OPSM 301 Operations Management Spring 2012 Class 2 Operations Strategy Evrim Didem Güneş egunes@ku.edu.tr

Announcements Web page available, please check for announcements and lecture notes Please get copies of the course pack from Copyland

Learning Objectives of Today Competitive dimensions Order winners-order qualifiers Efficient frontier and operational effectiveness The concept of a trade-off The concept of strategic fit

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

What is Operations Management? 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?

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

To deliver we need “capabilities” 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 Ability to cope with changes in demand volume Ability to introduce a variety of products “Order Winners” To deliver we need “capabilities”

Process Performance Measures Objective Some typical Measures Cost Minimum delivery time/average delivery time, utilization of resources, labor productivity, added value, efficiency, cost per operation hour Quality Number of defects per unit, level of customer complaints, scrap level, mean time between failures, customer satisfaction scores Speed Customer query time, Order lead time, frequency of delivery, actual versus theoretical throughput time, cycle time Flexibility Time needed to develop new products/services, range of products/services, machine change-over time, average batch size, time to increase activity rate, average capacity/maximum capacity, time to change schedules Effective measures are: Linked to external measures important for the customer Directly controllable by the process manager

Order Qualifiers and Winners Defined Order qualifiers: the basic criteria that permit the firms products to be considered as candidates for purchase by customers Screening criteria Standard, expected performance Order winners: the criteria that differentiates the products and services of one firm from another The more, the better Customer chooses based on this criteria 6

Order-Winners and Qualifiers Positive Less Important Competitive Benefit Neutral Order Qualifier Negative Low High Performance Source: Slack and Lewis

Fit Between Strategy and Processes Processes must fit the operations strategy of the firm: Competing on Cost (BİM,Southwest Airlines) Quality ( Organic Food market, e.g. Whole foods in the US) Flexibility/Variety (Honda, Carrefour etc) Speed (Domino’s Pizza) all require different process designs and different measures to focus on Corporate StrategyKey Performance Indicators Operations StrategyProcess Design& Improvement

Cost Competition-Discount Supermarkets

Flexibility at Honda Honda has some of the most flexible plants in the U.S. Honda is able to switch from producing  Civics to CR-Vs with only 5 minutes of downtime!  the Civic and CR-Vs were designed to be manufactured in the same sequence of steps Honda did have to invest $400m several years ago to improve its flexibility.  “Honda's manufacturing flexibility is almost as key to its success as its product lineup. To respond to changes in economic conditions, Honda is able to shuffle production among different plants as well as make different models in one plant.” Honda's Flexible Plants Provide Edge  Wall Street Journal, Sep 23, 2008

Strategic Fit: Desired Capabilities Processes Match processes with desired capabilities

A Framework for Designing an Operations Strategy and Structure Corporate Strategy Business Unit Strategy Desired Competencies Notes: Operations Structure Resources Processes 15 S. Chopra/Operations/Strategy

Representation of Strategy Current Position and Strategic Directions of Movement in the competitive product space: Variety B A Strategic positioning defines where the firm wans to position itself in its competitive product space. Firm B provides customized, high cost products (this could be ferrari), whereas firm A provides standardized, low cost products (Tata steel). The direction of arrow shows how the firms would want to move according to their strategy. Or responsiveness can be variety (migros vs bim) High Low Price OPSM901 Operations Management

Strategy vs. Operational Effectiveness The Operations Frontier as the minimal curve containing all current positions in an industry strategy Where on the frontier should we position ourselves? (the direction) High A operational effectiveness How far are we from the efficient frontier? How to get there? B Responsiveness C Operations Frontier Low High Low Price

Increasing Customer Value Increasing Value High Operations Frontier A B C Low High Low Price

Lowering Costs Operations Frontier Lowering Costs Value Price Trade-off: decreasing one aspect to increase another High Operations Frontier A B Lowering Costs C Low High Low Price

Focused Strategy and Focused Processes “ The essence of strategy is what to do and what not to do.” Porter, 1996

Shouldice Hospital Video Case

Shouldice Business Model Medical Simple hernias Optimized process Check-ups and follow-up Social Club Med like experience Co-production at individual and cohort level A network for life

Shouldice Patient Experience COST Low, both real and opportunity QUALITY Low recurrence, satisfaction with experience SPEED Fast operation and recovery X FLEXIBILITY The process rules: only simple hernias

Comparison to General Hospital FOCUS at Shouldice General Hospital: prepares for the most complex Hernia complexity Shouldice: prepares for the simplest

A product/process matrix Wish of Marketing High customization Low volume High unit margin High standardization High volume Low unit margin Product General Hospital: Variety & flexibility High cost Low margins Low Cost High margins (difficult to achieve) Shouldice Hospital: Standardization Cost, speed, quality Flexible Job shop Process Rigid line flow Wish of Operations Industrialization

Shouldice as a lean enterprise General Hospital Focus on low risk cases No focus, multiple goals Clear single value prop. Confusion of value prop. Predictable process Unpredictable process Strive for perfection Strive for threshold perf. Eliminate waste Tolerate some excess Manage patient flows View patients as functional tasks Pull patients into process Push patients through process Womack and Jones (2000) From Lean Production to Lean Enterprise, HBR March-April 1994

Focus at Shouldice: the results Breakthrough service High customer and employee satisfaction Industrial approach to service

Shouldice Process Life Cycle Birth of the Shouldice formula Process selection, design, and improvement Innovation at the interfaces Process overtaken (when?)

Next Time Will discuss Process Selection and Product-Process Matrix