volume Low Standardization One of a kind Low volume Many Products Higher volume Few Major Products High volume High Standardization Commodity Products Process Flexibility (Designed Dollar) Volume per family 1.0 10.0 100.0 100 Jumbled Flow. Process segments loosely linked. Job Shop Detroit Disconnected Line Flow/Jumbled Flow but a dominant flow exists. Batch Fremont # routes (product families) 10 Saginaw Tiffin Connected Line Flow (assembly line) Line Flow Sandusky Essex Lima Lebanon Maysville Continuous, automated, rigid line flow. Process segments tightly linked. Continuous Flow 1

Classification of Processes: by Customer Interface Make to Stock Product /Service Delivery Process Make to Order

US Furniture Market A $23 billion market with very low concentration. Top 3 players (Furniture Brands, Life Style Furnishings, La-Z-Boy) account for 20% of the market. Big 3 automakers have over 50% of market. Over 1000 other players. Very low barriers to entry. Not capital intensive. Furniture Brands spends only 2.2% of sales on capital spending. Ford spends about 6.6%.

A Typical Player Century Furniture Industries (Hickory, NC). $200 million in annual sales. Offers 3,500 different frames for sofas and chairs. With options for fabric, springs etc leads to 1.7 billion variants. What are implications for the bundle of attributes they can offer customers on process capabilities? Within Century’s factory parts can travel 14 miles within the factory.

A Different Way to Compete Mitchell Gold (Taylorsville, N.C) $70 million in sales. Lower price than goods of comparable quality but limited selection. Selling through Pottery Barn, Crate & Barrel, Restoration Hardware. Production takes place in one large modern factory (400,000 sq ft including warehouse space). 97% of shipments are on time. Productivity at Gold at $168,000 per employee, compared with an industry average of $105,000.

Another Player England, Inc. of New Tazewell, TN. A division of La-Z-Boy. “Make to order in 30 days or we pay you.” Offers more than 40,000 variants. 85 frames and 550 fabrics. Sofas are priced from $500 to $1,500. Production spread over several older buildings. Schedule production weekly to gain efficiencies in cutting fabric and wood. Have own trucking fleet and search for backhaul business. Have trimmed fabric suppliers to four to have some power over them.

Take-Aways Focused Operations & Strategic Fit Process View : Process View We need to see operations as a transformation process of inputs into outputs. Strategic View Align operational decisions with the overall company goals. Develop Operational Capabilities that support the positioning of a company. Identify what you should be good at. Link between business strategy, operations strategy, and operations structure. Capabilities defined by operational structure. Apply strategic operational audit to evaluate fit and areas for improvement Look for operational performance measures (time, inventory, throughput, flexibility) which are leading indicators of financial performance. .