OPERATIONS STRATEGY AND PLANNING

Operations Management The management of processes taking place while converting/transforming inputs into outputs Concerned with planning, designing and controlling the process of production of goods and/or services Ensures that business processes are efficient and effective

Operations Management (contd.)

Definition Conversion of land, labour, capital and management inputs into desired outputs (goods and services) The systematic design, direction and control of processes that transform inputs into services and products for internal, as well as, external customers

Process And Operation Process: Any activity or a group of activities that takes one or more inputs, transforms them, and provides one or more outputs for its customers Operation: A group of resources performing all or a part of one or more processes

Manufacturing vs. Service Organizations Tangibility Perishability Heterogeneity Inseparability Examples of services may include insurance, banking, healthcare, etc.

Functions Of Operations Management Policy Formulation Planning Controlling Resources Communication

Operations Strategy Addresses how the major resources available to a firm should be configured so as to achieve the desired corporate objectives An organization’s operations strategy provides a framework for determining how it prioritizes and utilizes its resources to gain a competitive advantage in the marketplace

Operations Strategy-Definition Development of a long-term plan for using the major resources of the firm for a high degree of compatibility between these resources and the firm’s long-term corporate strategy

Operations Strategy (contd.) Some of the major long-term issues addressed in operations strategy include: How large do we make our facilities? What type of process(es) do we install to make the products or provide services? How will our supply chain look like? What will be the nature of our workforce? How do we ensure quality?

Operations Strategy (contd.) Vision: A statement that provides long-term direction and motivation for the organization Mission: A statement about the organization’s business scope and methods of competing Corporate Strategy: Overall strategy adopted by the parent corporation

Operations Strategy (contd.) Strategic Business Unit: Stand-alone business within a conglomerate that operates like an independent company Business Strategy: How a strategic business unit (SBU) addresses the specific markets it serves and products it provides

Operations Strategy Process

Business Strategy Market Requirements Customers’ needs and success criteria Environment Competition, technological advances, government regulations Organizational Competencies Core capabilities, organizational culture, strengths and weaknesses Mission and Vision

Three Generic Strategies Suggested by Michael Porter Cost Leadership Differentiation Market Segmentation

Functional Strategies Production Marketing Human Resource Information Technology Finance

Some Other Strategies Competitiveness Competitive Priorities Low cost High quality Fast delivery Flexibility Service

Operational Decision Making

Operations Strategy Adds Value Customers want their money’s worth From a manager’s point of view, customers actually want more than their money’s worth The more customers receive for their money, the more value they perceive in the products or services they are purchasing Perceived customer value=Total benefits-total costs

Value Addition (contd.)

Trends Affecting Operations Strategy Decisions Globalization Lowering of trade barriers Decreasing transportation costs Emergence of high growth markets Technology Connectivity Speed Intangibility

Competitive Priorities Cost Quality Delivery Flexibility Service

Core Capabilities Specific strengths that allow a company to achieve its competitive priorities Firms now tend to focus only on their core capabilities Sub-contracting

Forecasting The art and science of predicting future events May involve taking historical data and projecting them into the future May be subjective, intuitive or a combination of the two

Forecasting Time Horizons Short-range forecast: < 3 months Purchase planning, job scheduling, job assignments, etc. Medium-range forecast: 3 months > 3 years Sales planning, production planning, budgeting, etc. Long-range forecast: > 3 years New product planning, facility location or expansion, R&D, etc.

Types Of Forecasts Economic Forecasts Predicting inflation rates, money supplies and other planning indicators Technological Forecasts Rates of technological progress (resulting in new product development that require new plants & equipment) Demand Forecasts Projections of demand for a company’s products or services

Forecasting Approaches Qualitative Methods Jury of executive opinion Delphi method Sales force composite Consumer market survey Quantitative Methods Naïve approach Moving averages method Exponential smoothing Trend projection Linear regression

Jury Of Executive Opinion Group of high level experts or managers E.g., Bristol-Meyers Squibb Company uses 220 well-known research scientists as its jury of expert opinion to get a grasp on future trends in the world of medical research

Delphi Method Decision makers, staff personnel and respondents Decision makers usually consist of a group of 5-10 experts who make the actual forecast Staff personnel prepare, distribute, collect and summarize a series of questionnaires and survey results

Sales Force Composite Sales forecasts in different regions Review of forecasts Combination of forecasts of different regions

Consumer Market Survey Inputs from customers or potential customers Helps in forecasting as well as improving product design and planning for new products Data can be unrealistic giving rise to incorrect predictions

Quantitative Methods Time-series Models Naïve approach Moving averages method Exponential smoothing Trend projection Associative Model Linear regression

Naïve Approach Simplest way of forecasting This approach is the most cost-effective forecasting model Assumes that demand in the next period will be equal to the demand in the most recent period

Moving Averages Method Uses a number of actual historical data values to generate a forecast Useful if it is assumed that market demands will stay fairly steady over time Moving Avg. = Σ Demand in previous n periods n where, n is the number of periods in the moving average

Weighted Moving Average Wt. Moving Avg. = Σ(Wt. for period n)*(Demand in period n) Σ Weights

Exponential Smoothing A sophisticated weighted moving average method New forecast = Last period’s forecast + α(Last period’s actual demand – Last period’s forecast)

Exponential Smoothing (contd.) F t = F t-1 + α(A t-1 -F t-1 ) where F t = new forecast F t-1 = previous forecast α = smoothing constant (or weight) A t-1 = previous period’s actual demand

Exponential Smoothing (contd.) In January, a car dealer predicted February demand for 142 Ford Mustangs. Actual February demand was 153 autos. Using a smoothing constant of α = 0.20, calculate the demand forecast for the month of March.

Trend Projections Fits a trend line to a series of historical data points and then projects the line into the future Least squares method Results in a straight line

Trend Projections (contd.) ŷ = a + bx where ŷ = computed value of the variable to be predicted (dependent variable) a = y-axis intercept b = slope of the regression line x = independent variable (time)

Linear Regression Sale of a product may just not be a factor of time Several other factors may also influence the sales of a particular product/service ŷ = a + bx where ŷ = computed value of the variable to be predicted (dependent variable) a = y-axis intercept b = slope of the regression line x = independent variable