Operations Strategy

Theres nothing here to take by storm; to strategy we must conform. Johann Wolfgang von Goethe (Faust,1808)

Operations Strategy

Operations Strategy: What to do (the goals) and how to get it done (the mean). The goal of strategy: value maximization Create more value for stakeholders (owners, employees, customers, and communities). Principle 1 (Value Maximization) The goal of strategy is to maximize the long run NPV of the organization. Toyota Production System (means) as a powerful competitive advantage and important contributor to profitability. Strategy Goal maximize NPV of the organization specific plans to achieve this goal.
Ardavan Asef-Vaziri Sep-09 2

Operations Strategy: 1- Introduction

Business Unit Strategy (Competitive Strategy)

Business unit strategy (competitive strategy) .

Relates a company to its environment. Strengths and weakness of the company (the system) to be related to opportunities and threatens in the environment Chooses an attractive competitive position by offering a high customer value proposition.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

Business Strategy: Environmental Scanning (OT)

The events and trends that present threats or opportunities for a company.

Competitor activities Complementor activities Changes in consumer needs and preferences Technological changes Economic trends (GNP, unemployment, inflation, interests, taxes, tariffs) Legal, political, and environmental issues

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

Business Strategy: Competing edges of the System (SW)

The special attributes or strengths and weaknesses.

Human Resources (cheap labor, skilled labor, etc.) Technology, Facilities, and Equipment Financial Resources Customers Product and Services Suppliers (low material cost, reliable suppliers) Management Practices (low overhead)

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

Customer Value Proposition

Customer Value Proposition: a set of benefits that the firm offers to customers. Customers purchase based on the value they derive from the product/service relative to its price. This value is the greatest amount a customer is willing to pay (the reservation price). If this value > price, the customer enjoys positive net value (consumer surplus). Customers will buy the service/product that offers highest consumer surplus.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

Zaras Strategy

Zara's main business is the design, manufacture, distribution and retailing of clothing. Distinguishes itself from rivals timely fashion for the masses. The customer value proposition timely yet limited variety at modest cost and quality of materials. CVP: a set of benefits the firm offers to customers. Customers purchase based on the value they derive from the product/service relative to its price. This value is the greatest amount a customer is willing to pay (the reservation price). Value > Price customer enjoys consumer surplus. Will buy one that offers highest consumer surplus.
Ardavan Asef-Vaziri Sep-09 7

Operations Strategy: 1- Introduction

Financial, Marketing, and Operations Strategy

To execute its competitive strategy, an organization further defines a

Financial strategy: how capital will be raised and invested Marketing and sales strategy: how the market will be segmented and how the product will be positioned, priced, and promoted Operations strategy: Three views of operations

Resource view focuses on the assets used in the operation Process view highlights the operation's activities. Competencies view, what a firm can and cannot do.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

Competitive Strategy vs. Operations Strategy

Competitive strategy: Defining Customer Value Proposition. Operations strategy: Enabling the execution of the competitive strategy- how to best deliver the CVP. A competitive strategy for Toyota: Whether to enter the full size pickup truck market by launching the (upgraded) Tundra in 2007. The operations strategy: choosing assets and processes to best design, source, make, and distribute this new vehicle while developing competencies for future products.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

Operations Strategy vs. Operations Management

Operations strategy: Developing assets, processes and competencies. Long to intermediate. Operations management: Appropriately utilizing given assets and processes to achieve expected competencies. Short to intermediate. Operations strategy in a retail bank includes which locations, what capacities, division and coordination of labor and processing between the many branch offices and the few back offices, which activities to outsource or when to form alliances at the retail level while perhaps vertically integrating at the back office. Operations management, how many staff during the day, how much reserved money per day, office layout, location of each type of account, hire/firing,
Ardavan Asef-Vaziri Sep-09 10

Operations Strategy: 1- Introduction

Mercedes-Benz
In 1993, Mercedes-Benz decided to build the first factory outside Germany, in Tuscaloosa, AL to produce the M-class (to cut tariff by 25%). A Consolidation Center opened near the plant to manage the parts/subassemblies from 65 suppliers. A distribution network to transport the vehicles to 135 countries. The firs car was sold in 97. Demand quickly surpassed all forecasts and the capacity of 65,000. The initial $300 million plant was expanded in 98-99 to 80,000 at a cost of $80 million; still insufficient. In 1999-2002, the M-class was also produced by contract developer in Austria. To produce R-class too in AL, a $600 million expansion in 2004 doubled the factory size; 4000 workers, 160,000 vehicles per year.
Operations Strategy: 1- Introduction Ardavan Asef-Vaziri Sep-09 11

Resource View Of Operations

Resource view organization is a bundle of real assets. Real Assets

Tangible real assets: human resources (people) and capital resources (property, plant and equipment). Intangible assets: relationships with suppliers or customers, intellectual property, reputation and brands, and knowledge and experience in processing, technologies, and markets.

To pay for the real assets, sell pieces of paper; financial assets, securities.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

12

Mercedes' Bundle Of Real Assets

Mercedes' bundle of real assets includes real estate in Alabama encompassing a plant with a variety of production and support equipment, such as presses, welding machines, and information systems, and staffed by 2000 employees. Its intangible assets include the supply base relationships it has formed, the process and product technologies that it employs, its knowledge of the local economic, legal, and social environment, its connections with logistics and transportation providers, and so on.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

13

Operations Strategy: Resource View

1. How many resources should we invest in? The capacity, in aggregate and per main resource type. MB, the aggregate annual capacity was 65000 at 1993. 2. When should we increase or reduce resources? The availability of capacity and the timing of capacity adjustments. MB, 85000 in 99, 160000 in 2004. 3. What kinds of resources are best? Is it a HR or a CR? To what extent can a capital resource operate unsupervised; i.e., the level of automation? What is the range of tasks, from single-task (specialized) to multitask (flexible)? How the 160K capacity split into M and R-classes, and into assembly of the various engines? Are the assets specialized to produce one or flexible to produce both?
Operations Strategy: 1- Introduction Ardavan Asef-Vaziri Sep-09 14

Operations Strategy: Resource View

4. Where should resources be located? Appropriate sites and their roles. How should the M-class plant location be chosen and what responsibilities should it have? The location is AL, but it would also include other locations if we were to consider the larger Mercedes supply chain. Location decisions are part of network strategy which also includes topology or configuration. FedEx uses huband-spoke. Car companies use a tiered supply network or tree topology. Also specify the transportation arrangements. Also whether processes should be standardized or localized; e.g., should Tuscaloosa processes be similar to the German processes?

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

15

Operations Strategy: Process View

Resources generate value. The process view how resources perform activities and add value. A process is a network of activities with specific precedence relationships among the activities. By starting with inputs (expressed customer demands) and ending with outputs (served customer demands), the process view is compatible with a customer-centric view of the world. From this customer-centric view, value stream mapping defines value from the perspective of the customer: a value-added activity is an activity that benefits the customer.
Ardavan Asef-Vaziri Sep-09 16

Operations Strategy: 1- Introduction

Operations Strategy: Process View

The process view: a horizontal view of the organization that cuts through functional silos ( finance, accounting, production, marketing sales, etc). Inter-functional relationships among internal partners, as well as the interfaces and relationships with external customers and suppliers. By equating organizations with processes the business process reengineering paradigm has put operations on the agenda of top management.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

17

Operations Strategy: Process View

1. Strategic sourcing decisions: Activity: internally/outsourced decisions, supply network (how many suppliers and how to manage them), vertical integration (how far up and downstream?). 2. Which technologies ? Four types of technology:

Coordination and IT: How do we coordinate, communicate, and plan execution throughout the activity network. Centralized or distributed control? In planning phase coordinate financial, sales , marketing, and operations forecasts. In the execution phase making events happen at the right times. IT such as communication technology (e.g., Internet, RF identification) and planning systems (e.g., enterprise resource planning; ERP).
Ardavan Asef-Vaziri Sep-09 18

Operations Strategy: 1- Introduction

Operations Strategy: Process View 2. Technology

Product technology: Is the product designed in modules or as an integral system? Does the design take into account manufacturability, testability, or reusability? Process technology: The structure of the conversion process and the methods. Network structure describes the layout of the activity network in terms of locations and interconnections, i.e., job shop or flow shop. Transportation technology: material handling and transportation network in production logistics and supply chain. Also includes how insurance policies are moved between the different processing steps.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

19

Operations Strategy: Process View

3. How do we match demand to available supply? The demand management includes demand planning and forecasting as well as tactical capacity allocation and order management. Inflexible supply processes cannot quickly adapt to changes in demand; airlines, hotels, and car rental. 4. How and when do we improve and innovate in products and processes? Not only R&D activities, but also continuous improvement and learning throughout the organization.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

20

The Competency View of Operations

Values are a third factor that affect what an operation-and thus an organization-can and cannot do. Values are the standards by which employees set priorities at every level. Some priorities are programmed into a process but many are not. Ex. judging whether an order or customer is attractive, whether a suggestion to improve a product or process is attractive, and whether an investment is worth making. As organizations become more complex, consistent values are powerful mechanisms for employees to make independent but consistent decisions.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

21

The Competency View of Operations

As successful companies mature, employees believe that the processes and priorities they have often used are the right way to do their work. They follow processes and define priorities by assumption rather than by conscious choice. Those processes and values come to constitute the organizations culture. The competency view characterizes the abilities of the organization's resources, processes, and values.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

22

The Competency View of Operations

Competencies determine the set of outputs that the operation will be particularly good at providing.

A premier management consulting company is good at providing high quality customized advice. An efficient operation such as McDonald's is good at delivering inexpensive food quickly, but from a standard and limited menu with a well-defined quality level. Zara is good at quickly delivering a large selection of new designs at a reasonable cost.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

23

The Competency View of Operations

Competencies change over time; they start in resources, gradually migrate to processes, and eventually reside in values.

Most of what gets done in start-up companies is attributable to resources, especially its people. Losing a person can be detrimental. As activities become more recurrent, processes are defined. As it becomes clear which business needs should be given highest priority, values emerge.

With hundreds of new recruits and departures per year, top management consulting companies remain successful because their processes and values are so strong that project staffing changes have little impact.
Ardavan Asef-Vaziri Sep-09 24

Operations Strategy: 1- Introduction

Operations Strategy: Competency View

1. Cost, including input costs and resource costs. Is important in low margin markets. 2. Response or lead time. The time needed to transform inputs into outputs? Responsiveness is important due to changes in customer preferences and technologies. 3. Quality. Quality refers to the degree of excellence of the process, product, or service. It has design-related dimensions such as performance and features, as well as process-related dimensions such as durability and reliability. Is a key differentiator in luxury and high precision businesses. 4. Flexibility, to change inputs, activities, volumes, or outputs. Similar to quality, flexibility has several dimensions such as scope flexibility (the selection or range of products and services offered, including the level of customization), volume flexibility, and robustness.
Operations Strategy: 1- Introduction Ardavan Asef-Vaziri Sep-09 25

A definition of operations strategy & Principle of value maximization

Cost Quality Time Variety

Competencies

Resources

Operations Strategy

Processes

Max NPV

Operations strategy is a plan for developing resources and configuring processes such that the resulting competencies maximize NPV
Ardavan Asef-Vaziri Sep-09 26

Operations Strategy: 1- Introduction

Framework and key decisions of operations strategy

Competitive Strategy

Competencies

Resources
(Asset Portfolio) Sizing
How much capacity to invest in?

Operations Strategy

Processes
(Activity Network)

Timing
When increase or reduce resources?

Type
What kinds of resources are best?

Location
Where should resources be located?

Supply

Technology

Demand

Innovation

When outsource Coordination, How match How and when & how manage product, process demand to to improve and suppliers? transportation available supply innovate?

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

27

A Framework For Operations Strategy

Operations strategy could emerge from a giant optimization model identifying the resources, processes, and competencies to maximize NPV. Not possible. Principle 2 (Alignment) Operations strategy should develop resources and configure processes such that the resulting competencies are aligned with the competitive position -Customer value Propositionthat a firm seeks over time.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

28

A Framework For Operations Strategy

1. Organization Customer value proposition for each market segment? 2. Operations Prioritize competencies for each market segment? 3. Which resources and processes best provide that competency prioritization? For each targeted customer segment, how are the asset portfolio (sizing, timing, and location of each resource type) and the activity network (supply, technology, demand, and innovation management) configured?

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

29

Market Driven, Technology Driven Strategies.

This "top-down and outside-in" perspective ensures that operations and all parts of the organizations reflect the intended market position, and tends to create a customer-driven organization. Market driven Strategy. The resource & process perspective, a bottom-up and inside-out perspective, starts from the premise that the building blocks of strategy are not products and markets, but processes and resources. Therefore, the value proposition offered to customers can be well executed with the given operations. It tends to create a resource-driven organization, such as Honda. Technology driven strategy.
Ardavan Asef-Vaziri Sep-09 30

Operations Strategy: 1- Introduction

Market Driven, Technology Driven Strategies.

As environments, strategy, and operations evolve, organizations must seek to maintain alignment by adopting both perspectives over time. In order to satisfy a new customer need, the firm may need to build new competencies, processes, and resources. Those processes and resources may later be used to invent new products and services that may drive or create new markets. Honda's abilities and knowledge in engine technology is legendary and has been the driving force in deciding which markets to enter and which products to offer: it has entered markets that need a product with a high-performance engine.
Ardavan Asef-Vaziri Sep-09 31

Operations Strategy: 1- Introduction

Zara: Resource view

High vertical integration ownership allows tight coordination. A design center, some manufacturing facilities (also outsources locally), two major DCs, and 90% of 724 retail stores. The design capacity of 11,000 new styles/year by over 200 professionals is in line with the timely fashion that Zara promises (design to rack of 3 weeks). Owns two central warehouses in Spain. The recent 123K m2 distribution center has a distribution capacity of 80K garments/hour. Direct access to highway and railroad. Proximity to airport favors fast handling of international cargo.
Ardavan Asef-Vaziri Sep-09 32

Operations Strategy: 1- Introduction

Zara: Resource view

Vertical integration high ratio of tangible fixed assets to sales of 34%. The average capacity utilization is 50%, many facilities are single shift. The supply network centered in Spain (25% from the rest of Europe and 25% from the rest of the world). The proximity of suppliers inputs are received quickly fast speed-to-market. Local facilities are used to produce the products with most demand uncertainty and time-sensitivity, off-shoring for basic products with more predictable demands. Industries exercising (fast response times + high demand volatility) experience low capacity utilization
Ardavan Asef-Vaziri Sep-09 33

Operations Strategy: 1- Introduction

Zara: Process view; Technology

Postpone the dyeing of fabric: almost half the raw materials are purchased undyed. Short lead time for product with high variability in their demand. Local manufacturing processes have short setup times and run in small batches, while offshore manufacturing of more predictable demand can have longer lead times. Distribution is highly centralized to reduce the number of stocking points and the associated handling time and so that one store's upside demand fluctuations can offset another's downside.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

34

Zara: Process view; Technology

The hub and spoke system uses the appropriate transportation mode (truck, rail, or air) depending on the store location and the time-sensitivity. Frequent deliveries (Thursday delivery is important in the fashion industry) with short lead times. It maximizes the flexibility of inputs and increases responsiveness while controlling working capital (inventory). IT enables the daily information flow between store managers, requesting products and providing customer preference feedback, and design and production sharing information on upcoming products.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

35

Zara: Process view; Demand

Intentionally short style campaigns that are likely to run out of stock create a scarcity image. Customers visit stores frequently and are likely to buy what is available at that moment because that particular product may no longer be available next time. The combination of short campaigns and limited inventory reduces markdowns and leftovers.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

36

Zara: Process view; Innovation

Fast new product design is a key enabler of Zara's strategy. Ideas inspired by urban hot spots, fashion shows, and store customers are transmitted to the creative teams. Design style platforms are created ahead of the season and are modified just before production based on feedback from retailers regarding the most recent fashion. This postponement of design styling requires fast and efficient information transfer.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

37

Zara: Process view; Innovation

A firm believer that people, cultures and generations share a special sensitivity for fashion. Standardizes a majority of its designs but allows some adjustments to local taste. Zara originally insisted on a standard set of sizes for all countries but had to add smaller sizes for Japan and larger ones for the U.K. and Ger. Has tailored the 8 drivers of its operations strategy to its fast-fashion, cheap-chic value proposition.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

38

Should every retailer adopt the Zara model?

Zara's operational system is not a panacea. Sweden's Hennes & Mauritz AB competes with Zara. It produces much fewer new styles per year with a much slower design-to-rack time of 16 weeks. Without the stringent speed requirement, H&M has more leeway in configuring its operations; more outsourcing and higher capacity utilizations resulting in much lower fixed capital requirements. The lower safety capacity and responsiveness of the operating system is replaced by higher safety stock to buffer demand uncertainty.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

39

Should every retailer adopt the Zara model?

The Zara model is not used in other industries such as toy, cell phone, or auto manufacturing. Zara model requires:
1. High customer willingness to pay for speed-to-market. 2. Short product life cycles with high demand uncertainty. 3. Low cost of excess capacity with low importance of scale economies. 4. Low cost of stockouts and distribution relative to inventory holding.

Great operations strategies are tailored to each company's competitive strategy. While companies may share some elements, a complete tailored operations system is unique

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

40

Competitive Product Space

Competitive Product Space: A representation of the firms product portfolio in the four dimensional space: Q, C, Var., Res.
Variety

Another firm: expensive and customized products.

B

One firm: low cost and standardized products

A Cost Efficiency (1/cost) Responsiveness
Operations Strategy: 1- Introduction Ardavan Asef-Vaziri Sep-09 41

Strategic Positioning
Defines those positions that the firm wants to occupy in its competitive product space. The current position, direction, and goal position.
Responsiveness

A
High Low

Price
Operations Strategy: 1- Introduction Ardavan Asef-Vaziri Sep-09 42

Operational Effectiveness

What distinguishes an effective business process? Operational effectiveness: developing processes and operating policies that support the strategic position better than the competitors. How does effective differ from efficient?

Cost Efficiency: achieving an output with minimal level of input and resources Effective Process: supports execution of companys strategy

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

43

Focused Strategy, Focused Operations

Focused Strategy: Committing to a limited, congruent set of objectives in terms of demand (product, market) and supply (input, technologies, and volumes). Aravind Eye Hospital, 100 cataract surgeries a day, operational excellence, 40% gross margin, 70% of patients pay almost nothing, and the hospital does not depend on donations. A focus process is not limited to a few products.

Focused process: one whose products all fall within a small region of the 4 dimensional product space.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

44

Plant Within Plants (PWP)

PWP: The business strategy is diverse. But the entire business is divided into several mini-plants each with focused processes. One PWP may focus on low cost, the other on quick response. To sustain competitive advantage, a firm must ensure that its competitors are not able to imitate its chosen position. An sculpture not a block. Strategic fit through focused operations make it very difficult for competitors to imitate. Supporting the strategic position with multiple mutually reinforcing activities creates a sustainable competitive advantage. It is harder for competitors to imitate an array of interlocked activities.
Ardavan Asef-Vaziri Sep-09 45

Operations Strategy: 1- Introduction

Shouldice Hospital, Corolla, Ferrari

Corolla: flow shop, decentralized assembly plants close to market, short flow time, low cost Ferrari: job shop, only a single plant in Italy, longer flow time, high cost
Operations Strategy: 1- Introduction Ardavan Asef-Vaziri Sep-09 46

Focus and the Efficient Frontier

sector
World-class Emergency Room

in Health-care

Responsiveness

One general facility

operations frontier

World-class (non-emergency) Hospital

Cost efficiency

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

47

Strategy Positioning and Operational Effectiveness

Responsiveness

Firms located on the same ray share strategic priorities. World class firms are on the efficient frontier.
A B

operations frontier the minimal curve containing all current positions in an industry
Low

High

Price
Operations Strategy: 1- Introduction Ardavan Asef-Vaziri Sep-09 48

Efficient Frontier

Firms not on the EF, are not on strict trade-off, they can make simultaneous improvement on more than one dimension. Firms on EF need to trade-off

Trade-off: decreasing on one dimension to increase on the other dimension. World class firms also try to push the EF outward. As technology and management practices advances, the EF moves upward. But the impact is not the same in all industries. Internet impact

In book industry pushes EF along both the dimensions of cost and variety In grocery increases the quality of service to customers, but increases the cost and reduces the responsiveness and variety
Ardavan Asef-Vaziri Sep-09 49

Operations Strategy: 1- Introduction

Strategic Positioning and Operational Effectiveness

Strategic positioning defines the direction of the improvement from current position, and thus the position on the EF the company wants to occupy. Operational effectiveness measures the distance of the current position to the operations frontier along the direction of improvement. To bring a company closer to a frontier or to push the frontier. (direction is not horizontal)

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

50

Wal-Mart
Corporate Strategy (Gain competitive advantage by) providing customers access to quality goods, when and where needed, at competitive prices.

Operations Structure

Operations Strategy
Short flow times Low inventory

Cross docking EDI Fast transportation system Focused locations Communication between retail stores
Ardavan Asef-Vaziri Sep-09 51

Operations Strategy: 1- Introduction

Wal-Mart (Resulting Benefits)

Inventory at retail stores turned over twice a week (Industry averages once every two weeks) Improved targeting of products to markets Sales per square foot increased from $102 in 1985 to $140 in 1991 (Industry average increased from $102 to $110)

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

52

Tailor Operations; Strategic Fit

Tailoring fitting the operational system to competitive strategy. Frederick Winslow Taylor (the father of scientific management); there is a "one best way" to configure any operation. No, the best operations configuration depends on the Strategy + Market. Strategic Operational Audit Does operations competencies fit with competitive strategy? Where can improvements be made? Top-down and bottom-up perspectives simultaneously and can be performed in three steps.
Ardavan Asef-Vaziri Sep-09 53

Operations Strategy: 1- Introduction

The Strategic Operational Audit

1.

2.

3.

Understand your customer & your competitive strategy CVP the current operational system; resources, processes, and competencies. Apply the resource & process views (bottom-up) the value propositions the current competencies can support. Apply the market (top-down) to specify the competencies, the best-aligned processes and resources, needed to execute the current strategy. The gaps between the current state and where we should be to ensure strategic alignment. Gap reducing actions to improve strategic alignment. These actions involve changing the competitive strategy and/ or changing the operations strategy.
Ardavan Asef-Vaziri Sep-09 54

Operations Strategy: 1- Introduction

The Strategic Operational Audit

Dells value proposition allows customers to selfconfigure their desktop. Its aligned operational system features assemble-to-order flexibility and a quick response by a direct sales model. Dell also has a laptop segment with the same operational system led to some gaps at all three levels

Customers value touching a laptop before buying it. Less need or value to customize a laptop while it certainly is more difficult and costly to do so.

Either the competitive strategy should be re-focused back to desktops, or that a new operational system with less flexibility would fit better with the laptop market segment.
Ardavan Asef-Vaziri Sep-09 55

Operations Strategy: 1- Introduction

Strategic Operational Audit

Deliverable Value Propositions
Resource view

Strategy Gap?

Value Proposition
Market view

Competency Gap? Competencies

Needed Competencies

Resources & Processes

Resource & Process Gap?

Needed Resources & Processes

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

56

How to describe strategic position? Our (p,T,V,Q) value proposition & The Discipline of Market Leaders
Product attributes
P Operational Excellence T V QoP

Service attributes: Customer Relationship

Image
Smart shopper

Companies excel at competitive pricing, Product quality, and on-time delivery

Customer Intimacy

Personalized service (QoS) Long term relationships

Trusted brand

Companies excel at offering personalized service to customers and at building long-term relationships with them

Product Leadership

QoP

Best in class

Companies excel at creating unique products with functionality that pushes the envelope
Source: Discipline of market leaders by Treacy and Wiersema

general requirement differentiator

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

57

A Balanced Scorecard Map

Balanced scorecard measures a company's performance in: market, operations, learning and growth, and finance. The map can be used relate an operations strategy with the firm's financial and competitive strategy. The balanced scorecard tends to emphasize the learning and growth view and represents earlier innovation lever as a separate view. The financial view specifies how the organization seeks to increase its NPV. The two financial levers are to increase revenues or decrease costs. The growth strategy must define its desired balancing point between emphasizing productivity or revenue growth.
Ardavan Asef-Vaziri Sep-09 58

Operations Strategy: 1- Introduction

A balanced scorecard map

Market View

Value Proposition

Competencies

Operations View

Resources

Operations Strategy

Processes

Learning & Growth View

Innovation

Growth Strategy
Financial View Productivity x Revenue

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

NPV

Sep-09

59

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

60

The Product-Process Matrix

Whereas the strategic operational audit and the balanced scorecard are highlevel tools for improving fit, the product-process matrix focuses on the match between process technology and delivered product attributes. The product-process matrix starts by evaluating the promised value proposition and the process used to deliver value. It verifies alignment along one dimension, often by comparing the degree of variety in the value proposition with the degree of process flexibility. This combination is then represented by a covered area in the matrix where the distance to the diagonal represents the degree of misalignment.
Ardavan Asef-Vaziri Sep-09 61

Operations Strategy: 1- Introduction

Facility Layout : Job Shop

Output

Product 1
Input

Product 2

A C
Ardavan Asef-Vaziri

B D
Sep-09 62

Operations Strategy: 1- Introduction

Job Shop
Functional layout or Process layout: similar resources in the same department. Ex. all press machines are located in stamping department. Ex. Bakeries, law firms, emergency rooms, repair shops.

low volume, high variety customized products flexible resources skilled human resources jumbled work flows high material handling large of inventories long flow time highly structured information system high cost per unit of product but low investment
Ardavan Asef-Vaziri Sep-09 63

Operations Strategy: 1- Introduction

Facility Layout : Flow Shop

Product 1
Input

A D B
Output

Product 2

C B A
Ardavan Asef-Vaziri Sep-09 64

Operations Strategy: 1- Introduction

Flow Shop
Product layout or line layout: Resources are arranged according to the sequence of the operations. Usually requires duplication ( and investment) of a resource pool; dedication of resources. Discrete flow shop: assembly line Continuous flow shop: beverage, chemical plant, process plant.

high standardization, high speed low material handling short flow time low unit-processing costs high investment cost; needs mass production. special purpose equipment, and low skilled labor prevent flexibility
Ardavan Asef-Vaziri Sep-09 65

Operations Strategy: 1- Introduction

Characteristics of Processes: Job Shop vs. Batch vs. Flow Shop

Type of Process Job Shop Batch Flow Shop Product Volume Specialized Equipment Product Variety Machine Setup Frequency Labor Skills Variable Cost

Most processes fall somewhere on the continuum between Job Shop and Flow Shop

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

66

Matching Process Choice with Strategy:

Product-Process Matrix
Process Flexibility
High
Jumbled Flow. Process segments loosely linked.

JOB SHOP
(Commercial Printer, Architecture firm)

Disconnected Line Flow/Jumbled Flow but a dominant flow exists.

BATCH
(Heavy Equipment, Auto Repair)

FLOW SHOP
Connected Line Flow (assembly line)
(Auto Assembly, Car lubrication shop)

Continuous, automated, rigid line flow. Process segments tightly linked.

CONTINUOUS FLOW
(Oil Refinery)

Low

Low
High Standardization Commodity Products High volume Few Major Products Many Products

High
Low Standardization One of a kind Low Volume

Product Variety
67

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

Process Flexibility
High
Jumbled Flow. Process segments loosely linked.

JOB SHOP
(Commercial Printer, Architecture firm)

Disconnected Line Flow/Jumbled Flow but a dominant flow exists.

BATCH
(Heavy Equipment, Auto Repair)

FLOW SHOP
Connected Line Flow (assembly line)
(Auto Assembly, Car lubrication shop)

A similar graph can be prepared to show the relationship between process flexibility and cost, or process flexibility and response time, but not for quality.

Continuous, automated, rigid line flow. Process segments tightly linked.

CONTINUOUS FLOW
(Oil Refinery)

Low

Low
High Standardization Commodity Products High volume Few Major Products Many Products

High
Low Standardization One of a kind Low Volume

Product Variety
68

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

The Product-Process Matrix

Top restaurants provide a continually changing culinary experience for a select set of customers. Chipotle makes two things-burritos & tacos-very well. Positions outside the diagonal signal misalignment. Threestar chefs who serve simple meals (burritos and tacos) with their highly flexible job shop process incur high opportunity costs. Substantial savings would result from changing resources (including chefs) and streamlining the process into a flow shop. Asking Chipotle's to change its menu daily would require high changeover costs. Asking it to deliver a three-star dining experience is virtually impossible.
Ardavan Asef-Vaziri Sep-09 69

Operations Strategy: 1- Introduction

Guidelines For Operations Strategy

A cross functional team + Senior management. Alignment balancing market operations. Change is the only constant. Periodic reviews of operations strategy. By balancing the external market view with the internal competency, resource, and process views whether operations strategy should be re-aligned or adapted. Operations strategy is not an exact science; it requires judgment, experience, creativity, and luck. A qualitative approach to formulate operations strategy. A quantitative approach then to refine and optimize, to improve systems and methods; integration; planning; and reduce complexity.
Ardavan Asef-Vaziri Sep-09 70

Operations Strategy: 1- Introduction

Historical Development of OM
1765: Factory System (Adam Smith, James Watt) 1810: American System of Mfg (Whitneys interchangeable parts) 1890s: Bicycle boom (sheet metal stamping, electrical resistance welding). Scientific Management Time & motion studies (Frederick Taylor 1900s) 1913: Mass Production (Henry Fords Moving Assembly Line) 1927: Flexible Mass Production (Alfred Sloan & GM). Statistical Quality Control (Walter Shewhart at Bell Labs, 1930s) Hawthorn Studies (Elton Mayo at Western Electric, 1930s) 1970: Toyota Production System (Taiichi Ohno) 1980s-now: Ops in the spotlight. Manufacturing Strategy Paradigm (HBS). Lean Ops: JIT, CAD/CAM, CIM, FMS, TQM, business reengineering

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

71

changing sources of competitive advantage

Low price: Having cheap labor 1900s Economies of Scale (< 1960s) Inject capital to increase labor productivity You can have any color you want as long as it is black Focused Factories (mid 1960s) Avoid diseconomy of scale Flexible Factories and Product variety (1970s) Cope with changes in consumer references. A car for every taste and purse Flexible resources. Quick changeovers Quality (1980s) Quality is free. Continuous improvement strategy. Zero defect. Perfect reliability Time (late 1980s-1990s) We love your product but where is it? Dont sell what you produce. produce what sells.
Operations Strategy: 1- Introduction Ardavan Asef-Vaziri Sep-09 72

Summary Of Learning Objectives

1. Explain the concept of operations strategy and discuss its impact on an organization.
Strategy is a plan to reach a particular goal. The value maximization principle specifies that goal as maximizing the NPV. Competitive strategy seeks to accomplish this by deciding which markets to enter and which value proposition to offer to its customers. This value proposition can be described by ranking the four dimensions of customer need: price, quality, responsiveness, and variety. Operations strategy is a plan for developing an operational system with competencies that maximize NPV. Integral to that plan is structuring interfaces with input and output, and capital and labor markets.
Operations Strategy: 1- Introduction Ardavan Asef-Vaziri Sep-09 73

Summary Of Learning Objectives

2. Adopt three complementary views to describe operations.
The resource view considers operations as a bundle of real assets. These tangible and intangible assets are the means of performing work. Deciding on the asset portfolio involves an investment decision. The firm finances this investment by selling financial assets, which are claims on the real assets and their cash flow. The process view highlights that operations are structured and coordinated networks of activities. The process view, which is graphically represented via a flow chart or value stream, takes on a horizontal, customer-centric perspective that is most useful for analyzing how the organization divides and coordinates work and produces value. The competency view characterizes the abilities of the ensemble of processes and resources. It describes what the operation excels at and is naturally linked to the customer value proposition.
Operations Strategy: 1- Introduction Ardavan Asef-Vaziri Sep-09 74

Summary Of Learning Objectives

3. Identify the key decisions and relationships in our framework for operations strategy. Our framework for operations strategy builds on the principle of alignment: the competencies of the operational system should be aligned with the competitive position that the firm seeks over time. Operations strategy formulation can thus start from the competitive position, ask what operations competencies are needed, and then choose the activity network and resource bundle compatible with those competencies. Instead of this market perspective, the sequence can be reversed using the resource perspective.
Operations Strategy: 1- Introduction Ardavan Asef-Vaziri Sep-09 75

Summary Of Learning Objectives

The competency view involves decisions on the prioritization of cost, time, quality, and flexibility. The resource strategy involves sizing, timing, and deciding on the appropriate types and locations of resources. The process strategy decides on supply and demand management (the interfaces with inputs and outputs); internal technology (coordination and information, process, product, and transportation); and planning for the future through improvement and innovation management.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

76

Summary Of Learning Objectives

4. Use three tools to implement the principle of alignment and tailor operations strategy.
Tailoring operations is the tool to achieve strategic fit with the competitive strategy. We discussed three qualitative guidelines for tailoring: the strategic operational audit, which is a gap analysis to assess the degree of strategic fit and to inspire improvement actions; the balanced scorecard map, which seeks to integrate the market, operations, and financial views of the organization; and the product-process matrix to verify alignment between process and product attributes.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

77

Summary Of Learning Objectives

As a tailored operation, Zara provided an example of the framework and reinforced the key message of this chapter: all eight operations drivers reinforce each other and yield a uniquely tailored operational system whose competencies are aligned with its strategy.

Operations Strategy: 1- Introduction

Ardavan Asef-Vaziri

Sep-09

78