Operations and Competitiveness

What Do Operations Managers Do? What is Operations? a function or system that transforms inputs into outputs of greater value What is a Transformation Process? a series of activities along a value chain extending from supplier to customer activities that do not add value are superfluous and should be eliminated What is Operations Management? design, operation, and improvement of productive systems

Transformation Process Physical: as in manufacturing operations Locational: as in transportation operations Exchange: as in retail operations Physiological: as in health care Psychological: as in entertainment Informational: as in communication

Operations as a Transformation Process INPUT Material Machines Labor Management Capital OUTPUT Goods Services TRANSFORMATION PROCESS Feedback

Operations Function Operations Marketing Finance and Accounting Human Resources Outside Suppliers

How is Operations Relevant to my Major? “As an auditor you must understand the fundamentals of operations management.” “IT is a tool, and there’s no better place to apply it than in operations.” “We use so many things you learn in an operations class—scheduling, lean production, theory of constraints, and tons of quality tools.” Accounting Information Technology Management

How is Operations Relevant to my Major? “It’s all about processes. I live by flowcharts and Pareto analysis.” “How can you do a good job marketing a product if you’re unsure of its quality or delivery status?” “Most of our capital budgeting requests are from operations, and most of our cost savings, too.” Economics Marketing Finance

Evolution of Operations Management Craft production process of handcrafting products or services for individual customers Division of labor dividing a job into a series of small tasks each performed by a different worker Interchangeable parts standardization of parts initially as replacement parts; enabled mass production

Evolution of Operations Management (cont.) Scientific management systematic analysis of work methods Mass production high-volume production of a standardized product for a mass market Lean production adaptation of mass production that prizes quality and flexibility

Historical Events in Operations Management Events/Concepts Dates Originator Industrial Revolution Steam engine 1769 James Watt Division of labor 1776 Adam Smith Interchangeable parts 1790 Eli Whitney Scientific Management Principles of scientific management 1911 Frederick W. Taylor Time and motion studies Frank and Lillian Gilbreth Activity scheduling chart 1912 Henry Gantt Moving assembly line 1913 Henry Ford

Historical Events in Operations Management (cont.) Events/Concepts Dates Originator Human Relations Hawthorne studies 1930 Elton Mayo Motivation theories 1940s Abraham Maslow 1950s Frederick Herzberg 1960s Douglas McGregor Operations Research Linear programming 1947 George Dantzig Digital computer 1951 Remington Rand Simulation, waiting line theory, decision theory, PERT/CPM Operations research groups MRP, EDI, EFT, CIM 1960s, 1970s Joseph Orlicky, IBM and others

Historical Events in Operations Management (cont.) Events/Concepts Dates Originator Quality Revolution JIT (just-in-time) 1970s Taiichi Ohno (Toyota) TQM (total quality management) 1980s W. Edwards Deming, Joseph Juran Strategy and operations 1990s Wickham Skinner, Robert Hayes Business process reengineering Michael Hammer, James Champy

Historical Events in Operations Management (cont.) Events/Concepts Dates Originator Globalization WTO, European Union, and other trade agreements 1990s 2000s Numerous countries and companies Internet Revolution Internet, WWW, ERP, supply chain management ARPANET, Tim Berners-Lee SAP, i2 Technologies, ORACLE, PeopleSoft E-commerce Amazon, Yahoo, eBay, and others

Continuum from Goods to Services Source: Adapted from Earl W. Sasser, R. P. Olsen, and D. Daryl Wyckoff, Management of Service Operations (Boston: Allyn Bacon, 1978), p.11.

Operations Management and E-Business Categories of E-Commerce Business Consumer B2B Commerceone.com B2C Amazon.com C2B Priceline.com C2C eBay.com

An Integrated Value Chain Value chain: set of activities that create and deliver products to customer Manufacturer Supplier Customer Flow of information (customer order) Flow of product (order fulfillment) Manufacturer Supplier Customer Flow of information (customer order)

Impact of E-Business on Operations Management Benefits of E-Business Impact on Operations Comparison shopping by customers Direct contact with customers Business processes conducted online Customer expectations escalate; quality must be maintained and costs lowered No more guessing about demand is necessary; inventory costs go down; product and service design improves; build to-order products and services is made possible Transaction costs are lower; customer support costs decrease; e-procurement saves big bucks

Impact of E-Business on Operations Management (cont.) Benefits of E-Business Impact on Operations Access to customers worldwide Middlemen are eliminated Access to suppliers worldwide Demand increases; order fulfillment and logistics become major issues; production moves overseas Logistics change from delivering to a store or distribution center to delivering to individual homes; consumer demand is more erratic and unpredictable than business demand Outsourcing increases; more alliances and partnerships among firms are formed; supply is less certain; global supply chain issues arise

Impact of E-Business on Operations Management (cont.) Benefits of E-Business Impact on Operations Online auctions and e-marketplaces Better and faster decision making Competitive bidding lowers cost of materials; supply needs can be found in one location More timely information is available with immediate access by all stakeholders in decision-making process; customer orders and product designs can be clarified electronically; electronic meetings can be held; collaborative planning is facilitated

Impact of E-Business on Operations Management (cont.) Benefits of E-Business Impact on Operations IT synergy Expanded supply chains Productivity increases as information can be shared more efficiently internally and between trading partners Order fulfillment, logistics, warehousing, transportation and delivery become focus of operations management; risk is spread out; trade barriers fall

Globalization and Competitiveness Favorable cost Access to international markets Response to changes in demand Reliable sources of supply 14 major trade agreements in 1990s Peak: 26% in 2000 World Trade Compared to World GDP Source: “Real GDP and Trade Growth of OECD Countries, 2001–03,” International Trade Statistics 2003, World Trade Organization, www.wto.org

Globalization and Competitiveness (cont.) Hourly Wage Rates for Selected Countries Source: “International Comparisons of Hourly Compensation Costs for Production Workers in Manufacturing,” Bureau of Labor Statistics, U.S. Department of Labor, Updated September 30, 2003. Germany: $26.18 USA: $21.33 Taiwan: $5.41 Mexico: $2.38 China: $0.50

Globalization and Competitiveness (cont.) Trade with China: Percent of each country‘s trade Source: “Share of China in Exports and Imports of Major Traders, 2000 and 2002,” International Trade Statistics 2003, World Trade Organization, www.wto.org

Risks of Globalization Cultural differences Supply chain logistics Safety, security, and stability Quality problems Corporate image Loss of capabilities

Competitiveness and Productivity degree to which a nation can produce goods and services that meet the test of international markets Productivity ratio of output to input Output sales made, products produced, customers served, meals delivered, or calls answered Input labor hours, investment in equipment, material usage, or square footage

Competitiveness and Productivity (cont.) Measures of Productivity

Changes in Productivity for Select Countries Internet-enabled productivity - Dot com bust - 9/11 terrorist attacks Source: “International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002,” Bureau of Labor Statistics, U.S. Department of Labor, September 2003. U.S. figures for 2002–2003 from “Major Sector Productivity and Costs Index,” Bureau of Labor Statistics, U.S. Department of Labor, March 2004

Productivity Increase Become efficient output increases with little or no increase in input Expand both output and input grow with output growing more rapidly Achieve breakthroughs output increases while input decreases Downsize output remains the same and input is reduced Retrench both output and input decrease, with input decreasing at a faster rate

Competitiveness and Productivity Productivity as a Function of Inputs and Outputs, 2001–2002 Source: “International Comparisons of Manufacturing Productivity and Unit Labor Cost Trends, 2002,” Bureau of Labor Statistics, U.S. Department of Labor, September 2003 Breakthrough Performance More Efficient Retrench

Global Competitiveness Ranking Switzerland Singapore Sweden Finland United States Germany Netherlands Denmark Japan United Kingdom Source: Global Competitiveness Report 2011-2012, World Economic Forum, www.weforum.org

Operations–Oriented Barriers to Entry Economies of Scale Capital Investment Access to Supply and Distribution Channels Learning Curve

Operations strategy is ….. “… the decisions which shape the long-term capabilities of the company’s operations and their contribution to overall strategy through the on-going reconciliation of market requirements and operations resources …”

Time scale Operations strategy is different to operations management Short-term Long-term for example, capacity decisions for example, capacity decisions Time scale Demand Demand 1-12 months 1-10 years Micro level of the process Macro level of the total operation Level of analysis Detailed Aggregated Level of aggregation For example For example “Can we give tax services to the small business market in Antwerp?” “What is our overall business advice capability compared with other capabilities?” Concrete Philosophical Level of abstraction For example For example “How do we improve our purchasing procedures?” “Should we develop strategic alliances with suppliers?” Operations strategy is different to operations management

Top-down and bottom-up perspectives of strategy Corporate strategy Business strategy Operations strategy Emergent sense of what the strategy should be Operational experience Top-down and bottom-up perspectives of strategy

The market perspective analysis of the garment company CUSTOMERS Segmentation on: Age - youth Purpose - general PERFORMANCE OBJECTIVES MARKET POSITION Dependability Speed of delivery Product mix flexibility Speed to market Differentiation on: Innovative products Time to market Product range Coordinated launches COMPETITORS Traditionally weak in: promotion design innovation The market perspective analysis of the garment company

The market perspective on operations strategy Customer Needs Market Positioning Performance Objectives Competitors’ Actions Required performance Understanding markets The market perspective on operations strategy

Processes Capabilities Resources Tangible Equipment Staff Intangible Reputation Relationships (internal and external) Experience Operations Strategy Decisions Capabilities Application of leading- edge lighting and sound technology Articulation of client requirements Location Virtual reality technology Supplier development Equipment tracking system Organizational structure Staff meetings Processes Integration of equipment supply and client requirements Design process Supplier liaison process The operations resource perspective analysis of the lighting company

Tangible and Intangible Resources Operations Capabilities Operations Strategy Decision Areas Operations Processes Understanding resources and processes Strategic decisions The operations resource perspective on operations strategy

Tangible and Intangible Resources Customer Needs Operations Capabilities Operations Strategy Decision Areas Market Positioning Performance Objectives Operations Processes Competitors’ Actions Understanding resources and processes Strategic decisions Required performance Understanding markets Operations strategy is the strategic reconciliation of market requirements with operations resources

Operations has to cope with the clash between the nature of external markets and the nature of internal resources Operations Resources are…. Market Requirements are…. Difficult to change Dynamic Technically constrained Heterogeneous Ambiguous Complex

Operations strategy is the strategic reconciliation of market requirements with operations resources Understanding Resources and Processes Market Requirements Understanding Markets Market Positioning Market Segmentation Competitor Activity Operations Processes Operations Resources Operations Competences Strategic Decisions Operations Strategy Decisions Required Performance Performance Objectives Quality Speed Dependability Flexibility Cost Capacity Supply networks Process technology Development and organization

What you HAVE What you DO What you WANT What you NEED Operations Resources Market Requirements Strategic Reconciliation What you HAVE in terms of operations capabilities What you DO to maintain your capabilities and satisfy markets What you WANT from your operations to help you “compete” What you NEED to “compete” In the market

Operations can kick-start two virtuous cycles Understanding of the processes Competencies embedded in the operation Capabilities enhance innovation and improvement Developing the resources which let the operation’s performance stay ahead of the competition Internal and Competitiveness Strong marketing High margin Investment Developing customers’ competitors’ and stockholders; perceptions and expectations External World Class Operations

Existing ‘effective’ capability Lafage Cosmetics’ requirements wide Existing ‘effective’ capability Variety of items per order Store delivery Catalogue customers narrow small large Number of items per order Hagen Style – Comparison of new demands placed on the order fulfilment processes by potential new business opportunities

Hagen Style – Operations resources and market requirements Cost efficiency Fast delivery Traditional ‘representative’ sales channels declining in popularity 2 x distribution centers State-of-art packing and information technology Processes ‘fine tuned’ to traditional ‘representative’ sales channels Good at what it does cost efficient fast throughput As above plus wider range of requirements more demand fluctuations? New channels catalogue Internet discount stores Hagen Style – Operations resources and market requirements