Operations and Supply Chain Strategies Chapter 2

Text: Introduction to Operations and Supply Chain Management Custom edition for Farmingdale State College Authors: Cecil Bozarth & Robert Handfield Where appropriate reference text page numbers will be on bottom of slides OSC may be used as an abbreviation of Operations and Supply Chain

Chapter Objectives Chapter 2 Be able to: Explain the relationship between business and functional strategies and the difference between structural and infrastructural elements. Describe some of the main operations and supply chain decision categories. Explain the customer-value concept and calculate a value-index score. Differentiate between order winners and qualifiers. Explain why this difference is important to developing operations and supply chain strategy. Discuss the concept of trade-offs and give an example. Define core competencies and give an example of how they can be used in the operations and supply chain areas 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.

Apple ipod Marketing Success Supply Chain Success Intro Oct 01 ipod dominated market for portable media players Constant renewal of product; new generation every year Partnering with suppliers Capable of quantity and quality Global Rapid response Partnering with logistics & retailers Walmart/Best buys Without extra cost Without extra inventory Informational supply chain Download music & videos Download software & upgrades

Business Elements Two Major Decision Categories Structural Infrastructural Difficult to change: Buildings Equipment Computer systems Other capital assets Changed infrequently Relatively easy to change: People Policies Decision rules Organizational structure Replaced vs Changed To compete successfully all elements must work together

Definitions Strategies Mission Statement The mechanisms by which businesses coordinate their decisions regarding structual & infrastructural elements Mission Statement A statement that explains why an organization exists. It describes it’s core values and identifies the domain

Definitions Business Strategy Long-term master plan for the company; establishes the general direction Functional Strategies Further develop the business strategy in segments of the business — must be aligned and coordinated Core Competencies Organizational strengths that provide focus and foundation for the company’s strategies

Business Strategy must Identify target customers & markets Set time frames and performance objectives Define the role of supply chain partners Identify & support development of core competencies

A Top-Down Model of Strategy Business Strategy Marketing Financial Operations Operations and Supply Chain Decisions ... Goals Mission Statement Supply Chain R&D

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Operations and Supply Chain Strategies Definition: how structural & infrastructural elements within Operations & Supply Chain will be aquired & developed to support the overall business strategy The three primary objectives Choose mix of structure and infrastructure based upon dimensions valued by customer Ensure the mix aligned with the overall business strategy Does it support the development of core competencies?

Functional Strategy Translates the business strategy into functional terms for other departments or functions. Assures coordination with other departments or functions. Provides direction and guidance for operations and supply chain decisions.

Supply Chain and Operations Key Interactions 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.

Decisions Guided by the Structural Strategy Capacity Size? Timing? Type? Facilities Size? Location? Technology Equipment? Processes? Information systems? Vertical Integration Direction? Extent?

Decisions Guided by the Infrastructural Strategy Organization Control/reward systems? Centralization/decentralization? Workforce – skilled/semi-skilled? Sourcing and Purchasing Supplier selection/performance metrics? Procurement systems? Sourcing strategy? Planning and Control Forecasting? Inventory management? Production planning/control? Continuous improvement processes? Business process management SPC/Six Sigma Process and Quality Development process? Organization/supplier roles? Product and Service Design

Value Analysis A process for determining the best choice when there are no unambiguous formulas for doing so. Helps maintain focus in gathering and assessing relevant data. (also called a preference matrix). Some examples are: Choosing which home to buy or apartment to rent Picking a location for a new factory Selecting the best person for a new position Deciding which supplier to use other than for lowest price Deciding which features to include in a new product

Value Index Determination A measure that used performance & importance scores of various dimensions of performance to calculate a score to indicate the overall value of an item to a customer Where: In = Importance of value dimension (criteria) n Pn = Performance of candidate with regard to dimension n N = total number of value dimensions evaluated (Higher values represent higher importance or performance)

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Value Analysis – Thoughts Requires definition of criteria and their importance beforehand to avoid bias It is useful if the importance or weighting values add up to 100% A threshold score can set by evaluating the current situation, if it exists, using the selected analysis criteria Requires careful definition of scoring values for performance assessment (highest value represents most desirable result) People may not be comfortable with this… but, that may be exactly what’s required! Encourages identification of less important factors. A higher score to reflect the more desirable outcome and to avoid biasing a choice. A potential problem that can be solved by eliminating any alternative that fails to meet the minimum acceptable score for that criterion.

Prioritizing: Where Must We Excel? Potential dimensions of distinct competence (Four Performance Dimensions) Quality (performance, conformance, reliability) Time (delivery speed and reliability, development speed) Flexibility (mix, changeover, volume) Cost (labor, material, engineering, quality-related) What does the customer value?

Quality The characteristics of a product or service which bear on its ability to satisfy stated or implied needs Performance Quality the basic operational characteristics of a product or service Conformance Quality to what degree the product or service meets specifications Reliability Quality The length of time a product will perform correctly without failing or requiring maintenance To remain competitive, operations and supply chain must consistently meet or exceed customer expectations on quality dimensions

Time Delivery speed how quickly the OSC can fulfill on order or need once it has been identified. Delivery Reliability the ability to deliver goods or services when promised and the accuracy of he quantity shipped Pg 30

Flexibility How quickly OSC can respond to the unique needs of different customers Mix flexibility the ability to produce a wide range of products or services Changeover flexibility the ability to provide a new product with minimal delay Volume flexibility the ability to produce whatever volume the customer needs Flexibility is of particular importance in Research and Development Pg 31

Cost Cost is always a concern, even if a company primarily competes on a different performance dimension. Cost covers a wide range of activities, most common categories are Labor Costs Material Costs Engineering Costs Quality-related costs There are many cost categories, many are specific to the issues facing a particular firm. OSC are targets for cost management because they account for much of an organization’s cost. Pg 31

Trade-offs between Performance Dimensions No organization can sustain a competitive advantage on all performance dimensions indefinitely…. All organizations must make trade-offs or decisions among dimensions to emphasize some at the expense of others. Most OSC decisions will require trade-offs To optimize this decision making, OSC managers must know which dimensions are valued most by their customers Excellence in one dimension may conflict with excellence in another Pg 32

Priority Trade-Offs 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 Qualifiers Differentiators — performance not yet duplicated by competitors Competitive advantage — performance better than all or most of the competitors Qualifiers Minimum acceptable level of performance Over time, Differentiators   Winners   Qualifiers as competition intensifies. Discussion about how today’s exceptional performance becomes tomorrow’s standard customer expectation.

Alignment between OSC strategies and the overall business strategy The goal is to develop an OSC stategy that supports the business strategy Management should know How each OSC structural & infrastructural choice supports the customer’s order winners & qualifiers What trade-offs had to be considered in these decisions However some organizations are not as far along towards achieving this than are others. Pg 33

Stages of Alignment between OSC strategies and the overall business strategy Neutral Supportive Stage 2 Industry Practice Stage 4 Actively Engaged Stage 1 Not linked Stage 3 Participation (Closing the loop) External Internal Stage 1 – Internally neutral – efforts are to minimize negative potential in OSC areas. No link to business strategy Stage 2 – Externally neutral – industry practice followed. No link to business strategy Stage 3 – Internally supportive – OSC areas participate in strategic debate. It is understood that OSC must be aligned with business strategy Stage 4 – Externally Supportive – OSC areas support business strategy and explore/improve core competencies Pg 34

Operations and Supply Chain Strategies Case Study Catherine’s Confectionaries