1. Chapter 2 - Operations Strategy and Competitiveness
Operations Management by
R. Dan Reid & Nada R. Sanders
3rd Edition © Wiley 2007
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2. Learning Objectives Define the role of Business Strategy
Explain how a Business strategy is developed
Explain the role of Operations Strategy
Explain the relationship between Business and Operations strategy
Describe how an Operations strategy is developed
Identify competitive priorities for Operations function
Explain the strategic role of technology
Define and compute productivity measures
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3. The Role of Business Strategy
Provides a plan (business strategy) making the best use of resources that:
Defines the long-range plan to compete in the marketplace
Helps to differentiate the firm from competitors
Provides a game plan upon which functional strategies are developed
Focuses on doing the “right tasks”
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4. Business/Functional Strategy
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6. Three Inputs to a Business Strategy
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7. Operations Strategy – Designing the Operations Function
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8. Competitive Priorities- The Edge
Four Important Operations Questions: Will you compete on –
Cost?
Quality?
Time?
Flexibility?
All of the above? Some? Tradeoffs?
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9. Competing on Cost?
Offering products/services at a low price relative to competitors.
Typically high volume products
Often limit product range & offer little customization
May invest in automation to reduce unit costs
Can use lower skill labor
Probably use product focused layouts
Low cost should not mean low quality
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10. Competing on Quality? Quality is sometimes subjective
Quality may be defined differently by customers versus employees
Quality dimensions:
High performance design:
Superior features, high durability, & excellent customer service
Product & service consistency:
Meets design specifications
Close tolerances
Error free delivery
Quality issues to address:
Product design quality – products/services must meet requirements
Process quality will produce error-free products/services
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11. Competing on Time?
Time is one of the most important competitive priorities
Being first-to-deliver often wins the race
Time –related issues:
Fast delivery:
Focused on shorter time between order placement and delivery
On-time delivery:
Deliver product exactly when needed every time
Rapid development speed
Using concurrent processes to shorten product development time
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12. Competing on Flexibility?
The company’s environment often changes rapidly
Flexibility is needed to accommodate these changes
Product flexibility:
Easily switch production from one item to another
Easily customize product/service to meet specific requirements of a customer
Volume flexibility:
Ability to ramp production up and down to match market demands
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13. Are There Priority Tradeoffs?
Emphasize priorities that support the business strategy, which may require “trade-offs”
Focus on “order qualifiers” and “order winners”
Which priorities are “Order Qualifiers”?
e.g. Must have excellent quality since everyone expects it
Which priorities are “Order Winners”?
e.g. Dell competes on all four priorities
Southwest Airlines competes on cost
McDonald’s competes on consistency
FedEx competes on speed
Custom tailors compete on flexibility
Can you have both high quality and low cost?
e.g. Yes, Coke and Pepsi are good examples
Can you offer design flexibility and short delivery?
e.g. Yes, modular housing manufacturers do it
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14. Translating to Production Requirements
Specific Operation requirements include two general categories
Structure – decisions related to the production process, such as characteristics of facilities used, selection of appropriate technology, and the flow of goods and services
Infrastructure – decisions related to planning and control systems of operations
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15. Strategic Role of Technology
Technology should support competitive priorities
Three Applications: New product technology, process technology, and information technology
Products - Teflon, CD’s, fiber optic cable
Processes – flexible automation, CAD
Information Technology – POS, EDI, ERP, B2B
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16. Technology for Competitive Advantage
Technology has positive and negative potentials
Positive
Improve processes
Maintain up-to-date standards
Obtain competitive advantage
Negative
Costly
Risks such as overstating benefits
Technology should
Support competitive priorities
Can require change to strategic plans
Can require change to operations strategy
Technology is an important strategic decision
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17. Productivity: Definition
Productivity is the relationship between the Outputs generated from a system and the Inputs that are used to create those outputs. Mathematically
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18. Productivity Improvement
Productivity Improvement (PI) is the result of managing and intervening in key transformation or work processes.
PI will occur if:
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19. Measuring Productivity
Productivity is a measure of how efficiently inputs are converted to outputs
Productivity = output/input
Total Productivity Measure
Total Productivity = $sales/inputs $
Partial Productivity Measure
Partial Productivity = cars/employee
Multifactor Productivity Measure
Multi-factor Productivity = sales/total $costs
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20. Measuring Productivity
Static Measures: P=O/I in a given period of time (t). Useful for cross-sectional (benchmarking?) purposes.
Dynamic measures:
t(1)=O(1)/I(1); t(2)=O(2)/I(2);
then t(2)/t(1) yields a dimensionless index that reflects change in productivity between periods and ((t(2)-t(1))/t(1))*100 yields the percentage change between periods.
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21. Measuring Productivity (cont..)
Partial-Factor: Uses a single “I” factor; e.g., output/labor-hour, sales/employee.
Multi-Factor: Uses more than one “I” factor; e.g. output/direct costs (labor, materials, and overhead).
Total-Factor: Uses all “I” factors.
(Note: Total-Factor captures “trade-offs” between input factors.).
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22. Interpreting Productivity Measures
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? Out sourcing? Major re-design?
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?
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23. Productivity Growth Rate
Can be used to compare a process’ productivity at a given time (P2) to the same process’ productivity at an earlier time (P1)
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24. Productivity Growth Rate
Example:
Last week a company produced 150 units using 200 hours of labor
This week, the same company produced 180 units using 250 hours of labor
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25. EFFECTIVENESS
Measures what the system sets out to accomplish (objective) with what was actually accomplished; budget vs. actual
Hence, effectiveness is an output measure. (Did the system output the “right” things--right quality, right quantity, on time, etc.)
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26. EFFICIENCY
Measures the resources expected to be consumed to the resources actually consumed.
Hence, it focuses on the input side of the system. (To what degree did the system utilize the “right” things.)
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27. Productivity, Competitiveness, and the Service Sector
A nation’s Productivity effects its standard of living
Productivity is a measure of how effectively resources are used
US productivity growth averaged 2.8% from
Productivity growth slowed for the next 25 years to 1.1%
Productivity growth in service industries has been less than in manufacturing
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28. Competing on Productivity
At the national level, growing productivity
leads to a higher standard of living
holds inflation in check
enhances international competitiveness.
The annual growth in GDP is due to
growth in productivity
growth in inflation
(Macroeconomic Theory)
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29. Productivity Portfolios
Investments in facilities and equipment
Investments in programs and systems
Investments in people.
(Note: these alternatives are not mutually exclusive; however, most organizations tend to choose one as their dominant orientation.)
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30. Chapter 2 Highlights
Business Strategy is a long range plan. Functions develop supporting plans
Strategy must address mission, environment, and core competencies
Business strategy provides a guide for designing operations strategy
Operations strategy must consider which competitive priorities are essential to meet business objectives
Competitive priorities are cost, quality, time, and flexibility
Companies must consider which product, process, and information technologies to use
Productivity measures how effectively a firm is using resources
Productivity is computed as a ratio of outputs divided by inputs
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31. Chapter 2 Homework Hints
6. Output (minus defects); use per day data; determine P1 and P2, then % change.
7. Output (minus defects); use per month data.
a. Determine P1 and P2.
b. Determine % change
8. a. Cost to patient=>revenue (output).
b. Output = # patients; input = time
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