3 - 2 McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Operations Management Framework Insert New Resource/Profit Model

3 - 3 McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. C H A P T E R 3 Value, Strategy, and Capabilities L E A R N I N G O B J E C T I V E S ▬Describe the concepts of business-to-business (B2B) and business-to-consumer (B2C). ▬Define the concept of a supply chain. ▬Describe the value attributes common to B2B and B2C customers. ▬Describe the role of the strategies that form the strategy hierarchy. ▬Describe Porter’s three strategies. ▬Define order winners, order losers, and order qualifiers and relate them to value. ▬List and describe examples of strategic structural and infrastructural decisions. ▬List and describe the competitive priorities of operations. ▬Summarize the effects each strategic decision category has on operations’ competitive priorities. ▬Distinguish between capabilities and processes. ▬Compare the strengths and weaknesses of process-oriented, product-oriented, and cellular layouts. ▬Describe the continuum of choices related to production volume and the alternatives available for linking to customer demand. ▬Describe what is meant by a capability chain.

3 - 4 McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Operations Management Framework FOUNDATIONS FOR SUCCESS Value  relative worth, utility, or importance of something Profitability is also  the difference between the customer’s perception of value and the cost of creating it Value has different meanings to different types of customers Profitability  Selling at a price greater than the cost of producing a product or service Insert New Foundations for Success

3 - 5 McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Supply Chains A supply chain “encompasses all activities associated with the flow and transformation of goods from the raw material stage (extraction), through the end user, as well as the associated information flows. “ Basic Producer ConvertersFabricatorsAssemblers Support Services Transport Storage Finance, etc. Supply-Chain Summary: “It gets us from dirt to value”

3 - 6 McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Supply Chains Basic Producer ConvertersFabricatorsAssemblers Support Services Transport Storage Finance, etc. Basic Producer – Mines, extracts or harvests natural resources Converter – Refines natural resources Fabricator – Converts refined materials into usable components Assembler – Assembles components into finished products

3 - 7 McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Supply Chains Exhibit 3.1 Generic Supply Chain Model

3 - 8 McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Value Attributes of Consumers Consumer  Product (service) performance and benefits Cost – What does it cost for the total time of ownership? Quality – Does it meet my needs? Convenience – How easy is it to get? Timeliness – How quickly can I get it?

3 - 9 McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Value Attributes of Consumers Consumer  Product (service) performance and benefits Personalization – Will the business treat me as special? Do they know me? Ethical Issues – Is the business acting responsibly?Ethical Issues Style/Fashion – Is the product the most current style? Technology – Do I need technical skills to use this product?

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Value Attributes of Business Customers Business  Potential to add value to the products or services they sell to other customers -Return on investment is the key criterion Cost – What does it cost for the total time of ownership? Quality – Does it meet our specifications? Delivery Dependability – Does the firm meet delivery promises? Flexibility – Can they adapt to special needs? Response Time – How quickly can they get it to us?

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Value Attributes and the Marketing Interface Product -Quality -Technology -Ethical Issues -Style/Fashion Price -Cost Place -Convenience -Response Time -Delivery Dependability Promotion -Personalization -Flexibility Selecting and Communicating these attributes is a “Marketing” issue. Delivering on them is about “Operations.” Integration of the functions is key to success.

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. The Value Transfer Model Each participant in the supply chain must add some value or risk “disintermediation” New technologies (e.g., internet) increase the risk of disintermediation by reducing the cost of obtaining information on alternatives Replace with new ex 3.5

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Operations Management Framework A strategy is a pattern of decisions an organization adopts in order to link resource decisions to goals (Wheelwright 1984) -Its not what you say, its what you do… Successful strategy -The firm has made decisions that enable it to continue providing that value at an acceptable cost (i.e., profitably) -Customers perceive value that is greater than that offered by competitors Strategy  A plan for being competitive Insert new “Foundations of Success”

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. The Strategic Hierarchy Corporate Strategy Business Strategy Operations Strategy

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. The Strategic Hierarchy Corporate Strategy -Broad and general in large diversified companies -Sets expectations for business performance Business Strategy -The general basis on which the business will compete Cost Leader Differentiation Focus - Price lower than competitors - Create unique products and services -Big chunk of a small market, become very good at a small thing Think about Business Strategy in terms of value attributes

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. One way to think about business-level strategy – Order Losers, Qualifiers, and Winners Order Loser: a product or service characteristic that repels customers. Order Qualifier: a product or service characteristic that is necessary, but not sufficient to win the order. Order Winner: a product or service characteristic most important to a particular customer. Rotten food (quality) Able to make cheeseburger plain (flexibility) Cool toy (style/fashion) Beware Order Winners Becoming Order Qualifiers!! Example: Taking kids to lunch on a Saturday afternoon. Cost Quality Response Time Dependability Convenience Style/ Fashion Ethics Technology Flexibility Personalization

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Cost Quality Response Time Dependability Convenience Style/ Fashion Ethics Technology Flexibility Personalization X X X X X Cost Quality Response Time Dependability Flexibility Understand what is “valued” in the market Choose which attributes to emphasize Prioritize those attributes Design operations to support Business & Operations Strategy “The management of resources used to create saleable products and services” – Definition of OM from class

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. The Strategic Hierarchy Functional strategies must support one another as well as the higher level strategies!! Operations Strategy -How to design the operation -How to allocate productive resources

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Trek Configures Operations to Add Value Operational decisions made by Trek to support the firm’s “value proposition” -Emphasis on product design based on customer input -“Breaking” bikes to figure out how to make them better -High cost, high technology materials (carbon fiber) -High technology manufacturing processes (plasma welding) -Flexible manufacturing setup Small batches Modular design Hand assembly -Empowered employees

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Structural vs. Infrastructural Decisions Structural - Related to tangible resources (buildings, equipment, process, supply-chain integration) Examples -Capacity High vs. Low volume Equipment, Adding capacity, Flexibility of capacity -Facilities Location, size, design, number -Process Technology Layout, Automation -Vertical Integration/Supplier Relationships Supplier links, partnerships, integration vs. outsourcing

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Structural vs. Infrastructural Decisions Infrastructural - Related to systems used to enhance the utilization and control of structural resources Examples -Human Resources Skill level, part vs. full time, salaries -Quality Prevention vs detection, control, specifications, supplier involvement -Planning & Control Inventory management, vendor policies

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Structural vs. Infrastructural Decisions Infrastructural - Related to systems used to enhance the utilization and control of structural resources Examples (continued) -New Product Development Sequential vs. parallel activities, development team composition -Performance measurement Team vs. individual incentives, types of measures, types of rewards -Organization structure Organizational structure, line and staff relationships

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Strategic Decision Categories and Value Relationships Among Strategic Decisions and Value Attributes

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Operations Strategy Prioritize value attributes so resource decisions (inventory, workforce, capacity, facilities, customer relationships) match strategy.

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Value Attributes and Competitive Priorities Value Attributes and Competitive Priorities for Operations

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Summary of Competitive Effects of Structural Decisions Insert Exhibit 3.10

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Summary of Competitive Effects of Infrastructural Decisions Insert Exhibit 3.11

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Strategic Objectives, Capabilities, and Process Requirements Mary’s Speedy Pizza -Guaranteed Pizza Delivery in 20 minutes

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Reflecting On Our Strategy Discussion - Order Qualifiers and Order Winners Mary looks at “Speedy” delivery as an order winner -Organizes processes to create capabilities that support that strategic objective Other minimum expectations must also be met before customers consider alternatives. -Taste & Temperature -Must develop process supported capabilities in these areas as well Even though we are talking about a product (pizza), the order winner is a service (speedy delivery). Role of order qualifiers and order winners change as markets mature. -What happens when everybody gets fast?

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Capability “Rules” Three principles about capabilities -No capability delivers competitive advantage (i.e., acts as an “order winner”) forever -No capability delivers competitive advantage alone -Because capabilities rely on matching processes for support, competitive advantage can be obtained by concurrent design of capabilities along with products and processes

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Process Layout Also Supports Product/ Service Delivery Layout as a strategic decision -Type of equipment -Facility design -Employee attributes Long-term cost implications -Tough to change Product-Oriented Process-Oriented Cellular

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. General Layout Decisions Product-oriented layout -Provides resources in a fixed sequence -Matches the sequence of steps required to produce a product or service -Common in high-volume manufacturing

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Product Oriented Layout Advantages Efficient production of standardized goods and services High processing speed Low cost per unit Disadvantages Lack of flexibility or customization Employee boredom/ dissatisfaction Quality problems

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Process Oriented Layout Process-oriented (“functional”) Layout -Organized by function -Steps completed in any sequence Advantages Flexibility and customization Disadvantages Higher cost per unit Higher skilled, high cost employees Transport/wait time between departments Less consistency across products or services

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Product vs. Process Layouts Transition from Process to Product Layout may be triggered by age of the product Early in life-cycle -Not much information on what customers want -Adopt process-orientation to remain flexible and produce many varieties Late in life-cycle -Much better understanding of what customers want -Shift to product-orientation with fewer options

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Cellular Layouts Cellular layouts -Mix of product and process layouts -Create “families” of products with similar process requirements -“Cell” contains all resources needed for family Advantages Flexibility greater than product- oriented layout Less costly than process-oriented layout Less material transport/wait Fewer changeovers Disadvantages Duplication of resources

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Layout and Product Attributes Process flow selection and the Product Process Matrix -Tends to be process-oriented -Cellular?? -Tends to be product-oriented

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Choices for Manufacturers: The Product/Process Matrix Process Types Project – Unique, one-of-a-kind, products or customers. Generally large in size (building a bridge, installing a software system, implementing a major improvement effort) Job Shop – Predominantly manufacturing, high customization and flexibility, but higher volume than project. Batch Production – Groups of identical products or customers processed together through one step and then moved together to the next step. More limited product variety, higher production volume.

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Choices for Manufacturers: The Product/Process Matrix Process Types Assembly Line – Narrowly defined processes, made up of equipment with limited flexibility. Much higher volume. Still the possibility of some flexibility. Continuous (Repetitive) Processing – Equipment and workstations dedicated to a single thing. Very high volume. Very low flexibility. Best chance for automation.

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Other Process Choices Make-to-stock (MTS) -Process activated to meet expected or forecast demand -Customer orders are served from target stocking level -Shorter lead time for stocked items MUCH longer for out of stock items Risk of obsolescence, shrink, etc. Make-to-order (MTO) -Process activated in response to an actual order May be either standard or custom product -WIP and finished goods inventory kept to a minimum -Tends to have longer response time

McGraw-Hill/Irwin Operations Now, 2/e © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved. Other Process Choices Assemble-to-order (ATO) -Partially manufactured and held in unfinished state -Customer order dictates final configuration -Quicker response than MTO; More flexible than MTS