Operations Strategies in a Global Economy

Country Minimum Wage (per day) Approx. Value in US$ Vietnam US$ 2.40 India US$ 2.24 Luxembourg US$ 14.24 (with 20% premium for skilled workers) Mexico US$ 4.88

Introduction Operational effectiveness is the ability to perform similar operations activities better than competitors. It is very difficult for a company to compete successfully in the long run based just on operational effectiveness. A firm must also determine how operational effectiveness can be used to achieve a sustainable competitive advantage. An effective competitive strategy is critical.

Factors Affecting Today’s Global Business Conditions Reality of global competition Quality, customer service, and cost challenges Rapid expansion of advanced technologies Continued growth of the service sector Scarcity of operations resources Social responsibility issues

Reality of Global Competition Changing nature of world business International companies Strategic alliances and production sharing Fluctuation of international financial conditions

Changing Nature of World Business The US gross domestic product (GDP) is, at around $15 trillion, the largest in the world. Companies all over the globe are aggressively exporting their products/services to the US Many US companies are targeting foreign markets to shore up profits. The global economy that interconnects the economies of all nations has been termed the global village. One of the most important new markets is China.

International Companies International companies are those whose scope of operations spans the globe as they buy, produce, and sell. International firms search out opportunities for profits relatively unencumbered by national boundaries. Operations managers must coordinate geographically dispersed operations.

International Companies World’s Largest Corporations (2013 data) Royal Dutch Shell Wal-Mart Exxon Mobil China Petrochemical (Sinopec) China National Petroleum BP State Grid Corporation of China Toyota Volkswagen Total

Strategic Alliances Strategic alliances are joint ventures among international companies to exploit global business opportunities. Alliances are often motivated by Product or production technology Market access Production capability Pooling of capital

Successful Strategic Alliances Starbucks partnered with Barnes and Nobles bookstores in 1993 to provide in-house coffee shops, benefiting both retailers. In 1996, Starbucks partnered with PepsiCo to bottle, distribute and sell the popular coffee-based drink, Frappucino. A Starbucks-United Airlines alliance has resulted in their coffee being offered on flights with the Starbucks logo on the cups A partnership with Kraft foods has resulted in Starbucks coffee being marketed in grocery stores. In 2006, Starbucks formed an alliance with the NAACP, the sole purpose of which was to advance the company's and the NAACP's goals of social and economic justice.

Production Sharing An agreement to share the production or extraction costs between two governments, a government and a corporation, or a corporation and an individual. This can be accomplished when two countries agree to allow certain raw materials to be shipped tariff free from the first country to the second country where the materials are manufactured into a finished product. That product is then shipped back, tariff free, to the original country. In oil or mineral extraction, the company doing the extraction is paid in oil or minerals as compensation for business costs as well as a share of the profit.

Quality, Service, and Cost Challenges The goal of adequate quality must be replaced with the objective of perfect product and service quality. The entire corporate culture must be redirected and committed to the ideal of perfect quality. All employees must be empowered to act. A commitment to continuous improvement has to be organization-wide.

The “Bang” mug has been redesigned many times to realize shipping cost savings. Originally, 864 mugs would fit into a pallet. After redesign a pallet held 1,280 mugs, and with a further redesign 2,024 mugs could be squeezed into a pallet, reducing shipping costs by 60%. Even better, the cost of production at Ikea's Romanian factory has also fallen because the more compact mugs require less space in the kiln.

Quality, Service, and Cost Challenges Customer Service Companies must quickly develop innovative products and respond quickly to customers’ needs. Organizational structures must be made more horizontal to quickly accommodate change. Multidisciplined teams must have decision-making authority, responding better to the marketplace. Large, unwieldy companies are spinning off whole business units making them autonomous businesses that can compete with small, aggressive competitors.

Quality, Service, and Cost Challenges There is continuing pressure to reduce direct costs (of producing and selling) and overhead costs. It cost the US automakers $1,500 more per auto for labor in 1980 than it cost the Japanese auto-makers. By the 1990s the difference was almost zero. Giant retailers (like Wal-Mart) squeezed weaker competitors out of the market, giving the retailers the leverage to force their suppliers to streamline operations and reduce costs/prices.

Quality, Service, and Cost Challenges Cost-cutting measures being used include: Moving production to low-labor-cost countries Negotiating lower labor rates with unions and workers Automating processes to reduce the amount of labor needed, particularly processes that are labor intensive.

Advanced Technologies The use of automation is one of the most far- reaching developments to affect manufacturing and services in the past century. The initial cost of these assets is high. The benefits go far beyond a reduction in labor costs. Increased product/service quality Reduced scrap and material costs Faster responses to customer needs Faster introduction of new products and services

Advanced Technologies US companies cannot use automated production technology as a long-term competitive advantage. Automation systems are available to any company in the world today, although the price is prohibitive for some companies. Not investing, or delaying investing in this technology could be disastrous for a company.

Continued Growth of Service Sector A robust service sector helps support the manufacturing sector. There is much opportunity for quality improvement in US service firms. Many operations managers are being employed in services. Planning, analyzing, and controlling approaches from manufacturing are being adapted to service systems. The US service sector, like the manufacturing sector, must streamline and improve operations if it is to survive.

Scarcity of Operations Resources Raw materials like titanium, nickel, coal, natural gas, water, and petroleum products are periodically unavailable or in short supply. A shortage of any necessary input to a conversion subsystem, including skilled personnel, can be a challenge for an operations manager. An important issue in the formation of business strategy is how to allocate scarce resources among business opportunities.

Social-Responsibility Issues Corporate attitudes are evolving from doing what companies have a legal right to do, to doing what is right. Factors influencing this evolution include: Consumer attitude -- Consumers are expressing their likes/dislikes by such means as stockholder meetings, liability suits, and buying preferences. Regulation – The Clean Air Act, etc. Self-interests -- Companies realize that profits will be greater if they act responsibly.

Social-Responsibility Issues Environmental Impact Product-Safety Impact Employee Impact

Social-Responsibility Issues Environmental Impact Concerns about the global environment include: Landfill waste reduction Recycling Energy conservation Chemical spills Acid rain Radioactive waste disposal … and more

Social-Responsibility Issues Environmental Impact There is a need for standardizing government regulations of the environment. Otherwise, companies will gravitate to the less-regulated countries. The International Organization for Standardization has developed a set of environmental guidelines called ISO 14000.

Social-Responsibility Issues Product-Safety Impact Harm to people or animals that results from poor product design can: Damage a company’s reputation Require a large expense to remedy Cause governments to impose more regulations

Social-Responsibility Issues Employee Impact Employee benefits and policies include: Safety and health programs Fair hiring and promotion practices Day-care Family leave Health care Retirement benefits Educational assistance … and more

Social-Responsibility Issues Employee Impact Employee benefits and policies impact long-term profitability due to their effect on: Employee morale and productivity Recruitment and retention of employees Demand for a company’s products Cost of defending against lawsuits and boycotts

Developing Operations Strategy Corporate Mission Assessment of Global Business Conditions Distinctive Competencies or Weaknesses Business Strategy Product/Service Plans Competitive Priorities Operations Strategy

Corporate Mission A corporate mission is a set of long-range goals and including statements about: the kind of business the company wants to be in who its customers are its basic beliefs about business its goals of survival, growth, and profitability

Coca-Cola Company Mission Everything we do is inspired by our enduring mission: To Refresh the World... in body, mind, and spirit. To Inspire Moments of Optimism... through our brands and our actions. To Create Value and Make a Difference... everywhere we engage.

Coca-Cola Company Vision To achieve sustainable growth, we have established a vision with clear goals. Profit: Maximizing return to shareowners while being mindful of our overall responsibilities. People: Being a great place to work where people are inspired to be the best they can be. Portfolio: Bringing to the world a portfolio of beverage brands that anticipate and satisfy peoples’ desires and needs. Partners: Nurturing a winning network of partners and building mutual loyalty. Planet: Being a responsible global citizen that makes a difference.

Business Strategy Business strategy is a long-range game plan of an organization and provides a road map of how to achieve the corporate mission. Inputs to the business strategy are Assessment of global business conditions - social, economic, political, technological, competitive Distinctive competencies or weaknesses - workers, sales force, R&D, technology, management

Four Steps for Strategy Formulation Defining a primary task What is the firm in the business of doing? Assessing core competencies What does the firm do better than anyone else? Determining order winners and order qualifiers What wins the order? What qualifies an item to be considered for purchase? Positioning the firm How will the firm compete?

Competitive Priorities Low Production Costs Definition Unit cost (labor, material, and overhead) of each product/service Some Ways of Creating Redesign of product/service New technology Increase in production rates Reduction of scrap/waste Reduction of inventory

Competitive Priorities: Cost Lincoln Electric reduced costs by $10 million a year for 10 years skilled machine operators save the company millions that would have been spent on automated equipment Southwest Airlines one type of airplane facilitates crew changes, record-keeping, maintenance, and inventory costs direct flights mean no baggage transfers $30 million annual savings in travel agent commissions by requiring customers to contact the airline directly

Competitive Priorities Delivery Performance Definition a) Fast delivery b) On-time delivery Some Ways of Creating a) larger finished-goods inventory a) faster production rates a) quicker shipping methods b) more-realistic promises b) better control of production of orders b) better information systems

Competitive Priorities: Speed Citicorp advertises a 15-minute mortgage approval L.L. Bean ships orders the day they are received Wal-Mart replenishes its stock twice a week Hewlett-Packard produces electronic testing equipment in five days General Electric reduces time to manufacture circuit-breaker boxes into three days and dishwashers into 18 hours Dell ships custom-built computers in two days Motorola needs less than 30 minutes to build to order pagers

Competitive Priorities High-Quality Products/Services Definition Customers’ perception of degree of excellence exhibited by products/services Some Ways of Creating Improve product/service’s Appearance Performance and function Wear, endurance ability After-sales service

Competitive Priorities: Quality Ritz-Carlton - one customer at a time Every employee is empowered to satisfy a guest’s wish Teams at all levels set objectives and devise quality action plans Each hotel has a quality leader Quality reports tracks guest room preventive maintenance cycles percentage of check-ins with no waiting time spent to achieve industry-best clean room appearance Guest Preference Reports are recorded in a database

Competitive Priorities Customer Service and Flexibility Definition Ability to quickly change production to other products/services. Customer responsiveness. Some Ways of Creating Change in type of processes used Use of advanced technologies Reduction in WIP through lean manufacturing Increase in capacity

Competitive Priorities: Flexibility Andersen Windows number of products offered grew from 28,000 to 86,000 number of errors are down to 1 per 200 truckloads Custom Foot Shoe Store: customer’s feet are scanned electronically to capture measurements custom shoes are mailed to the customer’s home in weeks prices are comparable to off-the-shelf shoes National Bicycle Industrial Company offers 11,231,862 variations delivers within two weeks at costs only 10% above standard models

Operations Strategy Operations strategy is a long-range game plan for the production of a company’s products/services, and provides a road map for the production function in helping to achieve the business strategy.

Elements of Operations Strategy Positioning the production system Product/service plans Outsourcing plans Process and technology plans Strategic allocation of resources Facility plans: capacity, location, and layout

Positioning the Production System Select the type of product design Standard Custom Select the type of production processing system Product focused Process focused Select the type of finished-goods inventory policy Produce-to-stock Produce-to-order

Product/Service Plans As a product is designed, all the detailed characteristics of the product are established. Each product characteristic directly affects how the product can be made. How the product is made determines the design of the production system.

Stages in a Product’s Life Cycle Introduction- Sales begin, production and marketing are developing, profits are negative. Growth - sales grow dramatically, marketing efforts intensify, capacity is expanded, profits begin. Maturity - production focuses on high-volume, efficiency, low costs; marketing focuses on competitive sales promotion; profits are at peak. Decline - declining sales and profit; product might be dropped or replaced.

Stages of a Product’s Life Cycle Introduction Growth Maturity Decline B&W TV Automobile Video Recorder CD Player Color Copier Cell Phone Internet Radio Fax Machine Dot-Matrix Printer

Outsourcing Plans Outsourcing refers to hiring out or subcontracting some of the work that a company needs to do. This strategy is being used more and more as companies strive to operate more efficiently. Outsourcing has many advantages and disadvantages. Companies try to determine the best level of out-sourcing to achieve their operations & business goals. More outsourcing requires a company to have less equipment, fewer employees, and a smaller facility.

Outsourcing Plans A company might outsource any of the following manufacturing related functions: Designing the product Purchasing the basic raw materials Processing the subcomponents, subassemblies, major assemblies, and finished product Distributing the product

Outsourcing Plans Many companies even outsource some service functions such as: Payroll Billing Order processing Developing/maintaining a website Employee recruitment Facility maintenance

Process and Technology Plans An essential part of operations strategy is the determination of how products/services will be produced. The range of technologies available to produce products/services is great and is continually changing.

Strategic Allocation of Resources For most companies, the vast majority of the firm’s resources are used in production/operations. Some or all of these resources are limited. The resources must be allocated to products, services, projects, or profit opportunities in ways that maximize the achievement of the operations objectives.

Facility Plans How to provide the long-range capacity to produce the firm’s products/services is a critical strategic decision. The location of a new facility may need to be decided. The internal arrangement (layout) of workers, equipment, and functional areas within a facility affects the ability to provide the desired volume, quality, and cost of products/services.

Competitive Priorities for Services The competitive priorities listed earlier for manufacturers apply to service firms as well Low production costs Fast and on-time delivery High-quality products/services Customer service and flexibility Providing all the priorities simultaneously to customers is seldom possible.

Positioning Strategies for Services Type of Service Design Standard or custom products Amount of customer contact Mix of physical goods and intangible services Type of Production Process Quasi manufacturing Customer-as-participant Customer-as-product

Positioning Strategies for Services Example: McDonald’s Highly standardized service design Low amount of customer contact Physical goods dominating intangible services Quasi-manufacturing approach to back-room production process

Forming Operations Strategies Support the product plans and competitive priorities defined in the business strategy. Adjust to the evolving positioning strategies. Link to the marketing strategies. Look at alternative operations strategies.

Evolution of Positioning Strategies The characteristics of production systems tend to evolve as products move through their product life cycles. Operations strategies must include plan for modifying production systems to a changing set of competitive priorities as products mature. The capital and production technology required to support these changes must be provided.

Evolution of Positioning Strategies Life Stage Intro. Early Growth Late Growth Maturity Product Custom Slightly Standard Standard Highly Standard Volume Very Low Low High Very High Focus Process Process Product Product Fin.Gds. To-Order To-Order To-Stock To-Stock Batch Size Very Small Small Large Very Large

Linking Operations and Marketing Strategies Operations Strategy Product-focused Make-to-stock Standardized products High volume Marketing Strategy Low production cost Fast delivery of products Quality Example: TV sets

Linking Operations and Marketing Strategies Operations Strategy Product-focused Make-to-order Standardized products Low volume Marketing Strategy Low production cost Keeping delivery promises Quality Example: School buses

Linking Operations and Marketing Strategies Operations Strategy Process-focused Make-to-stock Custom products High volume Marketing Strategy Flexibility Quality Fast delivery of products Example: Medical instruments

Linking Operations and Marketing Strategies Operations Strategy Process-focused Make-to-order Custom products Low volume Marketing Strategy Keeping delivery promises Quality Flexibility Example: Large supercomputers

No Single Best Strategy Start-up and Small Manufacturers Usually prefer positioning strategies with: Custom products Process-focused production Produce-to-order policies These systems are more flexible and require less capital.

No Single Best Strategy Start-up and Small Services Successfully compete with large corporations by: Carving out a specialty niche Emphasizing close, personal customer service Developing a loyal customer base

No Single Best Strategy Technology-Intensive Business Production systems must be capable of producing new products and services in high volume soon after introduction Such companies must have two key strengths: Highly capable technical people Sufficient capital