Transcript Document

Chapter 2 – Strategy &
Productivity
Operations Management
by
R. Dan Reid & Nada R. Sanders
4th Edition © Wiley 2010
Learning Objectives
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Define the role of Business Strategy
Explain how a Business strategy is developed
Explain the role of Operations Strategy in
the organization
Explain the relationship between business
strategy and operations strategy
Describe how an operations strategy is
developed
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Learning Objectives
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Identify competitive priorities for of the
operations function
Explain the strategic role of technology
Define productivity and identify
productivity measures
Compute productivity measures
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The Role of Operations
Strategy
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Provide a plan that makes best use of
resources which;
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Specifies the policies and plans for using
organizational resources
Supports Business Strategy as shown on
next slide
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Business/Functional Strategy
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Importance of Operations
Strategy
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Essential differences between
operational efficiency and strategy:
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Operational efficiency is performing tasks
well, even better than competitors
Strategy is a plan for competing in the
marketplace
Operations strategy ensures all tasks
performed are the right tasks
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To Develop a Business
Strategy
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Consider these factors and strategic
decisions:
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What business in the company in (mission)
Analyze and understand the market
(environmental scanning)
Identify the company strengths (core
competencies)
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Three Inputs to a Business Strategy
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Key Examples
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Mission: Dell Computer- “to be the most
successful computer company in the world”
Environmental Scanning: political trends,
social trends, economic trends, market place
trends, global trends
Core Competencies: strength of workers,
modern facilities, market understanding, best
technologies, financial know-how, logistics
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Developing an Operations
Strategy
Operations Strategy: a plan for the design
and management of operations
functions
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is developed after the business strategy
focuses on specific capabilities which give it
a competitive edge – competitive
priorities
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Operations Strategy – Designing
the Operations Function
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Competitive Priorities- The Edge
Four Key Operations Questions:
Will you compete on –
Cost?
Quality?
Time?
Flexibility?
 All of the above? Some? Tradeoffs?
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Competing on Cost
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Offering product at a low price relative to competition
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Typically high volume products
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Often limit product range & offer little
customization
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May invest in automation to reduce unit costs
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Can use lower skill labor
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Probably uses product focused layouts
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Low cost does not mean low quality
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Competing on Quality
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Quality is often subjective
Quality is defined differently depending on who is
defining it
Two major quality dimensions include
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High performance design:
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Product & service consistency:
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Superior features, high durability, & excellent customer service
Meets design specifications
Close tolerances
Error free delivery
Quality needs to address
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Product design quality – product/service meets requirements
Process quality – error free products
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Competing on Time
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Time/speed one of most important
competition priorities
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First that can deliver often wins the race
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Time related issues involve
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Rapid delivery:
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Focused on shorter time between order placement and delivery
On-time delivery:
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Deliver product exactly when needed every time
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Competing on Flexibility
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Company environment changes rapidly
Company must accommodate change by being
flexible
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Product flexibility:
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Easily switch production from one item to another
Easily customize product/service to meet specific requirements
of a customer
Volume flexibility:
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Ability to ramp production up and down to match market
demands
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The Need for Trade-offs
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Decisions must emphasize priorities that support business
strategy
Decisions often required trade offs
Decisions must focus on order qualifiers and order winners
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Which priorities are “Order Qualifiers”?
Must have excellent quality since everyone expects it
Which priorities are “Order Winners”?
Dell competes on all four priorities
Southwest Airlines competes on cost
McDonald’s competes on consistency
FedEx competes on speed
Custom tailors compete on flexibility
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Translating to Production Requirements
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Specific Operation requirements include
two general categories
 Structure – decisions related to the
production process, such as characteristics
of facilities used, selection of appropriate
technology, and the flow of goods and
services
 Infrastructure – decisions related to
planning and control systems of operations
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Translating to Production Requirements
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Dell Computer example – structure & infrastructure
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They focus on customer service, cost, and speed
ERP system developed to allow customers to order
directly from Dell
Product design and assembly line allow “make to
order” strategy – lowers costs, increases turns
Suppliers ship components to a warehouse within
15 minutes of the assembly plant - VMI
Dell set up a shipping arrangement with UPS
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Strategic Role of Technology
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Technology should support competitive
priorities
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Three Applications: product technology, process
technology, and information technology
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Products - Teflon, CD’s, fiber optic cable
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Processes – flexible automation, CAD
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Information Technology – POS, EDI, ERP, B2B
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Technology for Competitive
Advantage
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Technology has positive and negative
potentials
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Positive
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Improve processes
Maintain up-to-date standards
Obtain competitive advantage
Negative
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Costly
Risks such as overstating benefits
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Technology for Competitive
Advantage
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Technology should:
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Support competitive priorities
Can require change to strategic plans
Can require change to operations strategy
Technology is an important strategic
decision
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Measuring Productivity
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Productivity is a measure of how efficiently inputs are
converted to outputs
Productivity = output/input
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Total Productivity Measure
Total Productivity = $sales/inputs $
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Partial Productivity Measure
Partial Productivity = cars/employee
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Multifactor Productivity Measure
Multi-factor Productivity = sales/total $costs
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Productivity Example - An automobile manufacturer has presented the
following data for the past three years in its annual report. As a potential
investor, you are interested in calculating yearly productivity and year to
year productivity gains as one of several factors in your investment
analysis.
Unit car
sales
2003
2002
2001
2,700,000
2,400,000
2,100,000
2003 2002 2001
Partial Prod. Measure
Unit Car Sales/Employee
Employees
112,000
113,000
115,000
$ Sales
(billions$)
$49,000
$41,000
$38,000
Cost of
Sales
(billions)
$39,000
$32,000
21.2
Year-to-year Improvement 13.7%
18.3
15.8%
Multifactor Prod. Measures
Total Cost Productivity
$33,000
24.1
Year-to-year Improvement
1.26 1.24
1.6%
1.19
4.2%
Which is the best measurement?
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Interpreting Productivity Measures
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Productivity measures must be compared to
something, i.e. another year, a different company
Raw productivity calculations do not tell the complete
story unless there are no major structure differences.
In the prior automobile business example, it is
obvious that some major changes were taking place
to yield 15.8% and 13.7% year-to-year
cars/employee productivity improvements. What
changes could improve car sales per employee?
Automation? Out sourcing? Major re-design?
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Interpreting Productivity Measures
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Other productivity measure questions:
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Is this partial productivity measurement enough to
make an investment decision?
Is the Total Cost Productivity measure a better
reflection of year to year productivity at 4.2% and
1.6%. Why?
Should you also look at productivity measures for
the two major competitors for comparison?
Productivity measure provides information on
how the firm is doing relative to what is
critical to the firm
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Productivity, Competitiveness, and
the Service Sector
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Productivity is a scorecard
on effective resource use
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A nation’s Productivity
effects its standard of living
US productivity growth
averaged 2.8% from
1948-1973
Productivity growth slowed
for the next 25 years to
1.1%
Productivity growth in
service industries has been
less than in manufacturing
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Productivity and the Service
Sector con’t
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Measuring service sector productivity is
a unique challenge
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Traditional measures focus on tangible
outcomes
Service industries primarily produce
intangible outcomes
Measuring intangibles is challenging
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Operations Strategy Across
the Organization
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Business strategy defines long-term
plan
Operations strategy support the
business strategy
Marketing strategy needs to fully
understand operations capability
Financial plans in effect support
operations activities.
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Chapter 2 Highlights
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Business Strategy is a long range plan and vision. Each
individual business function develop needs to support
the business strategy
An organization develops its business strategy by doing
environmental scanning and considering its mission and
its core competencies.
The role of operations strategy is to provide a longrange plan for the use of the company’s resources in
producing the company’s primary goods and services.
The role of business strategy is to serve as an overall
guide for the development of the organization’s
operations strategy.
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Chapter 2 Highlights con’t
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The operations strategy focuses on developing specific
capabilities called competitive priorities.
There are four categories of competitive priorities: cost,
quality, time, and flexibility
Technology can be sued by companies to gain a
competitive advantage and should be acquired to support
the company’s chosen competitive priorities
Productivity is a measure that indicates how efficiently an
organization is using its resources
Productivity is computed as the ratio or organizational
outputs divided by inputs
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Questions (1)
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Explain the importance of a business strategy.
Explain the role of operations strategy in a
business.
Describe how a business strategy is developed.
Find an example of a company that makes
quality its competitive priority. Find another
company that makes time its competitive
priority. Compare these strategies.
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Questions (2)
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What is meant by the terms order qualifiers and
order winners? Explain why they are important.
Describe the meaning of productivity. Why is it
important?
Explain the three types of productivity measures.
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Problem 1
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Barry’s Tire Service completed 100 tire changes, six
brake jobs, and 16 alignments in an eight-hour day
with his standard crew of six mechanics. A brake
specialist costs $16 per hour, a tire changer costs $8
per hour, and an alignment mechanic costs $14 per
hour. The materials cost for a day was $2000, and
overhead cost was $500.
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What is the shop’s labor productivity if the retail price
for each respective service is $60, $150, and $40?
What is the multifactor productivity, if the crew
consisted of two of each type mechanic?
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Problem 2
The Abco Company manufactures electrical assemblies. The current process uses 10
workers and produces 200 units per hour. You are considering changing the process with
new assembly methods that increase output to 300 units per hour, but will require 14
workers. Particulars are as follows:
CURRENT PROCESS
NEW PROCESS
OUTPUT (UNITS / HOUR)
200
300
NUMBER OF WORKERS
10
14
MATERIAL COST / HOUR
$120
$150
Workers are paid at a rate of $10 per hour, and overhead is charged at 140% (or 1.4 times)
labor costs. Finished switches sell for $20 / unit.
a. Calculate the multifactor productivity for the current process
b. Calculate the multifactor productivity for the new process
c. Determine if the new process should be implemented
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