OPERATIONS MANAGEMENT for MBAs Fourth

Edition

Meredith and Shafer Prepared by: Al Ansari Seattle University John Wiley and Sons, Inc.

Chapter 1: Operations Strategy 1

Chapter 1 Operations Strategy and Global Competitiveness

Chapter 1: Operations Strategy 2

Introduction

Chapter 1: Operations Strategy 3

McDonald’s Corp

      Facing Increased Competition Smarter and More Demanding Customers Less Brand Loyal Switched to hamburger bun that does not require toasting.

Customers prefer taste of new bun Saves time and money Chapter 1: Operations Strategy 4

Olympic Flame

     10,000 runners 15,000 miles through 42 states in 84 days Two years of planning Must plan for no-show runners and rush hour traffic Cost of this operation in the neighborhood of $20 million Chapter 1: Operations Strategy 5

Kmart Versus Wal-Mart

     Both chains started in 1962 In 1987, Kmart had 2,223 stores to Wal Mart’s 1,198.

Kmart’s sales were $25.63 billion to Wal Mart’s $15.96 billion By 1991, Wal-Mart’s sales exceeded Kmarts Kmart still had more stores Chapter 1: Operations Strategy 6

Kmart Versus Wal-Mart

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   In year ending January 1996, Wal-Mart’s sales were $93.6 billion to Kmart’s $34.6 billion.

During this time Kmart emphasized marketing and merchandising (such as national TV ad campaigns).

Wal-Mart was investing millions in its operations to lower cost.

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Kmart Versus Wal-Mart

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    Wal-Mart developed sophisticated distribution system that integrated its computer system with its distribution system.

Kmart’s employees lacked skills needed to plan and control inventory.

Period from 1987 to 1995 Kmart's market share declined from 34.5 percent to 22.7 percent.

Wal-Mart's increased from 20.1 percent to 41.6 percent Chapter 1: Operations Strategy 8

Kmart Versus Wal-Mart

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 Fast forward to 2004 ◦ Kmart appears to have adopted a new strategy ◦  Merge with Sears, Roebuck & Co. Potential synergies between Kmart’s convenient locations and Sears’ strong brands Chapter 1: Operations Strategy 9

General Motors

      Highly competitive automobile Industry Market share eroding Rebate strategy Weakness in product offerings (8 brands) Toyota (2 brands) Long lead time to redesign What is a sustainable market share?

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Flat Panel TVs

   Large profit margins ($8 billion 2004) Asian manufacturers (LG Electronics and Royal Philips, Sony and Samsung, and Matsushita) North America’s Dell Chapter 1: Operations Strategy 11

Operations

  Heart of every organization Operations are the tasks that create value Chapter 1: Operations Strategy 12

Diversity and Importance of Operations     Improvements in operations can simultaneously lower costs and improve customer satisfaction.

Improving operations often dependent on advances in technology.

Can obtain competitive advantage by improving operations.

Diversity of Operations Chapter 1: Operations Strategy 13

The Production System

Chapter 1: Operations Strategy 14

Systems Perspective

    Inputs Transformation System ◦ Alter ◦ Transport ◦ Store ◦ Inspect Outputs Environment Chapter 1: Operations Strategy 15

Inputs

   Inputs include facilities, labor, capital, equipment, raw materials, and supplies. A less obvious input is knowledge of how to transform the inputs into outputs. The operations function quite frequently fails in its task because it cannot complete the transformation activities within the required time limit.

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Transformation System

  The part of the system that adds value to the inputs.

◦ ◦ ◦ ◦ Four major ways Alter Transport Store Inspect Chapter 1: Operations Strategy 17

Outputs

 Two types of outputs commonly result from a production system ◦ Services (physical goods) ◦ Products (abstract or nonphysical) Chapter 1: Operations Strategy 18

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Facilitating Good Concept

     Often confusion in trying to classify organization as manufacturer or service Facilitating good concept avoids this ambiguity All organizations defined as service The tangible part of the service is defined as facilitating good Pure Services Chapter 1: Operations Strategy 20

The Range From Services to Products Chapter 1: Operations Strategy 21

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Operations Activities

      Strategy Output Planning Capacity Planning Facility Location Facility Layout Aggregate Planning     Inventory Management Materials Requirements Planning Scheduling Quality Control Chapter 1: Operations Strategy 23

Defining and Measuring Quality

           

Conformance to specifications Performance Quick response Quick-change expertise Features Reliability Durability Serviceability Aesthetics Perceived quality Humanity Value

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Mass Customization

   Seek to produce low-cost, high-quality outputs in high variety.

Not all products lend themselves to being customized (Ex. Sugar, gas, electricity, and flour).

Is applicable to products characterized by short life cycles, rapidly advancing technology, or changing customer requirements.

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Chapter 1: Operations Strategy 26

Four Mass Customization Strategies     Collaborative customizers Adaptive customizers Cosmetic customizers Transparent customizers Chapter 1: Operations Strategy 27

Collaborative Customizers

 These organizations establish a dialogue to help customers articulate their needs and then develop customized outputs to meet these needs. For example, one Japanese eyewear retailer developed a computerized system to help customers select eyewear. The system combines a digital image of the customer's face and then various styles of eyeware are displayed on the digital image. Once the customer is satisfied, the customized glasses are produced at the retail store within an hour.

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Adaptive Customizers

 These organizations offer a standard product that customers can modify themselves such as closet organizers. Each closet-organizer package is the same, but includes instructions and tools to cut the shelving and clothes rods so that the unit can fit a wide variety of closet sizes. Chapter 1: Operations Strategy 29

Cosmetic Customizers

 These organizations produce a standard product but present it differently to different customers. For example, Planters packages its peanuts and mixed nuts in a variety of containers on the basis of specific needs of its retailing customers such as Wal-Mart, 7 Eleven, and Safeway.

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Transparent Customizers

 These organizations provide custom products without the customers’ knowing that a product has been customized for them. For example, Amazon.com provides book recommendations based on information about past purchases.

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Dependability and Speed

  The competitive advantages of faster, dependable response to new markets or to the individual customer's needs have only recently been noted in the business media.

Americans spend more time and money on marketing, whereas the Japanese spend five times more than the Americans on developing more efficient production methods.

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Relationship Between Response Time and Unit Cost

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Strategy

Chapter 1: Operations Strategy 34

Core Competencies

   Collective knowledge and skills an organization has that distinguish it from the competition.

Typically center on an organization’s ability to integrate a variety of specific technologies and skills in the development of new products and services.

Building blocks of core capabilities.

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Core Competencies

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    Are basis on which new outputs are developed.

Better to think of organization in terms of its portfolio of core competencies than as a portfolio of products.

Identifying and developing core competencies is one of top management’s most important roles.

Organization practices and business processes Chapter 1: Operations Strategy 36

Examples of Core Competencies     Sony - miniaturization 3M- knowledge of substrates, coatings and adhesives Black and Decker - small electrical motors and industrial design Honda - engines and power trains Chapter 1: Operations Strategy 37

Vision and Mission Statements



Vision statements used to express organization’s values and aspirations.



Mission statements express organization’s purpose or reason for existence.

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Strategic Frameworks

Chapter 1: Operations Strategy 39

The Life-Cycle Curve

Chapter 1: Operations Strategy 40

Product Life Cycle

   Strategies often tied to product life cycle Length of life cycles shrinking Business strategy should match life cycles stages Chapter 1: Operations Strategy 41

Categories of Business Strategies

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First-to-Market Strategy

   Products available before competition Strong applied research capability needed Can set high price to skim market or set lower price to gain market share Chapter 1: Operations Strategy 43

Second-to-Market Strategy

   Quick imitation of first-to-market companies Less emphasis on applied research and more emphasis on development Learn from first-to-market’s mistakes Chapter 1: Operations Strategy 44

Cost Minimization or Late-to Market Strategy    Wait until market becomes standardized and large volumes demanded Compete on basis of costs instead of product features Research efforts focus on process development versus product development Chapter 1: Operations Strategy 45

Market Segmentation

  Serving niche markets Applied engineering skills and flexible manufacturing processes needed Chapter 1: Operations Strategy 46

Example Performance Frontier

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New Technology Results in Shift of Performance Frontier

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Focus

 Stressing one key business value .

the key value at Hewlett-Packard is developing new products  Sticking to what the know best. Define core capabilities (strengths) and then build on them.

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Key Characteristics of Core Competencies/Capabilities    Should be used to gain access to a variety of markets Should be strongly related to key benefits provides by products or services Should be difficult to imitate Chapter 1: Operations Strategy 50

Order Qualifiers and Winners

  Order qualifiers are characteristics that are the ante to enter the market Order winners are characteristics that win the customer’s purchase Chapter 1: Operations Strategy 51

Product Life Cycle Stages and Emphasis Chapter 1: Operations Strategy 52

The Sand Cone Model

Chapter 1: Operations Strategy 53

Reasons to Produce Offshore

    Circumvent governmental regulations Avoid effects of currency fluctuations Avoid fees and quotas Placate local customers Chapter 1: Operations Strategy 54

Outsourcing

   Subcontracting out production of parts or performance of activities Activities and parts fall on a continuum ranging from strategically unimportant to strategically important Activities not strategically important are candidates to be outsourced Chapter 1: Operations Strategy 55

Hollowed Out

   The extent that most of a firm’s complex parts and production are outsourced Often when complex parts outsourced, engineering talent follows Supplier may become competitor Chapter 1: Operations Strategy 56

Copyright

Copyright 2010 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that named in Section 117 of the United States Copyright Act without the express written consent of the copyright owner is unlawful. Requests for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. Adopters of the textbook are granted permission to make back-up copies for their own use only, to make copies for distribution to students of the course the textbook is used in, and to modify this material to best suit their instructional needs. Under no circumstances can copies be made for resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.

Chapter 1: Operations Strategy 57