Chapter 2 - Operations Strategy and Competitiveness Operations Management by R. Dan Reid & Nada R. Sanders 3rd Edition © Wiley 2007 © Wiley 2007

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 © Wiley 2007

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” © Wiley 2007

Business/Functional Strategy © Wiley 2007

© Wiley 2007

Three Inputs to a Business Strategy © Wiley 2007

Operations Strategy – Designing the Operations Function © Wiley 2007

Competitive Priorities- The Edge Four Important Operations Questions: Will you compete on – Cost? Quality? Time? Flexibility? All of the above? Some? Tradeoffs? © Wiley 2007

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 © Wiley 2007

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 © Wiley 2007

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 © Wiley 2007

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 © Wiley 2007

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 © Wiley 2007

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 © Wiley 2007

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 © Wiley 2007

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 © Wiley 2007

Productivity: Definition Productivity is the relationship between the Outputs generated from a system and the Inputs that are used to create those outputs. Mathematically © Wiley 2007

Productivity Improvement Productivity Improvement (PI) is the result of managing and intervening in key transformation or work processes. PI will occur if: © Wiley 2007

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 © Wiley 2007

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. © Wiley 2007

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.). © Wiley 2007

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? © Wiley 2007

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) © Wiley 2007

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 © Wiley 2007

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.) © Wiley 2007

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.) © Wiley 2007

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 1948-1973 Productivity growth slowed for the next 25 years to 1.1% Productivity growth in service industries has been less than in manufacturing © Wiley 2007

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) © Wiley 2007

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.) © Wiley 2007

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 © Wiley 2007

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 © Wiley 2007