Long

Project Management Dayrine Julianna de la Cruz Aquino
Chapter 5
Exercise A5.1
Norwegian Satellite Development Company Cost Estimates for World Satellite Telephone
Exchange Project
NSDC has a contract to produce satellites to support a worldwide telephone system (for Alaska Telecom,
Inc.) that allows individuals to use a single, portable telephone in any location on earth to call in and out.
NSDC will develop and produce the eight units. NSDC has estimated that the R&D costs will be NOK
(Norwegians Krone) 12,000,000. Material costs are expected to be NOK 6,000,000. They have estimated
the design and production of the first satellite will require 100,000 labor hours and an 80porcent
improvement curve is expected. Skilled labor cost is NOK 300 per hour. Desired profit for all projects is
25 percent of total cost.
A: How many labor hours should the eighth satellite require?
Answer:
80% ratio for 8 units = 0.5120
The eight satellite = 100,000 labor hours x 0.5120 = 51,200 labor hours
B: How many labor hours for the whole project of eight? Why?
Answer:
The accumulative ratio for 8 units: 5.346
The whole project: 100,000 x 5.346 = 534,600 labor hours
C: What price would you ask for the project? Why?
Answer:
R&D costs: 12,000,000 NOK
Material cost: 6,000,000 NOK
Skilled labor cost: 300 NOK p/hour = 160,380,000 NOK
Total cost: 178,380,000 NOK
25% of total cost = 44,595,000
Price = 222,975,000 NOK

Project Management Dayrine Julianna de la Cruz Aquino
D: Midway through the project your design and production people realize that a 75 percent
improvement curve is more appropriate. What impact does this have on the project?
Answer:
75% cumulative = 4.802 accumulative
The whole project: 100,000 x 4.802 = 480,200 labor hours
Skilled labor cost: 300 NOK p/hour = 480,200 x 300 = 144,060,000 NOK
(80%) 160,380,000 NOK - (75%) 144,060,000 NOK =
Labor hour cost difference= 16,320,000 NOK (The cost will be reduced in a 10.17% respect the 89%
learning curve cost)
E: Near the end of the project. Deutsch telephone AG has requested a cost estimate for four
satellites identical to those you have already produced. What price will you quote them? Justify
your price.
Answer:
12 unit 75% curve: 6.315
12 satellites: 100,000 x 6.315 = 631,500 labor hours
Labor hour for 4 units = 631,500 labor hours - 480,200 labor hours = 151,300 labor hours
Skilled labor cost: 300 NOK p/hour = 151,300 x 300 = 45,390,000 NOKS
Total cost = 45,390,000 NOKS + (0.5) 6,000,000 NOK = 48,390,000 NOK (using the 75% learning
curve since we know it’s more efficient)
HEIZMX0E_013185755X.QXD 5/4/05 2:47 PM Page 771
Learning Curves
Quantitative Module
E
Module Outline
LEARNING CURVES IN SERVICES USING SOFTWARE FOR LEARNING CURVES
AND MANUFACTURING SOLVED PROBLEMS
APPLYING THE LEARNING CURVE INTERNET AND STUDENT CD-ROM EXERCISES
Arithmetic Approach DISCUSSION QUESTIONS
Logarithmic Approach ACTIVE MODEL EXERCISE
Learning-Curve Coefficient Approach
STRATEGIC IMPLICATIONS
PROBLEMS
INTERNET HOMEWORK PROBLEMS
L EARNING O BJECTIVES
OF LEARNING CURVES
CASE STUDY: SMT’S NEGOTIATION WITH IBM When you complete this module you
LIMITATIONS OF LEARNING CURVES
BIBLIOGRAPHY should be able to
SUMMARY
INTERNET RESOURCES
KEY TERM
IDENTIFY OR DEFINE:
What a learning curve is
Example of learning curves
The doubling concept
DESCRIBE OR EXPLAIN:
How to compute learning curve effects
Why learning curves are important
The strategic implications of learning
curves
772 MODULE E L E A R N I N G C U RV E S
Medical procedures such as heart surgery follow a learning curve. Research indicates that the death rate from heart
transplants drops at a 79% learning curve, a learning rate not unlike that in many industrial settings. It appears
that as doctors and medical teams improve with experience, so do your odds as a patient. If the death rate is halved
every three operations, practice may indeed make perfect.
Most organizations learn and improve over time. As firms and employees perform a task over and
over, they learn how to perform more efficiently. This means that task times and costs decrease.
Learning curves Learning curves are based on the premise that people and organizations become better at their
The premise that people tasks as the tasks are repeated. A learning curve graph (illustrated in Figure E.1) displays labor-
and organizations get hours per unit versus the number of units produced. From it we see that the time needed to produce
better at their tasks as a unit decreases, usually following a negative exponential curve, as the person or company produces
the tasks are repeated; more units. In other words, it takes less time to complete each additional unit a firm produces.
sometimes called
However, we also see in Figure E.1 that the time savings in completing each subsequent unit
experience curves.
decreases. These are the major attributes of the learning curve.
Learning curves were first applied to industry in a report by T. P. Wright of Curtis-Wright Corp.
in 1936.1 Wright described how direct labor costs of making a particular airplane decreased with
learning, a theory since confirmed by other aircraft manufacturers. Regardless of the time needed to
produce the first plane, learning curves are found to apply to various categories of air frames (e.g.,
FIGURE E.1 ■
The Learning-Curve
Effect States That Time
per Repetition
Cost / time per repetition
Decreases as the
Number of Repetitions
Increases
0 Number of repetitions (volume)
1T. P. Wright, “Factors Affecting the Cost of Airplanes,” Journal of the Aeronautical Sciences (February 1936).
L E A R N I N G C U RV E S IN S E RV I C E S AND M A N U FAC T U R I N G 773

jet fighters versus passenger planes versus bombers). Learning curves have since been applied not
only to labor but also to a wide variety of other costs, including material and purchased components.
The power of the learning curve is so significant that it plays a major role in many strategic deci-
sions related to employment levels, costs, capacity, and pricing.
The learning curve is based on a doubling of production: That is, when production doubles, the
decrease in time per unit affects the rate of the learning curve. So, if the learning curve is an 80%
rate, the second unit takes 80% of the time of the first unit, the fourth unit takes 80% of the time of
the second unit, the eighth unit takes 80% of the time of the fourth unit, and so forth. This principle
is shown as
T × Ln = Time required for the nth unit (E-1)
where T = unit cost or unit time of the first unit

L = learning curve rate
n = number of times T is doubled
If the first unit of a particular product took 10 labor-hours, and if a 70% learning curve is present, the
hours the fourth unit will take require doubling twice—from 1 to 2 to 4. Therefore, the formula is
Hours required for unit 4 = 10 × (.7)2 = 4.9 hours
LEARNING CURVES IN SERVICES AND MANUFACTURING

Try testing the learning- Different organizations—indeed, different products—have different learning curves. The rate of
curve effect on some learning varies depending on the quality of management and the potential of the process and prod-
activity you may be uct. Any change in process, product, or personnel disrupts the learning curve. Therefore, caution
performing. For example, should be exercised in assuming that a learning curve is continuing and permanent.
if you need to assemble As you can see in Table E.1, industry learning curves vary widely. The lower the number (say
four bookshelves, time
70% compared to 90%), the steeper the slope and the faster the drop in costs. By tradition, learning
your work on each and
note the rate of
curves are defined in terms of the complements of their improvement rates. For example, a 70%
improvement. learning curve implies a 30% decrease in time each time the number of repetitions is doubled. A
90% curve means there is a corresponding 10% rate of improvement.
Stable, standardized products and processes tend to have costs that decline more steeply than
others. Between 1920 and 1955, for instance, the steel industry was able to reduce labor-hours per
unit to 79% each time cumulative production doubled.
Learning curves have application in services as well as industry. As was noted in the caption for
the opening photograph, 1-year death rates of heart transplant patients at Temple University
Hospital follow a 79% learning curve. The results of that hospital’s 3-year study of 62 patients
TABLE E.1 ■
LEARNING-
Examples of Learning- CURVE
Curve Effects CUMULATIVE SLOPE
EXAMPLE IMPROVING PARAMETER PARAMETER (%)
1. Model-T Ford production Price Units produced 86
2. Aircraft assembly Direct labor-hours per unit Units produced 80
3. Equipment maintenance Average time to replace a Number of replacements 76
at GE group of parts
4. Steel production Production worker labor-hours Units produced 79
per unit produced
5. Integrated circuits Average price per unit Units produced 72a
6. Hand-held calculator Average factory selling price Units produced 74
7. Disk memory drives Average price per bit Number of bits 76
8. Heart transplants 1-year death rates Transplants completed 79
aConstant dollars.
Sources: James A. Cunningham, “Using the Learning Curve as a Management Tool,” IEEE Spectrum (June 1980): 45.
© 1980 IEEE; and David B. Smith and Jan L. Larsson, “The Impact of Learning on Cost: The Case of Heart
Transplantation,” Hospital and Health Services Administration (spring 1989): 85–97.
receiving transplants found that every three operations resulted in a halving of the 1-year death rate.
As more hospitals face pressure from both insurance companies and the government to enter fixed-
price negotiations for their services, their ability to learn from experience becomes increasingly crit-
ical. In addition to having applications in both services and industry, learning curves are useful for a
Failure to consider the variety of purposes. These include:
effects of learning can lead
1. Internal: labor forecasting, scheduling, establishing costs and budgets.
to overestimates of labor
needs and underestimates 2. External: supply-chain negotiations (see the SMT case study at the end of this module).
of material needs. 3. Strategic: evaluation of company and industry performance, including costs and pricing.
APPLYING THE LEARNING CURVE

A mathematical relationship enables us to express the time required to produce a certain unit. This
relationship is a function of how many units have been produced before the unit in question and how
long it took to produce them. Although this procedure determines how long it takes to produce a
given unit, the consequences of this analysis are more far reaching. Costs drop and efficiency goes
Trade journals publish up for individual firms and the industry. Therefore, severe problems in scheduling occur if opera-
industrywide data on tions are not adjusted for implications of the learning curve. For instance, if learning-curve improve-
specific operations’ ment is not considered when scheduling, the result may be labor and productive facilities being idle
learning rates. a portion of the time. Furthermore, firms may refuse additional work because they do not consider
the improvement in their own efficiency that results from learning. From a supply-chain perspective,
our interest is in negotiating what our suppliers’ costs should be for further production of units based
on the size of an order. The foregoing are only a few of the ramifications of the effect of learning
curves.
With this in mind, let us look at three ways to approach the mathematics of learning curves: arith-
metic analysis, logarithmic analysis, and learning-curve coefficients.
Arithmetic Approach
The arithmetic approach is the simplest approach to learning-curve problems. As we noted at the
beginning of this module, each time that production doubles, labor per unit declines by a constant
factor, known as the learning rate. So, if we know that the learning rate is 80% and that the first unit
produced took 100 hours, the hours required to produce the second, fourth, eighth, and sixteenth
units are as follows:
NTH UNIT PRODUCED HOURS FOR NTH UNIT

1 100.0
2 80.0 = (.8 × 100)
4 64.0 = (.8 × 80)
8 51.2 = (.8 × 64)
16 41.0 = (.8 × 51.2)
As long as we wish to find the hours required to produce N units and N is one of the doubled values,
then this approach works. Arithmetic analysis does not tell us how many hours will be needed to
produce other units. For this flexibility, we must turn to the logarithmic approach.
TABLE E.2 ■
Learning Curve Logarithmic Approach

Values of b The logarithmic approach allows us to determine labor for any unit, TN, by the formula
LEARNING
RATE (%) b TN = T1(Nb) (E-2)
70 .515 where TN = time for the Nth unit

75 .415 T1 = hours to produce the first unit
80 .322
b = (log of the learning rate)/(log 2) = slope of the learning curve
85 .234
90 .152
Some of the values for b are presented in Table E.2. Example E1 shows how this formula works.
A P P LY I N G THE L E A R N I N G C U RV E 775
Example E1 The learning rate for a particular operation is 80%, and the first unit of production took 100 hours. The
Using logs to compute hours required to produce the third unit may be computed as follows:
learning curves
TN = T1 ( N b )
Excel OM T3 = (100 hours)(3b )
Data File = (100)(3log .8/ log2 )
ModEExE1.xla
= (100)(3 −.322 ) = 70.2 labor-hours
The logarithmic approach allows us to determine the hours required for any unit produced, but there
is a simpler method.
Learning-Curve Coefficient Approach

The learning-curve coefficient technique is embodied in Table E.3 and the following equation:
TN = T1C (E-3)
where TN = number of labor-hours required to produce the Nth unit

T1 = number of labor-hours required to produce the first unit
C = learning-curve coefficient found in Table E.3
The learning-curve coefficient, C, depends on both the learning rate (70%, 75%, 80%, and so on)
and the unit of interest.
TABLE E.3 ■ Learning-Curve Coefficients, Where Coefficient, C = N (log of learning rate/log 2)

70% 75% 80% 85% 90%
UNIT
NUMBER UNIT TOTAL UNIT TOTAL UNIT TOTAL UNIT TOTAL UNIT TOTAL
(N) TIME TIME TIME TIME TIME TIME TIME TIME TIME TIME TIME
1 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000 1.000
2 .700 1.700 .750 1.750 .800 1.800 .850 1.850 .900 1.900
3 .568 2.268 .634 2.384 .702 2.502 .773 2.623 .846 2.746
4 .490 2.758 .562 2.946 .640 3.142 .723 3.345 .810 3.556
5 .437 3.195 .513 3.459 .596 3.738 .686 4.031 .783 4.339
6 .398 3.593 .475 3.934 .562 4.299 .657 4.688 .762 5.101
7 .367 3.960 .446 4.380 .534 4.834 .634 5.322 .744 5.845
8 .343 4.303 .422 4.802 .512 5.346 .614 5.936 .729 6.574
9 .323 4.626 .402 5.204 .493 5.839 .597 6.533 .716 7.290
10 .306 4.932 .385 5.589 .477 6.315 .583 7.116 .705 7.994
11 .291 5.223 .370 5.958 .462 6.777 .570 7.686 .695 8.689
12 .278 5.501 .357 6.315 .449 7.227 .558 8.244 .685 9.374
13 .267 5.769 .345 6.660 .438 7.665 .548 8.792 .677 10.052
14 .257 6.026 .334 6.994 .428 8.092 .539 9.331 .670 10.721
15 .248 6.274 .325 7.319 .418 8.511 .530 9.861 .663 11.384
16 .240 6.514 .316 7.635 .410 8.920 .522 10.383 .656 12.040
17 .233 6.747 .309 7.944 .402 9.322 .515 10.898 .650 12.690
18 .226 6.973 .301 8.245 .394 9.716 .508 11.405 .644 13.334
19 .220 7.192 .295 8.540 .388 10.104 .501 11.907 .639 13.974
20 .214 7.407 .288 8.828 .381 10.485 .495 12.402 .634 14.608
25 .191 8.404 .263 10.191 .355 12.309 .470 14.801 .613 17.713
30 .174 9.305 .244 11.446 .335 14.020 .450 17.091 .596 20.727
35 .160 10.133 .229 12.618 .318 15.643 .434 19.294 .583 23.666
40 .150 10.902 .216 13.723 .305 17.193 .421 21.425 .571 26.543
45 .141 11.625 .206 14.773 .294 18.684 .410 23.500 .561 29.366
50 .134 12.307 .197 15.776 .284 20.122 .400 25.513 .552 32.142
Example E2 uses the preceding equation and Table E.3 to calculate learning-curve effects.
Example E2 It took a Korean shipyard 125,000 labor-hours to produce the first of several tugboats that you expect to
Using learning-curve purchase for your shipping company, Great Lakes, Inc. Boats 2 and 3 have been produced by the Koreans
coefficients with a learning factor of 85%. At $40 per hour, what should you, as purchasing agent, expect to pay for the
fourth unit?
Excel OM First, search Table E.3 for the fourth unit and a learning factor of 85%. The learning-curve coefficient,
Data File C, is .723. To produce the fourth unit, then, takes
ModEExE2.xla
TN = T1C
T4 = (125, 000 hours)(.723)
Active Model E.1 = 90,375 hours
To find the cost, multiply by $40:
Examples E2 and E3
are further illustrated 90,375 hours × $40 per hour = $3,615,000
in Active Model E.1 on
the CD-ROM and in the
Exercise on page 780. Table E.3 also shows cumulative values. These allow us to compute the total number of hours needed
to complete a specified number of units. Again, the computation is straightforward. Just multiply the
table value times the time required for the first unit. Example E3 illustrates this concept.
Example E3 Example E2 computed the time to complete the fourth tugboat that Great Lakes plans to buy. How long will
Using cumulative all four boats require?
coefficients Looking this time at the “total time” column in Table E.3, we find that the cumulative coefficient is
3.345. Thus, the time required is
TN = T1C
T4 = (125,000)(3.345) = 418,125 hours in total for all 4 boats
For an illustration of how Excel OM can be used to solve Examples E2 and E3, see Program E.1 at the end
of this module.
Using Table E.3 requires that we know how long it takes to complete the first unit. Yet, what hap-
pens if our most recent or most reliable information available pertains to some other unit? The
answer is that we must use these data to find a revised estimate for the first unit and then apply the
table to that number. Example E4 illustrates this concept.
Example E4 Great Lakes, Inc., believes that unusual circumstances in producing the first boat (see Example E2) imply
Revising learning-curve that the time estimate of 125,000 hours is not as valid a base as the time required to produce the third boat.
estimates Boat number 3 was completed in 100,000 hours.
To solve for the revised estimate for boat number 1, we return to Table E.3, with a unit value of N = 3
and a learning-curve coefficient of C = .773 in the 85% column. To find the revised estimate, we divide the
actual time for boat number 3, 100,000 hours, by C = .773
100, 000
= 129,366 hours
.773
So, 129,366 hours is the new (revised) estimate for boat 1.
STRATEGIC IMPLICATIONS OF LEARNING CURVES

So far, we have shown how operations managers can forecast labor-hour requirements for a product.
We have also shown how purchasing agents can determine a supplier’s cost, knowledge that can help
in price negotiations. Another important application of learning curves concerns strategic planning.
An example of a company cost line and industry price line are so labeled in Figure E.2. These
learning curves are straight because both scales are log scales. When the rate of change is constant, a
log-log graph yields a straight line. If an organization believes its cost line to be the “company cost”
line, and the industry price is indicated by the dashed horizontal line, then the company must have
costs at the points below the dotted line (for example, point a or b) or else operate at a loss (point c).
S U M M A RY 777
FIGURE E.2 ■
Industry Learning Curve Ind

for Price Compared with C us
om try
Price per unit (log scale)

Company Learning pa pr
ny ice
Curve for Cost co
st
Note: Both the vertical and (c)
horizontal axes of this figure Loss
are log scales. This is known (b)
as a log-log graph.
Gross profit (a)
margin
Accumulated volume (log scale)
Applications of the Lower costs are not automatic; they must be managed down. When a firm’s strategy is to pursue
learning curve: a curve steeper than the industry average (the company cost line in Figure E.2), it does this by
1. Internal → determine
labor standards and 1. Following an aggressive pricing policy.
rates of material supply 2. Focusing on continuing cost reduction and productivity improvement.
required. 3. Building on shared experience.
2. External → determine 4. Keeping capacity growing ahead of demand.
purchase costs.
3. Strategic → determine Costs may drop as a firm pursues the learning curve, but volume must increase for the learning curve
volume-cost changes. to exist. Moreover, managers must understand competitors before embarking on a learning-curve
strategy. Weak competitors are undercapitalized, stuck with high costs, or do not understand the
logic of learning curves. However, strong and dangerous competitors control their costs, have solid
financial positions for the large investments needed, and have a track record of using an aggressive
learning-curve strategy. Taking on such a competitor in a price war may help only the consumer.
LIMITATIONS OF LEARNING CURVES

Before using learning curves, some cautions are in order:
• Because learning curves differ from company to company, as well as industry to industry,
estimates for each organization should be developed rather than applying someone else’s.
• Learning curves are often based on the time necessary to complete the early units; therefore,
those times must be accurate. As current information becomes available, reevaluation is
appropriate.
• Any changes in personnel, design, or procedure can be expected to alter the learning curve,
causing the curve to spike up for a short time, even if it is going to drop in the long run.
• While workers and process may improve, the same learning curves do not always apply to
indirect labor and material.
• The culture of the workplace, as well as resource availability and changes in the process, may
alter the learning curve. For instance, as a project nears its end, worker interest and effort
may drop, curtailing progress down the curve.
SUMMARY The learning curve is a powerful tool for the operations manager. This tool can assist operations
managers in determining future cost standards for items produced as well as purchased. In addition,
the learning curve can provide understanding about company and industry performance. We saw
three approaches to learning curves: arithmetic analysis, logarithmic analysis, and learning-curve
coefficients found in tables. Software can also help analyze learning curves.
KEY TERM Learning curves (p. 772)
USING SOFTWARE FOR LEARNING CURVES

Excel, Excel OM, and POM for Windows may all be used in analyzing learning curves. You can use the ideas
in the following section on Excel OM to build your own Excel spreadsheet if you wish.
Using Excel OM
Program E.1 shows how Excel OM develops a spreadsheet for learning-curve calculations. The input data
come from Examples E2 and E3. In cell B7, we enter the unit number for the base unit (which does not have to
be 1), and in B8 we enter the time for this unit.
These are used for computations. Do not touch these

cells. In cell B11, the time for the first unit is computed,
allowing us to use initial units other than unit 1. In cell
B12, the power to be raised to is computed, making
the formulas in the rest of column B much simpler.
=$B$11*POWER(1,$B$12) =SUM(B16:B16)
PROGRAM E.1 ■ Excel OM’s Learning-Curve Module, Using Data from Examples
E2 and E3
Using POM for Windows

POM for Windows’ Learning Curve module computes the length of time that future units will take, given the
time required for the base unit and the learning rate (expressed as a number between 0 and 1). As an option, if
the times required for the first and Nth units are already known, the learning rate can be computed. See
Appendix IV for further details.
SOLVED PROBLEMS
Solved Problem E.1
Digicomp produces a new telephone system with built-in TV (b) How long will the first 11 systems take in total?
screens. Its learning rate is 80%.
(c) As a purchasing agent, you expect to buy units 12 through 15
(a) If the first one took 56 hours, how long will it take Digicomp of the new phone system. What would be your expected cost
to make the eleventh system? for the units if Digicomp charges $30 for each labor-hour?
DISCUSSION QUESTIONS 779
Solution from Table E.3—80% unit time

(a) TN = T1C
T11 = (56 hours)(.462) = 25.9 hours
(b) Total time for the first 11 units = (56 hours)(6.777) = 379.5 hours
from Table E.3—80% total time

(c) To find the time for units 12 through 15, we take the total cumulative time for units 1 to 15 and subtract
the total time for units 1 to 11, which was computed in part (b). Total time for the first 15 units = (56
hours)(8.511) = 476.6 hours. So, the time for units 12 through 15 is 476.6 379.5 = 97.1 hours. (This
figure could also be confirmed by computing the times for units 12, 13, 14, and 15 separately using the
unit-time column and then adding them.) Expected cost for units 12 through 15 = (97.1 hours) ($30 per
hour) = $2,913.
Solved Problem E.2

If the first time you performed a job took 60 minutes, how long will
the eighth job take if you are on an 80% learning curve?
Solution
Three doublings from 1 to 2 to 4 to 8 implies .83. Therefore, we have
60 × (.8)3 = 60 × .512 = 30.72 minutes
or, using Table E.3, we have C = .512. Therefore:
60 × .512 = 30.72 minutes
INTERNET AND STUDENT CD-ROM EXERCISES

Visit our Companion Web site or use your student CD-ROM to help with material in this module.
On Our Companion Web site, www.prenhall.com/heizer On Your Student CD-ROM

• Self-Study Quizzes • PowerPoint Lecture
• Practice Problems • Practice Problems
• Internet Exercises • Active Mode Exercises
• Internet Homework Problems • Excel OM
• Excel OM Example Data Files
• POM for Windows

DISCUSSION QUESTIONS
1. What are some of the limitations to the use of learning curves? 5. Why isn’t the learning-curve concept as applicable in a high-
2. Identify three applications of the learning curve. volume assembly line as it is in most other human activities?
3. What are the approaches to solving learning-curve problems? 6. What are the elements that can disrupt the learning curve?
4. Refer to Example E2: What are the implications for Great Lakes, 7. Explain the concept of the “doubling” effect in learning curves.
Inc., if the engineering department wants to change the engine in 8. What techniques can a firm use to move to a steeper learning
the third and subsequent tugboats that the firm purchases? curve?
ACTIVE MODEL EXERCISE

This Active Model, found on your CD-ROM, allows you to evaluate important elements in the learning curve
model described in Examples E2 and E3. You may change any input parameter in a green colored cell.
ACTIVE MODEL E.2 ■
Great Lakes, Inc.

Learning Curve Analysis
of Boats, Using Example
E2 and E3 Data
Questions
1. If the learning is not as good as expected and rises to 90%, how much will the 4th boat cost?
2. What should the learning coefficient be to keep the total cost of the first 4 boats below $16,000,000?
3. How many boats need to be produced before the cost of an individual boat is below $4,000,000?
4. How many boats need to be produced before the average cost of each boat is below $4,000,000?
PROBLEMS*
P E.1 Amand Heinl, an IRS auditor, took 45 minutes to process her first tax return. The IRS uses an 85% learning
curve. How long will the
a) second return take?
b) fourth return take?
P
c) eighth return take?
E.2 Seton Hall Trucking Co. just hired Sally Kissel to verify daily invoices and accounts payable. She took 9 hours
and 23 minutes to complete her task on the first day. Prior employees in this job have tended to follow a 90%
learning curve. How long will the task take at the end of
a) the second day?
b) the fourth day?
c) the eighth day?
d) the sixteenth day?
P E.3 If Professor Tacy Quinn takes 15 minutes to grade the first exam, and follows an 80% learning curve, how long
will it take her
a) to grade the 25th exam?
b) to grade the first 10 exams?
*Note: means the problem may be solved with POM for Windows; means the problem may be solved with Excel
OM; and P means the problem may be solved with POM for Windows and/or Excel OM.
P
P RO B L E M S 781
E.4 If it took 563 minutes to complete a hospital’s first cornea transplant, and the hospital uses a 90% learning rate,
what is the cumulative time to complete
a) the first 3 transplants?
b) the first 6 transplants?
c) the first 8 transplants?
d) the first 16 transplants?
P E.5 Beth Zion Hospital has received initial certification from the state of California to become a center for liver
transplants. The hospital, however, must complete its first 18 transplants under great scrutiny and at no cost to
the patients. The very first transplant, just completed, required 30 hours. On the basis of research at the hospi-
tal, Beth Zion estimates that it will have an 80% learning curve. Estimate the time it will take to complete
a) the fifth liver transplant.
b) all of the first 5 transplants.
c) the eighteenth transplant.
d) all 18 transplants.
P E.6 Refer to Problem E.5. Beth Zion Hospital has just been informed that only the first 10 transplants must be per-
formed at the hospital’s expense. The cost per hour of surgery is estimated to be $5,000. Again, the learning
rate is 80% and the first surgery took 30 hours.
a) How long will the tenth surgery take?
b) How much will the tenth surgery cost?
P
c) How much will all 10 cost the hospital?
E.7 Manceville Air has just produced the first unit of a large industrial compressor that incorporated new technol-
ogy in the control circuits and a new internal venting system. The first unit took 112 hours of labor to manu-
facture. The company knows from past experience that this labor content will decrease significantly as more
units are produced. In reviewing past production data, it appears that the company has experienced a 90%
learning curve when producing similar designs. The company is interested in estimating the total time to com-
P
plete the next 7 units. Your job as the production cost estimator is to prepare the estimate.
E.8 Candice Cotton, a student at San Diego State University, bought six bookcases for her dorm room. Each
required unpacking of parts and assembly, which included some nailing and bolting. Candice completed the
first bookcase in 5 hours and the second in 4 hours.
a) What is her learning rate?
b) Assuming the same rate continues, how long will the third bookcase take?
c) The fourth, fifth, and sixth cases?
d) All six cases?
P E.9 Professor Mary Beth Marrs took 6 hours to prepare the first lecture in a new course. Traditionally, she has
P
experienced a 90% learning factor. How much time should it take her to prepare the fifteenth lecture?
E.10 The first vending machine that M. D’Allessandro, Inc., assembled took 80 labor-hours. Estimate how long the
fourth machine will require for each of the following learning rates:
a) 95%
b) 87%
P
c) 72%
E.11 Kara-Smith Systems is installing networks for Advantage Insurance. The first installation took 46 labor-hours
to complete. Estimate how long the fourth and the eighth installations will take for each of the following learn-
ing rates:
a) 92%
b) 84%
c) 77%
P E.12 Baltimore Assessment Center screens and trains employees for a computer assembly firm in Towson,
Maryland. The progress of all trainees is tracked and those not showing the proper progress are moved to less
demanding programs. By the tenth repetition trainees must be able to complete the assembly task in 1 hour or
less. Torri Olson-Alves has just spent 5 hours on the fourth unit and 4 hours completing her eighth unit, while
another trainee, Julie Burgmeier, took 4 hours on the third and 3 hours on the sixth unit. Should you encourage
either or both of the trainees to continue? Why?
P E.13 The better students at Baltimore Assessment Center (see Problem E.12) have an 80% learning curve and can do
a task in 20 minutes after just six times. You would like to weed out the weak students sooner and decide to
evaluate them after the third unit. How long should the third unit take?
P E.14 Collette Siever, the purchasing agent for Northeast Airlines, is interested in determining what she can expect to
pay for airplane number 4 if the third plane took 20,000 hours to produce. What would Siever expect to pay for
plane number 5? Number 6? Use an 85% learning curve and a $40-per-hour labor charge.
P E.15 Using the data from Problem E.14, how long will it take to complete the twelfth plane? The fifteenth plane?
How long will it take to complete planes 12 through 15 inclusive? At $40 per hour, what can Davis, as pur-
chasing agent, expect to pay for all 4 planes?
P E.16 Dynamic RAM Corp. produces semiconductors and has a learning curve of .7. The price per bit is 100 milli-
cents when the volume is .7 × 1012 bits. What is the expected price at 1.4 × 1012 bits? What is the expected price
at 89.6 × 1012 bits?
P E.17 Central Power owns 25 small power generating plants. It has contracted with Genco Services to overhaul the
power turbines of each of the plants. The number of hours that Genco billed Central to complete the third tur-
bine was 460. Central pays Genco $60 per hour for its services. As the maintenance manager for Central, you
are trying to estimate the cost of overhauling the fourth turbine. How much would you expect to pay for the
overhaul of number 5 and number 6? All the turbines are similar and an 80% learning curve is appropriate.
P E.18 It takes 28,718 hours to produce the eighth locomotive at a large French manufacturing firm. If the learning
factor is 80%, how long does it take to produce the tenth locomotive?
P E.19 Eric Krassow’s firm is about to bid on a new radar system. Although the product uses new technology, Krassow
believes that a learning rate of 75% is appropriate. The first unit is expected to take 700 hours, and the contract
is for 40 units.
a) What is the total amount of hours to build the 40 units?
b) What is the average time to build each of the 40 units?
c) Assume that a worker works 2,080 hours per year. How many workers should be assigned to this contract to
complete it in a year?
P E.20 As the estimator for Peter Ancona Enterprises, your job is to prepare an estimate for a potential customer service
contract. The contract is for the service of diesel locomotive cylinder heads. The shop has done some of these in
the past on a sporadic basis. The time required to service each cylinder head has been exactly 4 hours, and similar
work has been accomplished at an 85% learning curve. The customer wants you to quote in batches of 12 and 20.
a) Prepare the quote.
b) After preparing the quote, you find a labor ticket for this customer for five locomotive cylinder heads. From the
notations on the labor ticket, you conclude that the fifth unit took 2.5 hours. What do you conclude about the
learning curve and your quote?
P E.21 Sara Bredbenner and Blake DeYoung are teammates at a discount store; their new job is assembling swing sets
for customers. Assembly of a swing set has a learning rate of 90%. They forgot to time their effort on the first
swing set, but spent 4 hours on the second set. They have six more sets to do. Determine approximately how
much time will be (was) required for
a) the first unit.
b) the eighth unit.
c) all eight units.
E.22 Kelly-Lambing, Inc., a builder of government-contracted small ships, has a steady work force of 10 very
skilled craftspeople. These workers can supply 2,500 labor-hours each per year. Kelly-Lambing is about to
undertake a new contract, building a new style of boat. The first boat is expected to take 6,000 hours to com-
plete. The firm thinks that 90% is the expected learning rate.
a) What is the firm’s “capacity” to make these boats—that is, how many units can the firm make in 1 year?
b) If the operations manager can increase the learning rate to 85% instead of 90%, how many units can the firm make?
P E.23 Fargo Production has contracted with Johnson Services to overhaul the 25 robots at its plant. All the robots are
similar and an 80% learning curve is appropriate. The number of hours that Johnson billed Fargo to complete the
third robot overhaul was 460. Fargo pays $60 per hour for its services. Fargo wants to estimate the following:
a) How many hours will it take to overhaul the 13th robot?
b) The fifteenth robot?
c) How long will it take to complete robots 10 through 15 inclusive?
d) As the person who manages the costs for overhauling all equipment, what is your estimate of the cost of the
entire contract for overhauling all 25 robots?
E.24 You are considering building a plane for training pilots. You believe there is a market for 50 of these planes,
which will have a top speed of 400 kn and an empty weight of 10,000 lb. You will need one test plane. Use the
NASA Web site (www.jsc.nasa.gov/bu2/airframe.html) to determine the total cost and engineering cost of
building all 50 planes.
C A S E S T U DY 783
E.25
a)
Using the accompanying log-log graph, answer the following questions:
What are the implications for management if it has forecast its cost on the optimum line?
b) What could be causing the fluctuations above the optimum line?
c) If management forecast the tenth unit on the optimum line, what was that forecast in hours?
d) If management built the tenth unit as indicated by the actual line, how many hours did it take?
500
400
300
Average labor-hours per unit 200
Optimum Actual
100
80
60
40
20
10
1 10 100 200 300 400
Total units produced
INTERNET HOMEWORK PROBLEMS

See our Companion Web site at www.prenhall.com/heizer for these additional homework problems: E.26
through E.33.
CASE STUDY
SMT’s Negotiation with IBM tools, jigs, and fixtures; 5% for quality control; and 9% for pur-
chasing burden. Then, using an 85% learning curve, he backed up
SMT and one other, much larger company were asked by IBM to bid his costs to get an estimate for the first unit. He next checked the
on 80 more units of a particular computer product. The RFQ data on hours and materials for the 25, 15, and 38 units already
(request for quote) asked that the overall bid be broken down to made and found that his estimate for the first unit was within 4% of
show the hourly rate, the parts and materials component in the price, actual cost. His check, however, had indicated a 90% learning-
and any charges for subcontracted services. SMT quoted $1.62 mil- curve effect on hours per unit.
lion and supplied the cost breakdown as requested. The second com- In the negotiations, SMT was represented by one of the two
pany submitted only one total figure, $5 million, with no cost break- owners of the business, two engineers, and one cost estimator. The
down. The decision was made to negotiate with SMT. sessions opened with a discussion of learning curves. The IBM cost
The IBM negotiating team included two purchasing managers estimator demonstrated that SMT had in fact been operating on a
and two cost engineers. One cost engineer had developed manufac- 90% learning curve. But, he argued, it should be possible to move to
turing cost estimates for every component, working from engineer- an 85% curve, given the longer runs, reduced setup time, and
ing drawings and cost-data books that he had built up from previ- increased continuity of workers on the job that would be possible
ous experience and that contained time factors, both setup and run with an order for 80 units. The owner agreed with this analysis and
times, for a large variety of operations. He estimated materials was willing to reduce his price by 4%.
costs by working both from data supplied by the IBM corporate However, as each operation in the manufacturing process was
purchasing staff and from purchasing journals. He visited SMT discussed, it became clear that some IBM cost estimates were too
facilities to see the tooling available so that he would know what low because certain crating and shipping expenses had been over-
processes were being used. He assumed that there would be perfect looked. These oversights were minor, however, and in the following
conditions and trained operators, and he developed cost estimates discussions, the two parties arrived at a common understanding of
for the 158th unit (previous orders were for 25, 15, and 38 units). specifications and reached agreements on the costs of each manufac-
He added 5% for scrap-and-flow loss; 2% for the use of temporary turing operation.
(continued)
At this point, SMT representatives expressed great concern understand why SMT had quoted such a low figure. He wanted to be
about the possibility of inflation in material costs. The IBM negotia- sure that SMT was using the correct manufacturing process. In any
tors volunteered to include a form of price escalation in the contract, case, if SMT estimators had made a mistake, it should be noted. It
as previously agreed among themselves. IBM representatives sug- was IBM’s policy to seek a fair price both for itself and for its sup-
gested that if overall material costs changed by more than 10%, the pliers. IBM procurement managers believed that if a vendor was los-
price could be adjusted accordingly. However, if one party took the ing money on a job, there would be a tendency to cut corners. In
initiative to have the price revised, the other could require an analysis addition, the IBM negotiator felt that by pointing out the error, he
of all parts and materials invoices in arriving at the new price. generated some goodwill that would help in future sessions.
Another concern of the SMT representatives was that a large
amount of overtime and subcontracting would be required to meet
IBM’s specified delivery schedule. IBM negotiators thought that a Discussion Questions
relaxation in the delivery schedule might be possible if a price con- 1. What are the advantages and disadvantages to IBM and SMT
cession could be obtained. In response, the SMT team offered a 5% from this approach?
discount, and this was accepted. As a result of these negotiations, the 2. How does SMT’s proposed learning rate compare with that of
SMT price was reduced almost 20% below its original bid price. other companies?
In a subsequent meeting called to negotiate the prices of certain 3. What are the limitations of the learning curve in this case?
pipes to be used in the system, it became apparent to an IBM cost
estimator that SMT representatives had seriously underestimated Source: Adapted from E. Raymond Corey, Procurement Management: Strategy,
their costs. He pointed out this apparent error because he could not Organization, and Decision Making (New York: Van Nostrand Reinhold).
BIBLIOGRAPHY
Abernathy, W. J., and K. Wayne. “Limits of the Learning Curve.” McDonald, A., and L. Schrattenholzer. “Learning Curves and
Harvard Business Review 52 (September–October 1974): 109–119. Technology Assessment.” International Journal of Technology
Bailey, C. D. and E. N. McIntyre. “Using Parameter Prediction Management 23 (2002): 718.
Models to Forecast Post-interruption Learning.” IIE Transactions Smith, J., Learning Curve for Cost Control. Norcross, Georgia:
35 (December 2003): 1077. Industrial Engineering and Management Press, Institute of
Camm, J. “A Note on Learning Curve Parameters.” Decision Sciences Industrial Engineers. (1998).
(summer 1985): 325–327. Smunt, T. L., and C. A. Watts. “Improving Operations Planning with
Hall, G., and S. Howell. “The Experience Curve from the Economist’s Learning Curves.” Journal of Operations Management 21
Perspective.” Strategic Management Journal (July–September (January 2003): 93.
1985): 197–210. Weston, M. Learning Curves. New York: Crown Publishing (2000).
Lapré, Michael A., Amit Shankar Mukherjee, and Luk N. Van Zangwill, W. I., and P. B. Kantor. “Toward a Theory of Continuous
Wassenhove. “Behind the Learning Curve: Linking Learning Improvement and the Learning Curve.” Management Science 44,
Activities to Waste Reduction.” Management Science 46, no. 5 no. 7 (July 1998): 910–920.
(May 2000): 597–611.
INTERNET RESOURCES
Bailey, Charles (University of Central Florida): Production technology, Tampa, Florida:
www.bus.ucf.edu/bailey www.protech-ie.com/software.htm
NASA:
www.jsc.nasa.gov/bu2/learn.html
Operations Strategy – Student Study Guide
CHAPTER 1
OPERATIONS STRATEGY – THE TWO PERSPECTIVES
Introduction
This introductory chapter could have been called, “What Is Operations Strategy?”,
and it attempts to answer that question in two ways. First, it discusses operations
strategy relative to some of the more common categorizations within management and
business, especially operations management. It does this by trying to define what is
meant by “operations” and “strategy”. Second, it sets out what is the main framework
for the whole book – the idea that operations strategy means reconciling two different,
but equally valid, perspectives. These are the market requirements perspective and the
operations resource capability perspective. So, as you read through this chapter, try to
keep in mind these two main points,
 Operations is not the same as operational, it does have an important

strategic role to play in any business.
 All operations managers have to reconcile these two fundamental
objectives, to satisfy their markets and to build distinctive operations
resource capabilities.
Key points
“Operations” is not the same as “operational”
 This is probably the most important point made in the chapter. Many people
associate the operations part of the business with creating services and creating
products at a detailed and day-to-day level. Operations managers are the people
who implement strategies, get things done, solve problems, cope with all the
difficulties and (literally) deliver the goods. This is true of course. Operations
managers do all these things and are ultimately responsible for that on-going act of
value creation which is the on-going task of any type of enterprise. Yet there is
much more that operations can contribute to any business. Operations also has an
important strategic role to play. In the long term an enterprise has a greater chance
of surviving and achieving a sustainable level of market success if it can serve its
markets better than anyone else. To do this it must have the resources (people and
facilities and technology) and the processes (to create services and products,
develop new services and products and bring a continual stream of innovation)
that competitors find difficult to imitate. A company that has an operation that
both performs better than competitors and does so through using processes and
resources that are difficult for those competitors to copy, is giving an almost
invaluable strategic advantage to the company.
1
 This is not to downplay the importance of “operational” operations management.

It is of course important to get the details right and do so on a dependable day-to-
day basis. In fact, it is the accumulation of day-to-day experience which can build
up the operations capabilities that go towards providing the strategic operations
advantage. This is the paradox of running a successful operation. It has to be good
at both the day-to-day details and the broader strategic issues. In fact it has to be
able to connect the operational and the strategic aspects of operations together.
What are the main differences between operations strategy and operations
management?
 The chapter identifies four “dimensions” on which operations strategy and

operations management differ.
 Time scale – operations management is relatively short to medium term. This

will include decisions that affect minute-by-minute, to month-by-month
activities. Some operations management decisions will have an impact several
years in advance, but most are confined to the shorter term. Operations
strategy decisions however are generally focused specifically on the longer
term. So whereas operations management is concerned with reacting
effectively and efficiently to specific demands from its customers, operations
strategy is concerned with making sure that the company has an appropriate
capacity and capability to meet its market requirements years into the future.
 Level of analysis – many operations management decisions are relatively local

in their effect. For example, an individual retail store could be concerned with
how it manages it inventory levels within its own facilities. Operations
strategy tends to be wider in its application and effect. For example, a more
strategic view of thinking about inventory is to consider the whole supply
network from raw materials through to end consumer and question where
inventory should be held in the total network.
 Level of aggregation – operations management can be relatively detailed.

Resources are treated separately and are associated with specific services or
products. For example, “What kind of customer relationship skills do our
checkout operators need?” is a detailed operations management decision.
Operations strategy can rarely be so detailed. It tends to aggregate different
types of resource into one overall unit. For example, “What are our overall
human resource requirements in our larger superstores?” is an important but
highly aggregated decision.
 Level of abstraction – operations management concerns itself mainly with

what is immediately recognizable and tangible. So, the retail company might
ask itself, “How do we improve the procedures which place orders with
suppliers?” These procedures, systems, information flows and the physical
inventory associated with them can all be readily observed. Operations
strategy, on the other hand, deals with more abstract issues. For example,
2
“Should we develop strategic alliances with a small number of partners?” is a

question that touches on the very philosophy of the company.
Operations strategy is about service too
 In most developed economies manufacturing accounts for around 20 per cent or

less of economic activity. Admittedly it is a very important 20 per cent, but the
fact remains that the vast majority of business activities are concerned with
trading services rather than trading products. This means of course that the vast
majority of operations are concerned with producing service rather than producing
products. The inescapable logic is that, if operations strategy is to be a useful
concept, it must be at least as applicable to service operations as it is to
manufacturing operations. Yet the history of the subject is deeply rooted in
manufacturing. It is only relatively recently that books on the subject and
university courses started to change their names to operations strategy rather than
manufacturing strategy. Even so, a large number of these still concentrate on
manufacturing concepts and examples. In fact, as Chapter 2 points out, the
distinction between what is service and what is manufacturing is increasingly
irrelevant. Every manufacturer should think of themselves as providing service to
their customers even if much of the service is embodied within a physical product.
Similarly, every service operation has something to learn from the years of
systematic experience of managing operations in manufacturing companies.
 In the chapter two large companies, Nestlé (the world’s largest food
manufacturing company) and Wal-Mart (the world’s largest food retailer) are
compared under a series of headings. This exercise demonstrates that both
companies are concerned with a similar set of operations strategy decisions. These
decisions (which we shall explore more fully later) are,
 capacity
 supply networks
 process technology, and
 development and organization.
 Any type of business needs to consider these four sets of decisions, which together
form what we shall later call the “content” of operations strategy. So, whether you
are a hospital or a hotel, you must think about how your overall capacity needs to
expand or contract over the next few years. Both profession service companies
such as accountants and pharmaceutical giants are faced with the same decisions
as to what they should do in-house themselves versus what they should outsource
to subcontractors elsewhere in the supply network. Motor manufacturers and
merchant banks both must consider how much they need to invest process
technologies and what kind of process technologies they should invest in. Both
laundries and law firms need to decide how best to develop their services and their
processes for the future and how to organize themselves to respond to changing
market needs.
 Of course there are differences between different types of business. No one is

denying that running a hospital is the same as running an automobile plant. But,
3
there are some common issues, common decisions, and common principles. It is
the commonality in the approach to operations strategy analysis which is stressed
throughout this book.
The two perspectives
 This is probably the key point to understand if you are going to understand the
whole book. It is an issue which various chapters return to frequently. It is the
simple but fundamental idea that all businesses have to reconcile two pressures or
perspectives within their operations function. The first is the market requirements
perspective and the second is the operations resource perspective. Operations
strategy itself is defined as the process of reconciling the pressures which come
from these two perspectives.
 Market requirements is a relatively simple concept to understand. It means the

demands that are placed on the operations function because of the market position
the company has chosen to adopt. So, for example, if a company has chosen to
compete by offering low cost services or products into the market, the operations
function must be able to produce and deliver those services and products at low
cost. Conversely, if a company has chosen to inhabit a different part of the market,
say one that emphasizes high variety and customization, then it will demand a
different set of things from its operations function, in this case probably high
degrees of flexibility. So, an obvious pressure on any operation is to satisfy the
requirements of its markets.
 Until relatively recently the market requirements perspective was seen as the
major, if not the only, driver of how operations strategy should be viewed. More
recently it has become generally accepted that, by itself, this perspective is
incomplete. There are very few organizations that can simply configure their
operations resources to match market requirements quickly and effectively.
Usually markets are capable of changing far faster than a company can
reconfigure its resources. Therefore, at the very least, operations strategy must
recognize the inertia and constraints represented by its physical facilities, people,
technology, organizational structure and system. But the concept of operations
resources is wider than this. All operations have a history and a set of experiences
from which they have accumulated knowledge. This accumulated knowledge may
even have formed itself into a set of competencies or capabilities that allow it to
do certain things particularly well. Blindly reacting to (possibly short-term)
market demands, even if it is possible, would waste these capabilities. An
important responsibility for the operations function is to understand its own
capabilities and attempt to build on these and develop them to a point where they
provide a distinctive competitive advantage against competitors. This is what we
mean by the operations resource perspective.
Hints on answering the Hagen Style case exercise
 This may be a simple case but it reflects the two pressures always present when
considering operations strategy. That is, “Should we move with market and
4
change our operations, or should we stick to what we are good at and find ways of
making money with our existing expertise in other markets?”
 As is often the case, there is no clear answer to this case but it is important to
marshal the arguments for the options that the company faces. This is best done by
clarifying what is likely to happen in the marketplace in terms of how it affects the
requirements placed on operations. Similarly, it will be necessary to understand
exactly what the current operations resources can do (in terms of constraints) and
what they can do particularly well.
 Try identifying the options that you believe the company could adopt and then
assessing the advantages and disadvantages of each.
5
CHAPTER 2
THE CONTENT AND PROCESS OF OPERATIONS STRATEGY
Introduction
This chapter introduces two key ideas. Each is associated with what is called the
content and the process of operations strategy. Content means the actual decisions that
are taken over time and shape the operations strategy of a company. A simple model
called the operations strategy matrix is used to think about content issues. Operations
strategy process is the procedures that a company can adopt to formulate the strategy.
In other words, the way it goes about making content decisions. A three-level process
is proposed in the chapter, known as the “fit, sustainability, risk” model.
Key points
 The previous chapter established the idea of the two pressures on operations
strategy, or the perspectives on the area. However, it did not attempt to go into any
depth on how these two perspectives can be operationalized. But in order to think
about how the two perspectives can be reconciled, it is necessary to devise some
simple checklist or categorization method for each of them.
Performance objectives
 The main device used to understand market requirements are performance

objectives. These are the various aspects of performance in which market
requirements can be expressed. Remember that performance objectives are not the
same as the various tools and classifications that marketing professional use to
understand markets. They are a set of broad performance measures that have some
meaning to the operations function. Many of the concepts and frameworks used
within the marketing function, although very effective at enabling marketing
professionals to understand markets, have little meaning when brought within the
operations function. Therefore, performance objectives are a “translation” into
operations speak of a marketing professionals view of the market.
 The five performance objectives used throughout the book are:
 Quality
 Speed
 Dependability
 Flexibility
 Cost
1
 Not everyone who writes on operations strategy uses this particular set. One of the
best-known author teams, Hayes and Wheelwright of Harvard University, for
example do not use speed, seeing it as part of flexibility. Other authorities include
“innovation” as a performance objective, while this chapter sees it as part of
flexibility. It really doesn’t matter. In fact all the performance objectives, quality,
speed, dependability, flexibility and cost, are really clusters of issues and
measures. For example, “dependability” could mean a proportion of services or
products delivered late, average lateness, proportion delivered early, etc.
 Think of each performance objective as a bundle of issues that will need

separating out. They are a checklist defined in sufficiently broad terms to be
applicable to any kind of business or operation.
 Of course some of these performance objectives will be more important for some
operations than others. The chapter introduces one well-known method of
distinguishing between performance objectives – classifying them as order
winners or qualifiers.
 Order winners are performance objectives that clearly gain more business for the
company as its performance in these areas improves. Qualifiers are the “givens” of
doing business. No matter how well an organization performs at it qualifiers it is
not going to gain great competitive benefit. However, if it fails to meet the
expectations of the market in a qualifying performance objective it will suffer
disadvantage in the marketplace.
Operations strategy decision areas
 From the operations resource perspective there is a similar translation process to

achieve. Again this involves moving from a broad understanding through to a
more specific categorization. In this case, it is from a broad understanding of what
resources, processes and (above all) capabilities an operation may possess within
its resources through to an identification of the key decisions that operations
managers will need to take in order to exploit, build on and develop these
capabilities.
 In the chapter, ratio analysis is used to justify the four broad categories of
operation strategy decision. Although this categorization and the ratio analysis is
perfectly “clean” in separating out various decision, it does show that four clusters
of decisions have a significant effect on the overall financial performance of any
organization.
2
 Four decision categories are used. They are:
 capacity
 supply networks
 process technology
 development and organization.
 Remember, a bit like the performance objectives, these decision areas are not
totally separate and mutually exclusive. For example, no company can make
choices of which process technology it will invest in without considering how it
will impact on its suppliers and customers elsewhere in the supply network.
 Again also, remember that this categorization is not used by everyone. Professors
Hayes and Wheelwright at Harvard University use a different categorization as
shown in the following table. Also shown are the equivalent categories used in
this book.
Hayes & Issues Slack & Lewis’ Categories

Wheelwright’s
Categories
Capacity Amount, timing, type
Capacity
Facilities Size, location, specialisation
Technology Equipment, automation, linkages Process technology
Vertical Integration Direction, extent, balance Supply networks
Workforce Skill level, wage policies, employment
security
Quality Defect prevention, monitoring,

intervention Development and Organisation
Production planning / Sourcing policies, centralisation,

materials control decisions rules
Structure, control/reward systems, role

Organisation of staff groups
Adapted from : Hayes R.H. and Wheelwright S.C., ‘Restoring our Competitive Edge:
Competing through Manufacturing’, Wiley, 1984.
3
Manufacturing Strategy Decision Categories
The operations strategy matrix
 Perhaps the central point in this chapter is the development of this simple device
called the operations strategy matrix. It is simply the result of bringing
performance objectives together with operations strategy decision areas.
 The operations strategy matrix seeks to describe the reconciliation process by

understanding how what we want from our operations strategy is affected by what
we do in making operations strategy decisions.
 Remember that the operations strategy matrix does not provide answers in the
sense that it formulates a particularly appropriate operations strategy. It is
essentially a descriptive device that can be used to sketch out and understand
current (often implicit) operations strategy and spark a debate on how strategy
might be changed.
Fit, sustainability and risk
 Again, this chapter takes a slightly different view of the process of operations
strategy than that taken by many other authors. Usually the process of formulating
operations strategies is seen as one of aligning operations resources with market
requirements. This process of alignment is usually called fit.
 In this chapter two further issues are identified, these are sustainability and risk.
 Essentially this idea is that, while it is important to achieve fit as a first stage in
operations strategy formulation, this fit must be sustained over time. This means
both coping with the natural dynamics of markets and changes within operations
resource capabilities, and also attempting to move to a “higher level” of fit. This is
the process of sustainability.
 Yet as operations attempt to cope with the dynamics of business life and achieve
fit a higher level, they will inevitably move away from perfect fit at times. This
will expose them to some degree of risk. Sometimes they will have insufficient
resource capability to satisfy market expectations. At other times they may have
more capability than the market seems to need (a waste) or fail to be able to
exploit their capabilities into the marketplace (another kind of waste).
 Fit, sustainability and risk all have their own chapters at the end of the book.
4
Hints on answering the Dresding Medical case exercise
 This is really an exercise in using the operations strategy matrix to think about
how a company’s strategy may have to change.
 Try drawing an operations strategy matrix that describes the company’s current
operations strategy in making its current range of products. In doing this, use a
simple prioritization system to indicate what you think are the more important
performance objectives. For example, use three stars for very important, two stars
for important, one star for kind of important and no stars for not important.
 Draw a new operations strategy matrix for the new range of products. Think
carefully about how the prioritization of the performance objectives will have to
change and how therefore the decisions and capabilities in each of the decision
areas will have to change.
5
CHAPTER 3
TIME, TRADE-OFFS, AND TARGETING
Introduction
This chapter links three issues that are sometimes treated separately but are, in fact,
very closely linked. The first idea is that operations strategy takes place in a dynamic
environment. As markets and resource capabilities change, the type of things
operations strategy is called upon to do will also change. Second, at any point in this
dynamic journey operations strategy has to accept that the things any operation can do
are all interrelated. In the short term it cannot be exceptionally good at everything and
may have to sacrifice performance in one area for excellence in another. Third, this
idea of sacrificing one thing for great performance in another area can be taken to its
logical conclusion by focusing or targeting operations on a very narrow set of tasks
and objectives.
Key points
Operations strategy changes over time
 The chapter draws extensively on the example of Volkswagen Motor Company

and traces its history from its foundation up to the present day. In doing so it
shows how the balance between operations resources and market requirements has
changed over time. Interestingly, the one time when the company was having
major difficulties in understanding it own strategy was the time when both
operations resources and market requirements were themselves confused.
 As a postscript to the VW story, it is interesting to look at a press release

(reproduced below) that modified the strategy of common product platforms
further.
1
VW save up to 1,000 dm per car in new production strategy – Piech

November 06, 2000
WOLFSBURG, Germany
Volkswagen AG is about to overhaul its ‘platform sharing’ strategy, with a system

that could save up to 1,000 dm per car, Ferdinand Piech said in an interview in the
Wall Street Journal Europe.
No longer will the company focus its savings strategy on developing cars of similar
sizes that sit on the same platform.
Rather, VW is now aiming to develop ‘joint production systems’ that could lead to
major components being shared by a wide range of models and brands, he said.
Piech said that is some cases he will be able to save up to 1,000 dm in production
costs per car under the new program as the company achieves greater economies of
scale.
The strategy will also help underscore differences within VW’s wide-ranging brand
portfolio, he said.
All told, he envisions VW basing models on eleven joint-production systems, that will
be implemented through 2005.
“In the future we are going to have 11 module systems instead of four platforms,”
Piech said.
He also said the company will achieve a return-on-capital target of 9 pct to 11 pct by
next year, possibly even this year.
VW needs to expand its profit base, he added. Now, almost all of its profit is
generated by new-car sales and its parts business. Several years down the road,
however, the company hopes to cleave its profit base into thirds – new cars, financial
services and vehicle servicing.
 Of course the VW illustration is somewhat simplified. An alternative way of

considering how the role of operations strategy changes over time is to examine
what some authorities see as the three major foundation of competition.
 The product or service specification.

 The way the company markets its products and services.
 The way in which it manages its operations which create products and
services.
2
 The illustration below shows how the relative importance of these three areas is
reflected in the importance of product/service strategy, marketing strategy and
operations strategy in the pharmaceutical industry.
The contribution of each area will change over time
PRODUCT /
SERVICE PRODUCT
TECHNOLOGY SERVICE
TECHNOLOGY
OPERATIONS
MARKETING
MARKETING
PRODUCT / OPERATIONS
PRODUCT /
SERVICE SERVICE
TECHNOLOGY TECHNOLOGY
MARKETING
MARKETING
OPERATIONS
OPERATIONS
 Initially large pharmaceutical companies saw themselves almost exclusively as

applied research and development companies whose future depended on the
development of new drugs. In fact in the 1970s and 1980s the amount of money
that pharmaceutical companies spent on marketing their products started to equal
and then exceed their expenditure on developing new drugs. More recently, as
competition becomes fiercer and new product development becomes more
difficult and expensive, pharmaceutical companies have turned their attention to
increasing the effectiveness and efficiency of their operations strategy, most
especially their supply chain strategies. Interestingly, many people in the industry
now believe that the increased potential but increased expense of exploring the
human genome may result in a swing back to an increased emphasis on new
product (that is drug) development.
 The chapter also notes the idea of the “emergent strategy” as being important
when considering the dynamics of operations strategy. Do not underestimate this
point. Remember…… “the concept of emergent strategies in an important one in
operations strategy. Emergent strategies often emerge from the organizational
resource that are the direct responsibility of operation…….”
3
Trade-offs
 The issue of trade-offs has been one of the most closely fought debates in
operations strategy.
 Broadly speaking, there are three schools of thought regarding trade-offs. The
original school of thought derives from Skinner who was the first to point out that
trade-offs were an important issue in operations strategy. He emphasized the point
that trade-offs should be managed to reflect the company’s overall strategy. In
other words, achieving the right balance or positioning between various
performance objectives is fundamental to operations strategy. The second school
of thought was very much opposed to this idea. It emerged in the early 1980s
under the influence Japanese manufacturing principles and the concept of
continuous improvement. Put simply, it claimed that trade-offs were largely
imagined, that the main objective of operations management was to be good at
everything. Merely accepting that one aspect of performance must deteriorate if
another is to be improved was, they claimed, at best unimaginative and at worst
irresponsible. The final (and now largely accepted) school of thought is that yes,
trade-offs do exist, but over time they can be overcome. This is the approach taken
in the chapter. The illustration below indicates these three schools of thought using
the kind of trade-off diagrams explained in the chapter.
“Natural” Three schools of trade-off thought

Frontier of
Performance
Performance
Performance
measure B
measure B
X
Performance
measure B
X X
Y
Y Y
Performance Performance Performance

measure A measure A measure A
“You have to choose
“Must aim to be good when to reposition and
“It’s all about when to overcome trade-
positioning” at everything”
offs through
improvement”
Targeting and operations focus
 The idea of targeting operations or parts of operations on a relatively narrow set of

tasks or markets is not a new one. It was first written about in the 1960s and 70s
and pre-dates that in practice. Yet it is still one of the most important “solutions”
to managing the complexity present in most operations.
4
 Put simply, focused operations are given a narrow set of objectives, technologies,
products or services, markets, or activities on which to concentrate. A focused
operation is one that does not have to do everything. There are a number of
advantages to focusing operations.
 The overall managerial targets for operations management can be made simple
and clear. For example “We will protect you from the variations in the market
but you must keep costs to a very minimum” or “No customer must ever be
turned away, you must customize services to meet their individual needs, even
if this means increasing our costs”.
 Resources appropriate for those narrower set of objectives can be allocated to

this focused operation. For example, if cost is the main objective then high
volume, low variable cost technology could be used. If customization is
particularly important then more flexible technology could be used. The same
applies to people and systems.
 Focused operations can take a more appropriate improvement trajectory. For

example the operations that concentrate on cost can become particularly
experienced in shaving every cent off operations costs, whereas those
specializing in customization can develop particular skills of understanding
and interpreting customers’ needs into the delivered service.
 Related to the points made above, the theory box on “Burning your bridges (or
boats)” is particularly relevant. Increasingly companies are choosing to set up
focused operations to concentrate on one activity or part of the market on the basis
that it must be independently successful. An operation with a high degree of focus
has to make a success of its business or fold. There is nowhere else to go.
Hints on answering the Call-Us Banking Services case exercise
 This case calls for an identification of the key trade-offs within the bank.
 In trying to identify the key trade-offs use the model of trade-off categories
included in the chapter. Remember however that the trade-offs between working
capital and the other categories will not be as relevant because there are no
inventory implications mentioned in the case. However this still leaves the
following trade-offs.
 Trade-offs between cost and service.

 Trade-offs between cost and capital expenditure.
 Trade-offs between service and capital expenditure.
 Within the case there is at least one example of each of these.
 You may also want to think in general terms how an operation such as this could
overcome some of these trade-offs.
5
CHAPTERS 4 and 5
CAPACITY, CONFIGURATION AND DYNAMICS
Introduction
Not only does size matter in operations, size is a vitally important issue in determining
how well an operation can serve its markets. Nor is capacity a straightforward issue. It
is complex, both in the sense that it is not always easy to measure and in the sense that
two similar operations with similar levels of overall capacity can, in reality, be very
different in how they deploy their capacity. Two chapters are devoted to this topic.
Chapter 4 takes a steady state view of capacity. It more or less ignores issues of
growth or decline and concentrates on how organizations can configure their capacity
given a particular level of demand. Chapter 5 deals with capacity dynamics. In other
words, how the quantity and nature of a company’s capacity is changed to match
changing patterns of demand.
Key points
 The capacity of any operation is usually taken to mean its capability of operating
at a particular level. Often this is measured as output of products or services per
unit of time. So, each of General Motors’ car plants will have a capacity of so
many automobiles per week or per year. However, not all types of operation can
measure their capacity in output. For example a retail chain of stores could
measure its capacity in terms of the number of customers it serves, but that would
not be a very meaningful figure. In fact such an organization would measure its
capacity in thousands of square feet of floor space devoted to retailing. This is an
input measure of capacity.
 The capacity of any operation’s unit also depends on the mix of products or
services produced. Each of General Motors’ car plants will need to take into
account whether the mix of automobiles it makes remains constant. If it does not
then its effective capacity will change.
Capacity configuration
 Chapter identifies three main issues which apply to any operation configuring its
capacity in the long term. They are:
 What should the overall level of capacity be?

 What type of capacity should the organisation have (what is the balance
between the number and size of sites which make up the overall capacity)?
 Where should each site be located?
1
 A key issue in capacity configuration is that of economies of scale. Broadly this

means that for any operation’s unit, as its size increases, so its costs of producing
its goods and services decrease. However, after a particular point diseconomies of
scale start to kick-in. Thus there is a theoretical optimum point for any operation
where costs minimize.
 Economies of scale are really important in most industries, but don’t think this
optimum level of capacity is always easy to discover. It can change with the mix
of activities the operation has to cope with and it is just as influenced by “soft” or
attitudinal issues as it is by hard technical ones.
 Consider the following example which was not included the book (it turned out
bigger than we thought anyway). It demonstrates how creativity and innovation
should also be factored into our thinking about scale.
The paradoxes of scale in the pharmaceutical industry1

There is a fundamental and intriguing paradox in the pharmaceutical industry. Scale is
increasingly seen as important. Drugs companies are merging to form a handful of
industry giants. Yet these giants are obsessed with the dynamic innovation capabilities
exhibited by companies at the very opposite end of the scale spectrum, such as the
small biotech companies with their start-up mentality and innovative culture. For
example, GlaxoSmithKline (GSK) merged together from Glaxo Wellcome and
SmithKline Beecham, then the number two and three in the industry, to form a $180
billion giant which became the largest company in the industry. Then, within three or
four months it announced plans to separate out part of its research operations into six
competing ‘biotechnology-like companies’. Each of these would concentrate on
different disease areas, for example asthma and cancer.
Tachi Yamada, head of research and development at GSK, was quoted at the time as
justifying the move in terms of trying to achieve both scale economies and small
company advantages at the same time. “We have to be big and small at the same time.
I had to design something that would take advantage of scale. But we know for a fact
that big can sometimes mean bad. So we had to design something that could also
maintain agility and entrepreneurial spirit.”
1
From: Slack and Lewis ‘The Operations Advantage’, Forthcoming
2
Scale is particularly important, especially in the early stages of drug development

where many hundreds of thousands of compounds are checked out on an almost
production line basis, using advanced technologies to look for ‘hits’ against biological
targets. Scale is also important in the later stages of development which rely on
massive worldwide trials to establish the effectiveness of the drug and meet a myriad
of regulatory standards around the world. Scale is again important to ensure that a
company has all the required skills. Small companies cannot afford the investment in
establishing a deep knowledge base across all the different specialisms necessary for
modern drug development.
The disadvantages of scale come in the middle of the development process. This is
where the ‘hits’ from the basic screening processes are developed through to
prototype drugs with what the industry calls ‘proof of concept’. That is, having
sufficient scientific backing to warrant investment in massive drug trials. This part of
the process needs creativity, agility, entrepreneurial spirit and, above all, an ability to
be fast on your feet. None of these qualities come naturally to large and often
bureaucratic drug corporations. This needs what Mr. Yamada at GSK calls ‘autonomy
and accountable entrepreneurial spirit that maximises scientific interaction and
internal competition for resources. You need something that looks and feels like a
biotechnology company. GSK has created six units, two in the UK, one in Italy, and
three in the US. Each will concentrate on one of the different disease areas.’
GSK’s six units have no more than 500 scientists (small scale by pharmaceutical
company standards) working on the drug hits that have been discovered during the
screening process, organised at corporate level. If they manage to turn these leads into
safe and effective drugs they could receive significant financial rewards. After all,
independent biotech start-up creates plenty of millionaire scientists, “Why, says Mr.
Yamada, “should GSK not do the same?”
GSK is not alone in trying to achieve economies of scale and entrepreneurial focus
simultaneously. AstraZeneka is reshaping the layout of its largest research unit in the
north of England which houses 2500 scientists. Gone are the long corridors with their
rows of isolated laboratories working behind closed doors. In their place the company
3
is intending to build hubs around which laboratories will be clustered and where
scientists can interact, debate and test out their latest ideas. The idea is to stimulate
innovation by mixing different ideas and different disciplines. Many of the most
profitable drug discoveries have come from the intersections between different
disciplines, or from ideas that have crossed the boundary from one discipline to
another. For example, at Novartis, another major drugs company, 18 per cent of drug
development projects actually began in another therapeutic area. Perhaps the most
famous example of how boundary hopping stimulates creativity comes from Pfizer.
Their blockbuster drug Viagra actually started out as a heart drug. Again, here is the
paradox. Without entrepreneurial focus Viagra would never have been developed in
the way it was. Yet without scale, there may not have been the appropriate therapeutic
boundary for it to cross. (The original source of material for this piece came from,
David Pilling ‘Big Pharma Sees the Beauty of Thinking Small’, Financial Times,
April 2nd, 2001).
 The choice of location is also discussed in this chapter. An example is included of

Toyota’s decision to locate one of its recent European plants, not in the UK where
it already had a base, but in France. Examining this box gives a good overview of
the main factors which influence this type of location decision. These are:
 The UK is within the European Union, a large and affluent market , especially for
the products of the companies who have located in the UK. Automobiles and
electronic equipment are the obvious examples of this. Importing from outside the
European Union would have incurred import duties or even limits on the number
of products which could be imported.
 Government funded financial support ( grants and tax concessions to companies.)
was available, especially when the chosen locations were in areas of relatively
high unemployment. It is also worth noting, although some of the early locations
had substantial inducements, later ones had less.
 The UK there has a strong industrial tradition which meant that the labour force
had skills which might be useful to the incoming companies, though, that this was
also regarded as a disadvantage by some companies who were afraid of the ‘bad
habits’ of job demarcation and conservatism which had marked some areas.
 Also important were some factors which were not ‘rational’ as such. . For
example,there is the ‘critical mass’ issue. Simply because many other Japanese
companies had located in the UK it was perceived as a safe place to come. Partly
this is to do with such things as the availability of Japanese schools, Japanese food
stores and so on. Partly though it is also merely that the experience becomes a
familiar one rather than one which is unfamiliar and therefore perceived as risky.
 Clearly the fact that the English speak English, is an advantage to any company
with international operations. The Japanese especially, if they speak a foreign
language, it is likely to be English. The box makes the point that this is not only
4
convenient, it also helps to reduce errors and misunderstandings through

mistranslation.
 The cost of labour, and just as important the cost of employing labour, it would
appear, was an issue. Especially when compared to continental European
countries, UK labour rates look attractive.
 The prevailing business culture of the country is also a factor. The UK was seen as
a country where it was easy ‘to do business’. This was an image actively promoted
by the government of the time.
 The UK is seen by the Japanese as a good place to live. The climate is familiar to
them, entertainment such as golf courses and leisure facilities are regarded as
more than adequate, and the historical ‘heritage’ image of the country, it would
appear, appealed!
The more interesting question perhaps is now whether the companies who have
located in the UK will continue to expand their facilities in that country. Once the
company has located in the UK some of the points made above become less
important. Government grants, heritage and shopping facilities etc. may fade while
other points become more important. The continuance of low labour costs will
certainly remain as an important issue.
Capacity dynamics
 Looking at capacity configuration under steady state conditions first does not
mean that most organizations are at any point in time at steady state. It’s just that
it’s important to understand the broad influences on capacity strategy before
thinking about the issues of managing operations under growth or declining
markets.
 Again, Chapter 5 identifies three interconnected decisions.
 The timing of capacity change.

 The size of capacity change.
 Changing location.
 The chapter examines various strategies for changing capacity and illustrates them
under conditions of increasing demand. Remember however that the same issues
will apply when demand is decreasing. However, when managing decline there are
an additional set of issues which are illustrated in the boxed example “Sparks from
Flint”. “Reducing capacity” sounds neutral when it is written in this technical
manner, but of course it often means wrenching social disruption and severe
personal individual stress for those people who once staffed the capacity which is
being “reduced”.
5
 This issue of the degree (if any) of social responsibility which a company should
bear when making capacity decisions is clearly related to that of location. In some
parts of the world where legislation makes it difficult for companies to close plants
(for example in some parts of Europe), it is often argued that nearby regions or
countries with less restrictive legislation will have their capacity closed down first
in any downturn. The counter argument is that those areas which make it difficult
for companies to shut plants are unlikely to attract investment in capacity in the
first place.
 Whatever your views, the issue of social responsibility and capacity strategy is
worth thinking about and debating.
 One of the real big issues for many companies when planning their capacity
strategy (often for years ahead) is the reliability of market forecasts. Sometimes
these can be spectacularly wrong. This was the case in parts of the
telecommunications industry between 1998 and 2002. The problems faced by the
dot com companies was dwarfed by the over capacity issues of the companies
which built the networks which carry telecommunications traffic. Their problems
arose for four main reasons. First, their forecasts were must plain too optimistic.
Although the Internet did bring substantial amounts of new traffic, growth was
much slower than many in the industry were forecasting. Second, attracted by
what they thought would be huge returns on their investment, both established
players in the industry and several new entrants all built their own networks.
Between 1998 and 2001 the amount of optical fiber cable in the ground increased
fivefold. Third, there was a technical development which meant that signals could
be put into and taken out of the fiber optic cables considerably faster than using
the older technology. This effectively increased the transmission capacity of each
strand of fiber by 100 times. Fourth, there is a high fixed cost of digging up the
ground to lay the fiber in the first place. It therefore seemed sensible to put in
more cable while you are at it. Then came the crash and with demand down, the
volume of business slumped while the overcapacity in the industry kept prices
low. So profits were hit just as the companies were trying to pay off the debt they
had incurred by investing in transmission capacity in the first place.
Hints on answering the Freeman Biotest Inc. case exercise
 This case seems to be about a choice between purchasing two types of technology,
and of course it is. However, in making these decisions the company is shaping the
configuration of its capacity for the next few years.
 Think about two scenarios. The first assumes just a modest increase in demand for
FBXX. The second assumes that the technical breakthrough has occurred and
demand is substantially (3 or 4 times) higher.
 Now think about the consequences of increasing capacity through purchasing

Brayford machines or Bi-line 8 machines.
6
Hints on answering the Delta Synthetic Fibres case exercise
 Start of thinking about this case by identifying the different ways in which the
company could meet demand for both products in 2002.
 Think about the advantages and disadvantages of doing this and then consider
what might happen to the company if it chose to stick with its old product or,
alternatively, drop the old product entirely and concentrate on manufacturing the
new one.
 Only when you have considered the issues above, start to think about location.
What factors do you think are going to influence where the company decides to
invest?
 What might limit the company’s ability to meet forecast demand over the next six
years?
7
CHAPTERS 6 and 7
SUPPLY NETWORK RELATIONSHIPS, SUPPLY NETWORK

BEHAVIOR
Introduction
Chapters 6 and 7 both examine what has become one of the most fashionable topics in
management over recent years – supply chain or supply network management. And
while many fashions in management decay rapidly, supply network concepts are
likely to be influential in the long term. This is because the network concept has been
particularly influential in developing our understanding of the scope and content of
strategic action. Yet, as an idea, it is not all that novel. Many authors and academics
over the last 30 or 40 years have emphasized that an organization’s success depends
on its relationships with other “actors” in its industry, whether those be suppliers,
customers, partners or collaborators. The two chapters dealing with the these topics
are (in a similar way to the capacity issue) divided into one that initially looks at
supply networks from a static perspective, concentrating on the nature of the
relationships between actors in the network. The other examines the more dynamic
behavior of supply networks as they change both in the short term and long term.
Key points
Operations strategy changes over time
 It is useful to start off by recognizing that supply network management is, of

itself, still a controversial issue. Some people object to the term “management” in
this context. They argue that the organization ends where its discretion ends and
another begins. In other words, how can we manage the other actors in the
network, they are beyond our control. Yet, even if this view is technically correct,
it is certainly over pedantic. How can you manage anything or anybody for that
matter? By “supply network management” we are first of all attempting to
understand how one company’s actions are influenced by its interactions with
other players in the network and second, thinking about how we can influence
other players in the network towards a set of specific ends.
 Although neither chapter dwells on this issue, there is another point and a
particularly important one, that needs to be understood. That is, supply network
management has substantially reinforced the idea that operations management and
strategy is an important subject. Think about it like this. At one time, in order to
sell something to a customer, you simply extolled the virtues of the product or
service you were trying to sell. Yet the vast majority of sales transactions (in terms
of value at least) are from one company to another. Therefore, rather than say,
“Buy my product or service, it’s better than anyone else’s”, it is perhaps more
appropriate to say, “You are a business with an operation to run, I am also a
business who runs an operation, how can my operation help your operation to run
better?” Essentially this is an “operation-to-operation” transaction and in order to
1
make that transaction work the supplier operation must understand something
about the customer operation. That is, in order to make a sale to another business
you must be able to understand the operations management and operations
strategy issues that it faces. Or put it another way, you can’t sell effectively unless
you have the skills that enable you to analyze and understand your customers’
operations.
Types of relationship
 Chapter 6 uses the market requirements – operations resource distinction to define

different types of relationships. In
 Vertical integration
 Traditional market relationships
 Partnership supply relationships
 Virtual relationships
 Vertical integration has become relatively unfashionable in recent years as

organizations have been trying to stick to what they know best and ditch other
activities. Yet, although pure vertical integration is rarely found in modern
business, most organizations, at the margin, are still faced the decision as to
whether to do certain activities themselves or alternatively outsource them.
Therefore, just because vertical integration in its extreme form is unfashionable,
the principles and decisions behind vertical integration are an every day concern of
most businesses.
 Traditional market supply is the polar opposite of vertical integration. It means

relying on the market to provide goods and services as and when they are needed.
A company which practiced traditional market supply would therefore have a
large purchasing department that would continually be searching the market for
the best value. Relationships will be probably short and certainly purely
commercial.
 Partnership supply relationships are a method of trying to get the closeness of

vertical integration without its complacency. Although partnership relationships
have become very fashionable, Chapter 6 stresses the problems as well as the
advantages of such relationships. It also makes the point that the level of trust
required to maintain such relationships is often beyond the abilities (or indeed
interests) of many organizations.
 Virtual relationships are not so much a type of supply network relationship, but
rather a description of the extent to which a company relies on them. A pure
virtual company has no resources of its own but buys in everything it needs. In its
pure form one can imagine one person with a good internet connection and a
telephone running an entire network.
2
Supply Network Behavior
 One of the key points to understand about supply network behavior is that supply
networks change over time. They always have, and they always will. In any
particular industry sometimes the structure of supply networks changes quickly, at
other times relationships between companies may remain stable for years. What is
important is that any company understands when it is coming up to, or in the
middle of, a period of change, and is able to work on the operations implications
of that change.
 The best example of this (mentioned in Chapter 7) is the recorded music industry.
At the time of writing it is still not clear in what way (if at all) the ability to
download music over the Internet will change the nature and role of all the
companies that make up the supply networks in that industry.
 The second issue of supply network behavior which it is important to understand

is that of network dynamics. By this we mean the way that specific supply chain or
supply networks behave in the short to medium term. There are two ways of
thinking about this issue.
 From a quantitative point of view – understanding the bull-whip effect.

 From a qualitative point of view – soft system dynamics.
 There is a famous game, called “The Beer Game” which demonstrates this. It
involves a “chain” of players, who initially are not allowed to talk to each other,
placing orders on paper and moving products (barrels of beer, represented by coins
or counters) down the line. It demonstrates how relatively small changes in market
demand are amplified significantly further back up the chain. From an arithmetic
point of view, this is demonstrated in the form of a simple four-stage chain in
Chapter 7. It is worthwhile making sure that you understand the math used in this
example. Talk to any operations manager who runs a business upstream in a
supply chain and he or she will tell just how important this effect is.
 Often, an equally important issue is the qualitative nature of supply chain

behavior. This is illustrated in Chapter 7 by the gaps and mismatches that occur
between operations in a supply chain. Don’t dismiss this idea just because it is not
demonstrated mathematically. In practice it can be equally, if not more, important
as quantitative supply dynamics.
3
Hints on answering the Astec Component Supplies case exercise
 This case is really about risk. What risks does Astec face if it turns down the deal
from Desron or if it accepts the deal?
 The obvious way forward is to try and identify the advantages and disadvantages
of accepting or rejecting the Desron deal. Next, try and think of how you could
reduce the downside effects of accepting or rejecting the deal should you choose
to do so.
 Think about how the issue of “trust” applies in this case.
Hints on answering the Zentrill case exercise
 This case is about how we can only understand the pressures on one operation by
putting it in the context of its suppliers’ and customers’ operations.
 The case provides us with an opportunity to look for, not only the relationships
between the three operations described, but also how upstream and downstream
relationships affect each other.
 Use the soft supply network behavior model and its gaps to analyze the
relationships between the players in this chain.
 In such circumstances it’s usually best to start at the demand end and work
backwards through the chain.
4
CHAPTERS 8 and 9
PROCESS TECHNOLOGY – DEFINITION AND

CHARACTERISTICS, PROCESS TECHNOLOGY – CHOICE
AND IMPLEMENTATION
Introduction
Again this study guide deals with two chapters, both of those dealing with process
technology strategy. Also, again, there is a rough split between considering the static
issues of process technology in Chapter 8 and the more dynamic issues in Chapter 9.
What this means is that Chapter 8 concentrates on the general characteristics of
different types of technology, while Chapter 9 deals with the way in which process
technology is changed through investment and implementation decisions. Of course,
the usual warnings apply. In practice these static and dynamic dimensions merge
together. So, for example, a key issue in deciding which technology warrants future
investment should be a thorough understanding of the technological characteristics of
the various options available for investment. One final point by way of introduction,
many managers are reluctant to get involved in the details of process technology
because they consider them to be the province of “technical experts”. In other words,
they believe that a details degree of technical knowledge is necessary before one can
judge the appropriateness of a particular process technology. Yet this is clearly not the
case. More than thirty years ago, Wickham Skinner, in many ways the founder of
operations strategy, was pointing out that we did not need a degree in engineering to
choose a domestic lawn mower. We could all ask the fundamental questions regarding
its ability to do the job, convenience of use, investment and operating costs,
susceptibility to technological obsolescence, and so on.
Key points
 Note that both chapters deal with process technology rather than technology in
general. This is because, as students of operations strategy, we are interested in
how services and products are created through the processes within a company,
rather than the detailed technology of the service or product itself. But note that as
usual there is an overlap between the two. The boundary between process
technology on one hand and product or service technology on the other can
sometimes be blurred. This is especially true in high-contact services where the
customer experiences the process as part of the service. Yet in a different way, it is
also true more generally. Changes in product or service technology often imply
changes in process technology, and vice versa.
Direct and indirect process technology
 This is another one of those distinctions which it is important to understand yet

which is not, in itself, a clear and clean distinction. Direct process technology
1
directly helps to create the service or product whereas indirect process technology
helps to manage the process that creates the service or product.
 As an example of this distinction consider the legal industry. Because lawyers

consider themselves part of the “professional service” industry does not mean that
they cannot gain benefit by using process technology. The fact that lawyers
“process” knowledge (and clients) means that technology can help them store,
analyze and manipulate this knowledge (and these clients). Some of this
technology is known as “litigation support” technology. These enable lawyers and
clients to access databases, sometimes via the Internet, containing previous legal
judgments. Such databases are designed to help law firms capture, share and
recycle their accumulated collective experience. Search engines can help them
search “practice area libraries” to obtain access to different types of legal
information. By contrast, the indirect process technologies used by legal firms are
less client facing and more back-office oriented. These systems concentrate on
scheduling work, controlling activities within the firm and ensuring the efficiency
and dependability of the delivered service. Remember though that some
technologies can cross this direct/indirect divide. Some newer process
technologies used in the legal industry are built around systems that can help
clients directly to help track the progress of the work being undertaken for them
and even answer questions and take part in the processing themselves.
The product/process matrix
 Chapter 8 initially uses three dimensions of process technology. These are,
 The scale of the technology (that is, its capacity, not its physical size).
 The degree of automation of the technology (what the technology does itself
as opposed to requiring human intervention).
 The degree of coupling of the technology (the degree to which different parts
of the technology are integrated or linked together).
 These three dimensions are very strongly related. So, for example, a small
manufacturing jobbing shop will probably use “general purpose” machines
requiring the use of the skilled labor and physically separated so as to allow
flexibility of materials flow between them. At the other end of the scale, a large
food processing plant will have many of its activities automated with each stage in
the process being physically connected through materials handling devices.
 Although Chapter 8 does not pursue this issue fully, the type of tasks that
operations managers will be concerned with will also change as technology moves
down these three dimensions. With small, labor intensive and separated
technologies there is likely to be an emphasis on managing and controlling the
complexities that characterize such technology. On the other hand, large, capital
intensive and integrated technologies once designed and implemented, to a large
extent, run themselves. The key involvement of operations managers therefore is
in that initial design.
2
Dimensions of Major operations Major

process tasks management
technology Low emphasis
Small Low automation coupling
scale (labor intensive) (separated)
Allocating activities Emphasis on

Scheduling control of
Tracking jobs the process
Standardizing jobs
Standardizing parts
Balancing capacity
Materials flow
Planning capacity
Choosing technology
Emphasis on
design of the
process
Large High automation High

scale (capital intensive) coupling
(integrated)
 The main purpose of the product/process matrix is to demonstrate two points. The
first is that there is a “natural diagonal” or line of fit between the product or
service offerings that a company has and the characteristics of its process
technologies. Companies may move their position on this line of fit (often moving
down the diagonal as they progress along the product/service life cycle, or choose
to concentrate on inhabiting one particular position on the diagonal). The second
point is that any deviation away from the natural line of fit has cost consequences.
If technologies are too small, labor intensive and uncoupled for the volume and
variety of products and services produced, then the costs of making those products
and services will be higher than they could be using more appropriate
technologies. Conversely, if the technologies are too large, capital intensive and
integrated for the volume and variety of products and services produced, then the
technology will be too rigid, which itself produces extra costs and/or lost
opportunities.
The characteristics of “new” technologies
 Much of the basis for the product/process matrix came from academic work
routed in the 1960s and 70s. At that time most process technology meant
conventional manufacturing technologies. When dealing with process technology
that has significant amounts of information-processing embedded in it, the
dimensions need changing.
 Scale become scalability.

 Automation becomes analytical content.
3
 Coupling becomes connectivity.
 Although these modified dimensions are introduced in Chapter 8, do not think that
they are the direct equivalent of the three original dimensions. Instead they are
replacement dimensions.
 Scale is less important when technology can be brought together on an ad hoc

basis because it is scalable.
 Automation as such is not relevant when all technology to some extent

replaces human decision-making. More important is the extent to which it
replaces human decision-making; this is its analytical content.
 Coupling was traditionally associated with the rigidity that comes from
integrating physical technologies. But this rigidity can be overcome in IT-
based technologies when they can easily communicate with each other
because of their connectivity.
 Chapter 8 points out that these developments have, to some extent, changed the
nature of the trade-off between cost and flexibility. However, remember the
discussions in Chapter 3 regarding trade-offs. Rarely are they eliminated
completely; rather they just shift to a higher level. There may still be a trade-off
between cost and flexibility but the actual cost performance and flexibility
performance of the technology is better than it used to be.
Selecting process technology
 Chapter 9 takes a particular view on how companies should choose between

different process technologies. In doing so it does not cover all the conventional
financial capital budgeting techniques. Rather it focuses on the overarching idea
that technologies should be judged both on their impact in the market place and
their impact on the resource base of the organization.
 It also introduces a simple three-stage approach to evaluating technology that

distinguishes between:
 the feasibility of the technology – how difficult it is to get it operational.
 the acceptability of the technology – how much it improves competitiveness

and gives us a return on investment as well as adding to the resource base.
 The vulnerability of the technology – how much risk is involved in terms of

what could go wrong, especially during the implementation of the technology.
 Compared with the more narrow capital budgeting techniques, this is a far broader
approach.
4
 It is worth remembering that, in practice, the choice of new technologies is far less
rational and “clinical” than the impression given in Chapter 9. Usually, investment
decisions of this type are made against a background of opposing factions in the
managerial team with different views of how the market may chance, what risks
are appropriate, which technologies represent the way of the future and which
represent technological “dead-ends”, and so on. The issues and questions outline
in Chapter 9 should therefore be considered as providing a set of checklists and
structures which can raise this debate to a higher level rather than give any
answers as such.
Hints on answering the Bonkers Chocolate Factory case exercise
 Although this case is predominantly about understanding a process technology

investment decision, it also contains other issues. It concerns capacity strategy
and, more broadly, reflects some of the practical difficulties of formulating
operations strategy generally.
 The underlying decision is one of either developing a new process technology or

buying an “off-the-shelf” solution.
 There is clearly no agreement between the company’s managers so it is important

to understand the arguments of all the major “players” in the debate.
 Perhaps the best way to do this is to try and identify the potential advantages of
the new conching technology as well as its potential disadvantages.
 Having understood the new technology, try and identify the options that the
company faces.
Hints on answering the Ontario Facilities Equity Management

(OFEM) case exercise
 This is a case that deals with technologies that are, as yet, largely untested. The
analysis therefore must be at least partly speculative. Not surprisingly, there is
also a high degree of uncertainty, both market uncertainty and technological
uncertainty.
 Because of the uncertainty and the partial development of the technologies, the
issue of “risk” must be important in any analysis.
 Try and structure the analysis using the three criteria of:
 feasibility
 acceptability
 vulnerability.
 Combine this with what you see as the investment options.
5
 Before you reach your decision consider the issue of short-term evaluation versus
long-term evaluation. Would a long-term view be different from a short-term
view? Can the company afford to take a long-term view?
6
CHAPTER 10
OPERATIONS ORGANIZATION AND ROLE
Introduction
There are two quite distinct parts of this chapter. Although they are related, they are
often seen as belonging to different academic disciplines. The first part of the chapter
deals largely with the idea of organizational structure. In doing so it identifies several
types of organizational structure and discusses each as it relates to the operations
function. Most of this discussion would conventionally be found in a “human resource
management” or “organizational strategy” textbook. The material is included here
because it is an important part of operations strategy. Academic disciplines, after all,
do not always reflect real management concerns. The second part of the chapter deals
with the role of operations within the organization. Although this topic is often
discussed within operations strategy, it is not usually afforded much attention.
Key points
Organizational structure
 Do take note of the initial discussion regarding the overlap between “process” and
“content”. Although we are treated organizational design as a content decision, it
is clearly going to be influential in the process of putting operations strategies
together.
 Note also that the chapter takes a relatively “clinical” approach to describing
organizational structure. The theory box on Perspectives on organizations
discusses some alternative perspectives to the way we have chosen to describe
organizations or structure.
 Four “pure” types of organizational structure are described. These are:

 the U-form organization (organizing by conventional functional groupings);
 the M-form organization (groupings organized by separate divisions);
 the matrix-form organization (where individual groups of resources have two

or more levels of reporting responsibility);
 the N-form organization (where groups within the organization form a loose
network).
1
 It is a mistake to think of these organizational structures as distinct types. Rather,

they represent four influences on organizational design. These influences are:
 the extent of functional influence (the U-form organization);
 the extent of market, regional or operational unit influence (the M-form

organization);
 the extent to which resources have multiple reporting relationships (matrix-

form organizations);
 the extent to which organizational groupings form their own reporting

relationship alliances (the N-form organization).
 In practice, most large organizations will be influenced to a greater or lesser extent

by all four influences.
 The most important issue in this part of the chapter is how each organizational
structure is analyzed in terms of its effect on market requirements and operations
resource capabilities. While the table, which summarizes this, does give a broad
indication, it is, at best, approximate. The reality of most organizations is that
history, power groupings, leadership differences and pure chance will also
influence how different organizational structures “perform”.
The organizational position and role of operations
 One of the more important points covered in this section of Chapter 10 is the
degree of exposure or “visibility” of the operations function.
 Traditionally, most operations functions were well “buffered” from any exposure
with the external environment. In fact, the role of many other functions in the
business (such as personnel, purchasing, engineering and marketing) was there at
least partly to protect the operations function from outside influences. This was
because the operations function was seen as performing better under such
protection.
 While buffering is still an important issue in many organizations, there has been a
general move towards exposing the operations function more to its external
environment.
2
 In particular, service operations are more difficult to buffer especially with respect
to customers. Yet, what was seen to be a disadvantage of service organizations
(customers have access to the operation directly) is now often seen as an
advantage (the operation is kept in touch with customer opinion). This is why the
idea has migrated to manufacturing operations. The service factory concept is
evidence of this. This is where a manufacturing operation, rather than be isolated
from the environment, can act as,
 a laboratory;
 a consultant;
 a showroom;
 a dispatcher.
 A related point concerns the degree of overlap between the operations function
and other organizational functions. In many industries (especially service
industries) the overlap between operations and other functions can be very
significant. For example, although a university will have marketing and service
development activities, they are often indistinguishable from the general
operations function, which manages the ongoing production of academic research
and learning.
 Perhaps the most important point to be made in this chapter comes towards the
end, when it distinguishes between the two dimensions of;
 top-down or bottom-up approaches to operations development, and

 market requirements or operations resource focus of development activities.
 These two dimensions are used to create a 2x2 matrix, which is then used to
identify four stereotypical roles for the central operations function. These roles
are;
 central operations as governor - prescribing performance enhancing

improvements in a top-down manner;
 central operations as curator –collecting performance data and information and

keeping it centrally;
 central operations as trainer – developing the capabilities of operations

through learning activities;
 central operations as facilitator – acting as an enabler to allow operations to

improve themselves.
3
Hints on answering the Thought Space Partnership case exercise
 This is an unusual case for an operations strategy course. First, it is set in a

professional service organization, which are not often treated in such courses.
Second, it deals with an operation, which produces relatively “fuzzy” products,
that is, concepts ideas and designs.
 The case does not provide an explicit description of the company’s current
organizational structure, but it is worth considering which of the four pure types of
organizational structure described in the chapter seems to be the closest. Once you
have identified the closes structure look at the advantages and disadvantages of
this structure relative to others and ask yourself whether it appears the most
appropriate structure for this organization.
 Think about what the company call the “three Cs of the company, creativity,
commercialism and competence”. Try and identify how these three Cs are
equivalent to one of the diagrams used in the chapter.
 Two viewpoints are expressed in the case. The first involves improving the
existing organizational structure; the second involves using dedicated temporary
teams. Look at the main criticisms made of the Cityscope project and ask yourself
which of the two options might have a positive impact on the failures that
occurred in the Cityscope project.
4
CHAPTER 11
OPERATIONS DEVELOPMENT AND IMPROVEMENT
Introduction
Perhaps one of the more significant developments within operations management and
operations strategy over the last several years has been the refocusing of the subjects
from simply designing and managing operations towards improving them. Of course,
operations managers have always been concerned with improving their operations
processes. Even under the old paradigms of design, planning and controlling
operations, the objective way always to make things better, or at least stop them from
getting worse. What is still relatively unusual is for this increased emphasis on
improvement to be viewed from a strategic perspective. This chapter does this in two
ways. First, it distinguishes between the two common philosophies of improvement,
namely breakthrough improvement and continuous improvement. Second, it provides
a strategic framework within which the various aspects of an improvement strategy
can be fitted. Not surprisingly this framework adopts the market requirements and
operations resource capability model.
Key points
 Two stereotypical approaches to improvement are often discussed by authorities

on operations improvement. These are;
 breakthrough improvement – sometimes called innovation-based

improvement, where significant and often radical changes are made;
 continuous improvement – where small incremental changes are made on a

continuing basis.
 Chapter 11 discussed both these approaches to improvement and cites Business

Process Reengineering (BPR) as a typical example of breakthrough improvement
and Total Quality Management (TQM) as a typical example of continuous
improvement.
 Remember that these are both stereotypes of improvement. They are not mutually
exclusive. Very few organizations can afford to avoid some form of major
improvement (breakthrough) project over a period of years. At the same time, few
organizations would claim that they have no interest in improving on a more
continuous basis.
1
 While both approaches to improvement can be used simultaneously, the degree of

process change can govern the balance between the two approaches. The chapter
identifies four degrees of process change. These are;
 modification – minor realignment of activities;

 extension – redesign of sequence or routing between activities;
 development – redefinition of purpose or role of activities;
 pioneer – novel or radical change.
 The more extensive the degree of process change (development or pioneer) the
more the need for breakthrough approaches to improvement. See the figure below.
Degree of process change
Modification Extension Development Pioneer
Continuous
improvement Breakthrough
improvement
Direct, develop and deploy
 The majority of the chapter is taken up in expanding the “three Ds” strategic
improvement model. This proposes three sets of activities which any operations
function must develop in order to take a strategic approach to improvement. These
three sets of activities are as follows:
 direct – understand the intended competitive position of the organization in its

marketplace so as to let that direct the operations resources and processes;
 develop – within the operations function develop an understanding of the

resources and processes so as to enhance their overall capability;
 deploy – make sure that operations capabilities are fully understood by the
organization so that potentially advantageous changes in market position can
be made.
 In fact a fourth set of activities completes the loop, the development of market
strategy. This is seen by the model as the choice of a specific market position (or
sets of market positions) within the potential scope of feasible market positions
dictated by the operations capabilities.
2
 The first “D” in the three Ds model is “direct”, and the chapter discusses three
activities under this heading. The first activity is that of performance
measurement. Performance measurement is a topic in its own right and is only
briefly described in the chapter. To learn more about this topic you should consult
one of the many books on the subject. The second activity is that of
benchmarking. Again this is a big subject in its own right, and again there are
plenty of books that take the topic further. The third issue discussed under the
“direct” heading is that of importance-performance mapping. This is a particularly
useful, though very simple, approach to prioritizing performance objectives.
Remember though, it is not a prescriptive device, nor is it objective. As described
in the chapter, it is simply a way of formalizing subjective perceptions, still an
important activity.
 The second “D” is concerned with “developing” operations capabilities. Two

issues are discussed under this heading. The first is that of the learning, or
experience, curve. The second, and more important issue is that of process
knowledge and control. Essentially, the “develop” stage is one of building
knowledge. The chapter discusses how process control (specifically Statistical
Process Control, SPC) is increasingly seen as a mechanism for learning about a
process and thereby extending process knowledge.
 The third D concerns “deploying” capabilities into the marketplace. In other

words, any capability developed within an operation that is not leveraged into the
marketplace at some stage is a wasted capability. Indeed, some authorities hold
that capabilities that are not used will wither away. Chapter 11 uses a well-known
model based on Hayes and Wheelwright’s work to calibrate the extent to which
operations capabilities are influential in setting market position. This four-stage
model is presented at a relatively abstracted level. However, it can be
operationalized.
 Hayes and Wheelwright first probably their four stage model to be a broad brush
conceptual tools whose main point was to demonstrate that operations should think
about the extent of their contribution to the company’s competitiveness. But it can
form the basis of an analysis tool that can be used to calibrate the extent to which an
operations function can deploy its capabilities (if it has any). One way of doing this
is to deconstruct the elements of how Hayes and Wheelwright describe each stage.
Their descriptions mainly cluster around five issues. Namely,
 The way the operation relates with its external customers and the way it manages
its internal customer relationships.
 The degree to which it has an understanding and knowledge of its operations
practices.
 The way it links operations processes and resources with competitive strategy, and
 The degree of innovation shown within the operations function.
3
 The figure below ‘At what stage is your operation?’ fleshes this idea out. It takes
each element and attempts to describe the nature of each as they progress from
Stage 1 through to Stage 4. So, for example, in terms of relationship with internal
and external customers, Stage 1 operations are continually managing crises, Stage 2
operations are concentrating on establishing appropriate performance monitoring
systems, Stage 3 are using the performance monitoring systems as a basis for
improvement, while Stage 4 are exploring new ways of developing internal and
external relationships through an in-depth understanding of internal and external
customers and suppliers operations.
STAGE 1 STAGE 2 STAGE 3 STAGE 4

 Frequently lets down  The operation’s  The operation starts to  Operations understands the
Relationship with internal and
internal and external performance meets the exceed customers’ needs and expectations of
customers (who regard them minimum standards expected expectations. customers’ customers and
 Frequent discussion with
external customers
as frustrating their own by internal and external exceeds them.

improvement efforts). customers. internal and external  Continual exploration of
 The operation spends much  The operation only rarely customers as to the novel operation practice
time rectifying the results of lets down customers but adds appropriateness of linked to customers’ future
its own failures. little of positive value. performance standards. needs.
 Joint planning of continuous
improvement of performance
with customers.
Crisis relationship Performance monitoring Improvement of Creative relationship

relationship relationship
 Relatively little exchange of  Regular exchange of ideas  Operations management  Operations monitor external
ideas with other internal and performance with other takes on facilitator role in environment to predict their
Understanding of operations practice
operations. internal operations within the helping other internal future market conditions,
 Operations management organization. operations. labor and technology
has little knowledge of  Other similar external  Operations staff are requirements.
alternative ways of designing operations used to provide concerned with how to adapt  Process knowledge gives
and running their type of benchmarks of performance external ideas in order to ability to predict behavior
operation. and practice. make them more appropriate. under novel conditions.
 Operations staff are rarely  Operations staff consulted  Process knowledge gives  Operations take
included in discussing the on suitability of outside ideas. ability to control performance. responsibility for reshaping
incorporation of outside ideas.  Process knowledge allows competencies and
 Little knowledge of ‘what deviations from standard to expectations of whole supply
makes the operation tick’. be monitored. network.
General dissatisfaction with Continuous improvement of

operations practice Trying to position operations practice
appropriate operations Forward looking operations
practice practice
 Most people in the  Operations management  All operations staff  Operations have taken a
Links with competitive strategy
operation are not aware of the are aware that appropriate understand the relative leading role in shaping
role of their operation within operations performance will importance of operations competitive strategy.
the organization and its differ in different operations, objectives and can debate  Operations are seen as the
objectives. but are unclear how to their implications. prime source of the
 Operations managers find change operations practice to  Key performance trade-offs capabilities which competitors
difficulty in identifying the reflect different objectives. are identified and find difficult to imitate.
trade-offs that they are  Performance trade-offs are improvement strategies put in  Performance objectives are
required to manage. known but there is no clear place to overcome them. ‘trading-off’ at a significantly
idea of how to overcome higher level than competitors.
them.
Simplistic but little Clear explicit link between Strategy driven by unique
understood objectives strategy and operations operations capabilities
Starting to focus on key practice
objectives
4
 Operations management  Operations management do  New approaches to  Operations at the forefront

sees responsibility for take on full responsibility for operations practice developed of ‘changing the rules of the
innovations as being outside implementing new ideas and from within the operation. game’.
Innovation within the
the operation. exhibit flexibility and creativity  New approaches are based  Innovations timed to give
 “We could do much better if in getting things ‘up and on a sound understanding of maximum competitive
operation
it wasn’t for the others in the running’. the skills needed to meet advantage.
organization”.  Only minor ‘tinkering’ with market needs and work within
 Operations is creative only methods rather than resource constraints.
in trying to fix the worst developing entirely new
problems. approaches. Interpreting ‘strategy to
operations’ capabilities
Learning to network
‘Band Aid’ capabilities Project management capabilities
capabilities
This, of course, is not a precise instrument. It is only intended to help to give an

indication of where an operation is on the four-stage scale.
Hints on answering the Customer Service at Kaston Pyral case

exercise
 This case illustrates two specific and one general set of issues that are topical in
many types of operation. The two specific issues are those of increasing
internationalization and (often along with that) increasing consolidation into large
units of capacity. The more general issue is that of operations improvement.
 The case contains both general statements of the company’s strategy along with a
description of its decision to concentrate its call center operations on to three sites
worldwide.
 Try thinking about the information in the case under the three headings of
 Direct,
 Develop,
 Deploy.
 Use the quantitative data to draw an importance-performance matrix for the New
Jersey survey.
 Also try plotting a learning curve relating associate hours per call against
cumulative volume of calls processed.
 Do you think there is alignment between the CEOs final statement and what seems
to be happening in terms of operations improvement in the call centers?
5
CHAPTER 12
PRODUCT AND SERVICE DEVELOPMENT AND

ORGANIZATION
Introduction
The development of new and innovative products and services is clearly of
tremendous importance to most organizations. Without a stream of appropriate
innovation a company leaves itself vulnerable to having to react to however its
competitors decide to innovate. In fact many authorities would disagree with our
decision to cover the topic in just one chapter and as part of operations strategy at all.
They would say that new product and service development is one of the three major
processes that any organization must master in order to succeed (the other two of
course being operations and marketing). We would agree with this. In fact, it is
because the topic is so important that we include it within our broad treatment of
operations strategy; it is not that new product and service development is a subset of
operations strategy, rather it is that no operations strategy could regard itself as
complete without an understanding of how it interrelates with new product and
service development strategy. The way have decided to treat the subject is to look at it
through an operations strategy “lens” and explain it in terms of one of the models we
introduced earlier – the operations strategy matrix. Most of the chapter is devoted to
developing that particular perspective. However, prior to that it discusses the
relationship between new product and service development and process development.
Key points
 While the development of new product and service ideas has always been a
significant activity in most companies, it is getting more important. The chapter
opens by looking at some of the reasons for this, and more importantly, dividing
them into those which are based on an operations resource perspective and those
which are based on a market requirements perspective. It makes a compelling
case. But consider that the case is made particularly compelling by describing it in
operations strategy terms. In other words, because product and service
development is itself a process, it can be analyzed using operations strategy
models.
 Following on from the point above, the chapter uses a similar calibration of the
degree of product or service change to that which was used when describing
process change. Although this calibrated scale, which again moves from
“modification, through extension and development to pioneer” is described as a
four-stage process; it is, of course, a continuum.
1
 Product and service development and process development should be considered

together. The box that describes the development of the ballpoint pen illustrates
the obvious but important point that attempting extensive product or service
change at the same time as extensive process change increases the degree of
difficulty.
 Don’t ignore the theory box on modular design and mass customization. Both are
significant developments, both are interrelated, and both have done much to
overcome the trade-off between cost and variety in new product and service
design. For example, think of the way ordinary domestic paint is now sold.
Whereas some years ago a paint company would develop a range of colors,
manufacture those in its factory and distribute them as separate products to the
retail stores, much paint is now sold “made to order” in the store itself. The
customer simply chooses a color from an incredibly wide range of alternatives and
the paint is mixed there and then. This is only possible because each color is
comprised of a defined set of “modules” of component colors. This “recipe-based”
approach allows a degree of mass customization because a relatively small
number of “modules” or colors can be mixed together in a far wider variety of
ways.
 The chapter devotes some space to explaining the various stages of new product
and service development. Here it is important to remember the warning given in
the text that, although many organizations have a model that looks like the stages
described in the chapter, it is really a huge simplification of reality. Stages will
merge with each other and the process will often cycle backwards and forwards.
So, don’t think of this as a prescriptive set of steps but rather a description of the
activities that, in some order, generally take place during the new product and
service development process.
 Think about the overall design process as progressively filtering out potential
designs and thus reducing uncertainty, until the final design is reached.
A market perspective
 The design activity is itself a process that can be judged in the same way as any
other operations process, that is in terms of quality, speed, dependability,
flexibility and cost of the designs or development ideas that are produced.
 All the five generic performance objectives are important, but in recent years there
has been an increased emphasis on the speed of new product and service
development.
 This speed issue is often referred to “time-to-market”. That is, the time between
the original concept and the product or service starting to earn revenue in the
marketplace. It is an important performance measure and in most industries is
getting shorter.
2
 Later in the chapter several determinants of fast time-to-market performance are

identified. But the main ones are generally held to be;
 simultaneous overlapping of development phases (sometimes called

simultaneous or concurrent engineering);
 the early resolution of design conflict;
 project-based organization structures.
 The financial consequences of fast time-to-market are best illustrated by the figure
shows that a delay in launching a product or service usually means a far longer
delay in the financial payback from that product or service.
An operations resource perspective
 The four general categories of operations strategy decisions (capacity, supply

networks, process technology and development and organization) are all relevant
(and indeed important) in managing the new product and service development
process at a strategic level.
 Capacity is particularly interesting. The issue here being that, unlike the day-to-
day production of products and services, demand for new designs is not always
smooth. This “lumpiness” in demand can lead some companies to be reluctant to
invest in development capacity – often a mistake.
 The idea a product and service development network (a similar idea to a supply
network) is a useful way of thinking about whether any organization should
develop products and services themselves or subcontract the activity. Occasionally
organizations do subcontract all their new products and service development
activity (book publishers an obvious example!) but generally it is a question of
how much development activity to subcontract, if any at all.
 An interesting development that is likely to get more important is the issue of

involving customers in the development process. For example, the Boeing 777
aircraft development famously included several of the large airlines during its
development process.
 The idea of process technology in the product and service development process is
a relatively recent one. In manufacturing, computer-aided design (CAD) only
became common during the 1980s. Defined more broadly, process technology
includes such things as knowledge management technologies, expert systems and
simulations. All of these are becoming common in the design of services.
3
 One of the areas that has attracted considerable interest has been the organization
and development aspects of new product and service development. This interest
started in the late 1980s when several authorities began to identify the advantages
of dedicated project teams to manage the development process. Prior to that
development had often been organized in a functional manner with responsibility
being passed from one function to another in some kind of pre-planned sequence.
This process became known as “throwing the design over the wall”. In other
words, after one function has finished with the design, it merely passed it on to
another function without significant communication. The concepts of
simultaneous engineering and overlapping development between design phases
clearly required a new approach.
 In fact, as the chapter identifies, one can imagine a spectrum of organizational

design between pure functional organizations to pure project organizations. There
has been a general more towards increasing project orientation.
 The general problem in organizing new product and service development can be
illustrated by reading the box “….. but then Netscape changed”. This box briefly
discusses the issue of how some aspects of creativity can be sacrificed as markets
demand faster and more efficient new product and service development processes.
Hints on answering the Project Orlando at Dreddo Dan’s case

exercise
 This case exercise covers many issues found in new product and service
development projects. In particular the case examines a new type of product that is
to be launched in an uncertain and unpredictable market and which also carries
some development risks. Above all, the project is a significant development for
the company with both the potential for major competitive benefits and some
downside risk.
 Think about the degree of change, both in terms of the product itself and the
process that will make it, this project implies for the company. What implications
does this have for the company?
 Think about the performance objectives for this project. Start with the five generic
performance objectives (quality, speed, dependability, flexibility and cost) but
adapt them and introduce new ones if you think it is appropriate.
 What are the major decisions that the company faces and how do these relate to
the four conventional operations strategy decision categories of capacity, supply
networks, process technology, and development and organization?
 At this point you should be able to draw an operations strategy matrix that
articulates the key issues for the company.
 Use the matrix to make recommendations to the company.
4
CHAPTERS 13, 14 and 15
OPERATIONS STRATEGY AND “FIT”; OPERATIONS

STRATEGY AND “SUSTAINABILITY”; OPERATIONS
STRATEGY AND “RISK”
Introduction
There is a paradox in trying to study the process of operations strategy formulation.
On one hand it is probably the most practical topic of direct concern to every
company’s operations strategy. After all, if a company is to have an operations
strategy (formal or informal), it must have put it together (formally or informally) in
some way or other. On the other hand, every company is different. Each is faced with
a different set of market issues and a different set of resource capabilities and the
process is managed by managers with a different set of experiences. So, in spite of it
being a very practical subject, it is difficult to be prescriptive on how an operations
strategy should be put together. Of course, this does not stop many people attempting
to prescribe various methods of operations strategy formulation. Indeed a couple of
these approaches are described in Chapter 13. There is nothing wrong with these
prescriptions unless managers imagine that they can simply “turn the handle” of the
method and a strategy will “drop out” the other end of the process. It doesn’t work
like that. Operations strategies are nebulous and dynamic entities, subject to constant
debate, power politics and change. There is no right answer. Sorry, but there it is.
However, this does not mean that all is lost. The approach taken in these final three
chapters of the book is that there is plenty to consider, plenty to analyze and plenty to
try and do in order to make the operations function a real strategic asset for the
business.
Key points
 Back in Chapter 2 a distinction was drawn between operations strategy content

and operations strategy process. Put simply:
 Operations strategy content is the set of decisions that a company makes

(explicitly or implicitly) which shape its operations strategy. In other words,
“what shall we do?”.
 Operations strategy process is the method or approach they take to making

these content decisions. In other words, “how shall we decide what we do?”.
 Although the idea of operations strategy process is somewhat loose, it can be

treated at three levels.
 Fit – achieving alignment between what the market wants and what the
operations resources and processes are capable of giving.
1
 Sustainability – achieving fit over time, either to maintain the levels of market
requirements and operations capability at the same level, or to achieve fit
between the two at a higher level.
 Risk – coping with the uncertainties and their consequences as the operation
attempts to achieve alignment over time.
 There has always been argument as to whether it is worth formally formulating

strategies. Although over-rationalistic approaches to strategy formulation have
been largely discredited, it is still accepted by many that some elements of rational
planning can help organizations to cope with their business environment.
Generally, the advantages of brining some formality to the strategy process are as
follows:
 It provides a much needed discipline.

 It enforces communications about goals and resource allocation.
 It stimulates longer-term analyses.
 It generates a basis for evaluating and integrating shorter term plans.
 It makes managers focus on the long-term.
 It creates a repository of strategically relevant information.
Fit
 Of the three levels of analysis in operations strategy formulation, this is by far the
most frequently discussed. In fact to many authorities operations strategy process
is all about fit.
 It is a simple but fundamental concept, namely that the market position of a

company must be aligned with its operations capabilities.
 In a practical sense, this could mean one of two approaches. First, that we should
understand what the market wants and then develop operations resources to supply
this. Second, that we must understand what operations resources and processes are
particularly good at (their capabilities) and find a market that values this.
 Although there is some evidence that long-term competitive benefit can be

associated with unique operations capabilities rather than clever market
positioning, from a practical perspective most organizations would go with the
first approach. Namely that we must start by understanding the market and then
(over time) develop operations capabilities to match the market. There are good
reasons for this, all companies have markets, but not all companies have
operations capabilities worth exploiting.
 Nevertheless, do not dismiss the resource-led approach to devising operations

strategies. There is a strong argument that innovative and profitable differentiation
in any market is best achieved through developing unique and difficult to imitate
operations capabilities. In other words, there is a limit to where marketing can take
you, beyond that limit you need to be really good at operations.
2
 The example of Volvo’s operations strategy since the 1970s is a good example of
how most organizations achieve fit in response to external pressures. Note that
only some of these pressures come directly from the market for its products.
Certainly, issues of cost and quality became more important during the 1980s,
which was why Volvo changed its operations stance, however social issues also
played their part.
 The chapter uses the operations strategy to identify how fit can be described at
four levels (it also uses an alliterative approach so it is often called the “four Cs of
operations strategy”).
 To achieve fit you have to be comprehensive in exploring operation strategy.
 To achieve fit you have to have internal coherence between the different
decision areas.
 To achieve fit operations strategy decision must correspond to the priority of

each performance objective.
 To achieve fit the particularly critical intersections must be identified.
 To particular formulation models of fit are presented; the Hill framework and the
Platts Gregory procedure. Do not think these are the only two. In fact there are
hundreds of different published methodologies, many academics and all
consultancy companies tend to have their own.
Sustainability
 Sustainability is “achieving fit over time”.
 We can think about this in two ways. Either sustainability means being able to
maintain the same balance between operations resource capabilities and market
requirements over time, no matter what happens in the environment or within the
company. Alternatively, one can see sustainability as maintaining fit while
actively changing (presumably improving) the balance between resource
capability and market requirements.
 The example of the CAG Recycling Services used in Chapter 14 is an illustration

of how both the operations strategy matrix and the “line of fit” model can be used
to describe sustainability (as it happens, of the second type where the objective is
to move up the line of fit).
 When reading this example remember that the “line of fit” model is notional in the
sense that neither of the axes are calibrated. Nevertheless, it provides a useful
articulation of the company’s history.
3
 Remember also what the theory box calls the “Red Queen” effect. Even in the first
meaning of sustainability (maintaining the same balance between operations
capability and market requirements) can involve significant operations strategy
effort. As the Red Queen said, “It takes all the running you can do to keep in the
same place. If you want to get somewhere else, you must run at least twice as fast
as that”.
 Moving up the line of fit inevitably implies that an organization must learn how to
cope with tougher market conditions and/or learn to achieve higher levels of
resource capability. The key word here is learn. This is why the discussion on
single loop and double loop learning is important.
 Operationalizing these ideas often involves significantly rethinking the way an

operation organizes itself. The box on St. Luke’s, the advertising agency, is a good
example of this.
Risk
 Frankly, it is unusual for any treatment of operations strategy to include this topic.
Yet we believe it is particularly important. Operations strategy means making long
term and often fundamental changes. Not necessarily all at once, even a continual
stream of small decisions to “do nothing” is fundamental in the sense that it
dictates the organization’s position with its environment. And such fundamental
decisions invariably carry risks. Again, even the decision to “do nothing” carries
the risk that a failure to change will leave a company vulnerable.
 The chapter chooses to use the “line of fit” model to describe risk. Using this
model, risk is any significant deviation from the line of fit.
 Again, the operations strategy matrix can be used to classify risks (and realized
risks, in other words failure). Just as most companies have particularly important
or critical intersections on their operations strategy matrix, failure and risk can be
associated with a number of critical intersections.
 It is important to distinguish between pure and speculative risk. Pure risks involve
events that can produce only loss to the company, while speculative risks relate to
events that could hold potential for loss or gain. Usually, the consequences of pure
risk (such as disasters) are on the front pages of newspapers, while the
consequences of speculative risk (a business decision going wrong) are in the
business pages.
 A useful way of thinking about risk management and control is to distinguish

between,
 prevention – stopping something happening;

 mitigation – reducing the consequences when something happens;
 recovery – changing the perceptions of something going wrong.
4
Hints on answering the Focused Bank case exercise
 This case describes the process of operations strategy formulation and

implementation with the primary focus of achieving fit. However, it also
inevitably addresses some issues of sustainability and risk.
 Think about how the corporate service offering is different from the products the
company has been producing previously.
 What do you think are the advantages and disadvantages of the corporate service
offering?
 Think about how the Focused Bank could take the next step in developing their
corporate business.
 What do you think are the critical intersections on the company’s operations
strategy matrix?
Hints on answering the Clever Consulting case exercise
 This case describes a professional service company which does not have large
scale investment in capacity, process technology, supply networks and so on. This
allows us to focus directly on the process of operations strategy.
 Think about the history of the company and try and sketch it on the “line of fit”
model. In doing so, consider why, at various points in its history, the company
was either off the line of fit or on it.
 What do you think are the options facing the company?
 Try listing out the advantages and disadvantages (including the risks) of adopting
each of these options.
 Consider what is different about professional service firms like this from other
types of operation.
Hints on answering the Saunders Industrial Services case exercise
 This example describes the formulation and implementation of an operations

strategy, with the primary focus on the risks associated with the process. It
concerns a traditional, low volume manufacturing firm that has been operating for
many years. It now faces change competitive circumstances and is under pressure
to diversify. It decided to embark on a new era of high volume manufacturing.
 In terms of what could, or has, gone wrong with the company consider the
causative events. You can do this in one of two ways;
5
 use the classification of human, organizational and technological variables (the

HOT variables).
 use the generic decision area categories that underpin the operations strategy
matrix (capacity, supply network, process technology and development and
organization).
 Use the “line of fit” model to sketch out what happened at this company.
 Think about how the concepts of control and coupling (described in Chapter 15)
relate to this case.

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Project Management Dayrine Julianna de la Cruz Aquino

A: How many labor hours should the eighth satellite require?

80% ratio for 8 units = 0.5120

The accumulative ratio for 8 units: 5.346

The whole project: 100,000 x 5.346 = 534,600 labor hours

C: What price would you ask for the project? Why?

R&D costs: 12,000,000 NOK

Material cost: 6,000,000 NOK

Skilled labor cost: 300 NOK p/hour = 160,380,000 NOK

Total cost: 178,380,000 NOK

25% of total cost = 44,595,000

Price = 222,975,000 NOK

75% cumulative = 4.802 accumulative

The whole project: 100,000 x 4.802 = 480,200 labor hours

(80%) 160,380,000 NOK - (75%) 144,060,000 NOK =

12 unit 75% curve: 6.315

12 satellites: 100,000 x 6.315 = 631,500 labor hours

0 Number of repetitions (volume)

L E A R N I N G C U RV E S IN S E RV I C E S AND M A N U FAC T U R I N G 773

T × Ln = Time required for the nth unit (E-1)

where T = unit cost or unit time of the first unit

Hours required for unit 4 = 10 × (.7)2 = 4.9 hours

LEARNING CURVES IN SERVICES AND MANUFACTURING

APPLYING THE LEARNING CURVE

NTH UNIT PRODUCED HOURS FOR NTH UNIT

Learning Curve Logarithmic Approach

70 .515 where TN = time for the Nth unit

Learning-Curve Coefficient Approach

where TN = number of labor-hours required to produce the Nth unit

TABLE E.3 ■ Learning-Curve Coefficients, Where Coefficient, C = N (log of learning rate/log 2)

STRATEGIC IMPLICATIONS OF LEARNING CURVES

Industry Learning Curve Ind

Price per unit (log scale)

Accumulated volume (log scale)

LIMITATIONS OF LEARNING CURVES

KEY TERM Learning curves (p. 772)

USING SOFTWARE FOR LEARNING CURVES

These are used for computations. Do not touch these

Using POM for Windows

DISCUSSION QUESTIONS 779

Solution from Table E.3—80% unit time

from Table E.3—80% total time

Solved Problem E.2

60 × (.8)3 = 60 × .512 = 30.72 minutes

or, using Table E.3, we have C = .512. Therefore:

60 × .512 = 30.72 minutes

INTERNET AND STUDENT CD-ROM EXERCISES

On Our Companion Web site, www.prenhall.com/heizer On Your Student CD-ROM

ACTIVE MODEL EXERCISE

ACTIVE MODEL E.2 ■

Great Lakes, Inc.

Average labor-hours per unit 200

INTERNET HOMEWORK PROBLEMS

 Operations is not the same as operational, it does have an important

 This is not to downplay the importance of “operational” operations management.

 The chapter identifies four “dimensions” on which operations strategy and

 Time scale – operations management is relatively short to medium term. This

 Level of analysis – many operations management decisions are relatively local

 Level of aggregation – operations management can be relatively detailed.

 Level of abstraction – operations management concerns itself mainly with

“Should we develop strategic alliances with a small number of partners?” is a

Operations strategy is about service too

 In most developed economies manufacturing accounts for around 20 per cent or

 Of course there are differences between different types of business. No one is