Production Management Operations Strategy and the Global Environment Mohammad Najjar, PhD Management Science 1

Learning Objectives 2 1.Define mission and strategy 2.Identify and explain three strategic approaches to competitive advantage 3.Understand the significant key success factors and core competencies 4.Use factor rating to evaluate both country and provider outsources

Global Strategies 3 ▶ Boeing – sales and supply chain are worldwide ▶ Benetton – moves inventory to stores around the world faster than its competition by building flexibility into design, production, and distribution ▶ Sony – purchases components from suppliers in Thailand, Malaysia, and around the world

Reasons to Globalize 4 1.Improve the supply chain 2.Reduce costs (labor, taxes, tariffs, etc.) 3.Improve operations 4.Understand markets 5.Improve products 6.Attract and retain global talent

Reasons to Globalize: Improve the Supply Chain 5 ▶ Locating facilities closer to unique resources ▶ Auto design to California ▶ Athletic shoe production to China ▶ Perfume manufacturing in France

Reasons to Globalize: Reduce Costs 6 ▶ Foreign locations with lower wage rates can lower direct and indirect costs ▶ Example: saving $10 per hour per worker with 40- hour workweeks (52 weeks per year) and 1000 workers represents a savings in excess of $20 million annually. ▶ Trade agreements can lower tariffs ▶ World Trade Organization (WTO) ▶ North American Free Trade Agreement (NAFTA) ▶ European Union (EU)

Reasons to Globalize: Improve Operations 7 ▶ Understand differences between how business is handled in other countries ▶ Japanese – inventory management ▶ Scandinavians – working environment ▶ International operations can improve response time and customer service

Reasons to Globalize: Understand Markets 8 ▶ Interacting with foreign customers, suppliers, competition can lead to new opportunities ▶ Cell phone design moved from Europe to Japan ▶ Extend the product life cycle

Reasons to Globalize: Improve Products 9 Remain open to free flow of ideas Reduced risk, state-of-the-art design Firms can benefit by teaming up with a foreign partner to learn from each other and develop products and processes based on the unique knowledge of both firms. - Example 1, Toyota and BMW manage joint research and development - Example 2, Samsung and Bosch jointly produce batteries

Reasons to Globalize: Attract and Retain Global Talent 10 ▶ Offer better employment opportunities ▶ Better growth opportunities and insulation against unemployment ▶ Relocate unneeded personnel to more prosperous locations

Globalization: Cultural and Ethical Issues 11 ▶ Cultures can be quite different ▶ Attitudes can be quite different towards ► Punctuality ► Lunch breaks ► Environment ► Intellectual property ► Thievery ► Bribery ► Child labor -Managers must become aware of cultural differences, and they should adjust their expectations and management styles accordingly.

Mission and Strategy: 12 A firm’s mission: is its reason for existence, or firm’s purpose – it should answer: - Where the firm is going? - What the firm will contribute to society? - What are firm’s boundaries and focus? Strategy: a firm’s theory about how to gain competitive advantages, may need a plan and a set of coordinated actions – tells the firm how to get to the competitive advantage.

Mission and Strategy: 13 PespsiCo Our mission is to be the world's premier consumer products company focused on convenient foods and beverages. We seek to produce financial rewards to investors as we provide opportunities for growth and enrichment to our employees, our business partners and the communities in which we operate. And in everything we do, we strive for honesty, fairness and integrity.

Factors Affecting Mission: Benefit to Society Mission Philosophy and Values Profitability and Growth Environment CustomersPublic Image

Mission: 15 MarketingOperations Finance/ Accounting Functional Area Missions Organization’s Mission

Sample Mission: 16 Sample Company Mission To manufacture and service an innovative, growing, and profitable worldwide microwave communications business that exceeds our customers’ expectations. Sample Operations Management Mission To produce products consistent with the company’s mission as the worldwide low-cost manufacturer.

Sample Mission: 17 Sample OM Department Missions Product designTo design and produce products and services with outstanding quality and inherent customer value. Quality managementTo attain the exceptional value that is consistent with our company mission and marketing objectives by close attention to design, procurement, production, and field service operations Process designTo determine, design, and produce the production process and equipment that will be compatible with low-cost product, high quality, and good quality of work life at economical cost.

Sample Mission: 18 Sample OM Department Missions LocationTo locate, design, and build efficient and economical facilities that will yield high value to the company, its employees, and the community. Layout designTo achieve, through skill, imagination, and resourcefulness in layout and work methods, production effectiveness and efficiency while supporting a high quality of work life. Human resourcesTo provide a good quality of work life, with well- designed, safe, rewarding jobs, stable employment, and equitable pay, in exchange for outstanding individual contribution from employees at all levels.

Sample Mission: 19 Sample OM Department Missions Supply-chain management To collaborate with suppliers to develop innovative products from stable, effective, and efficient sources of supply. InventoryTo achieve low investment in inventory consistent with high customer service levels and high facility utilization. SchedulingTo achieve high levels of throughput and timely customer delivery through effective scheduling. MaintenanceTo achieve high utilization of facilities and equipment by effective preventive maintenance and prompt repair of facilities and equipment.

Strategy: 20 Strategy: a firm’s theory about how to gain competitive advantages, may need a plan and a set of coordinated actions – tells the firm how to get to the competitive advantage. ► A plan and a set of coordinated moves to achieve a mission ► Functional areas have strategies ► Strategies exploit opportunities and strengths, neutralize threats, and avoid weaknesses

Strategic Management Process: 21 MissionObjectives External Analysis Internal Analysis Strategic Choice Strategy Implementation Competitive Advantage

Strategic Management Process: 22 Objectives are specific and measureable targets. My objectives is to improve students’ managerial skills and knowledge. My mission is to give students a remarkable and superior experience to succeed in their jobs, and therefore their life. (In order to do this, I need specific and measureable objectives to direct my work) The things a firm needs to ‘do’ to achieve its mission

Strategic Management Process: 23 External analysis – a systematic examination of the environment in which the firm operates (phenomena external to the firm) Internal analysis – a systematic examination of a firm’s resources and capabilities External Analysis Internal Analysis Laws and Reg. Demographics Social trends Technology Human resources (knowledge) Manufacturing abilities Technology

Strategic Management Process: 24 Strategic Choice can be: -Business level strategic choices deal with the positioning of a given business, - A business may be positioned at the top of the market—high quality, high price, it may be positioned at the lower end of the market—low quality, low price, or it may be positioned somewhere in between these extremes - Corporate level strategic choices determine in which businesses a firm will operate or decisions that will affect the entire group

Strategic Management Process: 25 Strategy Implementation: - How managers carry out the strategic choices they make Who will do what (responsibility) Implementation issues: Organizational structure (hierarchy) and control Who reports to whom How does the firm hire, promote, pay, etc.

Strategies for Competitive Advantage: 26 In OM, strategies for competitive advantage can be: 1.Differentiation – at least different 2.Cost leadership – cheaper 3.Response – more responsive - An organization’s chosen strategy very much shapes how it approaches the 10 OM decisions Competitive Advantage: the ability to create more economic value than competitors, and it is the desired end state of the strategic management process

Differentiation 27 Uniqueness can go beyond both the physical characteristics and service attributes to encompass everything that impacts customer’s perception of value ► Walt Disney Magic Kingdom – experience differentiation ► Hard Rock Cafe – dining experience

Cost Leadership: 28 Provide the maximum value as perceived by customer. Does not imply low quality. ► Southwest Airlines – secondary airports, no frills service, efficient utilization of equipment ► Walmart – small overhead and distribution costs ► Franz Colruyt – no bags, no bright lights, no music

Response: 29 ▶ Flexibility is matching market changes in design and volumes ▶ Reliability is meeting schedules ▶ Timeliness is quickness in design, production, and delivery

OM Contribution to Strategy Implementation: 30 Product Quality Process Location Layout Human resource Supply chain Inventory Scheduling Maintenance DIFFERENTIATION: Innovative designSafeskin’s innovative gloves Broad product lineFidelity Security’s mutual funds After-sales serviceCaterpillar’s heavy equipment service ExperienceHard Rock Café’s dining experience COST LEADERSHIP: Low overheadFranz-Colruyt’s warehouse-type stores Effective capacity Southwest Airline’s useaircraft utilization Inventory Walmart’s sophisticated managementdistribution system RESPONSE: FlexibilityHewlett-Packard’s response to volatile world market ReliabilityFedEx’s “absolutely, positively, on time” QuicknessPizza Hut’s 5-minute guarantee at lunchtime 10 OperationsCompetitive DecisionsStrategyExampleAdvantage Response (faster) Cost leadership (cheaper) Differentiation (better)

Strategy Development: 31 ▶ Identify Key Success Factors ▶ Integrate OM with other activities ▶ Build and Staff the Organization > When you decide the strategy (diff., cost, response), you have to identify the success factors ( any or a group of the 10 OM decision and some related activities) that is/are important for achieving goals, then integrate the OM with other activities (e.g. finance and accounting, marketing), and then build the organizations (or new product line) and hire staff.

Strategy Development: 32 Operations Strategies of Two Drug Companies COMPETITIVE ADVANTAGE BRAND NAME DRUGS, INC.GENERIC DRUGS CORP. PRODUCT DIFFERENTIATION STRATEGY LOW COST STRATEGY Product selection and design Heavy R&D investment; extensive labs; focus on development in a broad range of drug categories Low R&D investment; focus on development of generic drugs QualityQuality is major priority, standards exceed regulatory requirements Meets regulatory requirements on a country-by-country basis, as necessary ProcessProduct and modular production process; tries to have long product runs in specialized facilities; builds capacity ahead of demand Process focused; general production processes; “job shop” approach, short- run production; focus on high utilization LocationStill located in city where it was foundedRecently moved to low-tax, low-labor- cost environment

Strategy Development: 33 Operations Strategies of Two Drug Companies COMPETITIVE ADVANTAGE BRAND NAME DRUGS, INC.GENERIC DRUGS CORP. PRODUCT DIFFERENTIATION STRATEGY LOW COST STRATEGY LayoutLayout supports automated product- focused production Layout supports process-focused “job shop” practices Human resources Hire the best; nationwide searchesVery experienced top executives provide direction; other personnel paid below industry average Supply chainLong-term supplier relationshipsTends to purchase competitively to find bargains InventoryMaintains high finished goods inventory primarily to ensure all demands are met Process focus drives up work-in- process inventory; finished goods inventory tends to be low SchedulingCentralized production planningMany short-run products complicate scheduling MaintenanceHighly trained staff; extensive parts inventory Highly trained staff to meet changing demands

Outsourcing (again): 34 > Outsourcing – transferring activities that traditionally been internal to external suppliers > Outsourced activities: ► Legal services ► Travel services ► Payroll

Outsourcing and Competitive Adv. 35 ▶ If an external provider can perform activities more productively than the purchasing firm, then the external provider should do the work ▶ Purchasing firm focuses on core competencies

Risk of Outsourcing 36 Potential Advantages and Disadvantages of Outsourcing ADVANTAGESDISADVANTAGES Cost savingsIncreased logistics and inventory costs Gaining outside expertiseLoss of control (quality, delivery, etc.) Improving operations and servicePotential creation of future competition Maintaining a focus on core competencies Negative impact on employees Accessing outside technology

Rating Outsourcing Provider 37 Factor Ratings Applied to National Architects’s Potential IT Outsourcing Providers IMPORTANCE WEIGHTS OUTSOURCING PROVIDERS FACTOR (CRITERION) BIM (U.S.) S.P.C. (INDIA) TELCO (ISRAEL) 1. Can reduce operating costs Can reduce capital investment Skilled personnel Can improve quality Can gain access to technology not in company Can create additional capacity Aligns with policy/philosophy/culture.1235 Totals Score for BIM = (.2 * 3) + (.2 * 4) + (.2 * 5) + (.1 * 4) + (.1 * 5) + (.1 * 4) + (.1 * 2) = 3.9