McGraw-Hill/Irwin

Chapter 3

Strategy and Value: Competing Through Operations

©The McGraw-Hill Companies, Inc. 2008

Supply Chains

A supply chain encompasses all activities associated with the flow and transformation of goods from the raw material stage (extraction), through the end user, as well as the associated information flows.

3-2

Supply Chains

Basic Producer Converters Fabricators Assemblers

• • • •

Basic Producer

Support Services Transport Storage Finance, etc.

– Extract or creates basic material such as iron ore from Mines, or creates natural resources such as wheat etc.

Converter

– use basic material as their input and refines them

Fabricator

– Converts refined materials into usable components such as doors

Assembler

– Assembles components into finished products such as houses

3-3

Supply Chain

• The entire network starting from basic producers, converter, fabricators, and assembler is the supply chain. Supply chain can be for product or service.

3-4

Generic Supply Chain Model

Supply Chains

3-5

Make or Buy

• Make or buy is a strategic decision. It affects productivity and competitiveness. Thinking on this issue has changed due to globalization, pressure to reduce costs, downsize, and focus on the firm’s core competencies. Trend is toward outsourcing.

• Make was favored by large organization resulting in backward integration and ownership of a large range of manufacturing.

• New approach is to buy.

3-6

Reasons for Make

• Maintain core competency • Need for small quantity and/or no supplier is interested in providing the product • Quality standards are so high that no supplier can meet it • Reliable Supply source • Technological secrets • Cheaper to make • Maintain steady labor force • Avoid Sole-source dependency

3-7

Reasons for Buying • No technical knowledge • Better quality • Lower cost • More flexibility • Inadequate capacity

3-8

Integration

• Purchasing can be extended to take the form of vertical integration.

• Vertical Integration – ability to produce goods or service previously purchased.

Backward Integration (upstream) – A firm purchases its supplier, i.e. Ford buying U.S. Steel.

Forward Integration (downstream) – A firm makes the finished product, i.e. Intel buying Dell.

3-9

Vertical Integration



Developing the ability to produce goods or service previously purchased



Integration may be forward, towards the customer, or backward, towards suppliers



Can improve cost, quality, and inventory but requires capital, managerial skills, and demand



Risky in industries with rapid technological change 3-10

Subcontract

• Prime Contractor who may bid out to other contractors (subcontractor) • Subcontract – A purchase order written with more explicit terms and conditions to provide specific product or service • Subcontract - Will it take a long period of time?

- Will it be costly?

3-11

Outsource

To buy something a company has been making in-house.

Contracting with a third party to provide some aspect of product or service.

• Managers must decide which tasks will be outsourced and which will be in-house.

If outsourced, should there be many suppliers or a single supplier (janitorial, food, security, IS, payroll, logistic)

3-12

Outsourcing

Outsourcing has become easier, because: • Ability to communicate electronically • Cost comparison is possible due to cost accounting tools

3-13

Why Outsource?

Organizational Improvement Financial - Focus on core - Obtain New - Reduce Cost competencies expertise/skills - Promote organizational – Keep pace with - Adjust fixed change technology cost ratio - Increase flexibility to – Improve operating - Make capital meet changing business performance funds available

3-14

Why Outsource?

Organizational Improvement Financial - Meet demand for - Improve management – Generate cash product or service control - Gain market access - Expand capacity - Increase shareholder value

3-15

Outsourcing

• Outsourcing allows companies to: - expand business without adding additional capacity - use the knowledge and technology of others who are better in providing that service However, some companies may not outsource due to concern for quality where a company can maintain tighter control.

3-16

RISKS OF OUTSOURCING

• Loss of Control • Exposure to suppliers risks – financial, poor quality, resources, etc.

• Lack of flexibility

3-17

Outsourcing

• Outsourcing decisions are crucial because they affect efficiency and responsiveness of supply chain. Choose suppliers if they can respond quickly to customer’s demand and who are cost efficient.

• Obstacle to Achieving Strategic fit (Do they meet all your goals?) - Increasing variety of products. The increased variety of products complicates the supply chain by making forecast for each product difficult. The uncertainty of demand will affect efficiency or responsiveness

3-18

Outsourcing

- Decreased product life cycle Product life cycle has been reduced. Product life now can be measured in months. Shorter life cycle increases uncertainty, makes coordination between supply and demand difficult.

- Demanding customers Customers want faster service, lower price and quality. It puts a pressure on the supplier to meet their requirements while keeping manufacturing lower cost.

3-19

Outsourcing

• Less Integration As more and more companies outsource, this makes the supply chain more complicated. As each company has its own policies and interests, the chain is hard to coordinate. Each chain is working toward its own goals rather than for the interest of the chain.

• Increased Globalization Supply chain has gone global. Obviously, it has provided an opportunity for companies to select global suppliers who may offer quality and cheaper product. But it also makes coordination difficult.

3-20

Mission

Mission/Strategy

• Mission where you are going

3-22

Mission

• Organization’s purpose for being • Provides boundaries & focus • Answers ‘How can we satisfy people’s needs?’ • Expressed in mission statement © 1995 Corel Corp.

3-23

Environment

Factors Affecting Mission

Philosophy & Values Profitability & Growth Mission Customers Public Image Benefit to Society 3-24

Mission Statement

• Product Mission To make, distribute and sell a quality product at a reasonable price and with continual customer service. • Economic Mission To serve customers and maintain profitability and grow while increasing value of stockholder and maintaining high morale of employees.

• Social Mission To operate the business ethically, and in socially responsible manner, while contributing to the benefit of the society.

3-25

Strategy



Strategy

how you are going to get there

Strategy

• Action plan to achieve mission • Shows how mission will be achieved • Company has a business strategy • Functional areas have strategies © 1995 Corel Corp.

3-27

Strategy Process

3-28

The Strategic Hierarchy • Mission Statement • Corporate Strategy • Business Strategy • Operations Strategy

3-29

The Strategic Hierarchy

• Mission Statement – A short statement of what a business does, what its values are, who are customers, and why. It describes why an organization exists and describes what is important to the organization, called its core values.

• Corporate Strategy – Broad and general objectives of the company – Defines the businesses the corporation will engage in and how resources will be expended in these businesses.

– Sets expectations for business performance • Business Strategy It identifies the firm’s targeted customers and sets time frames and performance objectives for the business.

– The general basis on which the business will compete • Cost Leadership • Differentiation • Focus

3-30

The Strategic Hierarchy • Functional Strategy

Translates a business strategy into specific action for the functional areas such a marketing, human resources, and finance

.

– Sets priorities so that day-to-day decisions support business strategy

3-31

Business & Operations Strategy

• Understand what is “valued” in the market Cost 4 1 Quality • Choose which attributes to emphasize Response Time Dependability 2 3 • Prioritize those attributes • Design operations to support those priorities Style/ X Cost Quality Dependability Flexibility Response Time REMINDER: Operations management is “The management of resources used to create saleable products and services”

3-32

Operations Strategy • Operations Strategy

– How to design the operation – How to allocate productive resources Functional strategies must support one another as well as the higher level strategies!!

3-33

Tactical planning is performed by middle-level managers to develop implementation tactics for middle-range goals (taking a year or two), such as acquiring additional facilities to support the growth strategy.

Strategic Planning Tactical Planning operational Planning Strategic planning is performed by senior-level management to provide general guidance on broad, long-range goals (taking multiple years), such as targeting a market sales growth rate for the organization as a whole.

Operational planning is performed by lower-level managers to implement short-range goals (monthly, weekly or day-to-day business activities), such as scheduling increased overtime for truck drivers to support the growth strategy.

Operations Strategy

• Align the value being created (cost, quality, response time, dependability, convenience, etc.) with resource decisions (inventory, workforce, capacity, facilities) so that your investment in resources creates what customers expect

and

you get a financial return on that resource investment that is better than your alternatives.

3-36

Supply Chain Strategy

• Strategy deals with the value created for customers • The position of the company in the market determined by the value it creates for customers. • Value is created by: - Price - Quality - Service Some of these factors are operational, but suppliers do affect value. That is why supply chain management is very important in creating value.

3-37

Keiretsu Networks



A middle ground between few suppliers and vertical integration



Supplier becomes part of the company coalition



Often provide financial support for suppliers through ownership or loans



Members expect long-term relationships and provide technical expertise and stable deliveries



May extend through several levels of the supply chain 3-39

DEFINITION of 'Keiretsu

A Japanese term describing a loose conglomeration of firms sharing one or more common denominators. The companies don't necessarily need to own equity in each other.

Example of 'Keiretsu'

One example would be the close relationship between AOL and Sun Micro (now owned by ORACLE). The two firms don't have ownership in each other, but they work closely on various projects. Sun Micro builds computer hardware and software . The firm is best known for developing workstations and operating environments for the UNIX operation system, and more recently, for developing and promoting the Java programming language.

Supply-Chain Strategies



Negotiating with many suppliers



Long-term partnering with few suppliers



Vertical integration



Keiretsu



Virtual companies that use suppliers on as needed basis

3-41

Characteristics of High ROI Firms

• High quality product • High capacity utilization Measure of how much of the total available capacity actually being used (actual/designed) • High operating effectiveness Measure of how much of the total available capacity should been used under the given conditions (expected/designed) • High investment intensity Measure of how extensive are the resource used (getting the most out of the least) • Low direct cost per unit (efficiency)

3-42

Environmental Scanning

•

Enables the business to stay abreast of changes in

– Technology – Customer expectations – Competitor’s offerings – Global politics – Regulations – Costs of inputs

3-43

Structural vs. Infrastructural Decisions

• Structural - Related to tangible resources (buildings, equipment, process, supply-chain integration) • Examples – Capacity • High vs. Low volume Equipment, Adding capacity, Flexibility of capacity – Facilities • Location, size, design, number of facilities – Process Technology • Layout, Automation – Vertical Integration/Supplier Relationships • Supplier links, partnerships, integration vs. outsourcing

3-44

Structural vs. Infrastructural Decisions • Infrastructural - Related to systems used to enhance the utilization and control of structural resources

• Examples – Human Resources • Skill level, part vs. full time, salaries – Quality • Prevention vs. detection, control, specifications, supplier involvement – Planning & Control • Inventory management, vendor policies

3-45

Strategic Decision Categories and Value

Structural and infrastructural decisions affect value, and ultimately whether or not the customer’s needs are met.

REMINDER: Operations management is “The management of resources used to create saleable products and services.” The structural and infrastructural decisions dictate how those resources are used.

3-46

Performance Dimensions

The relative importance of performance dimensions can be highlighted by: • - Order qualifier – performance dimension on which a customers expect a minimum level of performance.

Order qualifiers

are "those competitive characteristics that a firm must exhibit to be a viable competitor in the marketplace." (APICS Dictionary 2008) • - Order winner – performance dimension that differentiates a company’s product or a service from its competitor.

Order winners

are "those competitive characteristics that cause a firm's customers to choose that firm's goods and services over those of its competitors. Order winners can be considered to be competitive advantages for the firm. Order winners usually focus on one rarely more than two of the following strategic initiatives: price/cost, quality, delivery speed, delivery reliability, product design, flexibility, after-market service, and image." (APICS Dictionary 2008).

3-47

Performance Dimensions

Industrial chemical market example: - Buyers of industrial chemicals expect a certain level of purity before considering to buy – order qualifier. After purity is established other factors such as cost, delivery speed, and flexibility will be additional considerations – order winner.

- From the supplier’s perspective, product quality is the order qualifier; cost, delivery speed and flexibility are order winner.

3-48

Performance Dimensions

• Suppose two suppliers, A and B, that are competing head to-head in industry.

Suppose supplier A meets the quality requirement but falls below Supplier B on all but one dimension (delivery). But Supplier B has purity below minimum, Supplier B will be dropped.

3-49

Performance Dimensions

Understanding what the relevant order qualifier and order winner are helps operations and supply chain manager to formulate strategy: - helps identify potential problem - helps clarifies the issues surrounding decision on trade-offs - helps manager to prioritize their efforts - In the example above, supplier must take care of quality problem, then protect or increase its delivery and cost advantages. If increasing quality increases cost, it evaluates trade-off.

3-50

Order Losers, Order Qualifiers, Order Winners

Example: Taking a group of children to lunch

• Order Qualifier: hamburgers and fries are available. • Order Winner : a cool toy is given with the meal. • Order Loser : bad tasting food, soggy fries, etc.

Example: Selecting a bank after moving to a new city

• Order Qualifiers : ATM access, online banking drive-up window • • Order Winner : free checking, no ATM fees for other banks’ ATMS Order Loser : No ATM access, no online access.

3-51